Are China's Financial Reforms Leaving the Poor Behind - Harvard ...

5. Financial institutions in poor areas showed a greater willingness to lend to householdsand this relative trend strengthened over time.6. The non-performing loans problem is closely tied to institutional practices, or bankgovernance. While banks with greater repayment problems are reforming faster allthings equal, it is still the case the richer areas tend to have better governance and to bereforming faster.If we consider the motivating question for the paper and its title, the most accurateanswer is affirmative, but not for the anticipated reason, i.e., greater fund flows out ofpoor areas. While the increase in non-performing loans is undermining financialintermediation throughout rural China, the problem is worse in poor areas because ofslower deposit growth and more serious repayment problems. However, the way themotivating question is posed may be misleading because these changes are not so muchthe result of financial reform as the inability of reform to reduce non-performing loanseven as many regulations (especially interest controls and restrictions on interbanklending) continue to constrain the decisions of bank managers and link lending volumeclosely to local resources (deposits). If this, in fact, is what is happening, or rather nothappening, there is still ample scope for new changes and new distributionalconsequences as China continues to liberalize the financial sector in anticipation of WTOentry.To draw policy implications, it is important to understand the reasons for poorloan performance, especially in poor areas. If poor performance reflects the lack of goodprojects, the efficiency-equity tradeoff becomes quite stark, and policy-makers might bebest advised to improve the economic environment to make investments more desirable.However, if poor performance reflects institutional failings of financial institutions inremote areas, either because of stifling regulation or poor management, there may be31