(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000101200001-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: January 12, 2017
• Document Release Date: June 28, 2011
• Sequence Number: 1
• Publication Date: March 26, 1985
• Content Type: REPORT

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~ Central Intelligence Agency ,~
Washington. D. C. 20SOS
DIRECT ORATE OF INTELLIGENCE
26 March 1985
China: Bank Support to Rural Development
Summary
Beijing is adjusting its rural banking system
to meet the needs of the rural reform program. In
recent years:
-- Agricultural banks and credit cooperatives
have altered their loan priorities to support
the development of specialized households and
rural industries.
-- The State Council has granted rural banks and
credit cooperatives increased autonomy to
conduct bank operations.
-- The central government has raised interest
rates on loans and deposits while allowing
banking authorities greater flexibility in
setting rates.
Rural banking ref orms are designed to i ncrease the
ability of banks to respond to local credit needs
and to improve the allocation of funds in the
countryside.
We believe that the rapid growth last year in
rural industrial production results, in part, from
rural credit reforms already implemented.
Government policy encouraging further development of
diversified farming and township and village
This memorandum was prepared by China Division,
Office of East Asian Analysis. Comments and questions are
welcome and should be directed to Chief, Domestic Policy Branch
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industries, however, will put increasing pressure on
the rural banking system to provide funds for
investment. Although risking local failures and
some loss of central control over rural credit,
continuing bank reforms should improve the rural
banking system's ability to support rural
development.
Introduction of the household responsibility system,
increases~in purchase prices of agricultural staples, and
extensive development of rural industries have caused a surge in
the supply of and demand for funds in China's countryside. The
volume of work conducted by the rural banking system has
increased enormously in the last six years, with the number of
farm clients increasing from 6 million production teams to over
170 million peasant households. Beijing has responded by
shifting rural loan priorities, by allowing greater
decisionmaking autonomy at all levels in the rural credit
network, and by raising interest rates on loans and deposits
offered by rural banks and credit cooperatives.
Beijing's commitment to continued reform of the system was
underscored in a speech by Vice Premier Wan Li at a national
rural work conference last December. Complaining that the rural
banking system is not yet adept at absorbing and efficiently
distributing idle funds in the countryside, Wan maintained that
it is imperative to speed up the transformation of agricultural
banks and rural credit cooperatives from fund distributing
administrative organs to independent banks operating under broad
state supervision. Wan also praised the efforts of peasants in
raising and pooling funds outside the rural banking framework.
China has initiated two major changes in rural credit policy
since 1983 to support the readjustment of production in the
countryside. First, agricultural banks and credit cooperatives
have switched from primarily supporting communes, production
brigades, and collectives to offering greatly enhanced support
for individual, and particularly specialized, farm households.
Second, rural banks have shifted from mainly supporting
agricultural production to encouraging development of rural
industry, i~cluding storage, transport, and marketing
operations. Apropos of the second change, agricultural banks
1Table 1 lists assets and liabilities for the Agricultural
Bank of China in 1983 and 1984, as reported by Embassy Beijing.
Some of the amounts in the table do not correspond to Chinese
published amounts and we have not yet attempted to reconcile them.
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have been given primary responsibility for handling monetary
affairs for industrial and commercial operations in the rural
areas.
In 1985, Beijing plans to provide enhanced banking support
to rural industries. According to press reports early this year,
the Agricultural Bank of China (ABC) and the rural credit
cooperatives (RCCs) will increase their total volume of loans by
20 percent, with loans to rural enterprises projected to increase
by 30 percent, while loans to the2agricultural sector are
expected to grow only 10 percent. Loans for animal husbandry,
forestry, and fisheries are projected to increase by 70 percent,
50 percent, and 15 to 20 percent, respectively. If the planned
allocations are realized, by the end of 1985 the combined loan
portfolio for the ABC and the RCCs wi 11 have the following
composition: 41.4 percent will be loans for agricultural
production, 49.2 percent will be loans for rural enterprises, 1.1
percent wi 11 be 1 oans for animal husbandry, and 8. 3 percent wi 11
be loans for forestry, fisheries, and side-line activitives.
Rural banks will adjust interest rates to support Beijing's
rural development policies. Preferential rates will be offered
on loans to nonfarming enterprises including food and fodder
processing industries, small-scale energy projects, and building
materials production. Preference also will be given to existing
enterprises seeking funds for modern technology to upgrade
facilities. Agricultural banks will continue to support
irrigation projects, rural mining operations, transport and
marketing activities, and the adoption of scientific farming
methods. Rural banks wi 11 offer 1 oans to farmers for use i n
purchasing agricultural inputs, but farmers will be urged
increasingly to make use of their own funds to finance
agricultural production.
The ABC plans to promote rural development by offering
grants of 300 million yuan a year for the next six years to
China's most economically deprived counties. In 1985, the ABC
will also provide 300 million yuan in special development loans
for the same areas.
