46082-001: study on the financial support for modern ... · chapter 1 rural financial development...

Technical Assistance Consultant’s Report

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Project Number: 46082 September 2015

PRC: Study on Modern Agriculture Demonstration Area Planning and Financial Support Mobilization – Study on the Financial Support for Modern Agricultural Development in the People’s Republic of China Financed by the Technical Assistance Special Fund

Prepared by Xia Ying

Institute of Agricultural Economics and Development, Chinese Academy of Agricultural Sciences

Beijing, PRC

For the Department of Development and Planning, Ministry of Agriculture

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China, part of program (No. 46082), which is about the People's Republic of China: research on

the construction plan and the financial support for the modern agricultural demonstration areas

1

Study on the Financial Support for Modern

Agricultural Development in the People's Republic of China

Final Report

Xia Ying



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Catalogue

Introduction ....................................................................................................................................... 5

Chapter 1 Rural Financial Development Theories and Policies in China ...................................... 6

1.1 Basic theories of rural finance ............................................................................................. 6

1.1.1 Summary of three main rural financial theories ....................................................... 6

1.1.2 Selection of financing channels in rural financial market ........................................ 6

1.1.3 Performance evaluation of rural financial institutions ............................................. 7

1.1.4 Construction and reform of rural financial systems ................................................. 8

1.2 Financial support policies on agricultural development in China ..................................... 10

1.2.1 Fiscal policies ......................................................................................................... 10

1.2.2 Policies of tax reduction and exemption ................................................................ 13

1.2.3 Policies of differential interest rates ....................................................................... 14

Chapter 2 Current Situation of Investment and Financing of Chinese Modern Agriculture:

Taking Representative MADAs as Example ................................................................................... 16

2.1 Major suppliers of agricultural investments and financing in China ................................ 16

2.2 The supply status of agricultural investment and financing in recent years ...................... 18

2.2.1 Fiscal input ............................................................................................................. 18

2.2.2 Credit ...................................................................................................................... 20

2.2.3 Insurance ................................................................................................................ 29

2.3 Investment and financing demands in agriculture ............................................................. 30

2.3.1 Farms and large specialized households ................................................................ 30

2.3.2 Agricultural enterprises .......................................................................................... 35

2.4 Features and problems of supply and demand of agricultural funds ................................. 38

Chapter 3 Practical Explorations of Financial Support for the Development of Modern

Agriculture: the Perspective of Product Innovation and Service Innovation .................................. 43

3.1 Mortgage and guaranteed Loans ....................................................................................... 43

3.1.1 The practice of rural land financialization in Chongqing Municipality ................. 43

3.1.2 The practice of land revenue guaranteed loans in Jilin Province ........................... 45

3.1.3 Financial innovation in the reform of the collective forest rights in Fujian Province

......................................................................................................................................... 47

3.2 Combined loans by the interaction between government, banks and insurers .................. 48

3.2.1 “Tiandong Model” .................................................................................................. 48

3.2.2 “Shouguang Model” ............................................................................................... 50

3.3 Loans for cooperatives with joint guarantee: the case of Beijing ..................................... 51

3.3.1 Cooperative loans with joint guarantee by cooperatives ........................................ 51

3.3.2 Cooperative member loans with joint guarantee by cooperative members ............ 52

3.4 The various models of supply chain financing .................................................................. 53

3.4.1 Grain supply chain loans jointly supported by financial enterprises in Henan

Province .......................................................................................................................... 53

3.4.2 Wuliming model of supply chain finance created by Longjiang Bank and COFCO



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......................................................................................................................................... 54

3.5 Construction of rural credit system: the case of Lishui City of Zhejiang Province .......... 55

3.6 A typical example of rural financial payment system reform: Shouguang City of

Shandong Province ................................................................................................................. 55

3.7 Commentary ...................................................................................................................... 57

3.7.1 Financialization of resources assets such as farmland ........................................... 57

3.7.2 Supply chain finance .............................................................................................. 58

3.7.3 Loans jointly guaranteed by specialized cooperatives ........................................... 59

3.7.4 The model of loans jointly guaranteed by the government and the banks ............. 60

Chapter 4 Financial Support for Modern Agricultural Development: International Experiences 61

4.1 Agricultural financial service system of developed economies: organizations and

functions .................................................................................................................................. 61

4.1.1 Policy-oriented financial institutions play a major role in building a complete and

diversified agricultural financial system. ........................................................................ 61

4.1.2 Diversified agricultural policy-oriented financing methods well-matched with the

functions of institutions ................................................................................................... 64

4.1.3 Powerful policy-oriented financial system: co-existence of strength and pressures

of transformation ............................................................................................................. 66

4.2 Operation system and mechanism analysis of agricultural finance in major countries ..... 67

4.2.1 Fiscal support to agricultural financing by governments of developed economies 67

4.2.2 Cooperation among credit cooperatives: models and risk control ......................... 69

4.2.3 Cooperation between public sectors and private sectors to expand agricultural

financing channels ........................................................................................................... 71

4.2.4 Development mechanism that promotes value chain finance ................................ 71

4.2.5 Institutional mechanism that promotes the development agricultural

policy-oriented insurance ................................................................................................ 73

4.2.6 Establishment of agricultural development funds (ADF) ...................................... 73

4.2.7 Professional risk management and budget management, and assessment of the

progress towards policy goals ......................................................................................... 74

4.2.8 Adjustment of support focus and support method in accordance with social and

economic development.................................................................................................... 75

4.3 Conclusions and Lessons .................................................................................................. 75

4.3.1 Conclusions ............................................................................................................ 75

4.3.2 Lessons ................................................................................................................... 76

Chapter 5 Construction of Modern Agriculture Financial Support System and Supporting

Measures ......................................................................................................................................... 78

5.1 Modes of agricultural financing and functions ................................................................. 78

5.2 Goals and ideas for finance to support modern agricultural development ........................ 80

5.2.1 Development goals ................................................................................................. 80

5.2.2 Construction ideas .................................................................................................. 81

5.3 Content of the construction of modern agriculture financial support system .................... 82

5.3.1 Commercial financial institutions .......................................................................... 82

5.3.2 Policy-oriented agricultural finance ....................................................................... 83

5.3.3 Cooperative finance ............................................................................................... 85



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5.4 Supporting measures: comprehensive reforms on land, social security and rural finance 87

5.4.1 Perfection of existing agricultural financial system ............................................... 87

5.4.2 Binding rural land system reform, social security system reform and financial

system reform together .................................................................................................... 88

Chapter 6 Conclusions and Policy Suggestions ........................................................................... 89

6.1 Main conclusions .............................................................................................................. 89

6.1.1 On the conception and positioning of agricultural and rural finance ..................... 89

6.1.2 China has basically established an agricultural and rural financial system

combining policy-oriented finance, commercial finance, and rural cooperative finance.

......................................................................................................................................... 91

6.1.3 Formal financial institutions are the major suppliers of agricultural and rural

financial services in China, while private loans cannot be neglected. ............................ 91

6.1.4 Problems of insufficient supply, inconvenience, and poor sustainability exist in the

development of China’s agricultural finance .................................................................. 92

6.2 Suggestions on promoting the development of agricultural finance in China’s MADAs . 93

6.2.1 Institutional construction ........................................................................................ 93

6.2.2 Mechanism innovation and business innovation .................................................... 95

6.2.3 Institution building ................................................................................................. 96

6.2.4 To promoting construction of trustworthy culture for agricultural and rural

financial development ..................................................................................................... 97

References ....................................................................................................................................... 98



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Introduction

This is the final report on financial support for modern agriculture in China, which is part of the

ADB program: “The People's Republic of China: research on the construction plan and the financial

support for the modern agricultural demonstrated zones” (program number: 46082). Based on field

surveys in the five modern agriculture demonstration counties and official materials and data from

other demonstrations zones of rural financial reforms, the report analyzes the current situations of

financial services for Chinese modern agriculture, summarizes the progress and experiences of rural

financial innovation, and explores existing problems. Successful international experiences of

developing countries of financial support for modern agriculture and policies and measures of relevant

international organizations are also summarized and used as reference for policies recommendations on

improving financial support for modern agriculture in China.

Some of the major conceptions which are broadly used in this report are defined here:

Rural Financial System: it refers to the financial system which is composed of various banking

institutions at and under county level and provides financial support for rural economic activities,

including rural industrial development, agricultural infrastructure construction and rural consumption.

Rural finance is not exactly the same as agricultural finance, which covers much more fields than the

latter, while some of the functions of agricultural finance are implemented by urban financial

institutions. Policy financial institutions are important in the system of financial support for modern

agriculture, basically because agriculture is weak and fundamental in national economic system.

Policy agricultural finance: it is understood in two aspects. On the one hand, it refers to

policy-oriented finance, which are specific invention or steering policies to introduce financial services

into agriculture. It works on those rural financial institutions by financial instruments, some of which

are interest subsidy for loans, direct loans by policy financial institutions, subsidy on subsidy guarantee

charges, policy agricultural insurance, etc. On the other hand, it refers to the specific policy financial

institutions such as the national agricultural development bank, which assume the state policies and

strategies and aim at the shortcomings of commercial or cooperative financial institutions. In sum,

policy agricultural finance refers to those fiscal appropriation and loans to agricultural finance guided

by national and local policies.

Modern agriculture demonstration zones: These are those state-level modern agriculture

demonstrations specifically certified by MOA, which aim at realizing national strategy and solving

problems comprehensively.

Supply and demand Main bodies of rural finance: The supply main bodies of rural finance

(including credit money and product service) include: state-owned commercial banks, cooperative or

shareholding banks, agriculture-related dragon-head companies, intermediary financial institutions

(such as insurance, pension institutions, guarantee companies). The demand main bodies of rural

finance are those market participants within county scope, which are farm households, family farms,

specialized households, agricultural cooperative, agricultural companies, and agricultural service

companies.



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Chapter 1 Rural Financial Development Theories and Policies in China

1.1 Basic theories of rural finance

1.1.1 Summary of three main rural financial theories

In western economies, rural financial development theory is derived from general financial

development theory, and discusses the relationship between financial development of the rural areas in

developing countries, and agricultural development and non-agricultural development and other areas

such as the income growth of rural residents, and poverty elimination. Traditionally, there are two

representative theories about rural financial development: agriculture subsidized credit paradigm and

rural financial systems paradigm. Actually, these two theories are opposite. Although each has its own

shortcomings because of some biases, both are still meaningful for further researches. With the

improvement of previous research methods, new rural financial theory based on those two theories is

proposed. The new theory has the same importance as Hayek’s local knowledge theory and Stieglitz’s

imperfectly competitive market theory, whose theories have great impact on directing modern rural

financial development. During many years of development, the system of rural financial theory has

taken shape. Currently, the rural financial theory consists of three main branch theories: the agriculture

credit subsidy theory, rural financial market theory and imperfect competition market theory. These

three theories have already become the theoretical basis of China rural financial research. In recent

years, there is a debate related to the financial repression and financial deepening and financial

restriction in the academia. Essentially, the debate is related to the application of these three theories to

the selection of rural financial market system.

Briefly, the three theories of rural financial market development center on the same key issue,

that is how government plays its role in promoting rural economic growth in rural financial markets.

Because the agriculture credit subsidy theory relies too much on government, the theory brings about

two negative effects. The theory accelerates the development of rural economy at the beginning.

However, it is also criticized because of poor performance on poverty alleviation and financial

inefficiency, etc. The theory advocates the financial deepening proposal without the premise of stable

economy in rural areas, thus suffering market failure and other defects. The imperfectly competitive

market theory, proposed in late 20th century, is based on the information economics theory. The theory

discriminates the function of credit market, capital market and other markets in detail, and proposes a

moderate government intervention under the market operation mechanism. The views of the

imperfectly competitive market theory match the advancing gradually reform. Domestic scholars

compare the three theories, and most of them agree that imperfectly competitive market theory is

development direction of China’s rural financial market. According to the experience of international

agricultural modernization countries, such as America, France and Japan, agriculture credit subsidy

theory is no longer a mainstream theory (Ding, 2010).

1.1.2 Selection of financing channels in rural financial market

The rural financing channels are an important issue of researches on rural financial development.

Generally, there are two financing channels in rural areas: formal financial intermediaries and informal



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financial intermediaries.

About the causes of credit difficulty of rural formal financial institutions, according to Indian

economic experts Subrata Ghatak and Ken Ingersent, most farmers are excluded from credit market

because profit-seeking formal rural financial institutions have not enough branches but high operation

costs. Therefore, in order to meet the rural financial demand, developing countries should increase

credit supply and build a multilayered rural financial system to increase the rural financial supply.

Adams (1988) mentioned two important criteria in his evaluation criterion for rural financial

system. They are the number of people who offers rural official financial service and the service quality

of the financial institutions, both of which prove low coverage of rural finance. Based on our country’s

situation, Han Jun mentions that it is difficult for the main entities of China’s rural economy to get

credit support from formal financial institutions, because the low fiscal agricultural support leads to the

unbalanced development of rural financial organizations. Zhou (2004) also pointed financial

organizations are not necessary the financial organization that neared farm households, thus the

operation cost to obtain these farm households’ information is high for financial organizations.

Moreover, the lack of contract implementation mechanism of farmers and other adverse reasons as well

make rural financing difficult.

Because of difficulties of formal financing in rural areas, Chinese scholars began to discuss

informal financing channels. Yaron (1997) and World Bank (2004) believed that lots of ranchers and

the rich got agriculture credit; however, the poor always met their financing demands from informal

financial institutions. Besley (2001), Khandker (2003), Wen (2001) and other experts believed informal

financial market is the main financing channel for farm households, especially the poor ones in some

countries. Lou (2009) used impulse response function and variance decomposition of time series

analysis, combined with the statistics of Zhejiang province in the years from 1978 to 2007, and

believed there is a close relationship and long-term equilibrium between the rural finance in Zhejiang

province, private finance and rural economic growth. Also, Lou believed that rural finance has adverse

effects on economic growth, whereas, private financial supports has remarkable economic effects.

Other researchers found that micro-credit organizations had become another financing channel

for the rural financial market. Zeller (2001) believed micro-credit organizations can meet the farmers’

financing demands in terms of credit scale, interest rate pricing, regulatory system, risk management,

etc., especially for the poor farmers. World Bank (1997) and Washington Conference (2003) considered

that micro-credit had become the main innovation model of farmer financing. For now, the financial

model of Grameen Bank has been applied in more than 100 countries.

1.1.3 Performance evaluation of rural financial institutions

The above mentioned assumptions and policy proposal for the three rural financial theories

implicate the evaluation criterion of rural finance. For example, the amount of agricultural credit and

the credit approval speed are the standards to measure the performance of rural financial institutions.

However, actually this evaluation criterion has negative effects on enhancing the vitality of rural

financial institution and its sustainability. Based on the rural finance investigation of emerging

developing countries, Yaron (1992), rural finance consultant of World Bank and other consultants also

thought the performance of rural finance development should be evaluated with two main ways. The

first way is the contribution of rural finance to economic development, and Yaron (1992) proposed two

criteria to measure such contribution: i) the growth of agricultural production measured by the



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contribution of rural finance; ii) the effect of rural finance on rural economic fairness. The second way

is the independence and sustainability of rural financial market. However, it is difficult to propose a

comprehensive and reasonable criterion to evaluate the performance of financial institutions because of

the small business volume, narrowed business areas and low efficiency of rural financial institutions.

Additionally, compared with other financial institutions, rural financial institutions have special service

targets. Based on these reasons, Yaron (1992) thought the success of rural financial market should be

evaluated from two aspects in accordance with the real situation of rural financial market and financial

institution development:

(1) The service scope of rural finance: The contribution of rural finance to the rural economic

growth and economic fairness has something to do with the service scope of rural finance. In other

words, the contribution is related to the rural financial service coverage to rural finance target

customers. The rural finance service scope is a comprehensive index that can estimate the degree of

penetration of the rural financial market and evaluate the service quality of rural finance. Additionally,

the service scopes can also reflect the depth and breadth of rural finance development. Yaron, Benjamin

and Piprek (1997) refined the rural finance service into the amount of deposits and checking accounts,

the average value of saving and checking accounts, the variety of products or services, the number of

branches, the percentage of farmer who use rural finance service, etc.

(2) The self-sustaining ability of rural finance: Generally, a financial institution’s revenue should

exceed its expenditure, which is the requirement for the institution to keep operation. The

self-sustaining ability of rural finance is a composite index. Revenue includes interests obtained from

business activities and subsidies for the rural financial institution. Expenditure includes operating

expenditure, opportunity cost, etc. The subsidy dependence of rural financial institutions is an index for

self-sustaining ability that can be used to measure the operational ability of rural finance. Zeller and

Megor (2002) thought the welfare effects of rural financial system should also be considered as an

index to measure the self-sustaining ability.

1.1.4 Construction and reform of rural financial systems

This part focuses on formal and informal financial institutions. Germids (1990) and Besley (1994)

considered that rural financial market consisted of formal, quasi-formal and informal financial

institution. In this section, rural financial institutions are only divided into formal financial institution

and informal financial institution.

As to formal financial institution, Chinese scholar Li (2000) believed that because China rural

financial institutions developed slowly, farmer cannot get loans with low interest rates on time. As a

result, the credit demand of the farmer is repressed. Peng (2001) pointed that rural financial system

construction in China lagged behind seriously. After Zhang (2008) analyzed the weaknesses of China’s

rural financial institutions in inadequate capital scale, capital allocation ability, and ability to provide a

variety of financial services, he proposed that the function of Agricultural Development Bank of China,

commercial financial institutions and Rural Credit Cooperative should be strengthened and highlighted.

For the rural financial intermediary, Zeller (2003) analyzed the comparative advantages of every kind

of rural financial intermediary, and thought the union of different kinds of rural financial institutions

should be strengthened and promoted. In his opinion, the bank that located in the countryside, mutual

aid team and self-help group are level one; credit union and small bank are level two and commercial

bank, nationalized bank and multi-national bank are level three.



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As to informal financial institutions, as the informal financial market has become the main

financing channel for farmers especially for the poor farmers, more and more researchers are giving

attention to this market and analyze the reasons why informal financial intermediaries emerge from

every aspect. Heiko Schrader, a Germany researcher, referred informal finance as the finance market

beyond the control of national credit system and relevant financial regulations. Anders Isaksson (2002)

pointed out that private finance is the financial activity occurs without government supervision. It is a

rational response to policy distortion and financial repression. Because of the institutional

discrimination and bias against government’s credit allocation system under the financial repression, a

private financial market system is required. However, Thierry Pairault proposed that the development

of private finance in every country and region is the result of personal economy development. Steel

(1997) pointed out that the reason for the private finance development is that private finance can use

their advantages to get impeccable personal information in the local area. Therefore, private finance

solves the problem of information asymmetry that formal finance cannot deal with. Germidis Dimitri

(1990) thought one of the characteristics of informal finance is that there is a connection from simple

credit arrangements to complex mechanism of financial intermediary between the debtor, creditor and

saver.

Lin (2003) and other Chinese scholars has constructed a financial market model to prove that the

segmentation of financial market and informal finance market are the result of the interaction between

creditors of medium and small-sized business, creditors of informal financial institutions and creditors

of informal institutions. Also, they thought that adverse selection and moral hazard caused by

information asymmetry are the main reasons to boom private finance. In their opinion, financial

repression is only a catalyst. Lin et al.’s researches explained the reason why private finance also exists

in some countries with financial liberalization. Ren (2003) pointed out that the booming of private

finance is attributed to the replacement or changing of existing policy, or created by the new policy.

The booming of private finance is the result of the institutional change in finance. Cui (2006) said the

weakness of formal rural finance service in China is the reason for the development of private finance.

Zhang (2001) used the new institutional economics as a research method, and he believed private

finance satisfies the demand for finance of China’s private economy. Kellee Tsai (2001) used China as

a research sample. He compared the development path of private finance and the development path of

regional economy of Changle, Hui’an, Wenzhou and Zhengzhou areas, and concluded that the reason

why there is a difference in financial development in different areas is that local governments

implement differentiated policy to private economy. Tsai’s has the same opinion as Zhang, and they

both think that private finance is a form of private economy.

Based on China’s financial policies and the situation of private finance, Chinese scholars begin to

discuss the legality of usury, a production of private finance. Cao (2000), Wen (2002), Li and Shi (2003)

et al believed that usury is very popular in private finance, and it has really adverse effects on rural

development. However, Jiang (1996), Shi (1998), Mao (2002) et al support the rationality of high

interest rates, and they propose to give private finance a legal status.

As to the management of rural private finance, some scholars believe rural informal finance

should replace informal finance, because informal rural finance has high interest rates and low

efficiency. On the contrary, some scholars think there is a lack of formal rural financial system, while

informal financial system adapts to the rural environment; it is the major way for farmers to obtain

financial service. Hoffand Stiglitz (1996) thought formal financial institutions should connect rural



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formal finance with informal finance by choosing local agents in rural areas, loaning funds to informal

creditors and the latter again loans these funds to farmers, and making pawns.

1.2 Financial support policies on agricultural development in China

The financial policies to support agricultural development can be divided into three categories:

the fiscal support policies, preferential tax policies and differential interest rate policies. These policies

are mainly targeted on the reform of rural financial institutions, the support for the development of new

rural financial institutions, the measures to encourage the increase of agricultural credit, premium

subsidy for agricultural insurance, discount interest to help the poor, and so on.

