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This chapter details the evolution of Chinese informal finance, describing the different types of informal finance that have eased constraints posed by the formal financial sector. It discusses why informal finance is important and how it has evolved, as well as what can be further done to improve informal finance. Informal finance has been rejuvenated since the reform and opening-up policy of the 1980s, as China has experienced the transition from a planned economy to a market economy, as well as the transition from single-ownership to multi-ownership and a rapid boom of the private economy. Because of the critical role of informal finance in the economy, the government should regard informal finance as a “weathervane” that can forecast the credit demand of the financial market; as an innovation, which can optimize the allocation of institutional resources; and as an induced institutional arrangement, which can fix up the problems brought about by state-oriented financing and institutional change.

This chapter examines rural credit cooperatives (RCCs) in the context of China's rural financial landscape, with particular emphasis on their significance to the rural economy and households. China's rural financial system serves roughly 800 million people, who live in large swaths of hinterland in the central and western provinces and in rural and peri-urban locales in the eastern coastal provinces. Despite a diverse range of credit demands, the official rural financial sector has been largely monopolized by RCCs and, until the late 1990s, the state-owned Agricultural Bank of China (ABC). Since 1998, the ABC has been offering poverty alleviation loans at a subsidized interest rate to rural households in poor counties. This chapter first provides an overview of China's rural financial sector before discussing the importance of rural savings for rural households. It then considers township and village enterprises and the history of RCCs, along with the informal credit sector. It shows that the savings of rural households have been channeled to finance urban development, reflecting an inherent urban bias in China's development strategy.

This chapter examines the institutional design of rural credit cooperatives (RCCs) and whether it influences patterns in their lending. Drawing on the results of a household survey, it considers the factors that shape loan officers' behavior and affect the loan allocation process. Although not part of the state bureaucracy, RCCs are subject to a dual accountability system similar to that of any subnational bureau in China. Comparison of RCCs' line of reporting and supervisory structure with that of state-owned banks such as the Agricultural Bank of China and the People's Bank of China further illustrates why credit cooperatives are more susceptible to local-government influence. This chapter first discusses existing explanations for the rural credit sector outcome, particularly bias in lending toward local government-owned enterprises. It then provides an overview of RCCs' corporate governance structure and explains why China's banking regulator cannot supervise RCCs effectively. Finally, it analyzes lending patterns by rural cooperative foundations.

This book concludes by providing an update on the reform of China's rural credit cooperatives (RCCs) in the late 2000s, with particular emphasis on the costs of soft-budget constraints and bailouts by the central government. It compares the political–economic dynamics of the rural credit sector with the rise in local-government borrowing and debt as a result of the 2008–2009 fiscal stimulus program. The book situates its findings in the broader theoretical contexts of local development-oriented and predatory states, balance of power in central-local relations, and market-preserving federalism. It argues that the bailouts took place because the RCCs were “too big to fail,” thus creating “moral hazards.” Finally, it draws normative implications for China's development policies and its growth model.

This book examines the bias in lending toward local government-related enterprises in rural China. It investigates why the mobilization of rural savings has contributed to successful industrial development in some locales but not in others. Focusing on rural credit cooperatives (RCCs), the official banking institutions for rural China, the book looks at the role of local governments in regional development. More specificially, it explains how a highly decentralized fiscal structure led to disparate fiscal capacity of subnational governments, which in turn contributed largely huge variations in social spending and uneven regional development. It also analyzes two critical questions at the nexus of China's politics, finance, and development: first, why RCC loans have been allocated consistently to local government enterprises and projects; second,what is the local variation in industrialization outcome from savings mobilizations.

This chapter examines bias in the lending practices of rural credit cooperatives (RCCs) across all locales from the perspective of institutional design. More specifically, it shows how the Chinese Communist Party's cadre evaluation system and the fiscal system combine to create overpowering individual and collective fiscal incentives for local governments to pursue local industrialization and revenue maximization at all costs. After providing an overview of the cadre management system in Chinese townships, the chapter discusses the short-term opportunistic behavior and outcome orientation of the cadre evaluation system. It also considers how fiscal reforms have made it an imperative for local authorities to promote industrialization and maximize revenue at the collective level.