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2024 | OriginalPaper | Chapter

12. Irregular Financial Sector in Rural China After the Reform: A Case Study of Wenzhou

Author : Jun Zhang

Published in: Reform, Transformation and Growth

Publisher: Springer Nature Singapore

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Abstract

In the rural financial (credit) market, the irregular sector refers to the spontaneous formation of the private credit sector relevant to the official financial system and the banking organization.

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previous chapter Why Have China Had a Good Infrastructure: Decentralization Competition, Governance and Infrastructure Investment Decisions

I failed to collect information about non-governmental finance before the economic reform (1949–1978), nor any data. But I did hear something introduction about it in Wenzhou.

Zhang and Li (1990).

I was deeply impressed by this in Wenzhou. On the one hand, the offcial financial sector had a negative attitude towards the development of rural irregular finance; on the other hand, some officials of the relevant government departments seemed to show a supportive attitude.

And yet, when the bank departments wanted the government to intervene and ban the rural folk credit market, the commission of structuring reform and other departments (such as agriculture bureau, agriculture committee and industrial and commercial bureau) all supported development of private credit in different degrees. In fact, many non-governmental credit institutions were often examined and approved by the authorities of the government and registered by the industrial and commercial bureau without approval from the local people's Bank of China.

Zhang and Mao (1993).

Zhang Zhenyu and Mao Chunhua noted in their book A Survey of the Wenzhou Financial Phenomenon under the Condition of Socialist Market Economy that at the beginning of the 80s, the demand of the rural township enterprises and private sector for funds amounted to 700 million yuan, while the funds the official banks and rural credit cooperatives could provide were only 200 million yuan.

Zhang and Mao (1993).

The data on the scale of Wenzhou's private credit comes from my survey in Wenzhou in August 1996.

My survey in Wenzhou also showed that the current rate of private credit in Wenzhou is generally stable at around 30‰.

This kind of credit association still existed in the rural areas after the founding of new China, although it was cracked down and banned by the government at that time. The government even advocated “workers mutual savings association” to replace “rotating savings credit association” which was considered to have the “usury” nature.

Relatively speaking, the loan interest rate of dice throwing is slightly higher, also at 30‰ (monthly), but the period of this loan is longer.

Zhang and Li (1990).

The survey report was provided by Zhang Lidong of the Ouhai branch of Wenzhou Agricultural Bank, which was included in a book entitled A Preliminary Study of Wenzhou Capital Market edited by Wenzhou Finance Society.

For example, according to a survey (1986) conducted by Qian Shusen in Wenzhou, the fund-raising period in Hongqiao district, Yueqing county of Wenzhou was generally 1–3 years, and the dividend was generally 20–25‰ per month.

Seen from the national level, the rural cooperative foundation appeared as early as 1984 according to the survey of Cui Liukang in 1996.

The data provided by Chen Guoxing from the agricultural bank of Wenzhou show that since the Commission of Restructuring Reform of Cangnan County in Wenzhou issued the Notice on the Experiment of Rural Stock Cooperative Foundation in August 1992, 15 foundations were approved the county’s Commission of Restructuring Reform in February 1993, of which 11 commenced their business.

According to my survey in Wenzhou, the people's bank of Wenzhou was trying to rectify the rural cooperative foundations, but, because of disagreements among government's leaders, the banking sector could do nothing but complain.

Seen from the national level, the lending rate of the rural cooperative foundation is about 2–3 times higher that that of the rural credit cooperatives.

Pawn is a private financing system providing small amount of loans by using clients’ articles as collateral.

The basic information of the pawn industry in Wenzhou was provided by Zhang Zhenyu and Mao Chunhua (1993).

Von Pischke et al. (1990).

Luo and Yang (1995).

Adams (1984).

I was told by the staff of the financial department of Wenzhou that the interest rate of the rural private financial market in Wenzhou is still stable at 30‰.

Information economics is undoubtedly one of the most important fields of mainstream economics.

Stiglitz and WFiss (1981).

Akerlof (1973), Spence (1973).

D. W. Adams, Why Agricultural Credit Program in low Income Countries Perform Poorly? Farm Credit Situation in Asia, APO, 1984.

G. Akerlof, The Market for “Lemons”: Quality, Uncertainty and The Market Mechanism, Quarterly Journal of Economics, 1970, 86.

Luo Mingzhe, Yang Kunfeng: An Investigation of the Rural Financial Market Theory, see Jiang Heping: China’s Agriculture towards Twenty-First Century, Beijing, Chinese Agricultural Press, 1995.

A. M. Spence, Job Market Signaling, Quarterly Journal of Economics, 1973, 87.

J. Stiglitz, A. WFiss, Credit Rationing in Markets with Imperfect Information, American Economic Review, 1981, 71.

J. D.Von Pischke et al.: Rural Finance in Developing Economies, tr. Tang Shisheng, et al., Beijing, Chinese Finance Press, 1990.

Zhang Renshou, Li Hong: A Study of Wenzhou Model, Beijing, Chinese Social Science Press, 1990.

Zhang Zhenyu, Mao Chunhua: A Survey of the Wenzhou Financial Phenomenon under the Condition of Socialist Market Economy, Hangzhou, Zhejiang University Press, 1993.

Title: Irregular Financial Sector in Rural China After the Reform: A Case Study of Wenzhou
Author: Jun Zhang
Publisher: Springer Nature Singapore
Book: Reform, Transformation and Growth
Print ISBN: 978-981-9957-11-8

Electronic ISBN: 978-981-9957-12-5

Copyright Year: 2024
DOI: https://doi.org/10.1007/978-981-99-5712-5_12