1.2.1 Fiscal policies

1. Support policies and measures aiming at rural financial institution reform. First of all

there is the support on the the shareholding reform of Agricultural Bank of China. During the process

of the reform, the core capital adequacy ratio of Agricultural Bank of China is increased by receiving a

sum of dollars equivalent with 130 billion RMB Yuan from Central Huijin Investment Ltd. Besides, the

Cental Huijin Investment Ltd has help the agricultural bank improve its asset quality by supporting it to

dispose a sum of 815.7 billion yuan non-performing loans (NPL). Secondly, the reform of RCCs (rural

credit cooperatives) was supported. Subsidies of a total of 8.85 billion Yuan have been given to RCCs

that suffered losses resulting from implementation of inflation-proof savings during 1994 to 1997. In

addition, it was made clear that the service expenditure of provincial united cooperatives should be

allocated to grass root cooperatives, which means that part of the provincial united cooperatives’

income cannot be taxed. Thirdly, the state Agricultural Development Bank was built and supported to

expand its business scope so as to strengthening its role of policy-oriented supporting for agriculture.

2. Targeted cost subsidies for new rural financial institutions. Since the new rural financial

institutions is just established for a short period of time and they have to face big financial pressure at

the initial stage, the Ministry of Finance began to subsidize some qualified new rural financial

institutions to release their financial pressure since 2008. According to the Interim Measure for

New-type Rural Financial Institutions Targeted Cost Subsidies from Central Finance enacted by the

Ministry of Finance in 2010, some rural financial institutions will get a subsidy of 2% of their loan

average balance of the previous year only on the condition that the loan companies and rural fund

mutual cooperatives have achieved a year-on-year growth in loan average balance of the previous year

and met the regulatory index required by China Banking Regulatory Commission (CBRC), or village

and town banks have achieved a year-on-year growth in loan average balance of the previous year, the

loan-to-deposit ratio at the end of the previous year is higher than 50%, and has met the regulatory

index required by CBRC. In 2010, the Ministry of Finance included the financial institution outlets in

western area where basic financial services are weak into the subsidy plan.

The Interim Measure for New-type Rural Financial Institutions Targeted Cost Subsidies

(hereafter refer to as the “measure”) was enacted by the Ministry of Finance on March 28th

2014, and

began to take effect on April 11th

2014. Meanwhile, the Interim Measure for New-type Rural Financial

Institutions Targeted Cost Subsidies from Central Finance [Finance (2010) No. 42] enacted by the

Ministry of Finance in 2010 was abolished. The new “measure” shows that qualified new rural



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financial institutions, which refers to the village and town banks, loan companies and rural fund mutual

cooperatives authorized by the CBRC in the new “measure”, can get a subsidy of 2% of their loan

average balance of the current year from the financial departments. The amount of the subsidy should

be borne in proportion by the central and local finance. The allocation proportions of central and local

finance in eastern, central and western China are 7:3, 8:2 and 9:1 respectively. In the new “measure”,

the specific requirements for financial institutions to get this subsidy are as follows: a year-on-year

growth of loan average balance of the same year; the annual average loan-to-deposit ratio of village

and town banks is equal to or higher than 50%; the proportion of the average balance of agricultural

loans and loan average balance of small and micro enterprises is 70% of all the loans of the same year

or higher, etc.

3. The policy of loan with subsidized interest. First of all, there is the policy of interest subsidy

for poverty alleviation. In order to direct the financial capital into poor rural areas, money from the

central finance has been arranged as subsidy for loans to the poor since 1998. Meanwhile, the system of

interest subsidy for the loan for the poor central finance continues to be reformed and improved, and

thus the capital sources are enlarged. By the end of 2009, a total of 8.15 billion yuan the central finance

had allocated for the discount interest, and stimulated the issuance of over a 200 billion yuan loan for

supporting the poor. Secondly, there is the policy of interest subsidy for loans by local-level

governments. Taking Hainan province as example, to lower the financing cost of farmers, this province

has implemented the interest subsidy policy for small loans by farmers. Farmers’ small loans less than

100 thousand yuan can get the lower interest rate from the government, among which, the provincial

finance undertakes 5%, and the proportion of discount interest of the local city is decided by the local

governments according to their financial situation. The interest rate assumed by farmers of Danzhou

City is 1.5%, and that of Dongfang City is 1%. According to statistics, the number of farm households

who have applied for small loans less than 100 thousand yuan reached 56.7, amounting to 1.906 billion

yuan for the whole Hainan province in 2013. This province had paid government-funded interest

subsidy to 53.3 thousand households, amounting to 109 million yuan in that year, which effectively

alleviated the financing difficulties of farmers in their agricultural production and living.

4. Special funds for loan guarantee. In the policy documents about the innovation of

agricultural financial products and financial services, mortgage loan business involved with contractual

right of rural land and the right to use of cartilage are frequently referred, which have effectively

expended the coverage of mortgage guarantees[1]

. What’s more, the policies particularly encourage

local governments with necessary conditions to set up financing guarantee companies funded by these

governments, or allocate a specific fund quota from the existing financing guarantee companies to offer

guarantee services to new agricultural business entities; in addition, the polies emphasize that the

banking financial institutions should strengthen their cooperation with guarantee institutions that deal

with the guarantee business for new agricultural business entities, appropriately expand the amplifying

times of guarantee deposits, promote the financing model of “loan plus insurance”, and satisfy the

capital demands of new agricultural business entities[2]

. Therefore, supporting the development of

agricultural guarantee institutions by the government is one of the important routes for agricultural

[1]

Promote the innovation of rural financial products and services (Banking issued [2008] No. 295). [2]

The guide suggestion on the financial service for new agricultural business entities such as family farm (Banking

issued [2014] No. 42)



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financial products and the businesses innovation, so as to effectively strengthen the services that

financial institutions offer to agriculture, rural areas and farmers. At the local government level,

guarantee institutions funded by government has become a common practice to service agriculture,

rural areas and farmers. In the five counties investigated, each has guarantee companies backed by the

government. For instance, Fujin city of Heilongjiang province has established Fujin Jinxing

Agricultural Guarantee Company, a public institution affiliated to the municipal finance bureau; Helan

county has established a small loan guarantee center for the unemployed, which is affiliated to the

bureau of labor and employment service of this county, and provides guarantee services for rural

women, undergraduates, scientific special commissioners to start their business or obtain a job..

Tiandong county of Guangxi Zhuang Autonomous Region has established a financing guarantee

company financed by the government in 2009 to support the agriculture of Tiandong County, and it

inclines to offer guarantee services for comparatively large agricultural loans. After a two-time capital

increase, the capital of this company now has reached 30 million yuan. The rural commercial banks and

village and town banks that cooperate with it provide a tenfold credit ceiling, which means that the

amount of loan reaches 300 million yuan. In addition, the government of Hainan province actively

explores the way to establish guarantee funds supported by provincial finance to benefit farmers, to

deal with agricultural loans without mortgage, and to attract more financial capitals to the agricultural

field by means of credit guarantee.

5. Policy-oriented funds for agricultural insurance. In 2007, the Ministry of Finance enacted

Measures of Management on Pilot Areas of Agricultural Insurance Premium Subsidies from Central

Finance, and launched the pilot work for agricultural insurance premium subsidies, offering premium

subsidies to five crops of six provinces. The central and local governments bear 25% of the premium of

the pilot insurance types respectively, and the remaining 50% was borne by the farmers, or jointly

borne by the farmer, dragon-head enterprises and the financial department at the provincial, municipal

and county level. Since then, the central finance has been expanding the subsidy areas continuously,

raising the subsidy proportion and increasing the variety of subsidy insurance. Over these years, the

investment in subsidies has been increasing continuously (The subsidies from central finance is 2.133

billion yuan in 2007, 4.869 billion yuan in 2008, 5.965 billion yuan in 2009, and 6.776 billion in 2010).

At present, except for Hong Kong, Macao and Taiwan, the 31 provinces (autonomous regions,

municipalities directly under the Central Government) of the Mainland China has entered the track of

policy-oriented agricultural insurance pilot. There are up to 15 types of insurance related to national

economy and people’s livelihood and supported by the central finance, covering all the main food

production areas. The agricultural insurance subsidy has become a significant measure for finance of

all levels to integrate all efforts of financing to support the agriculture, rural areas and farmers.

6. Reward and subsidy policies for agricultural loans of financial institutions. To motivate

financial institutions to issue agricultural loans, the central and local governments have implemented

various financial reward and subsidy policies. In 2009, the Ministry of Finance enacted The Temporary

Measure of Incentive Funds Management for Increment of Agricultural Loans from the Financial

Institutions at County Level, and launched the pilot work of rewarding agricultural loan increment of

financial institutions at county level. As for the financial institutions at county level, if the average

balance of agricultural loan of the previous year has realized a year-on-year growth of more than 15%,

the 2% of the part that exceed the 15% will be rewarded, so as to stimulate the endogenous impetus of

financial institutions to increase the amount of agricultural loans. In 2010, the Ministry of Finance



13

further improved the pilot policy, and expanded the pilot range to 18 provinces (autonomous regions).

Each local government has made corresponding risk compensation policy or incentive policy in order

to encourage financing institutions to increase the amount of agricultural loans. For instance, Hainan

province gives a 1.5% risk compensation and 0.5% reward to small discount-interest loans of famers

offered by financial institutions. In 2013, the whole Hainan province cashed the risk compensation of

20.504 million yuan and the reward of 7.5395 million yuan. In 2012, Tiandong county of Guangxi

Zhuang Autonomous Region offered a reward of 1.06 million yuan to rural commercial banks, postal

saving banks and rural banks apart from the a 7.57 million yuan reward from national finance. What’s

more, the financing guarantee companies assist in agricultural development of Tiandong County

received a reward of 120 thousand yuan for guarantee loans according to its business volume. In

addition, Tiandong County allocated a special fund of 7.8 million yuan to establish the risk

compensation fund for small credit loans and financing risk compensation for rural property mortgage.

These funds provided 153 thousand yuan for the compensation of non-performing loans of Hongxiang

Rural Fund Mutual Cooperative and local Agricultural Bank.

7. Improvement of matched financial institutions. In terms of finance-related accounting

system, the Ministry of Finance has relaxed conditions for the write-off of bad agricultural loans of

financial institutions, and has authorized the financial institutions to restructure, reduce, or exempt

some qualified agricultural loans, and reduce or exempt the principal and interest in the table where

appropriate. As to the performance appraisals of financial institutions, the index of agricultural loan and

other elements have been included in the performance appraisals as bonus points.

1.2.2 Policies of tax reduction and exemption

1. The tax preference for agricultural financial institutions. According to relevant national

regulations[3]

, the interest income of financial institutions who issue small credit loans no more than 50

thousand yuan to the farmers are exempted from business tax; as to rural credit cooperatives, village

and town banks, rural fund mutual cooperatives, loan companies, and rural cooperative banks and rural

commercial banks whose institution with legal person is located in the county or lower-level areas, the

business tax only should be levied at a 3% preferential tax rate; the qualified guarantee institutions that

support agriculture and rural areas are exempted from business tax for three years; rural commercial

banks and village and town banks can enjoy a 15% corporate income tax reduction. According to the

regulations in the Notification of Pre-tax Deduction Policies for Loan-loss Reserves of Agricultural

Loans of Financial Enterprises and Loans of Small and Medium-sized Enterprises, the loan-loss

reserves of agricultural loans of financial enterprises and loans of small and medium-sized enterprises

should be deducted before tax.

2. The tax preference for special agriculture-related business. The interest income of

financial institutions from farmers’ small loans is exempted from business tax. When calculating the

taxable amount of incomes, only 90% of the interest income of financial institutions from farmers’

small loans, is calculated. As specified in the Notification of Pre-tax Deduction Policies for Loan-loss

Reserves of Agricultural Loans of Financial Enterprises and Loans of Small and Medium-sized

Enterprises enacted by Ministry of Finance, as to the premium income of insurance companies who

[3]

Notification about rural finance related to tax policy enacted by the Ministry of Finance ( Finance and Tax

[2010] No. 4)



14

provide insurance business to planting industry and breeding industry, only 90% of income is

calculated when calculating the taxable income amount. For insurance companies who operate certain

types of insurance in planting industry and receive premium subsidies from central and local finance,

the catastrophe risk reserves are written down according to no more than 25% of the premium income

of the insurance that receive subsidies of the current year, and can be deducted before the corporate

income tax based on actual situation.

1.2.3 Policies of differential interest rates

1. Lower reserve requirement ratios are implemented for small and medium rural financial

institutions. In order to ensure the sufficiency of rural credit fund, in the context that the liquidity

should be retrenched, rural credit cooperatives can still implement a lower reserve requirement ratio.

Since 2010, People’s Bank of China has up-regulated the legal reserve requirement ratio for many

times. Among these up-regulations, three times are targeted to such small and medium-sized legal

entities as the rural credit cooperatives. At present, the preferential reserve requirement ratio of rural

credit cooperatives is 6% lower than big commercial banks. What’s more, the reserve requirement ratio

implemented by rural credit cooperatives with a higher proportion of agricultural loans and small

capital scale is 7% lower than big commercial banks. Meanwhile, the legal reserve requirement ratio of

the village and town banks is the same as that of local rural credit cooperatives.

2. The marketization of loan interest rate is steadily advanced so as to lower the financing

costs of new agricultural business entities. The floating interest rate cap of rural credit cooperative’s

loans can be extended to 2.3 times of the benchmark interest rate for loan. In terms of the interest rate

of new rural financial institutions, People’s Bank of China has enacted the Guidance on Offering

Financial Services to New Agricultural Business Entities Such as Family Farmers (issued by People's

Bank of China [2014] No. 42). In this guidance, for eligible new agricultural business entities whose

local government has introduced government-funded interest discount and risk compensation policies

and who have received loans by mortgage or impawn or by introducing insurance or guarantee

mechanism, etc., the interest rate should be lower than the average loan interest rate of the same type

and the same level in the institution in principle. In addition, the banking financial institutions

shouldn’t charge additional fees apart from the loan interest rate, and shouldn’t conduct tie-in sales

with other financial products or attach other conditions to increase the financing cost. In summary,

these measures aim at reducing the financing cost for new agricultural business entities practically.

3. Specific policy measures are implemented on the principle of “certain proportion of

newly increased deposits should be used locally”. In 2009, People’s Bank of China and China

Banking Regulatory Commission (CBRC) unitedly formulated the Assessment Method for

Encouraging County-level Financial Institutions to Use a Certain Proportion of the Newly Increased

Deposits in Local Loans (for Trial Implementation), and the pilot work has been conducted in some

counties since 2011.

4. Management of agricultural reloan is improved. In recent years, By drawing upon the

experience of using agricultural reloan, the People’s Bank of China has strengthened the adjustment of

the quota of agricultural reloan among different areas, with more quota allocated to the west and the

major grain production areas. Meanwhile, the village and town banks are also included in the range of

agricultural reloan. In the busy season of spring plantation in 2010, the amount of agricultural reloan in

the west and major grain production areas was adjusted and increased to 10 billion yuan. After the



15

increase, the proportion of re-loan amount for supporting agriculture in these areas was up to 93% of

the whole nation. The agricultural reloan plays an active role in expanding the quota of agricultural

credit loans. In 2013, the range of applying for agricultural reloan was widened and this policy has

been promoted nationwide[4]

. Furthermore, each branch was required to reinforce the monitoring and

assessment of the service effect of re-loan for supporting agriculture, in order to take better advantage

of the function of the re-loan for supporting agriculture; that is to guide rural financial institutions to

raise the size of credit loan for the agriculture, rural areas and farmers.

[4]

Widening the range of re-loan for supporting agriculture (Issued by People’s Bank of China[2013] No. 58)



16

Chapter 2 Current Situation of Investment and Financing of Chinese Modern Agriculture: Taking

Representative MADAs as Example

The main sources of agricultural fund can be divided into four parts: fiscal investments, financial

industrial loans, social funds financing, and self-owned fund. In this part, only the first two parts are

discussed. The fiscal and financial funds have diversified forms in reality, which generally include

non-reimbursable grants (e.g., fiscal investments and fiscal subsidies), low cost loans (e.g., loans with

fiscally subsidized interest, various kinds of policy-oriented bank loans, loans guaranteed by the

policy-oriented guarantee institutions), and commercial loans.

Due to the characteristics of agriculture and compared with manufacturing and service industry,

agriculture has the features of “high-risk, high-cost, long-cycle and low-benefit. Accordingly, these

features also apply to investment in agriculture. Therefore, as to commercial finance, its investments in

agriculture do not conform to general market rules, resulting in limitations in commercial finance’s

support for agriculture. However, from the national perspective, as a fundamental industry, the intensity

and breadth of agricultural investment cannot be neglected. Thus, the government has enacted various

preferential policies about agricultural investments, to encourage and guide various funds to invest in

agriculture, and that is why most agricultural funds are more or less policy-related.

2.1 Major suppliers of agricultural investments and financing in

China

Government agencies (mainly fiscal department and functional departments related to

agriculture), commercial banks, policy-oriented financial institutions are the major suppliers of

agricultural investments and financing in China.

1. Government agencies. The main investment and financing suppliers among government

agencies are fiscal department, the system of Development and Reform Commission, agricultural

department, forestry department, water conservancy department, transportation department and so on.

Due to the limited local financial strength, the county-level fiscal department has little investment and

financing capacity for agriculture. Currently, fiscal investments in agriculture are mainly in the form of

transfer payment of specific fiscal funds issued by central and provincial fiscal departments, among

which central finance plays the dominate role. Of these departments, special funds of agricultural

department, finance department and the system of National Development and Reform Commission take

a comparatively large proportion; most of the capital of water conservancy department is used to

govern rivers and lakes, whereas, the capital of water conservancy construction of farmer lands take a

small proportion; a small amount of the road construction capital of transportation department is used

in rural low-grade road construction.

2. Commercial banks. Only the Agricultural Bank of China and China Development Bank have

scaled agricultural financing among the state-owned commercial banks.

3. Policy-oriented financial institutions. At present, there are several channels through which



17

policy-oriented agricultural financing activities can be carried:

--National policy-oriented financial institutions. Since 2007, China has launched a new round of

reform for the financial system with the emphasis on reform of the policy-oriented banks. With the help

of the reform, China Development Bank has entered the development stage of commercialized

operation, and it is no longer a policy-oriented bank. Thus, currently, on national level, there is one

agricultural policy-oriented financial institution in China— Agricultural Development Bank of China.

--Policy-oriented guarantee institutions. Meanwhile, the policy-oriented guarantee business has

achieved a breakthrough as well. China National Economic Technique Investment & Guarantee

Company was established in 1993. Around 1995, some specialized credit guarantee institutions was

established successively in some provinces and cities. Hence, taking the opportunity of credit guarantee

for medium and small-sized enterprises, the industry of policy-oriented guarantee developed rapidly

everywhere. Accordingly, the agricultural policy-oriented guarantee also started to develop.

--Innovation-oriented budget outlays such as government funds and special funds. Apart from the

development of policy-oriented financing institutions mentioned above, the budget outlays of the

governments at all levels also have some leverage and play a guide role to some extent, and function as

a kind of policy-oriented financing. What’s more, these outlays are oriented to agriculture, high-tech

enterprise, medium and small-sized enterprises, housing, etc. For instance, the special fund for medium

and small-sized enterprises development arranged by central budget can take the approach of discount

interest loan, capital injection, etc.; the guidance fund for the commercialization of national research

findings can take the approach of setting sub-fund for venture capital investment, risk compensation of

loans, etc.; the guidance fund for the venture capital investment of small and medium-sized

technology-based enterprise can take the approach of phased-based equity participation, follow-up

investment, risk subsidy, etc.

--Local government financing-platform companies. In response to the impact of international

financial crisis, China launched a large-scale economic stimulus package in 2009. In order to meet the

capital demand for this plan, local government at all levels had established various financing platforms

one after another. There were no more than 8000 local financing platforms in 2008, whereas, that

number reached ten thousand in 2010. The main purpose of these financing platforms is to raise fund

for local economic construction or social development, and the main method to raise fund is bank loans.

More than 50% of the credit capital is used for the construction of road and municipal infrastructure,

and a small proportion is used in agricultural infrastructure construction.

Apart from these channels mentioned above, the agriculture-related business of Postal Saving

Bank is also policy-oriented to some extent, but profitability is still its main goal and it places extra

emphasis on the operation model of commercial financial intermediary.



18

2.2 The supply status of agricultural investment and financing in

recent years

2.2.1 Fiscal input

The fiscal departments at all levels have been increasing their support for agriculture in recent

years in China, and the methods and the effect are being improved. The amount of various

agriculture-related funds is huge. Among these funds, agricultural expenditure and the expenditure of

the comprehensive agricultural development are the two expenditures directly used in agricultural

production. These expenditures accounted for 51.6% of the fund for supporting agriculture (Table 2-1).

Table 2-1 Status of Financial Support for Agriculture in China

Items 2008 2009 2010 2011 2012 2013

Agriculture 2090.5 3826.9 3949.4 4434.4

Forestry 377.3 532.1 667.3 744.6

Water conservancy 1086.8 1519.6 1856.5 2279.2

South to North Water Transfer 78.4 63.9

Poverty alleviation 322.9 374.8 423.5 493.3

Overall development of agriculture 271.8 286.8 337.8 381.7

Comprehensive rural reform 607.9 645.8

Other expenses from agriculture,

forestry, and water conservancy 208.8 287.3

Total 4288.9 6720.4 8129.6 9330.2

Proportion of funds directly used in

agricultural production

55.1 61.2 52.7 51.6

Data source: Financial Yearbook of China of the corresponding year

Note: a small amount of the capital for poverty alleviation and comprehensive rural reform is used in direct

agricultural production, which is ignored here.

According to the field investigation, the fiscal support in various regions, especially in the major

grain producing areas, has played a significant role in the development of agriculture. For instance, the

proportion of local fiscal revenue of Fujin City has been less than 20% of the total fiscal revenue over

the years; in 2013, that proportion was only 14.1% (Table 2-2).

