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

analyze changes in the degree of financial intermediation by rural financial institutions inrich and poor areas. This is an important question because it addresses the keyefficiency-equity tradeoff of market reform. It is now well-established that financialintermediation plays an important role in growth, so that current allocations of financialresources shape future patterns of inequality (Gertler and Rose, 1996; Levine, 1997; Kingand Levine, 1993; Levine and Zervos, 1998; and Rajan and Zingales, 1998). Givenrapidly rising regional income inequality in China and the concern shared by many thatcredit access is a key constraint to development in China’s poorest areas, betterunderstanding of the distributional consequences of financial reform takes on addedimportance. This is especially true given the lack of any systematic empirical study ofthis issue.In this paper, we study changes in financial intermediation and financialperformance over time using a unique data set from surveys of rural financial institutionsconducted by the authors in two rich, coastal provinces (Zhejiang and Jiangsu) and in twopoor, interior provinces (Sichuan and Shanxi) in 1998 and 1999. The paper focuses onthe financial role played by the two main rural financial institutions in China and ourresults should be qualified by an awareness that we do not consider informal borrowingor lending and saving in other formal or informal financial institutions. However,informal networks tend to be segmented and fragmented, and informal organizations thatreach large scale have not been tolerated. We therefore believe the role of ABC branchesand RCCs to be pivotal in achieving effective financial intermediation in rural areas.Focusing on rural financial institutions has several motivations. First, rural Chinaremains home of 70 percent of China’s population. Rural financial institutions are the6