Читать книгу Rural Finance in Poverty-Stricken Areas in the People's Republic of China - Xuechun Zhang - Страница 8

Economic reform in the PRC is a process of empowering individuals and enterprises and transferring power from government to market. It also is a process of government and market repositioning. The reform that has occurred in rural areas allows tens of millions of farmers to decide what and how much to produce. The reform in distribution enables suppliers and buyers to sell and purchase, as they desire, at mutually accepted prices. The reform of state-owned enterprises links the performance of managers with enterprises’ revenues, reflecting the rights and value of entrepreneurs as the soul of enterprises. The opening of the labor market endows the labor force with the freedom to migrate to other places and choose jobs. Farmers, as users of collectively owned land, are granted certain land lease right. Private capital is allowed to enter most industries formerly monopolized by state-owned enterprises, including the civil aviation industry, reflecting respect for the rights of investors.

Until now, however, reform has not touched upon the right of individuals and enterprises to access financing. The only legal financing channel for individuals is through financial institutions dominated by state-owned commercial banks, whereas enterprises can get financing only through bank loans or in the highly regulated capital market. Modern financial theory holds that finance includes both investment and financing. Thus, the financial rights of individuals and enterprises are incomplete if they comprise the right to make investment without access to financing.

The requirements for diversifying financial rights include cultivating the market, establishing a credit mechanism, and breaking the inertia of the traditional government administration system. The protracted state monopoly of the credit market suppresses informal finance, and unsound market mechanisms or the uncertainties of market operation are principal reasons for concentration of financial rights. For instance, financial institutions have maintained previous interest rates even after bank loan interest rate liberalization. The insensitivity of state-owned financial institutions to interest rates is partly to blame for this, but the lack of an effective interest rate discovery mechanism is a more important cause.

The insensitivity of state-owned financial institutions to interest rates is partly to blame for this, but the lack of an effective interest rate discovery mechanism is a more important cause

In addition, an incomplete credit information system may result in individuals infringing upon the state’s credit. Credit information is a basis for financial activities. For a long time, financial institutions have based their businesses on state or collective credit. Without a fully developed credit information system, uncertainties brought about by the diversification of financial rights may shift credit risks to the state. For instance, troubled securities companies and enterprises are put into state custody.

Finally, the inertia of the traditional system postpones financial diversification. In the command economy, all economic resources, including financial resources, were at the disposal of the state or collective. Given the unique role of finance in resource allocation, financial rights are an extension of the administrative rights of governments. When it comes to economic planning, industrial policies, project approval, and microeconomic adjustment, the combination of financial rights and administrative rights reflects the government’s guarantee. This is why, at a time when most economic rights are diversified, financial rights, especially the right to financing, remain centralized in government-controlled financial institutions.

Overly centralized financial rights concentrate economic risks in the state and are very costly. One major characteristic of centralized financial rights is a limit on the right of individuals and enterprises to use their own money, forcing them to entrust this right to state-designated and state-guaranteed financial institutions. Due to pervasive information asymmetry in financial markets, the use of others’ money in this way may lead to moral hazards. On the one hand, financial institutions may suffer from moral hazard in selecting clients and monitoring loans. On the other hand, enterprises may be subject to moral hazard when they sacrifice others’ interests in the pursuit of profits. Moreover, the centralization of financial rights may spread the credit risks generated by these two types of moral hazard throughout the entire economy.

Financial rights centralization also infringes on the economic rights of individuals and enterprises. Many business opportunities are transient and cannot be turned into earnings without the right to financing. In this sense, the right to invest is not complete without a right to financing. The difficulty of small and medium-sized enterprises in accessing funds reflects the conflict between diversified investment rights and centralized financing rights. The only option for most such enterprises is informal finance. However, informal finance is not protected by law and therefore represents a heavy burden rather than a right for individuals and enterprises. In the current system, informal fund-raising and soliciting deposits from the public are criminal conduct; there is only one step between investment and crime.

Major efforts are needed to guarantee the diversified financial rights of individuals and enterprises, beginning with the repeal of laws and rules that conflict with the establishment of a competitive financial market. For example, Article 176 of the criminal law stipulates that whoever takes deposits from the public illegally or in disguised form or disrupts financial order shall be sentenced to between 3 and 10 years in prison or criminal detention and fined CNY20,000 to CNY500,000, depending on the severity or monetary amount of the offense.