Table 2-2 General Financial Status of Fujin City

Unit: Hundred million yuan, %

Year Total financial revenue Grant from

the higher authority

Proportion of grant

from the higher authority

Public finance

expenditures

2009 12.2 10.6 86.6 12.1

2010 19.3 16.4 85.1 19.2

2011 21.0 17.0 81.0 20.8

2012 26.4 21.6 81.8 26.2



19

2013 27.1 23.3 85.9 27.0

Data source: extracted from the data from field investigation

However, the proportion of agriculture-related expenditure is usually around 50% of the public

fiscal expenditures; for example, this proportion reached 45.4% in 2012. What’s more, in Fujin City,

the proportions of expenditure directly used in agricultural production in public finance expenditures

and agriculture-related expenditure were 7.1% and 15.6% respectively in 2012 (Table 2-3).

Table 2-3 the Proportion of Agriculture-related Expenditure in the Total Financial

Expenditure in Fujin City

Unit: Hundred million yuan, %

Year Public finance

expenditures

Agriculture-related

expenditure

Proportion of

agriculture-related

expenditure

Agricultural

production

expenditure

Proportion of

agricultural

production

expenditure

2010 19.2 9.0 47.0 1.4 7.1

2011 20.8 8.4 40.4 0.9 4.3

2012 26.2 11.9 45.4 2.7 10.4


Note: part of the other items of agriculture-related capital is used in agricultural production, which isn’t

further split here.

In the direct agricultural expenditure of Fujin City, the central and provincial funds have played

the dominant role; for instance, the proportions of direct agricultural expenditurewere 95.8%, 96.9%

and 93.2% respectively in 2010, 2011 and 2012 (Table 2-4).

Table 2-4 General Status of the Financial Support for Agriculture in Fujin City

Unit: Ten thousand yuan, %

Name of the

agriculture-related

capital

Agricultural

production

Policy-or

iented

subsidy

Financial

resources

compensatio

n

Circulation

and

processing

Ecological

construction

Social

programs

Urban-rural

integration

2010 Total 13517.4 45451.3 15198.0 812.0 3762.8 11004.0 305.0

Central and

provincial 12949.4 41875.6 10198.0 812.0 2980.8 8197.0 305.0

Proportion of

grant from the

higher authority

95.8 92.1 67.1 100.0 79.2 74.5 100.0

2011 Total 8863.8 47245.1 12456.0 956.0 2902.0 11273.0 500.0

Central and

provincial 8592.2 44679.5 6456.0 956.0 1102.0 7350.0 500.0

Proportion of

grant from the

higher authority

96.9 94.6 51.8 100.0 38.0 65.2 100.0

2012 Total 27411.7 54402.7 13646.0 150.0 3015.3 19221.1 1161.0

Central and

provincial 25558.7 52082.5 5646.0 150.0 908.3 12715.5 450.0

Proportion of 93.2 95.7 41.4 100.0 30.1 66.2 38.8



20

grant from the

higher authority


In addition, the fiscal support for agriculture-related financial institutions is almost the same as

that for agricultural production expenditures in Fujin City. The fiscal fund of county level accounts for

less than 20% of the premium subsidy of agricultural insurance, and 25% of the reward for

agriculture-related loan increment of county-level financial institutions (Table 2-5).

Table 2-5 Fiscal Expenditure on Agricultural Finance in Fujin City

Unit: Ten thousand yuan

Year

Award for agriculture-related

loan increment of county-level

financial institutions

Premium subsidy

of agricultural

insurance

2010 Total 2740 513.1

Central and provincial 2054.2 425.2

Proportion of grant from the higher authority 75.0 82.9

2011 Total 256.1 640.5



2012 Total 563.4 1035.1




Note: Fujin City has no new-type rural financial institution, so the financial expenditure doesn’t include the

targeted cost subsidies for new-type rural financial institutions.

2.2.2 Credit

The agriculture-related business of banking industry has been improved in recent years, and the

financial products are becoming richer and richer. At the end of 2013, the agriculture-related loan

balance of banking financial institutions (excluding bills) was 20880 billion yuan with a year-on-year

growth of 18.4%, and was 4.5% higher than the growth rate of other loans during the same period

(Figure 3-3). The capital and financial strength of the rural credit cooperatives has been reinforced

continually, with significant profit growth for nine consecutive years, and its capacity for supporting

agriculture is growing. The three types of new rural financial institutions: the village and town banks,

loan companies and rural fund mutual cooperatives are making continuous development and the

competitiveness of rural financial market is being improved continually. By the end of 2013, the loan

balance of these three institutions was 365.1 billion yuan with a year-on-year growth of 56%. The

financial services have covered all the towns nationwide1.

Taking the year of 2011 as example, the proportion of the loans directly used in agricultural

production in various loans reached 9.84% (Table 2-6).

1 The People’s Bank of China, The financial stability report of China in 2014



21

Table 2-6 Rural Loans in RMB and Foreign Currencies of Chinese Financial Institutions

Balance of the

current period

Proportion

in various loans

Increment of

the current

year

Proportion

in various

loans

2011

Agriculture, forestry, animal husbandry,

side-line production and fishery 20220.2 3.54 2587.7 3.29

Fundamental construction of farmland 958.2 0.17 108.9 0.14

Agricultural product processing 5943.6

1.04

1390.1 1.77

Agricultural means of production 3118 0.55 817.7 1.04

Agricultural materials and

circulation of agricultural by-products 6347.4 1.11 585 0.74

Agricultural science and technology 210.2 0.04 20.8 0.03

Rural infrastructure construction 10000.4 1.75 2241 2.85

Subtotal 46798 8.20 7751.2 9.84

Others 73671 12.91 14757.2 18.74

Total 120469 21.10 22508.4 28.58

2012

Agriculture, forestry, animal husbandry,

side-line production and fishery 6699 0.99 888 0.98

Fundamental construction of farmland 1176 0.17 220 0.24

Agricultural product processing 7318 1.08 1110 1.22

Agricultural means of production 3629 0.54 583 0.64

Agricultural materials and circulation of

agricultural by-products 7315 1.08 1001 1.10

Agricultural science and technology 255 0.04 64 0.07

Rural infrastructure construction 11236 1.66 1455 1.60

Subtotal 37628 5.57 5321 5.85

Others 71645 10.60 13647 15.00

Total 109273 16.17 18968 20.85

Data source: Finance Yearbook of China of the corresponding year

As to the accessibility of agricultural financial services, at the end of 2013, there have been 468

rural commercial banks, 122 rural cooperative banks, 1803 rural credit cooperatives and 987 village

and town banks (Table 2-7).

Table 2-7 Outlets of Agriculture-related Financial Institutions at the End of 2012

Name of the institution Number Number of business outlets Number of employees

Rural credit cooperatives 1927 49034 502829

Rural commercial banks 337 19910 220042

Rural cooperative banks 147 5463 55822

Village and town banks 800 1426 30508

Loan companies 14 14 111

Rural fund mutual cooperatives 49 49 421

Total 3274 75896 809733

Data source: CBRC (China Banking Regulatory Commission)



22

Meanwhile, the revenue of main agriculture-related banking financial institutions has shown

some improvement. In line with the requirement of establishing a modern rural financial system,

agriculture-related banking financial institutions should stick to the market positioning of serving

agriculture, rural areas and farmers, and constantly carry forward the reform and innovation of

agriculture-related financial institutions. The rural credit cooperatives (including rural commercial

banks and rural cooperative banks) function as the main force to provide financial support to

agriculture, rural areas and farmers; the Finance Division of “Agriculture, Rural Areas and Farmers” of

the Agricultural Bank of China has made progressive achievement in its reform; the function of

policy-oriented services of Agricultural Development Bank has been increasing enhanced; the

county-level financial services of the Postal Saving Bank of China have been continuously

strengthened; and great progress has been made in the cultivation of new-type rural financial

institutions. The profitability of the main agriculture-related financial institutions is rising year by year;

non-performing ratio of agricultural loans is consistently decreasing; the capacity of sustainable

development has been steadily improved. By the end of 2012, the non-performing ratio of agricultural

loans of financial institutions was 2.4%, down 0.5% year on year. The non-performing ratio of

agricultural loans of rural credit cooperatives (including rural commercial banks and rural cooperative

banks) was 5.4%, 1.1% lower than that of the previous year (Table 2-8).

Table 2-8 Profitability Status of Main Agriculture-related Financial Institutions from 2007 to

2011

Institution Items 2007 2008 2009 2010 2011

Rural credit cooperatives Profit ratio of assets 0.45 0.42 0.41 0.36 0.74

Profit ratio of capital 10.36 9.87 9.72 8.34 15.3

Rural commercial banks Profit ratio of assets 0.70 0.79 0.80 1.01 1.2


Rural cooperative banks Profit ratio of assets 0.84 1.03 1.05 1.19 1.3


New-type Rural financial institutions

and Postal Saving Bank of China

Profit ratio of assets 0.34 0.59

Profit ratio of capital 16.17 20.01

Data source: CBRC (China Banking Regulatory Commission)

In the field of agricultural policy-oriented finance, financial institutions have also made some

progress. Table 2-9 shows the current status of agricultural financial business of main policy-oriented

financial institutions in China.

Table 2-9 the Delivery of Domestic Agricultural Policy-oriented Financial Services

Category Name Departments Involved

Positioning of Agricultural

Policy-oriented Financial

Services

Representative Financial

Products and Services



23

Policy

agricu

ltural b

anks

Agricu

ltural D

evelo

pm

ent B

ank o

f Chin

a

The whole bank

It is responsible for the

policy-oriented financial

services in rural construction,

and plays its core role as

policy-oriented finance in

guiding commercial finance

to serve agriculture and rural

areas.

Loans for agricultural

means of production,

policy-oriented loans for

water conservancy

construction, loans for

dragon-head enterprises of

agricultural

industrialization, and loans

for agricultural and rural

infrastructure construction,

etc.

Com

mercial F

inan

cial Institu

tion

s

Chin

a Dev

elopm

ent B

ank

Project Appraisal

Department Ⅲ

It implements the national

macroeconomic policies,

raises and guides social funds,

and is dedicated to promoting

the market construction and

market plan with financing,

promotes regional

coordinated development and

supports the development of

bottleneck fields such as

urbanization and “Three

Rural Issues”.

Loans for rural

infrastructure construction

Agricu

ltural B

ank o

f Chin

a

Finance Division of

“Agriculture, Rural

Areas and Farmers”

Its strategic positioning is to

focus on “agriculture, rural

areas and farmers”; this

division serves “agriculture,

rural areas and farmers” and

county economic

development, implements the

policies that support

agriculture with finance, and

explores new models of

addressing “Three Rural

Issues”.

Six core projects(poverty

alleviation, good harvest,

“Liuhao”, “Longteng”,

“One Thousand Cities”, and

“Huyue”)

Postal S

avin

gs B

ank o

f Chin

a

Rural Service

Department

It plays the role as the largest

financial network

communicating and

connecting the economy and

society of rural and urban

areas, perfects rural financial

services by virtue of its

branches covering all the

New country special

financing business, deposit

receipt pledge petty loans,

and micro-credit loans pilot

business, etc.



24

cities, counties, and major

townships, and branches at

country-level or below.

Oth

er join

t-stock

com

mercial b

anks

Basically no individual

department, scattered in

credit department and

other departments

They implement

market-oriented operation

according to their

self-positioning and regional

distribution on the basis of the

management and

development principle.

Issuing loans centering on

rural and urban overall

development, county

economic development,

small and micro finance,

and agricultural

dragon-head enterprises

Rural co

operativ

e finan

cial institu

tions

Rural cred

it cooperativ

es

The whole cooperative

It assumes the main

responsibility of offering loan

support to rural areas, farm

households, and agriculture,

functions as the main force

for new countryside

construction, and highlights

its foundational status in

providing financial support

for farm households.

Rural micro-credit loans,

joint households and joint

guarantee loans, rural

housing loans, rural

infrastructure loans, etc.

Rural C

ooperativ

e Ban

k

The whole bank

Based on the principle of

cooperative system, it attracts

farmers, rural industrial and

commercial businesses,

business entities and other

economic organizations to

buy shares, and provides

financial support to farm

households, agriculture, and

rural economic development.

Personal comprehensive

consumption loans,

personal business loans,

personal engineering

machinery mortgage

loans, and

student-home-based

loans.

Rural C

om

mercial B

ank

Basically the whole

bank

The joint-stock system is the

direction of the reform of

rural credit cooperatives in

the future, and its main task

should be providing financial

services to farm households,

agriculture, and rural

economic development.

Micro-finance to farm

households , forestry

property mortgage loans,

loans for poverty

alleviation of farm

households, and start-up

loans for women, etc.



25

New

typ

e rural fin

ancial in

stitutio

n

villag

e and to

wn b

anks

The whole bank

Established in rural areas,

these banks provide financial

services to local farm


rural economic development,

and bring into play the

features of flexible credit

measures and quick decisions.

Small and micro loans,

farming and breeding loans,

self-established building

loans, and agricultural

cooperatives loans, etc.

Loan

com

pan

ies

The whole company

They provide loan services

specialized to farm



These loans are mainly used

in supporting farm



Guaranteed loans, loans on

credit, etc.

mutu

al

The whole cooperative

It is found upon the free will

of farmers from a town or an

administrative village, and the

small rural l enterprises.

All the products

Micro

-credit co

mpan

ies Almost all the products

It optimizes rural financial

market, and addresses the

financing difficulties

encountered by “agriculture,

rural areas and farmers” and

small and medium-sized

enterprises.

Fin

ancial M

arkets/F

inan

cial Tools

Inclu

din

g ag

ricultu

ral assuran

ce

Full coverage

Agricultural assurance

companies play a leading role

among these non-bank

financial institutions. The

rural assurance service system

are perfected and completed

to provide important technical

support and assurance

guarantee to rural financial

innovation.

Crop insurance, breeding

industry insurance, pests

and diseases insurance, and

natural disaster losses

insurance, etc.



26

Agricu

ltural fu

tures

All the products

Protecting agricultural

production, stabilizing

agricultural product prices,

and guaranteeing the quality

of agro-products

Natural rubber, corn,

yellow soybeanⅠ,

yellow soybeanⅡ,

soya-bean meals,

soya-bean oil, etc.

Agricu

ltural secu

rities mark

ets

All the products

Solving the financing

difficulties through

securitization of agricultural

products, transferring risks in

agricultural production, and

promoting the development of

agricultural dragon-head

enterprises.

Listed companies in

agriculture

Agricu

ltural

investm

ent

funds

All the products

Investing equity capital in

mid-term agricultural

enterprises with relatively

complete supply chains

China Agriculture Industry

Development Fund

Notes: Beside the institutions mentioned in the table, local governments have established

agricultural investment companies, agricultural financing guarantee companies and similar institutions etc., to

offer agricultural policy-oriented financial services, the majority of which these institutions are controlled by the

local public financial sectors.

The progress made by the various banks is as follows:

1. Agricultural Bank of China (ABC)

The Finance Division of “Agriculture, Rural Areas and Farmers” of ABC has enlarged its scope

of pilot reform. On October 2013, county-level branches of ABC in 538 counties in Jiangsu, Zhejiang,

Hunan, Yunnan, Jiangxi, Shanxi, and Guangdong provinces were included in the scope of pilot reform

of Finance Division of “Agriculture, Rural Areas and Farmers” of ABC, and the policy of differential

deposit reserve rate, supervision fee reduction and exemption, and business tax reduction and

exemption, etc. are continued. Since the scope of pilot reform has been enlarged, the proportion of the

business volume and the amount of profit of the pilot branches in all the county-level branches of ABC

has risen from 40% to 80%. With respect to the support for “agriculture, rural areas and farmers” and

the development of county-level financial services, ABC pays high attention to the demand of finance

derived from rural reform and the construction of new-type urbanization, and improves its capacity in

serving the urban-rural integration. ABC is dedicated to supporting modern agriculture, and

improving the financial services offered to new-type business entities such as leading specialized

households, family farms, farmers' cooperatives, agricultural enterprises, etc. It has also made

innovations in the financing methods for agriculture-related clients, and continues to deepen the reform

of financial business system of “agriculture, rural areas and farmers” in order to build a mechanism in

favor of the improvement of the county competitiveness and release the vigor of county-level branches.

Financial service model for new-type urbanization has been innovated, and a “Product Box” serving



27

the construction of new-type urbanization has been created.2

2. Agricultural Development Bank of China (ADBC)

Agricultural Development Bank of China (ADBC) was established on November 1994. It is the

only policy agricultural bank in China. Its main responsibilities are raising funds based on state credit,

undertaking the agricultural policy-oriented business, and acting as an agency to appropriate financial

funds for supporting agriculture and serving agriculture and rural economic development according to

national laws, regulations and guidelines, and policies. So far, there are 30 provincial branches, 200

secondary branches, and 1,800 operating agencies in the system of ADBC, and its services network has

covered the mainland China except for Tibet.

As a policy-oriented financial institution supporting the development of “agriculture, rural areas

and farmers”, it’s the development orientation of ADBC that has determined its main business direction,

its focus of work, and its role as the backbone of China’s rural finance. As a massive-scale bank to

provide “policy-oriented agricultural business”, ADBC has been given great expectations and played an

active role continuously. In the future, with the improvement of China’s policy-oriented rural financial

service system, ADBC will continue to be a core driving force.

Table 2-10 Main Business of ADBC

Classification Specific Business

Agricultural

production

Loans for grain, cotton and oil purchase, reserve, and redeployment and sales

Special reserve loans for meat, sugar, tobacco, wool, and chemical fertilizer etc.

Loans for grain, cotton and oil seeds

Loans for agricultural means of production, including the circulation and sales of

agricultural means of production

Agricultural product

processing

Loans for industrialized dragon-head enterprises in farming, forestry, animal

husbandry, side-line production and fishery and grain, cotton, and oil processing

enterprises

Loans for grain warehousing facilities and cotton enterprise technology and equipment

upgrading

Loans for agricultural small businesses and loans for agricultural science and

technology

Rural infrastructure Rural road network, power grid, water network, and information network, and rural

energy and environmental facilities construction

Agricultural

infrastructure

Farmland water conservancy capital construction and transformation, agricultural

production base development and construction, agricultural ecological environment

construction, and agricultural technical services system and rural circulation system

construction

Intermediate business Issue financial bonds

Appropriating financial funds for supporting agriculture

Insurance agency business, fund settlement agency business, collection and payment

agency business

Inter-bank borrowing, bills rediscount, bonds counter purchase and transaction in

cash, and interbank deposit and withdrawn, etc.

Sources: ADBC annual report 2012.

Along with the constant advance of supporting rural construction and continuous adjustment of

agricultural structure, the ADBC has gradually changed its development strategy, and further

strengthened its positioning as “a policy bank” that supports rural and agricultural development. In

2 ABC, “Annual Report 2013”.



28

2011, based on “One Body with Two Wings” model, the ADBC made clear that the strategic orientation

of its future development would stick to the “Two–wheel Driven” strategy and further strengthen its

policy-oriented financial support. One of the wheel in this strategy is the continued support of ADBC to

agricultural and side-line products purchase”; the other one is “to support building new socialist

countryside”. These two wheels are regarded as the core driving force of this development strategy. The

“Two-wheel Driven” strategy is more comprehensive and advanced than the “Two Wings”

(middle/long term loans to support the production and processing of agricultural and side-line products,

and agricultural and rural development) in the earlier strategy of “One Body with Two Wings”. On the

one hand, it indicates that the theoretical exploration and practical experiences of financial support to

new countryside construction have been enriched, and ADBC has found a good way to advance new

countryside construction; on the other hand, it reflects ADBC’s upgrading and innovation in the

understanding of policy-oriented agricultural finance under the new circumstances. “Two wheel Drive”

strategy is the central idea for ADBC to advance new countryside construction under the new

circumstances. On the basis of the proven experiences (such as the model of “industrialization,

urbanization and agricultural modernization” coordinated development in pilot provinces), this strategy

is of great significance to the further realization of the function of policy-oriented finance to the

development of new countryside.

At the same time, in addressing the food security issue, the ADBC has formulated the core

mission for the current period and for some time in the future; that is “to perfect financial services,

adjust credit structure, control management risks, deepen system reform, comprehensively improve the

quality, construct a harmonious bank, and steadily advance the construction of modern agricultural

policy-oriented bank with the focus on two key tasks: guaranteeing national food security and the

stabilization of major agricultural products markets, and supporting agricultural and rural infrastructure

construction”.

To sum up, based on the traditional fundamental business such as purchase of grain, cotton and

oil, the ADBC is exerting itself to develop middle/long term policy-oriented credit business for

agricultural development and rural infrastructure construction, and satisfactory results have been

achieved and valuable development experience has been accumulated. In the future, the ADBC will

further exert itself to develop middle/long term policy-oriented credit business for agricultural and rural

infrastructure construction emphasizing on supporting new countryside construction and water

conservancy construction, deepen and extend the development of policy-oriented finance under the

new circumstances, and guide more funds to flow back to agriculture and countryside.

Table 2-11 Overview of ADBC’s Main Business

Items Cumulative Balance

(billion yuan)

Balance of 2012

(billion yuan)

Accumulative Total of

2012 (billion yuan)

Grain and Oil Loans 896.2 340.9

Agricultural Science and

Technology Loans 19.5

Agricultural Means of

Production Loans 30.5 25.7 8.2

Rural Circulation System

Construction Loans 21.9 10.7

Agricultural Small Business

Loans 7.3



29

Industrialized Leading

Enterprise Loans 38.6 28.5

New Countryside

Construction Loans 170.8

Water Conservancy

Construction Loans 46.9

Other Agricultural and Rural

Infrastructure Construction

Loans

42.7

Sources: ADBC annual report 2012.

3. China Development Bank (CDB)

Accelerating agricultural modernization and supporting new countryside construction are the key

directions of CDB’s agriculture-related financial business. By the end of 2012, CBD had issued

agricultural industrial loans of 21.6 billion yuan, and new countryside construction loans of 135 billion

yuan.

