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Multiple Principals and Collective Action: China's Rural Credit Cooperatives and Poor Households' Access to Credit

Published online by Cambridge University Press:  24 March 2016

Lynette Ong
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Abstract

Ample empirical evidence suggests that Rural Credit Cooperatives (RCCs), which are the core credit institutions in rural China, are not accountable to their member households. This article argues that this conundrum can be explained by an institutional analysis of the credit cooperatives using the multiple principals-agent framework: the credit cooperatives as agents are accountable to multiple heterogeneous principals—with multiple conflicting objectives. The multiple principals are (1) the County RCC Unions, which exercise control using the evaluation criteria on which the remuneration of grassroots RCC officers is assessed; (2) local party secretaries, who exert influence through top personnel appointment and dismissal in the credit cooperatives; and (3) member households, which are a “collective” principal. In a multiple-principals scenario, the “collective” principal has weaker control over the agents due to the “collective action” problem.

Keywords

Principal-agentmultiple principalscollective actionChina's political economycredit cooperatives
Type
Articles
Information
Journal of East Asian Studies , Volume 6 , Issue 2 , August 2006 , pp. 177 - 204
Copyright
Copyright © East Asia Institute 

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References

Notes

The author gratefully acknowledges helpful comments by Stephan Haggard; by an anonymous referee; and by Andrew MacIntyre, Christopher Findlay, Yongshun Cai, and Carsten Holz. This article benefited from suggestions made by participants at the inaugural Graduate Conference on China Studies at the Chinese University of Hong Kong in January 2005. All remaining errors remain those of the author.Google Scholar

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24. Structural losses for the RCCs were caused by several factors. First were the high interest rate differentials between loans and deposits. In the early 1980s, the RCCs paid rates of between 7.2 and 9.4 percent on farmers' deposits, most of which were fixed term; they were required to place 20–30 percent of their deposits with the ABC as reserve, but obtained only 4.3 percent interest returns on capital (Tarn, , “Rural Finance in China”). The negative margins between the interest rate received on the reserve and those paid to depositors were a major source of structural losses for the credit cooperatives (Watson, , “Financing Farmers”). A second factor was low capital utilization rates. The reserve deposit requirement substantially reduced the amount of capital the RCCs had available to lend out to earn returns with which to pay their depositors. Aside from the 30 percent reserve required to be placed at the ABC, the RCCs were also required to retain 15 percent of their deposits as operational reserves, and therefore only about half of their deposits were available for intermediation (Watson, , “Financing Farmers”; Tarn, , “Rural Finance in China”). A third factor was that deposits became a major source of capital for the ABC. Reserve deposits by the RCCs were the single largest source of funds for the ABC, accounting for nearly half of ABC's total deposits.Google Scholar

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27. The RCC unions of Changshu, Jiangyin, and Zhangjiangang counties in Jiangsu province were converted into rural commercial banks. The PBC provided interest-free on-lending to the RCCs in Jiangsu for five years to help reduce their historical debt burdens. Cheng, Enjiang and Xu, Zhong, “New Developments in China's Rural Financial Markets: Since the Middle 1990s,” paper presented at the China Brown Bag Seminar, Asian Development Bank, Manila, February 28, 2003.Google Scholar

28. The eight provinces are Zhejiang, , Shandong, , Jiangxi, , Guizhou, , Jilin, , Chongqing, , Shaanxi, , and Jiangsu, .Google Scholar

29. The different shareholding models include cooperative systems, shareholding systems, and commercial banking. In relatively developed areas with vibrant commercial activities and less need for supporting agricultural households, commercial banking models are being tested. The actual conditions for commercial banks are as follows: the total capital value of the RCC is no less than 1 billion yuan, the nonperforming loan ratio is lower than 15 percent, equity after restructuring is no less than 50 million yuan, and the capital adequacy ratio is at least 8 percent (Yu, Ning, “Nongxinshe youxian gaige” [Limited reforms of the RCCs], Caijing Magazine, no. 15, 2003, pp. 27–36).Google Scholar

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32. Personal interviews with RCC managers; the Sichuan Ministry of Agriculture, which was the base of the former Sichuan Rural Cooperative Management Station; and some township officials.Google Scholar

33. Though there is more than one individual or employee with each rural credit cooperative, we perceive them as a single agent having the same interests.Google Scholar

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39. It is important to note that if these two elements are not present, a collective principal will then become multiple principals. This may be a tautology, but it is sometimes easy to overlook the obvious.Google Scholar

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43. Ostrom, Elinor, Governing the Commons: The Evolution of Institutions for Collective Action (Cambridge: Cambridge University Press, 1990).CrossRefGoogle Scholar

44. “Conditional cooperators are individuals who are willing to initiate cooperative action when they estimate others will reciprocate and to repeat these actions as long as a sufficient proportion of the others involved reciprocate'. Conditional cooperators will tend to trust others and be trustworthy in sequential prisoner's dilemma games as long as the proportion of others who return trust is relatively high. Conditional cooperators tend to vary, however, in their tolerance for free riding. Some are easily disappointed if others do not contribute, so they begin to reduce their own contributions. As they reduce their contributions, they discourage other conditional cooperators from further contributions” (Ostrom, Elinor, “Collective Action and the Evolution of Social Norms,” Journal of Economic Perspectives 14, No. 3 [2000]: 137–148).Google Scholar