The basis for such laws is that financial resources belong to the state and no individual has the right to dispose of financial assets because limited financial resources must be used to serve the economic good. According to these provisions, deposit agreements between individuals, between enterprises, or between individuals and enterprises are illegal activities. Such lending and borrowing activities are regarded not as legitimate competition for state-owned financial institutions (including RCCs) but as illegal activities, and lending organizations outside of formal finance are illegal financial organizations. Beyond a certain threshold, taking deposits through private channels also is considered a crime. The coarseness of this legislation results in law enforcement authorities randomly cracking down on lending activities outside the system and puts a damper on financial innovation.

Major efforts are needed to guarantee the diversified financial rights of individuals and enterprises, beginning with the repeal of laws and rules that conflict with the establishment of a competitive financial market

The statutes governing usury are unclear. According to provisions of the Supreme People’s Court, private lending interest rates can be higher than the bank interest rate, to a certain extent, subject to the discretion of local people’s courts and in accordance with the local situation. However, the private lending rate may not exceed four times the bank lending rate in the same category; interest rates exceeding this threshold are not protected by law and are deemed usury. In a market economy, however, the lending rate should be linked with lending risks, and the interest rate on riskier loans should be higher. In a developing country such as the PRC, there are many uncertainties associated with loans, so annual interest rates of 15% to 30% are normal. Artificially limiting the private lending rate to within four times the bank loan rate renders illegal a large number of private lending activities.

In addition to repealing laws that hinder the establishment of a competitive financial market, laws and regulations should encourage such establishment. For example, to facilitate financial innovation, laws should confirm the integrity of individual and enterprise capital property rights, guarantee the legitimate investment rights of individuals and enterprises, and allow nonfinancial enterprises and individuals to lend their proprietary funds to other enterprises and individuals according to lawful agreements.

Second, when amending or drafting laws on taking deposits from the public, disturbing financial order, or usury, attention should be paid to distinguishing financial fraud from investment activities. The primary purpose of financial regulation is to avoid the moral hazards brought about by financial institutions taking deposits from the public, such as sacrificing depositors’ interests to maximize profits. Normal lending activities between individuals and enterprises that do not belong to this category should be legalized. The maximum penalty for the crime of illegally taking deposits from the public should be relaxed according to the type, purpose, and potential risk of loans. Anti–financial fraud laws should be instituted, but the crime of illegally disturbing financial order should be eliminated. Laws on market-based interest rates should be drafted, and the threshold interest rate for usury should be increased to eight times the benchmark bank loan interest rate or more.

Normal lending activities between individuals and enterprises that do not belong to this category should be legalized

Third, commercial bank law should be amended and the criteria for the entry of private banks should be relaxed. Lending shops, private lending agencies, and microcredit institutions with a long history of operation, good business records, adequate scale, and the desire to establish banks should be allowed to upgrade into banks according to the requirements for commercial banks, and prudential regulation should be applied. The key to a competitive financial market is to allow competitive financiers and financial institutions to grow into intermediaries of that market. This requires the creation of opportunities for informal financial institutions to grow into formal ones, bringing about meritorious competition in which superior institutions succeed and inferior ones fail.

Current law stipulates that national commercial banks must have no less than CNY1 billion in registered capital, city commercial banks must have no less than CNY100 million, and rural commercial banks must have at least CNY50 million. These high thresholds have resulted in a gap between informal and formal financial institutions, which is not conducive to the market entry and growth of small and medium-sized banks. Consideration should be given to reducing these thresholds and emphasizing the quality rather than the size of financial institutions. Community-based financial institutions are not necessarily big, but they can operate more efficiently than large commercial banks. In the United States, for example, credit cooperatives based on enterprises, schools, large organizations, and communities play an important role among financial institutions. They remain important in several waves of acquisition, primarily because they can take advantage of community information dissemination and contracts enforcement. Because national banks do not have such advantages, community-based credit cooperatives are irreplaceable.

Fourth, laws regarding microcredit institutions, cooperative finance, and informal finance should be promulgated. In the early stage of reform, microcredit institutions should be prohibited from taking deposits, cooperative financial institutions should have their membership and scale restricted, and the size of informal finance should be controlled. Nonprudential regulation should apply to these three types of institutions.

Fifth, international experience can be used to formulate laws or regulations on community reinvestment in the PRC. For example, the United States’ Community Reinvestment Act requires a community-based financial institution to meet the lending needs of the community, predicated on compliance with principles of operational safety and soundness. Other than that, there are no rigid requirements on loan percentages. In Thailand, on the other hand, all community-based financial institutions must use 20% of their deposits in agriculture.

Finally, antimonopoly laws should be enacted to protect fair competition, policy finance laws should be enacted to enhance the effectiveness and transparency of policy finance, and the investment activities of major shareholders in financial institutions should be regulated.