Meanwhile, the CDB is the holding bank of 13 village and town banks, and a shareholder of 2

village and town banks. The strengthened basic management to village and town banks has improved

their operating performance and service ability, and made them active in supporting “agriculture, rural

areas and farmers” and the real economy at primary level such as small and micro businesses. The loan

balance at the end of 2012 was 4.33 billion yuan, among which the agriculture-related loan balance was

3.09 billion yuan, and small and micro loan balance was 2.5 billion yuan. The full-year net profit was

130 million yuan, and the benefited farm households were 179 thousand.

2.2.3 Insurance

Agricultural insurance is an effective policy instrument for establishing and perfecting the

agricultural support and protection system and assisting agricultural development. In 2007, the central

fiscal department began to implement the agricultural insurance premiums subsidy, and China’s

agricultural insurance began to develop fast. In 2013, “Agricultural Insurance Regulations” was

formally implemented, and agricultural insurance was further accelerated, playing an active role in

stabilizing agricultural production, accelerating the increase of farmers' income, and improving rural

financial environment, etc.

The principle of China’s agricultural insurance is “government instructs, market operates,

autonomously and voluntarily acts, and collaboratively advances”, and several models have been

formed throughout the country. The first one is to choose eligible insurance companies to provide

underwriting services through bidding, and the companies who provide such services should be

responsible for their own management decisions and profits and losses. The second one is that several

insurance companies form a co-insurance entity to provide underwriting services jointly, and each

company apportions the premium and takes their share of risks. The third one is that the government

and insurance companies provide underwriting service jointly. The premiums are credited to a special

account for agricultural insurance funds and insurance account according to the agreed proportion, and

the two parties take risks proportionally. The fourth one is the government entrusts eligible insurance

companies to provide underwriting service. The insurance companies only charge commission fees,

and the premiums are deposited in the government’s account, but the risks will also be borne by the



30

government solely. Currently, the first two models are adopted by most regions. Financial support has

played an important role in the development of agricultural insurance. In 2013, the premium income

with financial subsidies accounted for 97% of the total premium income. Agricultural insurance in

China also has encountered several problems during its development, such as low degree of assurance,

limited income insurance products, same premium rate for grain crops, commercial crop and livestock

in some regions, and the scientificity and mechanism of risk diversification of disasters needs to be

further improved.

The development of China’s agricultural insurance could be generalized in three aspects.

Firstly, the coverage of agricultural insurance has been enlarged steadily, and the risk assurance

ability has been improved. According to the geographical distribution, started from 5 provinces

(autonomous regions, and municipalities) at the pilot period, agricultural insurance has now covered

the whole county. As to the variety of insurance, there are already 15 types of insurance subsidized by

central government. From the perspective of the risk assurance ability, as China’s agricultural insurance

has basically covered all agricultural industries, it has extended upward and downward to the

agricultural industrial chains, extending gradually from natural disaster risk, epidemic disease risk and

so on in the production field to the market risk, agricultural products quality risk and so on in the

circulation field.

Secondly, the number of business entities in the market is increasing constantly. In 2012,

insurance companies that develop agricultural insurance business have increased from 6 at the

beginning of the pilot to 25, and a moderately competitive market environment is forming gradually.

Thirdly, the policy support has been strengthened year after year. In 2012, the agricultural

insurance premiums that benefit from financial premium subsidy policy reached 23.25 billion yuan,

accounting for 97.98% of the total premiums. Insurance that receive financial subsidies is still the

major type insurance of China’s agricultural insurance, which has effectively reduced farmers’

premium cost.

Lastly, the function of economic compensation continues to perform. In 2012, a total indemnity

of 14.82 billion yuan was paid to 28.18 million farm households, which played an active role in

stabilizing agricultural production and promoting the increase of peasants’ income. In some region

where the insurance is widely covered, the indemnity has become an important source of funds to help

resume production after the disaster. In 2012, the total premium income of agricultural insurance of the

whole nation was 24.013 billion yuan, with a year-on-year growth of 38%. So far the scale of China’s

agricultural insurance business ranks only second to the United States, and China has become one of

the most active agricultural insurance markets in the world. In 2013, the premium income reached

30.66 billion yuan, with a year-on-year growth of 27.4%. The indemnity paid to 31.77 million farm

households affected by disasters amounted to 20.86 billion yuan, with a year-on-year growth of 41%. 1

billion mu of major crops were insured, and the insurance amount was over 1,000 billion yuan.

2.3 Investment and financing demands in agriculture

2.3.1 Farms and large specialized households

From November 2013, the research group began to conduct on-site investigations to one county



31

of each of the 5 provinces (autonomous regions): Zhejiang, Jiangsu, Hubei, Guangxi, Ningxia and

Heilongjiang in succession, and 111 effective survey questionnaires from farms and leading specialized

households were collected. The average age of the respondents is 43.9. Among those respondents, 10

are females, and the education level of most respondents is middle or high school; 66 are farmers and

21 are leading specialized households (Table 2-12).

Table 2-12 Basic Information of the Samples

Items Average Value

The Number of Respondents 111

Average Age 41.1

Average Family Size 4.7

Average Quantity of Labor Force 2.9

Total Income in 2013 (Thousand Yuan) 70.9

Amount of Debt in 2013(Thousand Yuan) 42.1

Total Land Area(Mu) 625.6

The difference in average land area among those provinces is huge. For example, the average

land area of Hubei, Guangxi, Ningxia, and Heilongjiang is 224.3 mu, 110.2 mu, 484.8 mu and 1,427.4

mu respectively.

Table 2-13 Average Land Area of the Interviewed Farms and Leading Specialized

Households of the Provinces

Hubei Guangxi Ningxia Heilongjiang

Average Land Area (Mu) 224.3 110.2 484.8 1427.4

Among the investigated counties, Jianli county of Hubei, Helan county of Ningxia, Fujin

county of Heilongjiang are major agricultural counties, but the farmers of these counties do not fully

understand relevant policies related to family farms and leading specialized households. The

investigation shows that financial support and technology support has covered a certain number of farm

households, especially those of Hubei province and Guangxi Zhuang Autonomous Region. It is

commonly believed that it is necessary for the state to offer financial support to family farms and

leading specialized households.

As to the business status of the respondents, the average revenue was 709.5 thousand yuan in

2013 (from 100 valid samples); the average expenditure was 901.2 thousand yuan (from 97 valid

samples); the average liability was 449.9 thousand yuan (from 70 valid samples). Corresponding to the

farm scale, the average revenue, average expenditure and average liability of Heilongjiang and Ningxia

farmers were significantly higher than those of Hubei and Guangxi farmers. Meanwhile, the gross

income of Heilongjiang and Ningxia farmers was higher than them that of Hubei and Guangxi farmers,

which revealed the importance of agricultural production scale to revenue.

Among the 111 respondents, 70 had liabilities, thus the occurrence rate of liability was 63.1%. In

the investigation, three sources of liability were offered: bank loans, the underground financial markets

or usury, borrowings from friends or relatives. The number of farm households who owned liabilities

from the three sources was 50, 17 or 47 respectively. In the aspect of balance of liability, bank loans

accounted for the highest proportion of the total liabilities, reaching 44.7%. Underground financial

markets or usury accounted for the least proportion, which was 17.1%.

Table 2-14 the Structure of Liability Sources of the Respondents in 2013



32

The structure of liability sources Proportion (%) Occurrence rate (%)

Bank loans 44.7 71.4

Underground financial markets or usury 17.1 24.3

Borrowings from friends or relatives 35.6 67.1

In terms of the fixed assets of the farmers, the average assets of the 88 valid samples were 1449

thousand yuan. The investigation divided the capital used by farmers to purchase fixed assets into four

categories: government funding, equity fund, bank loans, and other debts. The investigation results

show equity fund is the primary source of the capital used by the farmers to purchase fixed assets, up to

73.8%. Government funding accounts for the least proportion, which is only 1.4%.

It is worth noting that although the proportions of bank loans (9%) and other debts (15.8%) were

relatively low, they were quite popular among farmers. The occurrence rates of the two were 53.4%

and 67.0% respectively. The low proportion and high occurrence rate of these two sources revealed the

fact that, the demands of finance by farmers was strong, but the external sources of finance lacked

availability. Given the fact that a major part of other debts was borrowed from friends and relatives,

which can be seen as the quasi-equity fund, therefore, the capital sued by farmers to purchase fixed

assets was mainly comprised of the farmers’ equity fund. When the external sources of finance are

inaccessible, the farm households have to develop their owned fund.

Table 2-15 the Composition of the Capital Used by Farmers to Purchase Fixed Assets

The capital used to purchase fixed assets Amount Ratio Households Occurrence rate

The total value of fixed assets 12752 - - -

Government funding 178 1.4 14 15.9

Equity fund 9408 73.8 - -

Bank loans 1148 9.0 47 53.4

Other debts 2018 15.8 59 67.0

Regarding credit funds, most of the farm households admitted that they had suffered from

shortage of funds recently, especially those of Fujin City of Heilongjiang Province, and the proportion

was up to 90.3%.

Table 2-16 Basic Information about the Financial Items of the Respondents

Unit: %

Items of the investigation Hubei Guangxi Ningxia Heilongjiang

Receiving Financial Support 11.5 28.0 20.7 3.2

Receiving Technology Support 42.3 28.0 10.3 19.4

Knowing about Related Policies 26.9 36.0 31.0 25.8

The Necessity of Financial Support 65.4 68.0 86.2 74.2

Receiving Credit Support 46.2 48.0 31.0 38.7

Shortage of Funds in Recent Times 61.5 68.0 86.2 90.3

Financing with Security Guarantees 38.5 36.0 41.4 41.9



33

Repaying Loans on Schedule 69.2 64.0 82.8 83.9

Notes: some data of the investigation is missing.

Corresponding to the widespread shortage of funds, the farm households generally believe it is

extremely difficult to get access to finance timely. Of the total 87 valid samples, 68 consider it

relatively difficult or difficult to access to finance timely (72.2%), which is basically consistent with

the feedback from farm households of different provinces. In Hubei and Heilongjiang, that situation

appears to be more prominent, up to 88.2% and 85.2% respectively.

Table 2-17 the Level of Complexity of Timely Financing

Unit: %

Level of Complexity Hubei Guangxi Ningxia Heilongjiang Total

Easy 3.7 1.1

Relatively easy 11.8 18.8 5.7

General 12.5 25.9 14.8 14.9

Relatively difficult 29.4 31.3 44.4 22.2 32.2

Difficult 58.8 37.5 25.9 63.0 46.0

Since the agricultural operation of the respondents is already on a certain scale, they not only

have a high demand for solving the capital insufficiency, but also a relatively high requirement on the

scale of fund demand. Of the 75 valid samples, 34 (45.3%) have a fund demand of more than RMB

500,000; only 4 (5.3%) have a fund demand of less than RMB 100,000. Currently, the quota for farm

household co-guarantee loans of rural credit cooperatives and postal savings banks in most regions is

less than RMB 100,000, so the fund demands of the interviewed farm households cannot be resolved

by petty loans or co-guarantee loans, so financial institutions need to innovate in their business at least

in the aspect of capital supply quota.

Table 2-18 Borrowing Demand Scale of Farm Households

Borrowing Needs Households Ratio

> 500,000 34 45.3

300,000~500,000 17 22.7

100,000~300,000 20 26.7

50,000~100,000 3 4.0

30,000~50,000 1 1.3

Total 75 100.0

Note: some data of the investigation are missing.

Farm households also mentioned the mismatching between demand and supply with respect to

life of loan. Of the 76 valid samples, 40 (52.6%)said they expected the life of loan to be over 3 years,

while only 10.5% of the interviewed farm households expected the life of loan to be less than 1 year.



34

However, according to the provisions of the Guidelines for Farm Household Co-guarantee Loans of

Rural Credit Cooperatives, the life of a co-guarantee loan shall not be over 3 years, but in practice, the

life of loan is limited to 1 year in most regions, as reflected by farm households during the

investigation.

Table 2-19 Life of Loan Expected by Farm Households

Expected Life of Loan Households Ratio

>3 years 40 52.6

1~ 3years 28 36.8

<1 year 2 2.6

Relatively flexible 6 7.9

Total 76 100.0

The loan interest rate expected by the interviewed farm households is extremely low: 69.6% of the

farm households expect the loan interest rate to be below 5% and 48.1% of the farm households expect

the loan interest rate to be lower than 2%, which is much lower than the national benchmark loan

interest rate with a one-year term and equals to the current inter-bank offered rate (SHIBOR of August

7, 2014 is 5.00%).

Table 2-20 Acceptable Loan Interest Rate Expected by Farm Households

Acceptable Loan Interest Rate Farm Households Ratio

>20% 0 0.0

10-20% 2 2.5

5-10% 22 27.8

2-5% 17 21.5

<2% 38 48.1

Total 79 100.0

The farm households expect that the borrowing channels can be focused on financial institutions

within the system, such as Rural Credit Cooperatives (57.7%), Agricultural Bank (50.5%) and Postal

Saving Bank (22.5%), while the role of new rural financial institutions is not so significant (13.5%);

with respect to the off-system finance, the channel of borrowing from relatives and friends also plays

an important role (12.6%), while underground financial markets are hardly used by farm households as

a funding channel.

Table 2-21 Borrowing Channels Expected by Farm Households

Expected Borrowing Channels Households Ratio

Agricultural Bank 56 50.5

Rural Credit Cooperatives 64 57.7

Postal Savings Bank 25 22.5

Village and Town Banks 10 9.0

Rural Mutual Cooperatives 5 4.5

Underground Financial Markets 1 0.9

Relatives and Friends 14 12.6



35

According to the asset-liability status of farm households and their purchase of fixed assets, the

following two conclusions can be drawn: (1) liabilities are comparatively common among farm

households and most of the liabilities arise from the development of production, and can be deemed as

benign liabilities; (2) regular finance is the main channel for agricultural financing.

Considering the current financing approaches and fund demands of farm households, it is

believed: firstly, fund shortage and difficulty in acquiring funds are common among farm households;

they are highly associated with each other, and even can be considered as two aspects of one problem;

secondly, the farm households have extremely high fund demands, and to some extent, some

unreasonable factors may exist, but even if such unreasonable factors are excluded, their demands are

still higher than the current service capacity of financial institutions. To solve this problem requires

financial institutions to innovate their services and the state to make a system breakthrough.

2.3.2 Agricultural enterprises

1. Basic situation

The number of agricultural enterprises in the sample is 41, of which 32 were established after

2000, one is state-owned, one is collectively-owned, 34 are private-owned, two are joint-stock and two

are foreign invested and Hong Kong, Macao and Taiwan-invested. The average registered capital is

RMB 25.157 million, with the highest being RMB 199.12 million and the lowest being RMB

500,000. By the end of 2013, the average number of staffs and workers was 95.7 and the average

output of main products amounted to RMB 120.81 million (from 35 valid samples).

By the end of 2013, the average assets amounted to RMB 114.13 million, the average owner’s

equities amounted to RMB 62.221 million, and the average liability scale amounted to RMB 51.92

million (from 29 valid samples).

Table 2-22 Registered Capital of Sample Enterprises

Registered Capital (RMB 10,000) Households

≦100 2

>100&≦500 5

>500&≦1000 5

>1000&≦2000 7

>2000&≦5000 7

>5000 3

With respect to the industrial distribution of these sample enterprises (29 valid samples),

according to the International Standard Industrial Classification (United Nations Statistics Division,

May 2004), seven are categorized into agriculture (mainly plantation and cultivation), 15 are

categorized into manufacturing industry (agro-product processing and food processing), and four are

categorized into commercial industry (agro-product circulation and agro-production means circulation).

Table 2-23 Industrial Distribution of Sample Enterprises

Industry Households Remarks



36

Crop planting 3 Grain planting: 1; planting and processing: 1

Animal breeding 3 Chicken, rabbit and cattle: 1, respectively

Aquiculture 2

Meat processing 2

Dairy product and oil producing 7 Dairy products: 2; oil: 5

Food processing and feed processing 6 Grain processing: 1

Beverage production 2 Chinese wine: 1; beer: 1

Sales of production means 4 Forage: 1; production means: 3

Total 29

Status of Assets and Liabilities

As is known from data in 2013, the asset-liability structure of these enterprises was relatively

healthy, with the average asset-liability rate, average fixed asset ratio and average fixed ratio being

45.5%, 35.5% and 65.1%, respectively. From the angle of industrial features, due to relatively heavy

investment in equipment, plants and technology, both of the fixed asset ratio and fixed ratio are

relatively high in manufacturing industry; by contrast, the asset-liability ratio is relatively low in

agriculture, whereas its fixed asset ratio and fixed ratio are both the highest with the fixed ratio

reaching 112.4%. The relatively high fixed asset ratio indicates inadequate working capital of the

enterprises and is extremely unfavorable to their daily operation, which is consistent with the difficulty

in getting loans and inadequate working capital reflected by the agricultural enterprises during the

investigation. The extremely high fixed ratio of agricultural enterprises that exceeds 100% indicates

that all fixed assets of such enterprises are purchased with their equity capital, and there is a tendency

of severe capital inadequacy.

Table 2-24 Asset Structure of Sample Enterprises (2013)

Plantation and

cultivation

Agro-product Agro-materials

Processing circulation

Total

Average total assets (RMB 10,000) 3203.9 15860.0 8931.5 111413.0

Asset-liability Ratio (%) 40.3 46.1 44.6 45.5

Average Fixed Assets (RMB 10,000) 2150.3 4968.6 3936.0 4048.7

Fixed Asset Ratio (%) 67.1 31.3 44.1 35.5

Fixed Ratio (%) 112.4 58.1 79.5 65.1

Average Owner’s Equities (RMB 10,000) 1912.6 8548.8 4952.5 6222.1

Average Total Liabilities (RMB 10,000) 1291.3 7313.1 3979.0 5192.0

The average liability scale of the 29 enterprises amounts to RMB 51.92 million, of which 90.0% is

current liabilities and 10.0% is long-term liabilities, showing an extremely high liability structure ratio.

There is little difference in current liability and long-term liability structure among different enterprises,

but the difference in specific liability items is relatively big. With respect to current liabilities, the ratio

of short-term loans in the total liabilities is relatively high among manufacturing and commercial

enterprises (51.9% and 47.8% respectively), while the ratio of short-term loans is relatively low

(24.8%), but the accounts payable is extremely high (60.0%) among agricultural enterprises, which



37

shows their inadequate solvency.

The ratio of the total long-term loans and short-term loans in the total liabilities is 59.3%, but

there is significant difference among the three categories of enterprises. Due to the relatively low

capacity for short-term financing, the said ratio is only 38.5% among agricultural enterprises. In this

regard, the financing status of agricultural enterprises can be considered as even worse.

Table 2-25 Liability Structure of Sample Enterprises

Type of Liabilities

Plantation and

cultivation

Agro-product

processing

Agro-materials

circulation Total

Average Liabilities 1291.3 7313.1 3979.0 5192.0

Liability Structure Ratio 6.34 11.15 3.75 9.0

Current Liabilities Scale (RMB 10,000) 1115.4 6711.3 3140.8 4675.1

Ratio (%) 86.4 91.8 78.9 90.0

Short-term Loans Scale (RMB 10,000) 320.9 3795.4 1900.0 2575.5

Ratio (%) 24.8 51.9 47.8 49.6

Accounts Payable Scale (RMB 10,000) 774.8 2867.5 1203.0 2060.6

Ratio (%) 60.0 39.2 30.2 39.7

Long-term Liabilities Scale (RMB 10,000) 175.9 601.8 838.3 516.9

Ratio (%) 13.6 8.2 21.1 10.0

Long-term Loans Scale (RMB 10,000) 175.9 601.8 723.5 501.1

Ratio (%) 13.6 8.2 18.2 9.7

Sum of Long and

Short-term Loans

Scale (RMB 10,000) 496.8 4397.2 2623.5 3076.6

Ratio (%) 38.5 60.1 65.9 59.3

Investigation indicates that the channel for sample enterprises to get loans from financial

institutions is quite narrow. The manufacturing enterprises have relatively diversified approaches to get

institutional loans and have received loans from all major financial institutions; yet, the planting and

cultivating enterprises have a relatively limited source to get loans and the two loans offered by China

Development Bank are both policy-oriented loans, so their sources of commercial finance are limited to

Rural Credit Cooperatives and local financial institutions only. As observed in the investigation,

large-scale state-owned financial institutions hardly provide such services to the mentioned enterprises.

Table 2-26 Structure of Loans from Financial Institutions of Sample Enterprises

Financial

institutions

Plantation and cultivation Agro-product processing Agro-materials circulation Total

Scale Households Scale Households Scale Households Scale Households

Industrial and

Commercial

Bank of China 4850 4 4850 4



38

China

Construction

Bank 13000 2 13000 2

Bank of China 2870 3 2870 3

Agricultural

Bank of China 10275 3 7100 1 17375 4

Agricultural

Development

Bank of China 14985 3 14985 3

Rural Credit

Cooperative 400 3 200 1 600 4

New

Development

Bank 1100 2 500 1 1600 3

Other financial

institutions

20 1 21565 5 21585 6

Total 1520 6 68245 22 7100 1 76865 29

*Other institutions: local banks, Postal Savings Bank, local investment companies, new rural financial institutions,

etc., mostly from local banks such as Bank of Ningxia, Longjiang Bank and Guangxi Beibu Gulf Bank.

2.4 Features and problems of supply and demand of agricultural

funds

1. The current ratio (0.42) of agricultural enterprises is quite low, which causes significant

adverse impacts on the daily operation and solvency of enterprises.

Based on the asset-liability status of enterprises, their operation status and financing environment

can be simply assessed. In 2013, the current ratio of agricultural food processing, food manufacturing

and beverage manufacturing in China was 1.22, 1.26 and 1.26 respectively, while the average current

ratio of the sample enterprises was 1.15. Among these sample enterprises, the current ratio of

manufacturing enterprises (1.20) was quite close to that of commercial enterprises (1.22), but the

current ratio of agricultural enterprises was excessively low (0.42), which had significant adverse

impacts on their daily operation and solvency.

