Prosper or Perish

Prosper or Perish: Credit and Fiscal Systems in Rural China

Lynette H. Ong
Copyright Date: 2012
Edition: 1
Published by: Cornell University Press
Pages: 224
https://www.jstor.org/stable/10.7591/j.cttq43cv
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  • Book Info
    Prosper or Perish
    Book Description:

    The official banking institutions for rural China are Rural Credit Cooperatives (RCCs). Although these co-ops are mandated to support agricultural development among farm households, since 1980 half of RCC loans have gone to small and medium-sized industrial enterprises located in, and managed by, townships and villages. These township and village enterprises have experienced highly uneven levels of success, and by the end of the 1990s, half of all RCC loans were in or close to default, forcing China's central bank to bail out RCCs. In Prosper or Perish, Lynette H. Ong examines the bias in RCC lending patterns, focusing on why the mobilization of rural savings has contributed to successful industrial development in some locales but not in others.

    Interweaving insightful and theoretically informed discussions of rural credit, development, governance, and bank bailouts, Ong identifies various sources for China's uneven development. In the highly decentralized fiscal environment of the People's Republic, successful industrialization has significant implications for rural governance. Local governments depend on revenue from industrial output to provide public goods and services; unsuccessful enterprises starve local governments of revenue and result in radical cutbacks in services. High peasant burdens, land takings without adequate compensation by local governments, and other poor governance practices tend to be associated with unsuccessful industrialization. In light of the recent liberalization of the rural credit sector in China, Prosper or Perish makes a significant contribution to debates within political science, economic development, and international banking.

    eISBN: 978-0-8014-6595-6
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. List of Figures
    (pp. ix-xii)
  4. List of Tables
    (pp. xiii-xiv)
  5. List of Abbreviations
    (pp. xv-xvi)
  6. Acknowledgments
    (pp. xvii-xviii)
  7. Part I OVERVIEW AND RESEARCH QUESTIONS

    • 1 LOCAL GOVERNMENTS, RURAL CREDIT, AND REGIONAL DEVELOPMENT IN CHINA
      (pp. 3-26)

      In September 2008 a riot broke out in Jishou, a rather undeveloped city in rural Hunan province. More than ten thousand peasants who had lost their savings in an underground financing scheme took to the streets. By promising high rates of return, real-estate developers and other local companies in need of working capital had lured thousands of farmers to take out bank loans, using their savings and homes as collateral, in order to invest in these companies. When the scheme collapsed, the uproar persisted for several days and was finally quelled once the provincial government intervened to require the borrowing...

    • 2 THE RURAL FINANCIAL SYSTEM AND RURAL DEVELOPMENT IN CHINA
      (pp. 27-48)

      Drawing on secondary and some primary data, this chapter situates rural credit cooperatives (RCCs) in the context of China’s rural financial landscape in order to highlight their significance to the rural economy and households. China’s rural financial system serves roughly 800 million people, constituting 70 percent of the population. These people 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...

  8. Part II THE DESIGN OF CHINA’S ECONOMIC AND POLITICAL INSTITUTIONS

    • 3 THE DESIGN OF CHINA’S RURAL CREDIT INSTITUTIONS
      (pp. 51-75)

      Does the institutional design of rural credit cooperatives (RCCs) explain patterns in their lending? In this chapter I illuminate the factors that shape loan officers’ behavior and affect the loan allocation process by analyzing the findings of my household survey. Though 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 further illustrates why credit cooperatives are more susceptible to local-government influence.

      I begin by reviewing existing explanations for the rural credit sector...

    • 4 THE IMPLICATIONS OF CADRE EVALUATION AND FISCAL SYSTEM FOR LOCAL-GOVERNMENT BEHAVIOR
      (pp. 76-98)

      Local-government interference in lending operations can be explained through an analysis of political institutional design. Specifically, the Chinese Communist Party (CCP)’s cadre evaluation system and the fiscal system combine to create overpowering individual and collective incentives for local government to pursue local industrialization and to maximize revenue at all costs. Rural credit cooperatives (RCCs), due to their weak corporate governance structure (as detailed in chapter 2), became easy targets for local officials ravenous for financial resources. The central government seeks to control lower-level officials by setting binding quantifiable performance targets for them. But this outcome-oriented oversight is undermined by the...

  9. Part III CASE STUDIES:: BLIND MEN AND THE ELEPHANT

    • 5 DIVERGING PATHWAYS TO PROSPERITY: PRIVATELY LED VS. LOCAL GOVERNMENT-LED INDUSTRIALIZATION
      (pp. 101-125)

      On a bitterly cold winter day in 2006, I was riding a coach to Taizhou, Zhejiang province, for some fieldwork. When I reached the city, I was greeted by a giant poster captioned “the first shareholding cooperative (gufen hezuozhi) in China.” The ad was for a company called Baolite (pronounced bao-li-te) priding itself as a national pioneer of private enterprise. It was established in 1982, more than a decade before the central government formally recognized and permitted private ownership. Things are different now: private entrepreneurship is a muchcelebrated attribute of Taizhou these days.

      This chapter describes the journeys to prosperity...

    • 6 THE LOCAL GOVERNMENT-LED PATH TO RURAL DECAY
      (pp. 126-153)

      I had been in this village in Sichuan province for a week now, but there was still no sign of any working-age adults. There were plenty of children and old folks, but no healthy young men or women. It was an “hourglass population pyramid” village, in which the population pyramid is hollowed out at the center. Nearly all working-aged adults—men and women alike—had left to become migrant workers in Guangdong, Beijing, and other coastal provinces and cities, in order to support their families back in the village. Men were typically construction workers. Women usually worked in the factories....

  10. CONCLUSION
    (pp. 154-170)

    I start these conclusions by updating the RCC reform in the late 2000s, analyzing the costs of soft budget constraint and bailout by the central government. I then compare the political-economic dynamics of the rural credit sector with the surge in local-government borrowing and debt as a result of the 2008–9 fiscal stimulus program. I then situate the book’s findings in the broader theoretical contexts of local development-oriented and predatory states, central-local government relations, and market-preserving federalism. I conclude by drawing normative implications for China’s development policies and its growth model.

    The chief of China’s central bank, Zhou Xiaochuan,...

  11. Appendix: LIST OF NON-SURVEY FIELD INTERVIEWS, 2003–6
    (pp. 171-176)
  12. Notes
    (pp. 177-200)
  13. Glossary of Chinese Terms
    (pp. 201-202)
  14. Index
    (pp. 203-212)