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BANK AUTONOMY
Beijing recognizes that budgetary problems will prohibit the
state's financial departments from increasing their investments
in the countryside for some time. Since continued rural
development will depend largely on the ability of the rural
banking system to acquire funds from peasants, rural banks and
credit cooperatives have been granted i ncreased autonomy and a
broader range of operations.
Agricultural Bank of China
Beijing has reduced the proportion of savings that the ABC
must hand over to the People's Bank of China (China's central
bank) and now allows the ABC to redistribute funds within the
rural banking network. Rural banks have increased flexibility in
approving (or denying) loan requests for technological
transformation and other projects. To enhance the ability of
rural banks to support industrial development, Beijing has
removed the restriction that all ABC loans be made during the
spring planting season.
For the past two years, rural banks have been allowed to
extend loans to small, privately-owned businesses in the
countryside. Similarly, families engaged in rural production are
allowed to hold individual accounts at rural banks and credit
cooperatives. Some provincial branches of the ABC now offer
1 oans to farmers for purchasing automobiles and 1 arge farm
machinery (provided the farmers supply one-half of the required
capital), while other provincial agricultural banks have expanded
their network of RCCs, establishing credit cooperatives at the
village level.
Rural Credit Cooperatives
In order to increase rural savings and to improve the
allocation of rural funds, the State Council last August released
a circular encouraging reform of the credit cooperative system.
The circular proposed a gradual transformation of the credit
cooperatives into independent economic entities responsible for
their own profits and losses, collectively owned at the village
level through peasant shareholding.
Guidelines announced at the provincial level suggest that
the RCCs:
Will be controlled locally by a "cooperative members'
representative assembly" which will elect cooperative
directors and oversee planning and f i nanci al management.
Will have freedom to determine the nature, recipients,
amounts, and terms of 1 oans i t offers, without ABC
approval.
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-- Will be allowed to set loans rates within a 20-percent
band of the state-determined rate.
-- W i 11 give priority to shareholders (which may include
village workers and rural enterprises) when extending
loans.
Agricultural Bank off i ci al s, however, have used the credi t
coo perati ves as their own branches, and continue to oppose an
independent role for the RCCs. According to Embassy reporting,
the ABC thus far appears to have been successful i n stal 1 i ng the
reforms .
Popular Credit Institutions
In what is perhaps a concession to an already established
practice, Beijing has recently encouraged peasants to form
private credit institutions to support the development of rural
factories and transport and power networks. These "popular"
credit institutions--often taking the form of local credit unions
or joint stock operations--were praised by Wan Li in his December
speech as important supplements to the ABC and the RCCs.
According to provi nci al media, popul ar credit institutions often
outbid rural banks and credit coo perati ves for funds by offering
higher rates of return, and extend 1 oans at above-bank rates to
peasants and enterprises that have no other place from which to
borrow.
We believe that Beijing's willingness to loosen control of
rural credit and risk complaints about usurious interest rates
ref 1 ects a disappointment with the pace of ref orm i n the rural
banking system. In his speech, Wan referred to unresolved
structural problems that limit rural banks and credit
cooperatives. Supporting the development of private credit forms
may also be an attempt to diminish the control of rural cadres
over credit in the countryside.
On 1 January, 1984, China raised the basic monthly interest
rate for agricultural production loans from approximately 0.45
percent to 0.6 percent, gi vi ng the head off ice of the ABC
discretion to ~djust the rate upward or downward within a 20-
percent range. The increase was designed to bring loan rates in
line with credit conditions in the countryside and the
discretionary range was instituted to enhance the ability of
rural banks to differentiate between borrowers.
3Table 2 gives monthly interest rates on loans and deposits
at rural banks in 1984.
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The increase in loan rates was also implemented to correct
the inverted interest rate structure that was adversely affecting
the profitability of rural banks and credit cooperatives. The
success of the household responsibility system in agriculture
caused a 1 arge i ncrease i n savings deposits held by individual
peasants (which earned a monthly interest rate of 0.24 to 0.75
percent compared with the 0.15 percent received for deposits by
commune and brigade collectives). As the proporation of high-
i nterest-rate deposits increased, the cost of rural deposits
exceeded the interest that agricultural banks and credi t
coo perati ves recei ved from rural loans.
We believe that the rapid growth in China's rural industrial
production last year resulted, in part, from loan support
provided by the ABC and RCCs. Loans from private credi t
institutions also appear to have provided an important boost to
village-level enterprises. Beijing's policy encouraging further
development of diversified farming and rural industries, however,
will put increasing pressure on the rural banking system to
provide funds for i nvestment.
Reports that interest rates on private loans are
consi derably higher than rates on bank loans, along with offi ci al
criticism of the rural ban king system for its i nabi 1 ity to absorb
and efficiently use idle funds, suggest to us that substanti al
barriers exist which inhibit the transfer of credit within the
system from surplus to deficit areas. Granting rural banks and
credit cooperatives more latitude to set interest rates and
screen potential borrowers should help improve the allocation of
funds i n the countryside.