Table 2-27 Current Ratio of Sample Enterprises

Items Current Ratio

Plantation and cultivation 0.42

Agro-product processing 1.20

Agro-materials circulation 1.22

Total 1.15

2. There is always a gap between the supply and demand of funds, and the approaches to

solve the problem differ by industries



39

Of the 41 interviewed enterprises, 37 have provided complete feedback about their fund demands

and financing environment (including the aforementioned 29 enterprises). The 37 sample enterprises

are also classified as plantation and cultivation (8), agro-product manufacturing (21) and agro-product

and productive means circulation (8).

With respect to the status of loan demands, most of the enterprises (29) said they had encountered

funding deficits in the recent three years and the approach to fill these fund gaps varied, but the major

approach tended to be applying for loans from financial institutions. Among the three categories of

enterprises, the agro-product manufacturing enterprises show a clear tendency towards private capital

investment and inter-enterprise financing, while the circulation enterprises prefer private loans.

Table 2-28 Approaches to Fill the Fund Gap

Approaches

Number of enterprises

Plantation and cultivation Agro-product processing Agro-materials

circulation

Loans from financial institutions 4 16 4

Private capital investment 3 8 2

Inter-enterprise financing 1 5 4

Private loans 2 1 5

National finance 1 4 4

Self-raised funds by staff and

workers of the enterprise 1 1 1

Note financing 1

Foreign capital 1

These loans are basically used by these enterprises in the same way. Infrastructure construction

and technical reform remain to be the major motives for enterprises to apply for loans, and

manufacturing enterprises is the only category that depends relatively more on bank loans for working

capital.

Table 2-29 Usage of Loans by Enterprises in Recent Three Years

Applications of Loans Plantation and cultivation Agro-product

processing

Agro-materials circulation

Capital Construction 5 4 4

Technical Reform 3 10 1

Distribution of Salaries

Make-up of working capital 7

3. Difficulties in getting loans is still the major concern of enterprises and the solution to the

shortage of collateral is desperately needed

The major financing channels for the sample enterprises are formal financial institutions, but they

also agreed there are certain difficulties in obtaining loans. Of the 37 enterprises, 15 (up to 41%)

considered it was relatively difficult or extremely difficult to get loans; which was more representative

in the 8 plantation and cultivation enterprises, 6 of which said it is relatively difficult or extremely

difficult. As to the reasons for difficulties in loans, the respondent didn’t said much about the outlet



40

distribution and interest rates of financial institutions, but 20 of them (54%) indicated that financial

institutions had stringent requirements to loans, which was consistent with the urgent demand by the

enterprises to solve the problem of lack of collateral during the survey seminar.

By making efforts for financing in different forms, the status of fund demands of the sample

enterprises was alleviated to some extent and most of them indicated that their loan demands were

basically satisfied, and only 5 of them (13.5%) indicated their fund demands were less satisfied.

Table 2-30 Difficulties in Loans and Degree of Demand Satisfaction

Items Plantation and

cultivation

Agro-product

processing

Agro-materials

circulation

Having Fund Gaps in Recent 3 Years 6 17 6

Difficulties in

getting bank

loans

Extremely easy 1

Relatively easy 2 2

General 2 12 3

Relatively difficult 5 5 3

Extremely difficult 1 1

Major Reasons

for Loan

Difficulties

Lack of local financial institutions 2

Excessively high requirements for

loans by financial institutions

3 14 3

Complicated procedures in

getting loans

2 1

Relatively high loan interest rates 1 1

Excessively high extra cost of

loans

1 1

Degree of

Satisfaction of

Loan Demands

Basically satisfied 5 11 2

Partially satisfied 1 9 4

Rarely satisfied 2 1 2

4. The sample enterprises show certain preferences in financing channel, financing mode

and supporting mode respectively

According to their operation experiences, the sample enterprises have expressed their ideas about

financing demands and the way to improve financial services. Most of them (62.2%) indicated that

loans from financial institutions would remain to be the major financing channel in the future,

meanwhile (18.9%) they also expressed their hope for state financial support; in terms of financing

modes expected by these sample enterprises, credit loans is strongly favored (87.5%); as to financing

support modes, loans with discounted interest service is more preferred by the sample enterprises

(73.0%).

Table 2-31 Expectations of Sample Enterprises in Satisfying Loan Demands



41

Unit: households

Expectation in Satisfying Loan Demands Plantation and cultivation

Agro-product

processing

Agro-materials

circulation

Expected financing

approaches

Loans from financial

institutions 7 12 4

Self-raised by staff

and workers 1

State financial input 1 3 3

Capital market

financing

1

Foreign capital 1

Stock exchange

financing

1

Expected financing

mode

Credit loans 1 18 8

Mortgage 2

Guarantee 1

Pledge 1

Expected financing

support mode

Loans with

discounted interest 6 16 5

Loan guarantee or

loan insurance

1 1

Project fund support 1 5 2

5. Enterprises show no obvious preference in joining in enterprise alliance or supply-chain

financing

Of the 37 sample enterprises, 14 (37.8%) have joined enterprise alliances of their respective

industry or region and 50% of them indicated that the alliance they had joined could help with loans or

guarantee. As a whole, enterprises show no strong preference for one-time loans or cycle loans in

industrial chain financing, but the preference of different enterprises is inconsistent in this regard,

enterprises of the plantation and cultivation category (85.7%) in particular show extremely strong

preference for one-time loans, which may be associated with the nature of their production.

Table 2-32 Development of Industrial Chain Financial Services of Sample Enterprises

Type of enterprises

Plantation and

cultivation

Agro-product

processing

Agro-materials

circulation

Joining an enterprise alliance or not? Yes 4 8 2

Status of financial services

development by enterprise alliance

Providing loans 1 1

Providing guarantee 4 1

Not providing 3 4



42

One-time or cycle loans One-time loan 5 12 4

Cycle loan in

installments 3 9 4

Loan method preference One-time loan 6 9 2

Cycle loan 1 11 4



43

Chapter 3 Practical Explorations of Financial Support for the Development of Modern Agriculture: the Perspective

of Product Innovation and Service Innovation

The innovation in rural financial products and services follows the rule that demand creates

supply. Modern agriculture, characterized by large-scale industrialized production, requires not only

scale operation of lands and intensive management of the labor force, but also large amounts of money,

so as to meet consumers’ demands and increase the producers’ income. Under this trend, new types of

business entities (such as family farms, farmers’ cooperatives, and agro-related business) with larger

production scale and higher capital requirement compared with general famers emerge and become

major carriers for the development of modern agriculture.. Attention has been given to innovations in

financial products and services regarding new business entities gradually and financial supporting

policies exclusive to new business entities have been made by competent authorities. Under the

guidance of People's Bank of China and China Banking Regulatory Commission, several regions have

been actively exploring innovations in rural financial products and services and worked out diversified

rural financial solutions. Some provinces have implemented rural land mortgage, represented by

Chongqing City, and Lishu County in Jilin Province. As a pilot county, Tiandong County in Guangxi

Zhuang Autonomous Region has implemented omni-directional reform and innovation. Beijing City

has innovated the pattern of loan for farmer specialized cooperatives by various types of “Joint

Guarantee Loans”. Besides, supply chain financing is being carried out in several places.

3.1 Mortgage and guaranteed Loans

After the Third Plenum of the 17th CPC Third Plenary Session, the understanding and

policymaking regarding the real rights or property attribute of resource assets such as agricultural lands

and forest lands have been strengthened. The decision made at the Third Plenary Session of the 18th

CPC Central Committee explicitly stated that “farmers are granted the right to possess, use, benefit

from and circulate their contractual land management rights as collateral or guarantee”, which further

deepened the understanding of the decision of the Third Plenum of the 17th Central Committee; that is

“farmers will be granted more sufficient and guaranteed land contractual management rights”, and “to

the land contractual management rights will be perfected”. “The Guide to Provide Financial Services to

New-Type Business Entities Including Family Farms” ([2014]Yin Fa, No.42) issued in 2014 by

People's Bank of China requires banking institutions to “make greater effort to innovate rural financial

products and services, and provide diversified financing solutions according to the differentiated capital

demands varying between different types and between the different scales of operation of new

agricultural business entities including family farms”, which includes broadening the scope of

collateral.

3.1.1 The practice of rural land financialization in Chongqing Municipality

As the only municipality in central and western China, Chongqing was authorized as a pilot area

for urban-rural comprehensive reform, and has a strategic position in promoting regional coordinated



44

development and advancing the reform and opening up. Under the guideline of “actively promoting

reform experiment and constructing the mechanism to balance urban and rural development”,

Chongqing has been actively exploring the reform experiment of rural land financialization.

On November 23rd 2010, Chongqing government introduced the “Recommendations on

accelerating rural financial service reform and innovation” ([2010]Yufu Fa, No.115), which set forth

definite work goals for rural financial service reform and innovation, that is “to innovate rural financial

institutions with focus on comprehensively promoting property rights mortgage financing including the

land contractual management rights, rural residential housing and forest; innovate and perfect rural

finance organizing system emphasizing on the development of new rural financing institutions;

innovate supporting system of rural financial service centering on the advancement of rural credit and

equity circulation and the establishment of rural financial risk sharing mechanism, so as to provide

comprehensive financial support to the integrated development of rural economy”. Relevant

departments of Chongqing have introduced series of normative documents, and the Chongqing Mode

of rural land financialization has been initially formed. The main practices of Chongqing are as

follows:

Within the city of Chongqing, land contractual management rights can be used as collateral to

apply for a loan no matter how these rights were obtained. Similar to other forms of bank credit, rural

land mortgage loan should be concerned about the risks of the collateral (land contractual management

right), as well as the evaluation of the borrower’s credit and the benefits of the industrial projects. The

borrower should enjoy a good credit standing, and observe disciplines and laws; the agricultural

industry projects to which the loans are issued should achieve good benefits, and the first source of

repayment should be fully guaranteed. When dealing with land contractual management right mortgage,

the value of which should be determined by the negotiation between the parties to the mortgage or by

the assessment of appraisal agencies approved by the parties. The determination of the collateral value

need no assessment from professional appraisal agencies in principal if the loan amount is within 1

million yuan, and can be done by the negotiation between the lender and borrower; if the loan amount

is over 1 million yuan, the assessment could be entrusted to a qualified professional appraisal agency,

and fee thus incur will be paid according to the minimum standard. Rural land mortgages are publicly

displayed if they are registered, which is an important condition for the right to rural land mortgage to

take effect. The registration agencies are the competent administrative departments. The registration

fees may be deducted, exempted, or charged pursuant to the minimum standard.

Asset management companies could be established with the support from Chongqing agricultural

guarantee companies, and be responsible for disposing non-performing assets arising from rural land

mortgages. If the performance period expires and the borrower fails to repay the loan, or the mortgage

is realized according to the agreement made by the parties, the mortgagee and mortgagor can dispose

the mortgaged property by negotiation, the proceeds obtained from the disposal will be paid to

mortgagee in priority, and the value exceeding the obliges’ rights will be attributed to the mortgagor,

and the gap will be paid off by the obligors. If no agreement upon the negotiation is reached, the parties

to the mortgage can apply for arbitration to financial arbitration institutions or institute a legal

proceeding to people's courts as agreed in the contract. The collateral of rural land mortgages can be

disposed by auction, selling, circulation and so on. All things being equal, the collective economic

organization and their eligible members have the right of first refusal. The land contractual

management right should be disposed within the collective economic organizations. If they are



45

incapable of disposing the rights, rural asset management companies can purchase or circulate the

collateral (but the rural land contractual management right could only be circulated). If the collateral is

permitted to be transferred outside the collective economic organizations according to laws and

administrative regulations, these laws and regulations should be followed. If the loan is mortgaged by

rural land contractual management rights, the mortgagee will have priority to claim the proceeds

obtained from the circulation of rural land contractual management right; if that right is incapable of

being circulated, the mortgagees will have priority to claim the proceeds in the way of auction, selling,

and liquefaction of agreement.

In order to promote rural land mortgage financing and establish a sound rural finance risk sharing

mechanism, public finance of city and county (including autonomous county) levels have funded and

established compensation funds for financing risks of “Three Rights” mortgage loans. The

compensation funds compensate for a certain proportion of losses of principal and interest caused by

“Three Rights” mortgage loans to the financial institutions offering “Three Rights” mortgage financing

services. According to the current rules, risk compensation for mortgage financing is limited to the

losses of financial institutions who suffer from “Three Rights” mortgage financing loans as a result of

offering mortgage financing loans to agro-related entities such as relevant businesses, farmer

specialized cooperatives, and farm households to increase agriculture, forestation, herding, fishing and

sideline production. Loan losses will be compensated if the following conditions are satisfied: the

financial institutions should be in strict legal compliance; the loans should be up to the required

standards; the intended use of the loans should be in production, cold storage, processing, and

circulation of agriculture, forestation, herding, fishing and sideline within Chongqing City; they have

obtained the awards with legal effect from the arbitration organization or the court's effective verdicts

and suspension or termination of them have been executed, or the loans have been delinquent for two

years and above; the financial institutions have performed the duty of care. Loan losses that match

those criteria will be compensated for 35% of the losses by the risk compensation funds, of which

city-level compensation funds claim 20%, and districts and counties claim 15%.

3.1.2 The practice of land revenue guaranteed loans in Jilin Province

Jilin Province is a traditional major agricultural province, while the proportion of loans to farm

households is only 6% of the total loans. In order to deepen the financial reform, promote financial

innovation, improve financial services, and further strengthen the support of finance to “Three Rural

Issues”, Jilin Province has proposed that they would “constantly broaden the scope of collateral,

actively improve the supporting management measures, and propel the pilot project of mortgage and

pledge loans of forest rights, rural land contractual management rights, farm machinery and

homestead”, and actively explore new model of rural land financialization--land revenue guaranteed

loans. In this model, farm households transfer their land contractual management rights to real rights

finance companies which make commitments to financial institutions that they will be jointly liable.

“This model takes the future income rights of land as a guarantee of farmers’ loans for the first time,

and breaks the patterns of taking physical objects as collateral or joint guarantee by several other

farmers.” Jilin Province also hopes to make a breakthrough with this model in dealing with the rural

financial dilemma and solving the intractable problem of rural-urban financial dualistic structure it

brings, and explores a fundamental way to solve the “Three Rural Issues”, in order to balance the urban



46

and rural development, and provide local practices with reference value for breaking rural-urban

dualistic structure.

The key practices of Jilin model are as follows: County-level governments establish Real Rights

Financing Service Center and Real Rights Financing Agricultural Development Co., Ltd (“RRFAD”).

They are the same organization with two names, and are the joint financing platform led by

governments. A farmer household transfers his land contractual management rights to a real rights

financing company, and meanwhile the company subcontracts the land contractual management rights

to that farmer household. After the contract is signed, the farmer household should return the original

copy of “Certificate of Rural Land Contractual Management Right” to the issuer who will keep it. The

contracting parties apply for change of registration on the land contractual management right register

book and Certificate of Rural Land Contractual Management Right, indicating that the new land

management right contractor is the real rights financing company. The transfer amount that the

company should pay to the farmer household and the contracting amount that the farmer household

should pay to the real rights financing company will offset and no gap will be left. When the farmer

household applies for a loan from a financial institution, the real rights financing company will sign a

“guarantee contract” that provides joint guarantee liability with the farmer household, and the real

rights financing company guarantees the liability to the financial institution with responsible property

consisting of land circulation earnings, capital owned by the company and credit revolving assurance

fund set up by the government.

If the farmer household repays the principal and interest of the loan to the financial institution

without delay, the transfer contract of land contractual management rights between the farmer

household and the real rights financing company will be terminated automatically. The farmer

household delivers the discharge issued by the financial institution who has offered the loan to the real

rights financing company, and the company is obliged to apply for alteration registration to the issuer

and the land contractual management right will return to the farmer household. If the farmer household

fails to repay the loan on time, the subcontract relationship between the two parties will be terminated

automatically. At this time, the real rights financing company will pay back the amount of loan for the

farmer household, and such amount will offset the equal part of the transfer amount. Meanwhile, the

real rights financing company is entitled to solicit a contractor who offers the highest price. The least

unit of subcontracting duration is “year” and the estimated transfer amount will be subject to principal

and interest of the loan. The farm household is entitled to take part in the bidding, and on equal terms

he has the priority to get the contractual right. If the amount obtained from the subcontracting reaches

or exceeds the principal and interest that the original farm household has borrowed, the transfer

contract will be terminated automatically, and the land contractual management right will return to the

farmer after the subcontracting period expires. The part of the aforesaid amount that exceeds the

principal and interest of the loan lent to the original farmer household will be turned over to the farmer.

If there is money left over from the subcontracting after deducting the principal and interest of the loan,

the real rights financing company is obliged to pay this left part to the farmer household. In order to

guarantee the survival interest of the farmer, the farmer household could only use 2/3 of his land

contractual management right for land revenue guaranteed loans, and there is still 1/3 of the lands left

for provisions so that the lands will not be lost and the basic living will be guaranteed even if he

couldn’t pay back the loan on time and the land contractual management right is subcontracted. During

the period of subcontracting, subsidies related to the land will still belong to the original farmer



47

household. By limiting the credit ceiling, the subcontracting period of the rural land is generally less

than three years and no more than five years.

Chart 3-1 The Process of Land-Revenue Guaranteed Loans in Jilin Province

3.1.3 Financial innovation in the reform of the collective forest rights in Fujian

Province

Fujian province is rich in forest resources with a forest coverage of 3.1%, ranking the first place

in China. In 2003, Fujian first implemented the reform of the system of collective forest rights, and

issued a unified forest right certificate. The forest land management right and the ownership of forest

recorded by the certificate can function as capital, and can be used in mortgage finance as collateral. In

recent years, Fuzhou Branch of the People's Bank of China has enhanced their cooperation with forest

departments and promoted the innovation of forest right mortgage business, and has achieved good

effects in supporting agriculture.

1. Fuzhou Branch of the People's Bank has joined hands with the forestry administration to

organize the enactment of the “Guidance on Promoting Financial Innovation and Facilitating the

Development of Forestry” endorsed by the provincial government, which guides financial institutions

participating in innovation and as a special credit policy, provides policy support for the innovation.

2. It has promoted the construction of supportive service system involving forest right

registration, evaluation, and circulation, and established 74 forest right registration management

organizations basically covering all the forest regions in the province and 66 county-level forest right

trading platforms, providing services for forest right registration and management, assets appraisal and

circulation of forest resources.

3. It has incorporated forest insurance into pilot policy-oriented insurance, which has effectively

The real rights financing

company

Farm households Commercial Banks

The

guarantee

contract

Rural Land Contracting

Transfer of

possession

Application/repayment of loan

Offering loan

Repayment

Collecting new contractor



48

reduced operational risks of forest right mortgages, and further improved the external environment of

forest right mortgage loans.

4. It has issued subsidized micro-loans that are easy to evaluate in forest regions with finance

discount, which can meet foresters’ demands for petty productive cash used for afforestation, forest

cultivation and forests protection.

5. It has improved forest right mortgage service system, guided the financial institutions to

simplify the approval process for forest right mortgages and determine loan maturities and interest rates,

making forest right mortgage loans more accessible and convenient.

Since the China’s first forest right mortgage loan of 1 million yuan issued by rural credit

cooperatives of Sanming Yong’an City, financial institutions participating in forest right financing

innovation have increased gradually, and now there are 9 banking financial institutions that have

carried out forest right business activities. They have gradually formed various types of forest right

mortgage loans in which forest right certificates play a role directly or indirectly, including direct loans

with forest right certificates, “guaranteed by guarantee company + counter guaranteed by forest right

certificates” and “corporation + farmer” model. Furthermore, China Development Bank has integrated

its capital and the network of rural credit cooperatives and set up a developmental forest right financial

service platform to provide financing services to foresters and forestry businesses.

3.2 Combined loans by the interaction between government,

banks and insurers

3.2.1 “Tiandong Model”

On the premise of reinforcing rural financial infrastructure in local towns and major

administrative villages, Guangxi Tiandong County has established its rural financial service supporting

system of “One Office, One Right, and One Rating”, constructed a triune mechanism of “Insurance +

Guarantee + Payment” serving the “Three Rural Issues”, and formed the duplicable,

easy-to-popularize, and sustainable “Tiandong Model”, relying on a small amount of financial input as

leverage. The basic components of this model are as follows:

One Office: The Financial Service Office on “Three Rural Issues” was set up in 162

administrative villages of the county, and the office is composed of the two “village committees”,

college-graduate village officials and rural bellwethers, and is responsible for assisting the banks and

insurance companies, and servers as a bridge and bond to connect financial institutions and rural

residents. It has brought the work of credit collection, pre-loan investigation, loan collection, insurance

services, and finance knowledge publicity to the village level, and solved the problem of bank outlet

and manpower shortage. By 2013, the loans issued to farm households through The Financial Service

Office for Addressing “Three Rural Issues” had reached 811 million yuan among 32,206 households.

One Right: The rural property right are used for financing in the market; that is to say, the county

activates the rural production factors with support from Tiandong County Rural Property Trading

Center. The rural residents are guided to handle rural property circulation, rural property mortgage

loans, rural asset appraisal, and policy and regulation consulting, etc. So far, the center has conducted



49

57 rural property transactions with the turnover of 187.16 million yuan (among which: 26 are land

circulation certificating involving 14, 883.82 mu and a turnover of 153.86 million yuan; 30 are

mortgage loans of rural property rights including forest rights, land management rights, and production

facility, farm houses and beneficiary rights, etc. with an amount of 32.09 million yuan; 1 is to dispose

the banks’ 1.212 million yuan non-performing assets ); and organized 33 rural asset appraisals with the

value of 117.58 million yuan.

