China: Where Has Billions of Subsidized Agricultural Household Credit Gone?

2004

Lynette Ong

In an effort to improve the standard of living of the rural poor and to narrow the gap between the haves and haves-not, China's central government sets aside no less than 10 billion yuan (US$1.2 billion) a year to provide subsidized credit to poor agricultural households in the vast countryside. However, delivery of the subsidized credit is fraught with problems - few dollars actually reach the hands of the households, and the proportion of the recipients who are indeed 'poor' is a tiny minority. China's subsidized credit program highlights the heated debate among development practitioners about the efficacies of pro-poor policies in assisting the poor.

It is estimated that less than 10 per cent of the subsidized credit nationwide is actually delivered to agricultural households. My own fieldwork in rural Sichuan province suggests subsidized loans have not reached the households since 2001. Prior to that, only those who have good social connections (what the Chinese term 'guanxi') with local officials delivering the program were able to gain credit access. And yet, they were the 'better offs' who least deserved the scarce subsidies made available by the central authority. Since 2001, subsidized loans have been given to profit-maximising (private or semi-private) enterprises that are involved in the construction of airports, electricity plants or other infrastructure projects - going against the spirit of the subsidized agricultural loans.

A fundamental problem with loan delivery is the inconsistencies between the commercial orientation of the Agricultural Bank of China (ABC), now charged with the responsibility of delivering subsidized credit, and the very nature of the pro-poor program. The rural impoverished usually reside in the mountainous regions and villages with poor transport links to major cities. To cut costs, the ABC has in recent years shut down its branches at the grassroots level, leaving it with no machinery to reach out to the poor.

The repayment rate for the subsidized credit is about 50 per cent according to official statistics. However the actual repayment rate could be as low as 10-20 per cent. Because of its subsidized nature (the difference between the market and loans' interest rates are subsidized by the central Ministry of Finance), neither the borrower nor the ABC has much incentive in ensuring loan repayment.

WATCHPOINT: The central policymakers are studying the possibility of transferring the delivery of the subsidized loans from the Agricultural Bank of China, a commercial bank, to the Agricultural Development Bank of China, a policy bank. Will this improve the efficacy of loan allocations?

 

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