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Problems and Countermeasures of Rural Mutual Credit
Cooperatives in China

Wu XILIANG1

Introduction
Even though China’s rural financial markets have undergone great reform in recent years
and banks and financial institutions cover every township, today China’s rural mutual
credit co-operatives (RMCC) remain underdeveloped in contrast with other financial
institutions. This paper presents the problems in RMCCs and gives some countermeasures
to address these problems.

The Structure of China’s Rural Banking Market
In China, the current, longstanding government measures used to manage the banking
market in the rural areas are the same as the measures used in urban areas. However,
commercial banks cannot know the rural areas completely, and it is difficult for farmers
to get loans from commercial banks (Guangwen, 2009).
There are several types of financial institutions such as: the Rural Credit Cooperative
(RCC), Agriculture Bank of China (ABC), Agriculture Development Bank of China (CADN)
and China Post Bank; furthermore, there are new types of rural financial organizations
such as: village and township banks, lending companies and rural mutual credit
cooperatives. The RCC is the basic part of the rural financial system, but it is being
reformed into three types: rural credit cooperatives, rural commercial banks and rural
cooperative banks. Until the end of 2010, there were 85 rural commercial banks, 223
rural cooperative banks, and 2,646 rural credit cooperatives at the county-level in China.
The reform is on-going, but it is a commercial mode led by government and the RCC is
becoming more and more distant from farmers (Guangwen, 2009). The Agriculture Bank
of China (ABC) and the Agriculture Development Bank of China (ADBC) are the key pillars,
and the other new types of rural financial institutions are complementary. The
Agriculture Development Bank is a policy bank. Though the China Post Bank has obtained
remarkable results with the reform, it receives more deposits from farmers and gives
fewer loans to farmers, which is described as a financial funnel or water pump in the
rural areas.
In recent years, the new types of rural financial institutions such as: village and township
banks, lending companies, and rural mutual credit cooperatives (RMCC), have been

The Amazing Power of Cooperatives ...225...


encouraged to develop in rural areas. According to the China Banking Regulatory
Commission’s (CBRC) 2010 Annual Report, there are a total of 395 new types of rural
financial institutions including 349 village and township banks, 9 lending companies and
37 rural mutual credit cooperatives. At the same time, there are unregistered civil
financial institutions, which mainly include Rotating Savings & Credit Association
(ROSCA), private loans, private funds, and illegal banks in the rural areas of China, the
number of which cannot be calculated. These unregistered civil financial institutions
play some role in resolving funding difficulties, but they cannot be registered. Based on
the work of Cindy Marks (2010), we provide a table to illustrate the rural financial
structure here.

RMCC
The Temporary Regulation of Rural Mutual Credit Cooperatives (TGRMCC) was pro-
mulgated and implemented in January 12, 2007; however, Bai Xin RMCC was established
as a productive cooperative in Li Shu County, Ji Ling Province, in July 2004, and it was
registered as a RMCC after the promulgation of the TGRMCC in 2007. The stockholders
of RMCC were farmers or small enterprises. In 2006, CBRC began 7 RMCC experiments
in 5 provinces. In March 9, 2007, Bai Xin RMCC was registered as the first village-level
RMCC in China, and Xingle RMCC in Yurun Township Ledu county, Qinghai province was
registered as the first township-level RMCC. In 2008, the experimental regional scale
expanded from 5 provinces to 31 provinces. Up until the end of 2010, there were 37 RMCCs,
which received permits from the national financial regulator, China Bank Regulatory
Commission (CBRC). As a result of the strict access rules, many civil rural financial
cooperatives cannot obtain registration from the CBRC and local government. The RMCC
can be divided into three kinds:

I The RMCCs, which obtained approval from CBRC and have business and financial
licenses. As stated above, until the end of 2010, there were only 37 RMCCs given
permits by the national CBRC in China, but there were more than 600 thousand
administrative villages, which were communities in need of financial services in rural
China.

I Government departments had propelled RMCCs as a form of poverty relief in villages
affected by poverty since 2006, which was a financial experiment employed by
governments to relieve poverty. For example, some RMCCs in the impoverished
villages of Si Chuan Province were established with the support of the Ministry of
Finance and the Leading Group Office of Poverty Alleviation and Development,
affiliated to the State Council. Until the end of 2008, there were 4,165 RMCCs
established in impoverished villages.

...226... The Amazing Power of Cooperatives


I The RMCCs were also propelled by NGOs: for instance, Oxfam Hong Kong established
the community development fund in Yunnan province and Guizhou province (see the
Ecological Association established community development funds in Inner Mongolia).

I The RMCCs received acceptance from local governments and had business licenses
or registration as juridical associations in the local civil administrative departments.
For example, the Fengyang county government in An Hui province gave support to
establish several local RMCCs. The Yancheng government in Jiangsu province also
propelled this kind of RMCC.
Of course there were many unregistered financial organizations, such as the Rotating
Savings & Credit Association (ROSCA), private loans, private funds and others, so the
quantity of the third kind of RMCC is often unclear, and they did not receive a permit
from CBRC or local governments. In 2009, there were 16 RMCCs and 148 village and
township banks. In 2010, there were 37 RMCCs and 349 Village and township banks. So
the quantity of the registered RMCCs was few and RMCCs developed slower than other
new-type rural financial institutions.