One Rating: It means farmer credit rating. On the basis of rural credit reference system

established in 2009, Tiandong County updated 83 thousand farm households’ information of the county

and rated their credit in 2013, and incorporated the county’s 1,251 small and micro businesses, farmer

specialized cooperatives, and specialized households of crop and animal production into credit rating

system. Those who are rated as high-grade are offered unsecured loan support. Tiandong’s credit

system construction was appreciated by Joint Inter-Ministerial Meeting of National Social Credit

System Construction and its successful experience was popularized to 14 cities in Guangxi and several

other provinces. In 2013, Tiandong-model credit system was duplicated in Baise Youjiang District,

Tianyang County, and Pingguo County, and in 2014 it will be applied to other 8 counties in Baise City.

Insurance: The policy-oriented agricultural insurance is vigorously promoted in the county. The

Rural Insurance Service Station has been established in all the 10 townships in the county, insurance

service points has been set up in all administrative villages (including communities), and the village

insurance service network has realized fully coverage. Agricultural insurance covers characteristic

agricultural industries such as sugarcane, banana, mango, bamboo, rice, and wood, and underwritten

areas reached 395 thousand mu in 2013. Left-behind children insurance and broiler chicken insurance

were developed in 2013. The yearly premium revenue of policy-oriented agricultural insurance was up

to 9.6415 million yuan of that year with a year-on-year growth of 14.8%; the compensation amount

was 2.509 million yuan, and the loss ratio was 26.02%. The vegetable price index insurance was set

about to be promoted on January, 2014, which is initiated in Guangxi Zhuang Nationality Autonomous

Region.

Guarantee: Guarantee institutions have a role to play. Tiandong Farmers Aid Guarantee

Company was set up to lower the bank’s credit risks. So far, the loans guaranteed by the company have

added up to 140 cases with a loan balance of 76.78 million yuan. At the same time, public financial

funds can be leveraged with the agricultural credit risk compensation mechanism. The risk

compensation fund with an amount of 8 million yuan was established according to a certain proportion

of the amount of agriculture related loans, and it is used for the risk compensation of various types of

financial institutions’ loans serving “Three Rural Issues” according to the principle of “earmarking a

fund for its specified purpose only, retaining the surplus, rolling the use, and no reimbursement for the

overspending”. So far, the fund has been used for the reimbursement for the bad debt of 615 thousand

yuan of ABC’s petty loans, the bad debt of 730 thousand yuan of rural commercial bank’s agriculture

related loans, and bad loans of 88 thousand yuan of “Xiangzhouhongxiang Rural Mutual Financial

Cooperative”.

Payment: The construction of payment system has been reinforced to tackle the problem in

settlement and deposit and withdrawal of pretty cash of farm households. By 2013, banking financial

institutions set up 45 physical outlets, and installed 90 ATM machines, 1153 POS machines, and 940

telephones for bank transfer, with all the indexes higher than the national average level. On this basis,

Tiandong Rural Commercial Bank installed 322 Guishengtong payment terminals in the whole county,



50

covering the suburbs and 162 administrative villages of the county, which further improved the

coverage of payment network in villages, and solved the problem of payment and settlement in rural

areas. The county issued 780 thousand bank cards of various types with 1.81 for each person. Personal

e-bank and SMS has been widely used in the county, and the proportion of bank card consumption of

the total retail sales reached 22%. The idea of “Inclusive Finance” proposed at the Third Plenary

Session of the 18th CPC Central Committee has been initially realized.

3.2.2 “Shouguang Model”

Generally speaking, “Shouguang Model” means that the government sets up a small business

association and a policy-oriented guarantee company, the bank innovates credit systems and financial

products, and then eligible small businesses are selected to offer the credit support. It is mainly

reflected in the innovation of rural financial reforms with various means of mortgage to ensure farmers’

and small businesses’ credit demands.

In 2008, Shouguang City issued a series of pilot measures for rural financial reform, including

“Interim Procedures for Greenhouse Mortgage Loan in Shouguang City”, “Interim Procedures for

Rural Housing Mortgage Loan in Shouguang City”, and “Interim Procedures for Land Use Right

Mortgage Loan in Shouguang City”, etc. On May 2009, government of Shouguang City issued “Policy

Measures for Accelerating the Development of Rural Financial Reform”, which stipulates that the

applicants who are in the need of 4 vegetable greenhouse mortgage loans, land use right mortgage

loans and rural housing mortgage loans will get the greenhouse ownership certificate, the land use right

certificate and the house ownership certificate in priority issued by the registration authority; the

farmers who develop production and establish economic entities and are eligible for vegetable

greenhouse, rural housing and land management right mortgage loans will enjoy preferential loan

interest rates within the current interest rate range; financial institutions who carry out the aforesaid

mortgage loan business will be given risk compensation rewards based on 1.5% of the annual average

amount of new vegetable greenhouse, rural housing and land management right mortgage loans; if

there are unliquidated obligations for the borrowers when the performance period expires, the

registration authority will handle the ownership transfer procedure in priority without transfer fee;

qualified villages are encouraged to establish collateral buyback mechanism for the farm households

who have applied for loans in case of foreclosures due to temporary financial difficulties; the

progressive situation of vegetable greenhouse, rural housing and land management right mortgage

loans is included in the year-end performance assessment of the townships(street offices).

As is known, the Bank of Weifang, the Shouguang Rural Commercial Bank, the Shouguang

Rural Bank, the local Agricultural Bank of China, and the local Postal Savings Bank of China have

conducted vegetable greenhouse mortgage loan business successively. According to the official

statistical data, by the end of June 2013, Shouguang City Economic Management Bureau had issued

1,047 vegetable greenhouse ownership certificates for 1027 farm households free of charge, and 127

vegetable greenhouse ownership certificates for 114 agricultural dragon-head enterprises and farmers’

cooperatives, offering greenhouse mortgage loans of 600 million yuan. Apart from the vegetable

greenhouse mortgage loan, Shouguang City has also introduced the rural housing mortgage loan

similar to the former, and primarily targets at farm households who develops industrial management of

agriculture and self-employed and private businesses. In addition, the available collateral for



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Shouguang farmers also includes land contractual management rights, forest rights, sea area use rights,

salt field use rights, and Agricultural products orders, etc. According to the statistics, loans mortgaged

by these new types of collateral issued in Shouguang have amounted to 5.1 billion yuan. Over the four

years from 2009 to 2012, agriculture related fiscal subsidies had amounted to 432 million yuan in

Shouguang City, and the financing obtained from new types of mortgage loans received by farmers was

over 10 times than agriculture related fiscal subsidies.

Modern agriculture is a high-input industry, and financing is an unavoidable problem in the

development of the agriculture industrialization. However, “Shouguang Model” provides a reference

for solving agriculture financing problems across the country. “Shouguang Model” is not only the

interaction between the government and the bank, but also the interaction among leading

agribusinesses, village collectives, farmers’ cooperatives and farm households. It provides a way that is

to be further explored for solving credit difficulties in the development of agricultural industrialization;

that is loans jointly guaranteed by small businesses and farmers’ cooperatives and mortgaged by rural

housing, land contract rights, forest rights and vegetable greenhouses.

3.3 Loans for cooperatives with joint guarantee: the case of

Beijing

3.3.1 Cooperative loans with joint guarantee by cooperatives

Loans jointly guaranteed by farmers’ cooperatives are a new financial product exclusively for the

cooperatives, developed by the Beijing Municipal Research Center for Rural Economy and Beijing

branch of the Agricultural Bank of China in 2012. Loans jointly guaranteed by farmer cooperatives

means that at least three farmer cooperatives form a joint-guarantee group and apply for credit from

Agricultural Bank of China in the name of the group, with the joint responsibility of guarantee borne

by all members. The legitimate appliers of this loan are those demonstration cooperative with at least

county-level certification, who have signed cooperation agreements and letters of commitment on joint

guarantee with other group member. The credit amount for a single demonstration cooperative of

municipal level or above shall not exceed 8 million yuan, and the amount for a single demonstration

cooperative of county level shall not exceed 5 million yuan. What’s more, the sum of all the loans of

joint guarantee group members cannot exceed the sum of guaranteed amount of the joint guarantee

group members. These loans are mainly used for circulation, seasonal and temporary liquid capital

demands in the process of the borrower’s regular production and business. The term of the loans should

be no more than one year in principle, and the longest term is two years. The loan whose term is over

one year should be reported to the branch bank for approval. The interest rate of the loans follows

related regulations of People’s Bank of China and Agricultural Bank of China. Meanwhile, certain

preferential policy can be applied to the interest rate when the loans are in the scope of national policy

for supporting agriculture. As to the repayment method of the loan, it can be determined by the

characteristics of cash flow of the borrower and the requirement of risk control. When the term is less

than half a year, periodical payment of interest and one-time payment of principal when the term

expires can be adopted; when the term is more than half a year, the payment of principal and interest



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should be on a monthly (or seasonally) basis in principle.

According to the agreement of banks, on the basis of joint guarantee of farmer specialized

cooperatives, if no member of the joint guarantee group is a demonstration cooperatives at county level

or above, an enterprise with government ground or a credit guarantee institution recognized by the

bank located in the area of lender should be required to provide guarantee for the borrower, or the

mortgage of land leasehold and forest land leasehold should be conducted. In terms of insurance, the

banks have also made relevant agreement. Cooperatives who are members of the joint guarantee should

cover agricultural insurance for the means of agricultural production they bought, the sales, processing,

transportation and storage.

At present, the joint guarantee by cooperatives is conducting pilots in Miyun and Yanqing County

of Beijing. At the beginning of 2013, Miyun County confirmed that the three cooperatives: Jingcun

Beekeeping Specialized Cooperative of Beijing, Mifu Organic Apple Specialized Cooperative of

Beijing, Chengkaicheng Chicken Raising Specialized Cooperative as the first cooperatives qualified for

the joint guarantee loans. These three cooperatives signed joint guarantee loan contract with the term of

three years and joint guarantee agreement with Miyun branch of Agricultural Bank of China, and the

credit amount for each cooperative is determined to be 3 million yuan according to the capital status

and credibility of each cooperative. In accordance with the agreement and the credit amount, the

cooperatives can determine the time to use the loan and the quantity of the use on their own based on

their capital needs. Whenever they apply for a loan, the bank will issue the loan. Thus, the interest will

be calculated according to the time actually used. In June 2013, the first loan of 2 million yuan has

been issued to Jingchun Beekeeping Specialized Cooperative.

3.3.2 Cooperative member loans with joint guarantee by cooperative members

This is an innovative product introduced by Huifeng Village and Town Bank of Miyun County in

2010. Loans of this model are targeted at members of the cooperative, and require that the member

should have one year or above occupational experience in this industry or in relevant industrial field.

The guarantee group should be composed of four to eight members of the cooperative, and the

members within this group provide cross-circulation to each other, and the cooperative should provide

guarantee for the loan. The guarantee amount is about 50 thousand to 500 thousand yuan. As for the

chairman or council members of cooperative, and core members who hold more than 20% of the

cooperative’s share and play significant role in the operation or management of the cooperative, the

amount of loan can be up to 700 thousand yuan with term of one year. If the cycle of production in an

industry is comparatively long, the loan term can be extended to two years. According to the

production cycle and the cash backflow, the repayment method can be flexible, for example on a

weekly, fortnightly, monthly, quarterly or semi-yearly basis, which can release the repayment pressure

of the borrower. Since 2010, Huifeng Village and Town Bank of Miyun County has introduced a loan

product mainly for the members of the cooperative. By the end of 2013, this program has

accumulatively issued loans of 35 million yuan, covering 170 members from more than 40

cooperatives.



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3.4 The various models of supply chain financing

3.4.1 Grain supply chain loans jointly supported by financial enterprises in

Henan Province

The loan for grain supply chain with joint financial support in Henan province is to integrate the

financial resources of agricultural financial institutions, and take the principle of “grand combination

and delicate division of work”. Focusing on the grain production, purchase, and processing industries,

and taking the core members of order-based agriculture, grain purchase and processing enterprises and

food enterprises as emphasis of the support, this model can develop a strategic cooperation supported

by industrial chains, and realize the seamless connection of credit support between each link in the

grain supply chain, so as to promote the agriculture to enter a virtuous cycle in development.

The detailed operational approaches are as follows:

1. A tripartite agreement between the enterprise, the bank and the core members of the

association is signed, and the mechanism of information communication is established, so as to ensure

the closed operation of loans and the capital linkage of planting link and purchase link.

2. The purchase funds will be lent mainly to the core members and small farmers, which will be

guaranteed by existing orders of the member companies. The circulation of capital of banks, enterprises

and core members is realized through a special bank account closely, which can enhance the approval

efficiency and the loan pertinence.

3. The grain processing enterprises can receive capital support according to the supply and

marketing contract with the food enterprises and the grain pledge, so as to give loan support to the

whole course including grain planting, purchase and processing .

4. Food processing enterprises are offered corresponding liquid capital loans, which help to

expand the market, and process local grain products in priority, thus promoting the development of the

whole grain industry.

The main characteristics of this model are as follows:

1. The systematic risk of the agricultural industry chain has been considerably reduced. The grain

industrial chain financing takes the industrial chain as the tie, and forms a comparative perfect

financing system, which can decrease the fluctuation of grain production in a single link and reduce the

credit capital risk of the bank.

2. The features of each bank’s credit products will be fully utilized. With the signing of the

strategic agreement, banks can provide targeted capital support to farmers, enterprises and related links

within the business scope permitted by their own credit policy, which will lead to joint force and

realized a win-win situation.

3. Close running of capital. Conduct close running to the capital in the grain planting and

purchase links, and ensure the special fund is used for specified purpose only, so as to ensure the

capital withdrawal.



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3.4.2 Wuliming model of supply chain finance created by Longjiang Bank and

COFCO

What is supply chain finance? Quoted from the words of Guan Xihua, president of Longjiang

Bank, it is to bind the upstream and downstream medium and small-sized enterprises, the farmers, and

the consumers together, centered on the core enterprises of the supply chain, and provide systematic

financial solutions to support agricultural supply chain. In 2009, with Biochemistry Energy (Zhaodong)

Limited Company of COFCO at the core, Wuliming Model was successfully launched in this area,

which marked a new agricultural financial product connecting finance and agricultural industrial chain

in a real sense in the history of COFCO.

In practice, the farmer buys a share of the cooperative with his land, and the cooperative uses the

land contractual management right as the hypothecation to get a loan from Longjiang Bank by taking

advantage of the trust product related to land transferring right introduced by COFCO Trust

Corporation; Longjiang Bank helps the cooperative and COFCO to reach the cooperation in supply

order. This is done as follows: COFCO collectively purchases the corn of Wuliming, and Longjiang

Bank deducts the principal and interest of cooperative’s loan from the corn income paid by COFCO.

This model implements closed circulation of the credit capital, which integrates the farmer, the

cooperative and agricultural production enterprise into a whole modern agriculture industrial chain.

Based on Wuliming Model, Longjiang Bank has been innovating its financial products persistently. At

present, it has five models and 17 products related to agricultural supply chain financing. These five

models are: agricultural materials company plus farmer, company plus cooperative, cooperative plus

farmer, purchase and storage company plus farmer, and core enterprise plus medium and small-sized

supplier, which match the four links in agricultural industrial chain: production and sales of agricultural

materials, agricultural product planting and breeding, storage and processing, and the production of

branded food, and promote the coordinated operation of every link. The products include: planting loan,

breeding loan, agricultural material loan, grain trade loan, agricultural production loan for borrowers

with large scale land operation, agricultural machinery loan, Jinyi loan for private enterprisers with no

legal personality, persons engaged in individual business of industry and farmers related to agriculture,

Golden Land loan for state-owned enterprises who have the operation right, use right and profit right of

the state-owned land in Heilongjiang province, the Jinqiaotong loan only used to purchase merchandise

from contracted producer for the agricultural distributors who have signed agreement with the producer

and the bank, Rongtongcang loan for agricultural entrepreneurs engaged in trade, production and

processing, etc.

The key point of the innovation of Wuliming Model lies in the trust cooperation between

Longjiang Bank and COFCO. Based on the land use right trust plan developed with the support from

industrial chain, they hypothecate the land trust right to the bank, which not only avoid the legal and

policy risks, but also realize the effective extension of mortgage system. What’s more, the “bank +

cooperative + farmer + dragon-head enterprise” cooperative model has solved the problem of high

transaction cost when the bank directly issues loans to farmers. Meanwhile, the participated entities

bear their responsibility respectively, defusing the high risk of agricultural credit.



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3.5 Construction of rural credit system: the case of Lishui City

of Zhejiang Province

In recent years, according to the requirement of The Guidance for Promoting Rural Credit

System Construction enacted by People’s Bank of China, each branch of it has explored to set up a

credit evaluation system for farmers referring to the local situation, and active progress has been made.

Thus, a batch of work methods and models with special characteristics appear. Among these, Lishui

city has effectively advanced the rural credit system construction by making unified planning, unified

standards and unified action and taking the evaluation of rural credit grade as the breakthrough point,

following the principle of “government leadership, People’s Bank of China dominated, multi-party

involved and the mutual benefit”. Thus, Lishui city has become the first prefecture-level city with all of

its administrative villages accomplishing household credit grade evaluation nationwide. As the pilot

county of financial reform of People’s Bank of China, Lishui city of Zhejiang province is

representative in the construction of rural credit system and the innovation of agricultural loan products

and services, and its practice is called the “Model of Zhejiang Lishui”.

1. Construction of rural credit system. Conduct “tripartite joint evaluation” to assets evaluation,

credit grade evaluation and the credit amount assessment to build a credit grade evaluation system;

make “tripartite joint movement” in credit loan, mortgage loan and joint guarantee loan to build an

evaluation result operation system s; implement the “tripartite joint” of government, bank and farmer to

build an tripartite collaboration interaction system.

2. Construction of mortgage guarantee system. Actively innovates the model of mortgage

guarantee combining local reality. Focusing on the forest ownership mortgage, farmer’s house

mortgage and the movable property mortgage, explore and promote a diversified mortgage guarantee

model of “two cards, two certificates and mortgage with various objects”.

3. Construction of financial service system. According to the goal of building a rural financial

service system with “multi levels, wide coverage and sustainable development”, perfect the operation

and management mechanism and the layout of service outlets, to satisfy the diversified demands of

farmer loans. After various efforts, the credit assessment of farmers of more than 15 thousand villages

from 3453 administrative villages in Lishui City has been finished completely; 380.3 thousand farmer

credit information files has been built, and 91% of the farmers has been evaluated; 330 thousand credit

households, 697 credit villages and 20 credit towns has been evaluated, which effectively consolidates

the foundation of agricultural work supported by finance.

3.6 A typical example of rural financial payment system reform:

Shouguang City of Shandong Province

It will help actively promote the upgrading and innovation of rural financial service and stimulate

rural consumption to improve rural payment service environment, to smooth the channel of rural final

payment and to accelerate capital circulation. In 2009, People’s Bank of China organized work to

improve rural payment service environment by means of pilot counties. According to the local



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economic level, the branches of People’s Bank of China in every province (autonomous region,

municipality directly under the Central Government, city specifically designated in the state plan)

divided the counties into three categories: relatively high, ordinary and relatively low, and chose one or

two counties as the pilot county to improve the rural payment service environment. During the

exploration of suitable methods, it has used the experience of promoting work in all areas by drawing

upon the experience gained on key points and explored a lot of experience and construction models

with different features, which steadily drive for the improvement of the rural payment service

environment nationwide. As the famous town of vegetables in China, Shouguang City of Shandong

province has fully engaged in the construction of rural payment service environment since 2009. It has

gradually formed the Shouguang Model of “agriculture, rural areas and farmers and the medium-small

enterprises development supported by the county’s financial innovation based on the principles of

“central bank driving, government support, bank innovation, market leading and the society

participation. This model is of great significance in demonstration and popularization.

1. Emphasis on the improvement of the payment tools in Shouguang vegetable wholesale market

Firstly, the county has proposed the trading portfolio of “special POS + online banking”.

Vegetable buyers can use the Golden Spike debit card and sweep the card directly on the POS in the

electronic final payment center of the market to transfer money to the bank account of the electronic

final payment center of the vegetable wholesale market. When the seller collects his money, the

vegetable wholesale market will directly transfer the payable capital to the seller’s Golden Spike debit

card in time using the paying agent function for single transaction of the online banking.

Secondly, the county has introduced the Co-Branded Card— Golden Spike Agri-products

Logistics Park Card with the function of final payment within the market and the function of banking

card. One side of this card has a magnetic stripe, which records the bank saving status of the client; the

other side has an IC chip, which records the transaction status of the client within the market. The

“magnetic stripe” and the “IC chip” transfer money through “a circle saving (withdrawal) machine”.

This model of final payment is the first in national large scale wholesale markets, and has replaced the

traditional model of cash transaction that had lasted for more than twenty years in the whole vegetable

transaction.

2. Innovation of the final payment method for farmers who hold a multi-function card

Since 2009, People’s Bank of China has been actively driving Shandong branch of Agricultural

Bank of China and the government of the Shouguang city to co-conduct the pilot work of “Huinong

Card”. The Agricultural Bank of China’s Huinong Card not only has the common functions as a

banking card, but also has the function of small loans for farmers, undertaking the subsidies of every

policy that supports agriculture and benefits farmers. As for the situation of lack of outlets in rural areas,

the Agricultural Bank of China has cooperated with the government of the town, and set up financial

service stations supporting agriculture, rural areas and farmers at the village committee, at the

supermarket providing agricultural materials service and at the village clinic of every village. Thus,

every station is equipped with a telephone for bank transfers, and every household has been issued

Huinong Card.

3. Introducing farmers’ self-service terminals and innovating the payment model of “farmers’

card (bankbook) plus self-service terminal”.

Shouguang Rural Commercial Bank initiated the pilot work to develop the “farmers’ self-service

terminal” in Shandong province, and installed these terminals in the appointed farmer’s houses. This



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self-service terminal basically covers all the business of the saving outlets, which can meet the basic

financial service demands of the farmer client.