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47. The County Unions are guided (zhidao)—not managed—by the higher-level RCCs (prefectural and provincial) in terms of information provisions regarding government policy changes. For instance, to support the agricultural sector's credit demand, the central government has required that a certain proportion of RCC loans be given to agricultural households, and the provincial RCC unions are responsible for transmitting the required policy information to the lower units to help ensure that all the units operate in the direction of the central government's macroeconomic and financial policies (personal interview with a provincial RCC director).Google Scholar

48. Personal interviews with various RCC managers.Google Scholar

49. This suggests that the variable component of officers' remuneration is determined collectively at the unit, rather than at the individual level. If a township RCC performs well on these criteria, all the officers that work at the unit will receive the same compensations on the variable component. Similarly, if the unit does not perform well due to the action of an officer, the compensation of the other officers in the same unit will also be affected.Google Scholar

50. That said, this upward transfer of excess funds has been partly mitigated by the transfer from the County RCC Unions to townships where capital is in short supply, and some households have been able to obtain loans that they would not have otherwise. One of the functions of the County RCC Unions is to clear funds and accounts. When the RCC in township A has more savings than profitable lending opportunities, it cannot lend the funds to the RCC in township B that has an excess of lending opportunities over savings. However, the RCC in township A can transfer the funds to the County RCC Union, and the latter can then lend the funds to the RCC in township B to invest in profitable lending activities.Google Scholar

51. Like the Soviet system, China has parallel party and government administrative apparatuses at the national and subnational levels. The formal administrative levels below the center—province, prefecture, county, and township—are organized in basically the same way as the center, with government and party organizations paralleling one another. The Communist Party committee at each level, headed by the party secretary, is the primary point of authority coordinating the activities of the organizations within its geographical jurisdiction. The people's government is the administrative (executive) organ of the people's congress. In principle, the party is to make policy, and the government is to administer it. For the purpose of our analysis, we perceive the party apparatus and government administration at the same administrative level as a single entity. And the two terms are used interchangeably. For further details on the Chinese government and party systems, see Lieberthal, K. G. and Lampton, D. M., Bureaucracy, Politics and Decision-Making in Post-Mao China (Berkeley: University of California Press, 1992); and Saich, Tony, Governance and Politics in China (New York: Palgrave, 2001).Google Scholar

52. The local governments have direct control over two parts of after-tax profits from TVEs. The first part is that portion remitted directly to the government and known as “management fees.” The second part is the profits retained by TVEs but earmarked for public expenditures. The local government decides on the use of those funds for supporting agriculture and providing community welfare—for example, for schools, roads, health care, pensions. In addition, it also has significant influence on the remaining after-tax profits, which are used for reinvestment. Che, Jiahua and Qian, Yingyi, “Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises,” Journal of Law, Economics, and Organization 14, No. 1 1998): 1–23.Google Scholar

53. This concept has been explained in Watson, “Financing Farmers,” and in various articles in Chinese. See for example, Guo, Xiaoming, “Yi nongmin hezuo de mingyi: sichuansheng nongcun hezuo jijinghui qunwang licheng, 1986–1999” [In the name of farmers' cooperatives: Milestones of RCFs in Sichuan province, 1986–1999], University Service Centre Seminar Series No. 16, The Chinese University of Hong Kong (2001), available at www.usc.cuhk.edu.hk/wk_wzdetails.asp?id=920.Google Scholar

54. A distinction is made between “principals” and “clients.” Depositors who are clients of a bank may not necessarily be the principals to the banks. But bank investors, like the member households, who contribute to the equity of the bank, are principals.Google Scholar

55. I have conducted a thorough search of the secondary literature, such as Chinese-language newspapers and academic papers, and have found no evidence of actions by member households.Google Scholar

56. For a literature review of peasant resistance in rural China, see O'Brien, Kevin, “Collective Action in the Chinese Countryside,” China Journal 48 (2002): 139–154.Google Scholar

57. Refer to Xie, “Zhongguo nongcun xingyonghezoushe tizhi gaige de zhenglun” for examples of the central government's bailouts of the RCCs.Google Scholar

58. Some political scientists have conducted excellent work on the political economy of rural China, such as Oi, Jean C., Rural China Takes Off (Berkeley: University of California Press, 1999); Whiting, Susan, Power and Wealth in Rural China: The Political Economy of Institutional Change (New York: Cambridge University Press, 2001); and Tsai, Kellee S., Back-Alley Banking: Private Entrepreneurs in China (Ithaca: Cornell University Press, 2002). Some anthropologists have also ventured into explaining why rural finance has failed to meet the credit demands of the poor. For example, see Robinson, , The Microfinance Revolution. CrossRefGoogle Scholar

59. Here I refer to the China specialists, and the studies conducted by the China specialists are usually empirical and free of theoretical jargon or models, the merits (demerits) of which are, of course, a point of contention, which is beyond the scope of this article.Google Scholar