Expansion of credit to specialized farm households and
privately-operated rural enterprises will inevitably lead to
instances of borrowers who are unable to repay loans. Beijing
maintains that because the state owns the 1 and, peasants cannot
go bankrupt and wi 11 al ways have cl aim to a pl of of "food grain"
land. Supposedly, the state and local authorities will aid
peasants who become financially overextended. Beijing, however,
has not spelled out a policy for handling bankruptcies in the
countryside, and we believe it may not understand fully the
dimensions of the potential problems.
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Bal ance Sheet for Agricultural Bank of China
(figures i n bi 11 ions of yuan )
SOURCES OF FUNDS
1983
1984
Percent Change
Deposits by tate-Owned
5.6
6.6
18
Agricultural Enterprises and
Institutions
Deposits by Industry and
3.9
9.6
147
Commerce i n the Rural Areas
Deposits by Township Enterprises 1
S
2.1
0.8
(62)
avings Deposits in the Rural Area
6.8
9.7
43
Deposits by Credit Cooperatives
D
35.5
32,g
fig)
eposits by Government Organs
4.1
3.5
(15)
and Other Organizations
Other Deposits
D
3, 6
3.4
~ 6)
eposits from Funds Alotted
1.0
1.2
20
by the State for Agricultural
Production
Intercourse Among Banks
15.0
35.8
139
Funds Owned by ABC
Surpl us
Total
22.0
1.4
101.0
21.1
1.7
126.2
~ 4)
21
25
USES OF FUNDS
Loans to State-Owned
3.9
5.1
31
Agriculural Enterprises
Loans to Industry and Commerce
45.0
71,4
59
i n the Rural Areas
Loans to Township Enterprises 2
16.3
7.7
(53)
Loans to Peasants
1.9
4.4
132
Loans to Credit Cooperatives
1,6
3.1
94
Loans for Advances
0.7
0
7
O
Other Loans
4
2.1
.
2
1
0
Agency Services
29.5
.
31
7
7
Total
101.0
.
126,2
25
1Formerly titled "Deposits by Communes and Production
Brigades."
2Formerly titled "Loans to Communes and Production
Bri gades."
3Formerly titled "Loans for Forward Purchases."
4Formerly titled "Business Done on Other Banks' Behalf."
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Table 2
Monthly Interest Rates at
Rural Banks in 1984
LOAN RATES
0.42 - 0.54 percent for energy development 1 oans (rates were 1 ower for
small hydropower development),
0.48 - 0.90 percent for 1 oans to contract, specialized, or key households
(lower rates were for short-tens personal loans, higher rates were
for farmers engaged i n commercial activities ),
0.60 - 0.66 percent for 1 oans to collectives and bri gade-run enterprises,
0.72 percent for 1 oans to i ndi vi duals engaged i n rural sideline
industries, commerce, and transportation.
DEPOSIT RATES
0.24 percent for demand deposits, 1
0.48 percent for one-year deposits,2
0.57 percent three-year deposits,
0.63 percent for five-year deposits,
0.75 percent for eight-year deposits .
1Prior to 1980, the monthly interest rate for demand
deposits was .18 percent.
2Prior to 1980, the monthly interest rate for one-year
savings deposits was . 33 percent.
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Subject: China: Bank Support to Rural Development
Distribution:
Department of State
1 - Donald Anderson, Director, Office of Chinese Affairs (EAP/C), Room 4318
1 - Howard Lange, Deputy Director of Economic Affairs, Office of Chinese
Affairs (EAP/C), Room 4318
1 - Richard Howarth, Director, Office of Economic Policy (EAP/EP),
Room 5321
1 - John Danylyk, Chief, INR/EC Communist Economic Relations Division,
Room 8662
1 - Chris Clarke, INR/EAP, Room 8840
Department of Treasury
1 - James Griffin, Office of East-West Economic Policy, Room 4450
Department of Commerce
1 - Office of Intelligence Liaison, Room 6854
Ft. Meade ~ _ _ . _ _, ....,,_,,.,ay vcuurt t,y Hgency,
1 - Fred Surls, Leader, PRC Section, Department of Agriculture, Room 350
Central Intelligence Agency
1 - DDI (7E47)
1 - Executive Director (7E 12)
1 - NIO/EA (7E47)
1 - NIO/Eton (7E47)
1 - D/OEA (4F18)
2 - C/OEA/CH (4G32)
1 - OEA Research Director (4G32)
1 - C/OEA/SDS (4G32)
1 - C/OEA/CH/DEF (4G32)
1 - C/OEA/CH/DEV (4G32)
1 - C/OEA/CH/DOM (4G32)
1 - C/OEA/CH/FOR (4G32)
1 - C/OEA/NA (4G43)
1 - C/OEA/SA (4F38)
1 - PDB Staff (7G15)
5 - CPAS/IMC/CB (715)
1 - CPAS/ILS (7G15)
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1 - C/PES (7G15)
1 - OCR/DSG (1H19)
1 - C/DO/PPS (3D01)
3 - D/OLL (7B24)
1 - FBIS/AG/CB (212 Key)
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