4. The telephone transfer business was greatly promoted so as to innovate the payment ways

among business individuals. The transfer call can provide uninterruptible service 24 hours a day and

365 days a year. It only takes several seconds to complete a business transfer. At the end of March 2010,

Shouguang agricultural-related banking institutions had arranged and installed 3836 telephones for

bank transfer, completed 1.3 million transactions with the transaction amount of more than 6 billion

yuan The improvement of Shouguang payment system accelerates the turnover of the capital, reduces

the cost of cash transfer, avoids the cumbersome final payment operation of counting and small change

when the vegetable merchant carries a large amount of cash, allays the worry about counterfeit money,

and provides guarantee for safe final payment.

According to official statistics, until 2013, 13 banks, 5 financing-based guarantee companies and

9 small loan companies had set up 122 business outlets. Among them, 70% of the outlets of Shouguang

Agricultural and Commercial Bank are distributed in rural areas, and a whole coverage of rural finance

has been realized. Meanwhile, 85 ATMs, 3215 telephones for bank transfer and 201 farmers’

self-service terminals has been installed in rural areas, thus, the 975 administrative villages has made

Shouguang the first city with financial service covering every village in Shandong province.

3.7 Commentary

3.7.1 Financialization of resources assets such as farmland

On the whole, the financialization of resources assets has widened agricultural financing channels,

and achieved good effects in solving loan difficulties of new business entities and farmers. However,

since its scale is small and it is in the pilot stage, some problems in system and mechanism need to be

improved and perfected.

1. Barriers of the property right and financialization of farmland. Now, the land contractual

management rights obtained by the means of family contract and other means all belong to the

usufructuary right acknowledged by Property Law. Both of these are usufructuary right, but they are

different in system design. As for farmland financialization, it is stipulated in current laws as Rural

Land Contract Law, Property Law, Management of the Transfer of Rural Land Contractual

Management Right, and Explanation of Suitable Laws for the Cognizance of the Case of Rural Land

Contract Dispute by Supreme People's Court. Among these, based on different situations, different

systems have been designed: first, as for the contractual right obtained from other ways, there is no

limit to the identity of the subject of the right. Market entities can get these kinds of contractual rights

by bidding, auction and public negotiation or other market transactions. The right can be used by the

subject following market rulers, including the guarantee right designed by this kind of land contractual

right. Second, for the contractual right obtained by means of family contract, only the contractual right

regarding arable and mortgage the Property Law forbids is just. Under the legislative guidance of

relaxing the limitation on mortgage range as far as possible in Property Right, this kind of land

contractual rights set up on the farmland of other use can be mortgaged.

On the basis of further strengthening the land contractual right, farmers’ right of disposition of



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their land contractual rights should be put into practice. Taking the land contractual right as mortgage is

a kind of right of disposition executed by farmers, which shouldn’t be over limited by laws. The

experience of the farmland finance reform everywhere shows that, no matter it is the Chongqing Model

that breaks present laws, or the Jilin Model that adopts a detour path of alienation mortgage, at least

there is no suitable juridical status for them under the present system. Therefore, there is no choice but

to revise the present laws and rebuilding the mortgage system of land contractual management right.

2. The parties in the farmland mortgage relationship. As to the relationship of land contractual

right, the implementation of mortgage might cause bad effects to the parties. Since the land contractual

right is not completely marketed, it is reasonable to make necessary limits on the qualification of the

parties. Firstly, the entities who has accepted the mortgage of farmland and given the loans should be

the financial institutions. However, this limitation seems too rigid. In practice, in the Chongqing Model,

the entities who has accepted the mortgage of farmland and given the loans are the banks, the guarantee

companies and other non-banking financial institutions; in the Jilin Model, the person who has

accepted the guarantee and given the loans is the property financing company (which is the financial

platform directed by local government). Secondly, the farmland mortgager does not have to have a

stable non-agricultural occupation or stable income, and does not have to be proved by the institution

issues the loan, but should report to relevant departments of the government.

3. Setting regulations for farmland mortgage right. As for the alteration in property right caused

by legal acts, the Property Law adopts the model of “contract + announcement”. Therefore, the use of

farmland mortgage should follow these rules. In terms of the positive law, according to the mortgage

setting for the land contractual monument right obtained by other contractual means in the Property

Law of China, besides covenanting formal mortgage contract, the mortgage should be registered, and

the mortgage right is set up by the time of registration. Accordingly, when setting mortgage right for

the land obtained by family contract, the same plan should be adopted, which means the registration is

needed. What’s more, the registration is the requirement for the mortgage right to be valid. Chongqing

Model has adopted the same practice.

4. The implementation rules of land mortgage right. At present, the farmland is not completely

marketed. Farmland mortgage, as a means of farmland transfer, is developed under the rules of no

change of land property right, no change of land contractual right and no change of the use of the land.

After the farmland is totally marketed, the implementation rules of land mortgage right should be

rebuilt according to the general implementation rules of mortgage right.

3.7.2 Supply chain finance

Agricultural industrialization is the trend of modern agricultural development, therefore it is a

general trend to introduce the supply chain finance into agricultural industrialization is. However, in

practice, there still exist some barriers and restraints for promoting the supply chain finance at present.

Firstly, the degree of agricultural industrialization is not high, and the room for developing

supply chain finance is limited. Due to the low interdependency of the members in the industrial chain

and their loose connection, it is difficult for the bank to control the risks of the whole industrial chain in

loans. Therefore, in the procedures of issuing loans, the bank should pay more attention to credit status

and repayment sources of individual enterprise, and set higher requirements to the loan mortgage. This

method exercise control over the supply of larger loans to some extent, and increase the operation cost



59

of the bank.

Secondly, the strength of core enterprises is not strong enough, which also limits financial

capacity of supply chain. Because supply chain finance is based on the credit of core enterprises,

offering financial solution for the whole supply chain is actually transferring the financial capacity of

core enterprises into that of upstream and downstream enterprises. If the dragon-head enterprises are

small scale and lack of strength, they will directly influence the financial capacity of the whole

industrial chain.

Thirdly, there is not yet a complete credit system. As a most important link for connecting the

agriculture and market, whether the order can be used as a basis for loan or not depends on whether it

can be fulfilled effectively. Since the rural credit environment is not so perfect, the performance rate of

the orders is not high. This situation not only limits the development of order-based agriculture, but

also creates barriers in credit support for agricultural industrial chain.

Fourthly, legislation is relatively lagged behind. The supply chain finance business is an

innovation, and many problems such as credit binding, pledge supervision, assets disposal and the

confirmation of transaction cost, involve a series of legal problems. However, it is difficult for present

laws to cover all problems, which will bring legal risks to supply chain finance business.

3.7.3 Loans jointly guaranteed by specialized cooperatives

1. Loans jointly guaranteed by specialized cooperatives. This model is an innovative financial

product exclusive for farmer specialized cooperatives introduced by Beijing branch of the Agricultural

Bank of China. (1) As to the mortgage guarantee, this model doesn’t need the cooperatives to provide

mortgage or pledge, or guarantee company to provide guarantee; (2) In terms of term and amount of

the loan, the loans jointly guaranteed by specialized cooperatives is flexible in its use, which means the

cooperatives can confirm the use time and amount of the loan on their own within the term of contract.

What’s more, the cooperatives can be applied for loans at any time, and the loans should be issued

whenever they are applied. The interest is calculated according to the use time and should be repaid

when the loan is issued. This kind of loans can basically meet the current liquid capital demands of the

cooperatives.

The requirements for this kind of loan are as follows: (1) The farmer specialized cooperative

should be a demonstration cooperative at the administrative district or county level or above. In

addition, one member of the joint guarantee cooperatives should be a demonstration cooperative at the

city level or above, with good operation, good financial situation, and comparatively perfect inner

management system. (2) There should be at least two cooperatives with strong capital strength to

comprise a joint guarantee group with the specialized cooperatives, and they are willing to take the

guarantee responsibility for the group members. (3) The farmer specialized cooperatives that

participate in the joint guarantee should buy agricultural insurance for the agricultural production

materials they have bought, the sales, the processing, the transport and the storage of the agri-products.

(4) The banks should grant credit to qualified cooperatives.

According to the Management of Joint Guaranteed Liquid Capital Loan of Farmer Specialized

Cooperatives Issued by Beijing Branch of the Agricultural Bank of China, this model is only suitable to

the revolving, seasonal and temporary liquid capital demands with the term of less than one year.

2. Loans joint guaranteed by cooperative members. The innovation in this model is



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cross-guarantee, which is a kind of credit loans. It needs no individual mortgage and guaranty, so it has

essentially solved the difficulty of the famers who have no mortgage and guaranty. As to the amount of

loans, it is between 50 thousand to 700 thousand yuan for a member in this kind of financial products.

The members of the cooperative can apply for this loan at the same time, which can meet the financial

demands of the cooperative to a certain extent. Besides, this kind of product can be applied for by

ordinary members of cooperatives located in the administrative regions, and the cooperative does not

have to be demonstration cooperatives. This model has certain universality to some extent.

Although this model does not require the borrower to provide collateral, there are some

requirements in actual situation too. The requirements are as follows: (1) The loan applicant should has

relevant occupational experience to this industry or the relevant fields. Of course, most members of the

cooperative has no problem in the application; (2) the joint guarantee group should at least have four

members, which means three members of the cooperative should take the guarantee responsibility for

the applicant at the same time; (3) the cooperative has to provide guarantee to the loan; (4) the bank has

granted credit to the qualified members of the cooperative. The term for this kind of loan is one year. If

the production cycle is relatively long in some industries, the term can be extended to two years. On the

whole, the loan term is comparatively short, so it is mostly used for the liquid capital circulation of the

cooperative or its members.

3.7.4 The model of loans jointly guaranteed by the government and the banks

While Tiandong County is actively promoting and widening the credit and agricultural insurance,

it is also vigorously exploring new cooperation pattern of “credit plus insurance” jointly guaranteed by

the government and the bank to support, help and benefit agriculture. It takes the action of the

combination, which not only effectively reduces the credit risk, but also increases the risk guarantee

capacity of agriculture. In Tiandong County, Kangshi Sunshine Company receives an annual loan

amount from 1 million to 1.5 million yuan with the joint guarantee of government and bank, and all the

bananas planted by this company are insured. Although this company has suffered some disaster loss in

recent years, its business scale has increased steadily. Obviously, the loans and the policy-oriented

insurance contribute a great share for this achievement. Driven by the joint development system of

agricultural credit and policy-oriented agricultural insurance, the combined l service model for finance

to support agriculture is worth to be promoted and learned.



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Chapter 4 Financial Support for Modern Agricultural Development: International Experiences

4.1 Agricultural financial service system of developed economies:

organizations and functions

Establishing a multi-layered and multi-function agricultural financial system that includes

policy-oriented financial institutions, cooperative financial institutions, commercial financial

institutions and private financing is a common practice for developed economies to promote

agricultural development. However, the function of different financial institutions differs from country

to country. In the United States, for instance, government plays a fundamental role in promoting the

financial system for family farms, commercial financial institutions are the major financing channels of

family farms, and cooperative finance works as an important complementary channel in the financial

system of family farms, whereas in Netherland and Japan, cooperative finance acts as the major

channel.

4.1.1 Policy-oriented financial institutions play a major role in building a

complete and diversified agricultural financial system.

There has been evident policy support for the agricultural financing of main developed

economies since the first half of 20th century. Agricultural policy-oriented financial system is

independent of commercial banks in the general sense of common market, and it has significant impact

on agricultural development.

1. The United States

Private institutions and individuals provided almost all the agricultural credits in the early 1900s

of the United States; thereby such credits were shorter-term and limited in quantity. The US

government started to make a range of farm credit laws since 1916. Farm Credit System (FCS) was

established and led by the government. The nature of FCS is agricultural cooperative finance based on

farmer private economy which includes four types of organizations: federal land banks, federal

medium-term credit banks, cooperative banks and production credit associations. FCS does not accept

deposits and raises funds by selling government bonds. The first 80% of the capital stock of Federal

Land Bank came from government grants. Federal Land Bank system, already the major provider of

long-term credits to farmers, consists of federal land banks from 12 agricultural credit zones and their

affiliated cooperatives. To get a loan from Federal Land Banks, the farmer must subscribe a certain

number of shares of these cooperatives and become a member of the federal bank cooperative. Federal

Land Bank provides long-term loans to farmers for purchasing lands, farm machinery and livestock.

Medium-term Credit Bank offers medium and short-term mortgage loans for non-fixed farm assets

purchase to farmers via production credit associations. Cooperative Bank provides loans and

counseling services to agricultural cooperatives. These loans consist of short-term and seasonal

working capital loans, infrastructure construction loans and farm products export loans. These loans



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can also be provided to farmer members through agricultural cooperatives (Zhang, 2009).

As a rural credit institution directly under the government, FSA consists Farmers Home

Administration (FHA), Commodity Credit Corporation, Small Business Administration (SBA), and

Rural Electrification Administration. These agencies jointly exercise FSA’s functions. Commodity

Credit Corporation, founded in 1933, is a company affiliated to Stabilization and Protection

Administration Department of Agriculture. Its main functions are to manage and implement price and

income support programs, to provide policy-oriented financial services such as mortgage loans that

provide price support to farm products, and provide financial services to farm products export. SBA

collaborates with FHA in providing credits to small farms. FHA will offer financial support to small

farm borrowers if they apply a small amount of loan amount and their economic condition is not good.

As the economic condition of small farm borrowers improves, SBA will satisfy their increasing credit

demands. FSA and RMA affiliated to the United States Department of Agriculture (USDA) are mainly

responsible for the management and guidance of financial services required by agricultural businesses.

FAS focuses on agricultural credits and RMA focuses on agricultural insurance.

2. Canada

Farm credit in Canada can be traced back as early as to 1927 when government founded The

Canadian Farm Loan Board (FLB) to offer long-term mortgage loans to farmers. In order to advance

agriculture modernization, Canadian government began to implement the government secured loan

system in 1944 and passed the Farm Improvement Loans Act with the purpose of expanding credit

support to agricultural producers and cooperatives through federal government guarantee. The federal

government increased its intervention in agricultural financing and passed the Farm Credit Act in 1959.

Hence, the Farm Credit Canada (FCC) was founded and became the policy-oriented financial

institution of the federal government. Farm Credit Canada mainly uses the Consolidated Revenue Fund

of the federal government to provide farmers with long-term loans that private sectors are unwilling to

provide (Coleman, 1998). FCC is the largest long-term farm loan lender who focuses its business on

agriculture in Canada, covering all kinds of clients engaged in agriculture from family farms to

agricultural enterprises. Compared with provincial and regional policy-oriented financial institutions,

FCC plays a critical leading role in the agricultural financial operation of Canada. As a royal

corporation, FCC is one of the most important institutions in Canadian agricultural financial system

and reports to the Congress through Agriculture and Agri-food Canada. FCC is also a major channel

through which the federal government invests fund in agricultural development.

It’s worth noting that both Canada and America have set up special department to manage

agricultural finance under Ministry of Agriculture. Provincial governments echo the federal

government and set up agricultural financial departments too. Agricultural financial departments at

different levels collaborate to offer guidance and supervision in promoting the integration of finance

and agriculture.

4. Japan

Japan is a typical country that accomplishes the catching-up strategy through policy-oriented

financial system in the world. After the Second World War, Japanese government began to set up one

policy-oriented financial institution in almost every industry in order to accelerate economic

development. Commercial financing and policy-oriented financing were separated from each other and

the policy-oriented financial institution system of “two banks and nine corporations” was formed,

which includes Development Bank of Japan, Export-Import Bank of Japan, National Life Finance



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Corporation, Agriculture, Forestry and Fisheries Finance Corporation, Government Housing Loan

Corporation, Japan Finance Corp. for Municipal Enterprises, Hokkaido-Tohoku Development Finance

Public Corporation, and Okinawa Development Finance Corporation. These policy-oriented financial

institutions offer long-term loans with low interest to small and medium-size enterprise, housing,

economic development, export and import, agriculture, environmental health, and health care.

Policy-oriented finance provides huge funds to promote the rapid economic growth of Japan. Moreover,

policy-oriented financial system changes its investment focus at different stages, thus supporting the

changing needs of the social and economic development of Japan at different stages.

Agriculture, Forestry and Fisheries Finance Corporation (AFFFC), founded in 1953, is the most

important policy-oriented agricultural financial institution with the highest fund input. With the capital

from fiscal budget, AFFFC can directly lend or entrust with financial system it cooperates with to

deliver services. Affiliated to Business Department of Agriculture, Forestry and Fisheries (Fig.4-1), the

goal of AFFFC is to offer funds and services that are not available from commercial financial

institutions to agricultural operators and businesses in order to increase the productivity of agriculture,

forestry and fisheries.

Moreover, Japan Agricultural Cooperatives (JA) plays an irreplaceable role in Japan’s

agricultural modernization and provides a strong institutional guarantee to realize modernized,

technological, and high value-added agriculture. The financial services provided by JA are crucial

during this process. According to incomplete statistics, over 50% of the farmers have deposits in JA

and over 40% of the farmers apply for loans from JA. JA maintains its status as the major bank for

farmers. Meanwhile, the insurance contract amount of JA ranks second in Japan and insurance business

has become JA’s pillar industry.

Public Sector Private Sector

Fiscal investment and

financing

Government general

accounting

Financial

institution of JA

· JA bank

·Agricultural

Credit Union

·JA

Ordinary financial

institutions;

Banks;

Credit Corporation

Japan policy-oriented finance

corporation (Business

department of Agriculture,

Forestry, and Fisheries)

Lending

Corporation Funds Agricultural modernization Individual bank financing Individual bank financing

Entrust with financial

institutions, Agricultural

Credit Union, banks, etc.

Deb

t G

uaran

tee



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Figure 4-1 Agricultural Financial System of Japan

4.1.2 Diversified agricultural policy-oriented financing methods well-matched

with the functions of institutions

Considering the diversified fund demands of policy-oriented financing and the demander’s

ability, diversified methods are adopted by various countries in their policy-oriented financing activities,

and the support offered by fiscal funds varies across countries. In terms of policy-oriented agricultural

financing, the service methods are well-matched with the functions of institutions.

1. The United States.

The United States has established a comprehensive policy-oriented financial system in agriculture,

including long-term, medium and short-term loans, financial leasing, insurance, etc. To meet various

financial demands in agricultural production, there are differences in the preferential level of loans and

interest, which reflects the government’s policy inclination to different business (for detailed

information please refer to table 4-1).

Table 4-1 Agricultural Policy-oriented Financial System of USA

Organizations

Policy-oriented

financial

institutions

Clients

Main

financing

methods

Financing

period

Financing

purpose

Government-

sponsored

enterprises

Agricultural

Credit

system(financial

cooperative

institutions)

Federal Land

Bank

Farms,

agricultural

producers, and

other

agriculture-relate

d borrowers

long-term

real estate

mortgage

5-40 years Real estate

purchase

Federal

Medium-term

Bank

Agricultural

producer

Medium-term

credit,

financial

leasing

5 years

Agricultural

production and

management

Cooperative

Finance Cooperatives

Equipment

loans,

operating

loans,

commodity

loans

20 years

or

medium

and short

term

loans

Purchase of

production

means,

supporting farm

products sales

and export

Government-sponsored

enterprises

Federal

agricultural

mortgage loan

enterprise

Secondary market facilitating farmers’ real estate and rural housing

loans, providing guarantee service for secured mortgage loans in

secondary market

Departments directly under

federal government

Farmers Home

Administration

Limited to

farmers unable to

get loans from

other normal

channels (i.e.

Low-cost

subsidized

loans;

secured loans

(since 1972)

Long and

medium

term

Loans for farm

purchase and

construction,

operation cost,

farm house



65

commercial banks

and other

agricultural

financial

institutions)

construction,

water

exploitation., soil

conservation

Commodity

Credit

Corporation

Farm producers

who abide by

United States

Department of

Agriculture’s

conservation

reserve program

and allocated

areas

Loans and

direct

subsidies

(including

mortgage

loans for

farm

producer,

disaster

subsidy, price

difference

subsidy,

loans for

storage,

drying, and

other

equipment )

Medium

and short

term

Exercise price

control with

financial means

over farm

products

circulation so as

to adjust

production and

stabilize farm

income

Rural

Electrification

Administration

Rural power

cooperatives and

farms

Loans,

preferential

interest rates

Long term

Set up wires,

build rural power

network,

purchase

power-generation

equipment,

develop

communication

facility, promot

rural

infrastructure

construction and

raise the rural

electrification

level

2. Canada

FCC provides diversified loan services to agricultural businesses and farmers, including initial

financing, loans for cash flow optimization and fixed assets loans. FCC also offers a variety of

insurance services, including life insurance and accident insurance, insurance for critical production

personnel, and payment protection insurance. In addition, FCC is active in venture capital program. It

has reached collaboration agreement with many regional financial institutions or federal government

departments to promote the development of specific fields. For instance,, FCC has collaborated with

Western Economic Diversification Canada to propose the “Financing Program for Agricultural

Value-added Processing Enterprises in Western Canada” to offer long-term debt capital to western

small and medium-sized enterprises. These loans can be used in commercial R&D or marketing

development programs to promote the development of high value-added agricultural food industry and

get access to international market, hence booming local rural economy. For another example, the

Agriculture and Agri-Food Canada has entrusted FCC to manage the National Bio-ethanol Program to

which the government has provided 140 million Canadian dollars to encourage farmers to increase



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investment in ethanol industry (Bai, Xu, and Wang, 2006). Besides state-owned organizations,

provincial organizations, such as Quebec Agricultural Credit Office founded in 1930s, also provide

subsidized long-term loans to agriculture.

3. The Netherlands

The Netherlands is known for its farmer cooperative financial system based on farmer cooperative

banks and its main function is to provide credit support or other financial services to its members. For

example, the famous Rabo Bank, a farmer cooperative bank, is originated from farmer credit

cooperative. Currently, over 90% of the country’s farmers’ credits come from farm cooperative banks.