Problems
Low Management Level of RMCCs and Shortage of the Cooperation Spirit.
Most of the managers of the RMCC have a low level of education and no financial
professional knowledge nor enough risk awareness. Consequently, the RMCCs are led
by the elites in rural areas. In some RMCCs, the directors of the village or the presidents
of the Village Communist Party take the post of the directors of RMCCs. So the RMCCs
have the same problems of low cooperative governance as the problems of FSCs. The
more important issue is the cooperative spirit of the organization. To be a director or
president of a cooperative, one has to devote more time, energy and money to the
cooperative than other members, especially in the beginning phase of the cooperatives.
High Cost to Register and Operate a RMCC
The law of RMCC gives a serious limit to the RMCC. It is not easy to get permission from
the China Banking Regulatory Commission (CSRC) to register a RMCC. Even though some
cooperatives get permission, the operation costs are very high. It cost RMB 76,000 for
Bai Xin RMCC to get permission, and its director Jiang Bailing has to spend energy and
resources in unproductive activities. Shao Chunlin (2010) used two cases to demonstrate
the high cost of registering. When the RMCCs are operating in rural areas secretly and
illegally, there is a high level of institutional efficiency; meanwhile after RMCCs access
legitimate status, its institutional efficiency decreases. It is the government’s excessive
regulation that increases RMCCs operating costs and causes the social welfare loss.



Lack of Funds and Monotony of Business
The funds of RMCCs are limited to the funds and stocks of members. It is not easy to get
wholesale loans from commercial banks because the RMCCs are always small-scale.
Since the Baixing RMCC was established, there were only two loans valued RMCC
200,000. Until February 2010, Banxing RMCC was still repaying the loan. At the same
time, the business of RMCC was of monotonous. Before the establishment of most of
the RMCCs, they were a productive co-operative. After registering the RMCCs, they had
to stop production because the temporary regulations of RMCCs limited their business
scale. The scale of RMCCs was small, and they had high operation cost. It is a benefit for
the grassroots cooperative to have financial, productive, sales business, but the FSCs are
limited to productive and sales business while the RMCCs are limited to financial
business.

Countermeasures to the Problems of RMCCs
As far as the problems in RMCCs, here we provide some countermeasures.

Look for the Cooperative Spirit in RMCCs
There is no cooperative spirit in RMCCs as in other FSCs, while the cooperative spirit is
necessary for the management level of the RMCCs and FSCs. It is doubtful whether there
is a cooperative spirit in Chinese society and culture (Cao, 2000). Most cooperation is
built in rural areas based on blood and relative relations among farmers; Fei Xiaotong
(1985) described this relation as the Diversity-Orderly Structure (Graphic 1). Chinese
people take themselves as the center in their history, and then look at their home, family
and the society last. So Chinese people could not trust other neighbors and could not
cooperate with strangers. Yet cooperatives need cooperation and the trust between
neighbors and strangers.
The cooperatives and cooperative spirit came from western countries. There were two
kinds of cooperative: the cooperative from man and the cooperative from God. China
had 100 years history of the cooperatives, but the cooperatives in the past 50 years have
been built on communism, which was of man and controlled by man. So the fate of the
cooperatives have been seriously affected and decided upon by man and man’s politics.
The directors of cooperatives should have a broad spirit of love and equity. The broad
love and equity spirit is from the God in Christianity. The cooperative spirit is from the
belief of the civil society—not from man’s political organization. In Chinese culture, the
main past civil belief of Confucianism could not foster a spirit of broad love and equity
in cooperatives. The political party could not intervene in the affairs of the civil
cooperatives as before either. The cooperative spirit of RMCCs and FSCs came from the



civil belief of Christianity. Current RMCCs and FSCs are built on blood and relative
relations, which make the directors of cooperatives use their relatives to manage the
co-operatives.
Involvement with FSCs
The Temporary Regulation of the RMCC dictates that the RMCC cannot have productive or
sales business. The law of the FSCs formulates that it cannot have the credit business either.
It is difficult for the FSCs to get sufficient funding to develop their productive and sale
business. As far as the views of Wang Shuguang (2009), there are three ways to solve these
problems. The first is to have some means of guaranteeing FSC member security; the
second is to use the commercial guarantee corporation, with the government providing
support and guarantee fees; the third is that the FSC could develop its own credit business
for members. Now, in the Tong Zhou region of Beijing city, experimental RMCCs are chosen
from the FSCs and members of the experimental RMCCs are also the members of the FSCs.
In China, the Chinese Communist Party leads the government. The party uses its political
power to direct the RMCC. In the party’s No. 1 Document, the quantified FSCs could
establish the RMCCs. The document guides the government to follow party orders to make
the FSCs establish the RMCC. So in the future, it is possible for more FSCs to get permission
to be credit businesses. At the same time, the cooperatives with financial, productive and
sales business expect to be legitimized.
Promote Cooperation with the Other Financial Banks
Traditional official rural credit cooperatives (RCC), post banks, village and township banks
and new types of financial institutions dominate the rural financial markets. In the rural
areas, it is difficult for the RCC and VTB to deal with scattered farmers. The transaction
costs – including the information cost and supervision cost – between them is very high.
But the RMCCs live among the farmers and have the advantage of dealing directly with
the farmers. So if the RMCC takes the duty of loaning wholesale, it could have enough
funds and lower its loaning risk. Here we provide a graph of the fund connecting
mechanism of RCC, VTB, SLC and RMCC (Shuguang, 2008).

