Financial transfusion required
By Chen Xiwen (China Daily)
Updated: 2004-02-24 16:12

The shaky financial foundation of China's rural economy is the root of many of the problems facing the agricultural sector.

Experts from home and abroad agree that China's agricultural sector has made much headway over the past several years, but from the perspective of resource distribution, several problems persist.

In 2002, the nation's agricultural output accounted for 14.5 per cent of the gross domestic product (GDP) while labourers from the sector accounted for half the national labour force.

Such a stark contrast indicates the sector is inefficiently run, with little or no chance for farmers and their families to get rich.

This is best illustrated by unreasonable resource distribution in the country.

In 2002, loans for agriculture accounted for only 5.24 per cent of all outstanding loans made by financial institutions.

Considering its contribution to the GDP, China's agriculture has yet to realize its full potential.

In another sense, however, this is a sign the sector has not received the financial resources that match its role.

Taking into consideration China's large number of rural township enterprises, which produce 31.6 per cent of the country's GDP with the backing of 5.19 per cent of the country's loans, the imbalance in resource distribution is obvious.

In other words, China's financial institutions put nearly 90 per cent of their resources into non-rural-economy sectors, such as urban industry and tertiary industry, that produce about 50 per cent of the GDP.

This has led to serious losses in terms of efficiency, and failing to solve the problem will inhibit the long-term development of China's rural economy and ultimately victimize the national economy.

Since the founding of the People's Republic, rural people have contributed enormously to the country's develop-ment.

First, during the planned economy period, a colossal amount of capital was taken out of the rural area to support the national economy by the so-called "price scissors" effect, in which rural people bought industrial consumer goods at a price comparatively higher than that of the agricultural surplus they sold.

While experts are divided on the figure of the capital exodus, some estimate it could be up to 800 billion yuan (US$96 billion).

Second, farmers have sacrificed much cultivated land, which is owned collectively, for the country's economic development.

Land requisition is a normal process that happens in many countries. The problem here is the low level of compensation for farmers' loss of land.

My estimation is that through low-priced requisition, farmers' contribution is more than 2 trillion yuan (US$241 billion).

Third, the 100 million rural migrant workers in cities boost local GDP growth while local governments provide few public services for them.

While contributing to the national economy, the rural economy has not be given its due resources for sound development, which in turn has affected the healthy growth of China's economy.

Our country has witnessed sizzling growth over the past few decades. From 1978 to 2002, its average annual GDP growth was 9.4 per cent.

The high growth rate, however, has obfuscated the worsening economic disparity between rural and urban areas.

In 2002, the average disposable income of urban residents was 3.11 times that of rural people's income. In 1978, the ratio was 2.57.

Sustainable economic growth depends on a large market. China has encountered the economic bottleneck of inactive domestic demand due to a limited market.

Although China boasts a population of 1.3 billion, only about one third of the population have adequate purchasing power to ratchet up the market given the predominant proportion of rural population, who have suffered from slow income growth for many years.

The biased mentality of some local officials must be scrapped.

Given the declining proportion of agriculture in the GDP growth, many local governments and officials, largely GDP-oriented, think it unworthy to invest in the sector. As a result, it is increasingly difficult for local agriculture to get necessary resource input and in this condition it is not surprising that problems have cropped up in the rural areas.

Without discarding this GDP fetishism, it will be a "mission impossible" for China's agriculture to be revitalized.

Regarding credit service, investigation shows that only 15 per cent of the 240 million rural families have obtained loans from financial institutions while 85 per cent borrow from private creditors. This shows that China's financial system has failed to provide adequate financial services for farmers.

Apart from the misconception held by some financial managers that agriculture is a sector with few returns for their loans, there are some systemic obstacles.

For example, farmers' land is not accepted as a legal guarantee if they want to borrow from financial institutions because the Guarantee Law prohibits cultivated land from acting as guarantee. Their right of land use also cannot act as guarantee.

The only property left for farmers that may possibly become their loan guarantee is a house. But since many farmers build their own houses, the government does not issue a house certificate, without which local credit co-operatives will not take the house as a legal guarantee.

Admittedly, most farmers in China only possess a small plot of land with a limited output. Therefore, the lending cost for financial institutions is much higher than that when they deal with large-scale businesses in urban areas.

As a result, it is reasonable to raise the lending interest rate in line with market demand. Actually, many farmers are willing to borrow from local rural credit co-operatives even if the current interest rate was doubled. However, the authorities forbid hiking interest rates citing possible distortion of market order.

Another example of undue financial services for the rural economy is the lack of long-term infrastructure loans for rural construction.

Examination of the rural credit structure indicates that little of the credit for rural infrastructure is long-term. Most of the loans are circulating funds, which will affect the long-term development of the rural areas.

Currently many problems are facing the rural areas, such as slow income growth of farmers, the widening income gap between rural and urban residents and poor public services.

But in essence, the solution to the rural problems lies in the transfer of redundant rural labourers to urban areas and diversion of investment and financial resources in those poorly efficient urban projects to rural areas.

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