Conclusion
There is a large financial demand by farmers in the rural areas of China. Local government
gives traditional financial supply. Even the Rural Credit Cooperative came from farmers in
earlier times and it was transformed into an official commercial bank. The Temporary
Regulation of RMCC was developed in 2007, but there are many problems, including: low
management levels, fund shortages, business monotony and high registration-operation
fees. To solve these problems, we have to consider some other countermeasures such as:
establishing cooperative values in the culture of local places; involving RMCCs with other
kinds of cooperatives and with other financial institutions in the rural areas of China.



Table 1: Financial institutions in China’s Rural Banking Market

Source: China Banking Regulatory Commission Annual Report 2010; ABC and ADBC websites.

Graphic 1: Diversity-orderly Structure of the Chinese Society



Graphic 2: The Link of Professional Cooperation and Cooperative Cooperation

Graphic 3: The Fund Connecting Mechanism of RCC, VTB, SLC and RMCC

Note
1
College of Politics and Manage Science, Henan Normal University, Xinxiang, Henan, 453002, China



Bibliography
CAO, J. (2000). China Along the Yellow River: A Scholar’s Observations and Reflections on Rural Society,
Shanghai, Shanghai Literary and Publishing House.
XIAOTONG, F. (1985). Rural China, Beijing, Sanlian Press.
MARKS, C. (2010). “Rural Banking in China”, Asia Focus, Federal Reserve Bank Of San Francisco, may.
GUANGWEN, H. (2009). “Dilemma and Countermeasure of the development of Rural Credit Cooperatives”,
China Co-Operation Economy, No 12.
SHUGUANG, W. (2008). “An Investigation of the First Rural Cooperation Fund”, The Chinese Banker, No 7.
SHUGUANG, W. (2009). “How to Break through the Bottleneck of the Cooperative Finance”, Management and
Administration on Rural Co-operative, No 11, p.12-13.
SHUGUANG, W. (2010). “Rural Mutual Credit Cooperation: Operation Mechanism, Industry Baseand
Government Function”, Management and Administration on Rural Co-Operative, No 08.

Summary
The main object of this paper is to show the current problems of rural mutual credit cooperatives
(RMCC), which is drawing on the analysis on the structure of China’s rural banking market. The main
problems are: the management level is low and there is less cooperation spirit in RMCCs; RMCCs are
short of funds and their business is of monotony; the cost is high to register and to operate a RMCC.
Furthermore, we give some countermeasures to solve these problems: to look for cooperation spirit
in RMCCs; to involve with Farmers’ Specialized Cooperatives; to promote the cooperation with other
financial banks.

Resumen
El principal objetivo de este trabajo es mostrar los problemas actuales de las cooperativas rurales de
crédito mutuo (RMCC, por sus siglas en inglés) haciendo uso del análisis de la estructura del mercado
bancario rural en China. Los principales problemas son: el nivel de gestión es bajo y hay menos espíritu
cooperativo en las RMCC; las RMCC tienen escasez de fondos y sus negocios son monótonos; es
costoso registrar y operar una RMCC. Además, se proponen algunas medidas correctivas para resolver
estos problemas: suscitar el espíritu cooperativo en las RMCC; relacionarse con cooperativas
especializadas en agricultura; fomentar la cooperación con otras instituciones financieras.

Résumé
L'objet principal de ce texte est de montrer les problèmes actuels des coopératives de crédit mutuel
rurales (RMCC), en s'appuyant sur l'analyse de la structure du marché chinois des services bancaires
en milieu rural. Les principaux problèmes sont les suivants : le niveau de gestion est faible et il y a
moins d’esprit de collaboration dans les RMCC; les RMCC manquent de fonds et leur entreprise
fonctionne dans la monotonie; les coûts pour inscrire et exploiter une RMCC sont élevés. En outre,
nous donnons quelques mesures de prévention pour résoudre ces problèmes : pour susciter un esprit
de coopération dans les RMCC; pour faire participer les coopératives d‘agriculteurs spécialisés et pour
promouvoir la coopération avec d'autres institutions financières.


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