Meanwhile, the Netherlands government has established agricultural guarantee fund organizations to

help with the financing of farmers. These organizations provide services and offer guarantee to farmers

who borrow from banks. Besides, the Netherlands government has set up the agriculture safety fund to

offer assistance to farmers who suffer from natural disasters (Fan, 2009).

4. Japan

Financial services provided by policy-oriented financial system can be classified into two major

types: subsidies and low-interest loans. (1) Getting financing with the help of Agriculture, Forestry and

Fisheries Finance Corporation (AFFFC). The major financing programs of AFFFC started from

long-term low-interest loans for land consolidation, afforestation, fishing harbor construction and other

infrastructure construction programs, and then extended to loans for promoting the development of

small and medium-size enterprises and integrated facility construction. (2) Central and local finance

provide interest subsidy to JA financial system and other financial system, especially to their loans for

agricultural modernization, to encourage financial institutions to satisfy qualified financing demands of

agricultural modernization, and. (3) Other fiscal subsidies, including natural disaster relief, new

technology popularization and promotion.

4.1.3 Powerful policy-oriented financial system: co-existence of strength and

pressures of transformation

America: According to the government policy, agricultural policy-oriented financial institutions

provide long-term and low-interest loans which are not available from commercial financial institution

and other private financial institutions to disaster victim relief, new agri-zone construction, price

support, and farm products purchase (Chou et al. 2008). America agricultural credit system has set up

an organization network covering the whole country, and provides loans of almost 200 billion dollars,

which account for over one third of the agricultural credit funds. Besides, commercial banks are also

major providers of agricultural credits and offer about 50% of agricultural loans.

Canada: Grain production in the Prairie Provinces of Canada was significantly impacted in

1980s, and FCC, as the lender of last resort, carried out a Special Farm Assistance Program providing

0.4 billion Canadian dollars to protect the income of marginalized producers. This event prompted the

transformation of Canada agricultural credit policy from development mode to mixed marketization

mode. The federal government decided that FCC would not act as the lender of last resort but provide

appropriate mortgage loans on a break-even basis in 1988. Thus, the interest rate differentials between

FCC and private lending institutions narrowed gradually. The Farm Credit Act passed in 1993 further

expanded FCC’s service scope to the mixed marketization mode and its business was gradually



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expanded to diversified farm production, high value-added farm products production, food processing

industry, and consultations and suggestions for equipment and livestock purchase, farming program,

and farm management. FCC, a state-owned enterprise, had transformed from a leading institution

providing long-term farm credits to an enterprise that can directly compete with private enterprises by

the mid 1990s.

Japan: Policy-oriented financial support for agricultural development is sufficient, accounting

for more than 40% of the national economic investment. Private financial institutions outside the JA

financial system hold a very small share in modern agricultural financial system, and the share of their

loans only accounts for 3%. The loan balance in agriculture from different financial institutions in

Japan was 20.1 trillion Japanese yen by March 2008, of which, loans from JA financial institutions

were 17.9 trillion, accounting for 89% of the total loan balance in agriculture, and loans from AFFFC

were 1.5 trillion, accounting for 7% of total loan balance in agriculture (Zhang et al., 2012). The

advantages of Japan’s agricultural financial system are: it relates cooperative financial institutions to

agricultural modernization development and national policies closely; it has relatively fixed service

scope; its information resource is sufficient; its loans are highly instructive. Cooperatives at all levels

are relatively independent with high autonomy in management, which is more helpful for the

government’ to provide support to basic industries. Whereas, the shortcomings include relatively

narrow business coverage, low margins, high dependence on government preferential policies, and

relatively high fiscal pressures. Therefore, the development and reform of JA system has always been a

subject of concern.

4.2 Operation system and mechanism analysis of agricultural

finance in major countries

It’s a common practice for developed economies to make use of fiscal support, cooperation among

credit cooperatives and agricultural insurance to support agricultural financing, among which, the

integration of fiscal means and financial means is worth learning.

4.2.1 Fiscal support to agricultural financing by governments of developed

economies

Public finance is the most important system to support agricultural financing in developed

economies. The government’s public finance funds or provides most of the funds to set up national

policy-oriented financial institutions. For instance, in America, the establishment of Federal Land

Banks and Cooperative Bank were funded by government initially; operating fund of Farm Products

Credit Corporation was fully funded by national treasury; capital fund of JFFFC was financed by the

fiscal investment and financing programs of government. The loan coverage and interest preferential

terms of these institutions are closely related to government policies; they aim not at economic interest,

and are adjusted in accord with different historic development phases, development situation, and

external environment.



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1. Credit Subsidy

In general, fund providers need special incentives to satisfy the credit demands of the majority of

farmers. Such incentives mainly refer to the transfer of operation cost, such as government subsidy, tax

deduction and exemption, and so on. To be specific, the credits to borrowers are flexible. Subsidies of

certain amount can offset the cost in loan application, monitoring, and recovery. In other words, loan

cost can be reduced by decreasing risk premium.

A variety of subsidy methods can be used to expand the demand and supply of agricultural

financial products. One of them is to provide subsidies, directly or indirectly, to financial institutions.

Direct subsidies are usually offered to financial institutions by interest rate subsidy so as to decrease

loan interest rates of farmers and the lending cost of financial institutions, thus assisting financial

institutions in improving its lending capability. This is one of the most common farm credit support

method in the past. Indirect subsidies include tax deduction and exemption, preferential terms in

services and goods so as to lower lending cost.

Another kind of subsidy is targeted at other supporting institutions in the system, so as to guide

them in offering support to agricultural finance through government policies and administration rules.

For instance, subsidies to financial service institutions (including the credit administration and

collateral registration administration sectors) and capital investment and laws reform in market trade

guarantee and intellectual property right protection, can increase borrowers’ credibility, decrease

lenders’ lending risk, and increase the market demand on investment loans. In addition, subsidies to

training programs on financial knowledge and production technology can help farmers to participate

more effectively in the value chain and help financial institutions to expand their source of clients.

However, subsidies to agricultural finance have many drawbacks too, which are mainly reflected

on the distortion of production and market activities caused by government subsidies. For example,

subsidies can result in the overuse of fertilizer and pesticide and crowd out the market share of private

sectors. In the case of lack of resources, subsidies can generate unfair selection of beneficiaries and

financial institutions’ dependence on subsidies. And in particular, subsidy mechanism is difficult to

cancel once formed.

Another special kind of subsidy is direct funding from governments, international organizations,

and foundations to promote agricultural investment. In history, direct funding from governments and

international agricultural R&D organizations was the core impetus behind the success of green

revolution in agriculture and fight against worldwide hungry (Pingali & Kelley, 2007; Evenson &

Gollin, 2007). Grants to non-governmental organizations and service sectors are important in

expanding farm input supply and improving small farmers’ participation in value chain.

A few questions in direct funding are worthy noticing in actual implementation. The first is

whether market failures exist and whether the direct funding can solve problems practically, which

require an analysis to the reasons why private sectors fail to function in the market and an evaluation of

whether direct funding is the best solution to market barriers. The second is it’s necessary to carry out a

detailed economic assessment of funding programs and a cost-benefit comparison of solving market

failures. The third is whether the pattern of the funding program is appropriate, whether the allocation

of amount of assistance to individuals and enterprises is appropriate, and whether program

implementation scheme is feasible (Meyer, 2011).

Credit support is a major component of agricultural funds in each country. Finance of each

country compensates banks to provide low-interest or subsidized loans to agriculture. America



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Commodity Credit Corporation provides surplus farm products mortgage loans to farmers so as to

solve the marketing problem of surplus farm products through “non-recourse” loans. French banks

provide preferential loans to farmers with funds from national finance, which plays an important role in

the modernization of French agriculture. JFFFC provides low-interest loans to farmers through the

credit sector of JA system.

2．Guaranteed loan

It’s a common practice that governments will guarantee the lender’s loss ceiling when the payout

is beyond the borrower’s capability under extremely adverse situations or when the borrowers defaults

on payment. Government’s guarantee measures have effectively reduced the risks encountered by

lenders and encouraged the borrower to apply for loans. This practice can promote the supply and

demand of credits. Compared with interest rate subsidies, this practice is more targeted and efficiency,

and has become an important method to support agricultural finance in USA and Canada.

Case 4-1 Guaranteed loan management of US Small Business Administration (SBA)

As a policy-oriented financial organization, SBA mainly provides medium and long-term guaranteed loans to

small businesses. SBA never guarantees the full amount of any loans but a portion of the value to ensure that

lenders, mainly commercial banks, take some risks as well. The guarantee rate of SBA was 90% of loan amount in

1990s. However, commercial banks would not pay close attention to SBA’s guaranteed loans since it found out the

guarantee ratio was so high. Hence, SBA lowered the ceiling of guarantee ratio: no more than 85% for loans up to

150 thousand dollars, no more than 75% for loans exceeding 150 thousand dollars, and 50% for a maximum loan

of 2 million dollars. Recently, SBA has adjusted its guarantee ratio in order to stimulate the tightened small

business credit market. The ceiling of guarantee ratio was temporally increased to 90% by the Recovery and

Reinvestment Act passed in 2009. This Act was renewed by the Small Business Jobs Act passed in 2010 and

meanwhile a permanent improvement clause was issued, lifting the credit ceiling from 2 million to 5 million

dollars. In addition to guarantee whose ratio can be flexibly adjusted, SBA has also stipulated that lenders are not

allowed to require guarantee for the portion of the loans that was not guaranteed by SBA.

4.2.2 Cooperation among credit cooperatives: models and risk control

1. United States

The United States has set up a comprehensive management system different from commercial

banks for agricultural cooperative financial institutions, and the system includes an independent

regulatory authority (National Credit Union Administration), industry self-discipline association,

financing clearing center, and mutual insurance corporations. There are open unions and stable clearing

system in the US credit cooperative system. Credit cooperatives at grassroots level can join in any

credit cooperative union across US on their own will. Credit cooperative unions provide services to

their members through computer technology, fund clearing, investment agency and others. In addition,

America Credit Cooperative Association provides members with non-operating services, including

coordinating public relations, vocational education, publishing industry journals, policy research and

analysis, promotion and interview, etc. Financing clearing centers play an important role in transferring

credit cooperative funds and dealing with off-site billing. Another important part for supporting credit

cooperative system development is an effective insurance mechanism, which includes a voluntary

social insurance company as well as the credit cooperative deposit insurance fund, a mandatory and

binding insurance fund organized by regulatory authorities. Credit cooperatives who participate in this

insurance fund deposit part of its deposits each year into this fund, which is mainly used for



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guaranteeing deposit payment for bankrupt credit cooperative members and offering assistance to credit

cooperatives in difficulty.

Besides, the US agricultural credit cooperative organizations possess a few characteristics as listed

below:

1. “Established by government but operated by private sectors”: these organizations were initially

funded and established by government, and developed under the guidance of government. When they

were on track, government would gradually sell the stock equity to cooperatives and farmers, and then

these organizations became true cooperative organizations.

2. Independent development but benefiting from multiple preferential policies: the government

will not intervene the operation and management of cooperatives and allow these cooperatives to form

unions on their own will. The preferential policies that these credit cooperatives enjoy include

exemption of corporate tax and income tax, no reserve requirement on deposit, and permission to buy

American debt with credit cooperative funds.

3.The important role of industry associations: to protect the interest of credit cooperatives,

industry associations will contact and coordinate with Congress and relevant government departments

and lobby actively in the stipulation of laws and rules. Thes associations also provide law consultation,

staff training and contact and promotion to members (Cheng, 2005).

2. Germany

Germany cooperatives have a long and prosperous history in credit cooperation. In risk control,

there are many aspects that are worth learning. Firstly, the government doesn’t intervene directly and

allow industry associations to play their roles. There is an industry self-discipline organization in

Germany cooperative bank system, the National Credit Cooperative League with members of

cooperative banks at grassroots level, regional central cooperative banks, DG Bank, and some

professional cooperative financial corporations. This organization provides institutional guarantee from

multiple aspects for the standardized development of cooperative banking system. In particular, it has

promoted the establishment of credit guarantee systems for cooperative banks, such as Hermes

Insurance System, which provide guarantee to short-term micro loans of small and medium-size

enterprises. Secondly, deposit insurance organizations of cooperative finance indirectly provide

protection to lenders by supporting member institutions. Thirdly, voluntary insurance principle is

implemented and preferential policy on tax is offered to the insurance fund.

3. Japan

The development of Japan’s cooperative finance is also reflected in the complete cooperative

financial organization system and sound credit insurance system. Firstly, Deposit Insurance

Organization of Agriculture, Forestry, and Fisheries Cooperative has set up a deposit insurance system

funded by central finance, central bank, Norinchukin Bank, and JA at county level. Secondly,

temporary fund transfer and mutual assistance system were established. Thirdly, agriculture disaster

compensation system was set up. Fourthly, agriculture credit guarantee insurance system (loan

guarantee system) was implemented.



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4.2.3 Cooperation between public sectors and private sectors to expand

agricultural financing channels

Besides market factors, the government also encourages private investment in agricultural finance,

which can be realized through the following ways: tax deduction, exemption or subsidy, issuing

government debt, stipulating loose and preferential rules and policies, and using investment guidance

funds to motivate private sectors. In addition, the government has strengthened its protection to

intellectual property rights of agricultural technology inventions, which makes agricultural R&D more

profitable and thus attracting more private funds to agricultural R&D so as to push modern agriculture

development.

Besides stipulating related public policies, the government’s support also lies in collaboration with

private sectors in value chain finance and other farm investments.

Case 4-2 American Federal Agricultural Mortgage Corporation

Federal Agricultural Mortgage Corporation (Farmer Mac) is a joint stock company and a government

sponsored enterprise (GSE). A new regulation was added to American Agricultural Credit Act on the basis of its

1971 version and the Farmer Mac was established with the approval from the Congress in 1987 with the aiming to

strengthen the supply of long-term loans for agriculture. Farmer Mac provides a secondary financial market for

farm mortgage loans, rural facility loans, and loans guaranteed by USDA for promoting agriculture and rural

development in order to increase fund liquidity and lending ability. Market behaviors of Farmer Mac include the

purchase of loans from lenders and the purchase of debts that provides guarantee for loans. In general, Farmer

Mac is a secondary market for agricultural financial products. It integrates huge amount of loan products, reduces

risks and increases fund liquidity, and promotes the prosperity of agricultural financial market.

4.2.4 Development mechanism that promotes value chain finance

Agricultural value chain integrates agricultural production means, and agricultural products

production, processing, storage, transportation and sales into a whole. Value chain finance provides

stable fund support and financial services to agricultural business (Song, 2012). Agricultural value

chain came out in 1950 in America and developed worldwide later, playing an important role in world

farm products industrialization and marketization. Agricultural value chain is highly developed in

developed economies such as America and the Netherlands, and is mainly provided by private sectors

with the support from governments.

Operating models of agricultural value chain mainly include: (1) producer-driven value chain. For

example, producer association composed of small farmers can help small farmers enter new market, get

higher market price, and stable their market position. (2) Buyer-driven value chain, which is formed

when processors, exporters, retailers, traders, and wholesalers contract with farmers. Contract farming

is the most common buyers-driven value chain. (3) Coordinator-driven value chain. For example,

governments, non-profit organizations and non-governmental organizations provide support to small

farmers and agri-businesses and help them get into the commercial value chain to reduce poverty and

promote local economic development. (4) Integrated value chain, the earliest and typical internal

vertically integrated value chain, such as supermarket value chain (Miller and Jones, 2010). Some

innovative agricultural value chains have shown up in China, including leading enterprise–driven value

chain, farmer plus enterprise-driven value chain, farming and animal husbandry integrated value chain,



72

rural and urban integrated value chain, government-led value chain, park-zone-led value chain, and so

on (Cui and Jiang, 2010).

Case 4-3 Canada Agriculture and Food Value Chain Roundtable Meeting，AVAC

Canada Ministry of Agriculture and Ministry of Industry has jointly set up the agricultural products value

chain roundtable meeting mechanism. Though equal discussion and negotiation with industry representatives,

this mechanism supports farm products food industry with policy guidance and system incentive, and assists

administration sectors to stipulate sound regulations. There are value chain promotion schemes at provincial level,

which bridges the federal government and private enterprises. For instance, the value chain scheme of Alberta

province not only complements with the promotion programs of Federal Ministry of Agriculture, but also

cooperates with private sectors, including providing large sum of funds to Alberta Value Added Corporation (AVAC)

to facilitate its popularization in agricultural chain and modernization.

Case 4-4 Farm Credit Canada (FCC)

FCC cooperates with other regional financial institutions to provide all-round financial services and products

to participants at each link of agricultural production. Its representative programs include:

Crop Input Financing Program: In this program, FCC allies with crop input suppliers. Farmers can withdraw

the fund at any time in accordance with the approved loan amount, or arrange a fund withdraw timetable

according to their cash flow. Specific loans can also get approval through suppliers.

Retail Financing: For instance, FCC works with the United Farmers of Alberta (UFA) and its 95,000 members

to provide financing for them to purchase production equipment, and carry out construction program and various

innovative programs. UFA has over 30 agricultural input stores across Alberta; their clients can receive financing

from FCC when buying farm inputs with loan ceilings ranging from 4,500 Canadian dollars to 35,000 Canadian

dollars; the loan ceiling for large equipment can be increased to 200,000 Canadian dollars, and only telephone

approval is needed. Clients can apply for their credit lines in advance, which will be valid for one year, to avoid

provisional application when they have demands (Bai and Xu, 2006).

These two kinds of financial services extend financing to value chain participants and make financing more

flexible and pertinent. Simplified operating procedures also push the flow of funds in the chain and increase the

vigor of market transactions.

Case 4-5 Flower Industry Value Chain Finance Development of the Netherlands

Agricultural economy accounts for 10% of the economy of the Netherlands, but agricultural trade accounts

for nearly half of the national trade. Net export value of farm products each year maintains around 13 billion US

dollars, taking up 10% of world’s farm products market trade. The export quantity of flowers ranks No. 1 in the

world. Flower products exported by the Netherland in 2008 accounted for about 60% of world’s flower trade

value, which was about 6 billion Euros. There are about 11,000 flower production enterprises in the Netherlands,

most of which are farmer family enterprises.

Flower industry in the Netherlands has formed a highly developed and complete industry chain, which

includes the whole breeding, production, procurement, processing, storage, transportation, and sales process of

flower products. Advanced technologies and equipment and fine facilities are used in each link in order to

increase its scientific content and added additional value. In addition, the flower industry interacts actively with

other industries and forms a comprehensive agricultural complex.

It’s worth mentioning that auction market plays an important role in the agricultural value chain of the

Netherlands. Transactions in auction market are highly efficient, which can facilitate the improvement of farm

products quality and standardization level. The auction process is open, fair and competitive; therefore sound

prices can be formed, so as to protect farmers’ interest and adjust market supply and demand, thus optimizing

the resource allocation.

The Netherlands government has stipulated criterion for the whole production chain and every producer

must take responsibility for its role in the chain management.

In recently years, the Netherlands has spent 45 million US dollars to fund over 60 industry chains and value

chain pilot programs. The experience of the Netherlands indicates that close cooperation among chain members

is critical to the success of enterprise value chain.



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4.2.5 Institutional mechanism that promotes the development agricultural

policy-oriented insurance

Developed economies usually offer great support to agricultural insurance in order to guarantee

agricultural production and development since agriculture faces great risks and more uncertain factors,

and is easily affected by disasters or world market prices; therefore its losses are hard to assess. In

order to guarantee agricultural production and development with insurance, developed economies

always provide great support to agricultural insurance. Their major practices include: stipulating and

perfecting laws and regulations, providing preferential policies to financial institutions engaged in

agricultural insurance, government finance covering premium deduction & exemption or subsidies,

government bearing most of the risk loss. In addition, by encouraging agricultural insurance

organizations to participate in credit guarantee system building (including the implementation of farm

loan insurance system and deposit insurance system for credit cooperatives), the government has not

only effectively spread the risks of agricultural loans from financial institutions, but also guaranteed the

interest of each participant of agricultural finance.

4.2.6 Establishment of agricultural development funds (ADF)

As one of the forms by which governments provide financial support to agriculture, agricultural

development funds features strong leading effect, large-scale capital, and obvious policy implications.

ADF usually develops a variety of development programs with varied industry focus, collects

applications widely, and then allocates funds after assessment, aiming to provide fund support to

agricultural development from every perspective. For instance, ADF managed by USDA has set up

dozens of rural development programs to support agriculture development with loans or direct grants.

These programs mainly cover housing and community facility construction, resources utilization and

processing, and commercial cooperation, etc. ADF offers support in a variety of forms, including direct

loans or guaranteed loans, subsidies, technological support, and materials for research popularization.

Case 4-6 Canadian Adaptation and Rural Development Fund

Canadian Adaptation and Rural Development Fund (CARDF) was set up by Canadian government in 1995.

CARDF invests 60 million Canadian dollars each year with the aim at promoting long-term economic development,

employment, agricultural development and rural development. CARDF was set up to assist Canadian agriculture

in facing new structural challenges and market shocks. The support of CARDF is focused on 6 aspects: research

and innovation programs, human resource construction, seizing market opportunities, environment sustainable

development, food quality and safety, and rural development. Through these programs, CARDF has effectively

promoted a virtuous circle and sound development of Canadian agriculture and food industry. It also encourages

innovative thinking on the premise that food safety is given priority and environmental resources sustainability is

achieved.

CARDF not only funds national programs but also regional programs led by provincial governments and

industry committees. This feature strengthens the communication and cooperation among industries and regions.

About 60% of CARDF’s funds are invested in national programs, covering many aspects of agriculture production

and management. Federal Ministry of Agriculture and Food and industry associations jointly manage programs

funded by CARDF. About 40% of CARDF’s funds are invested in regional programs, which are approved and

operated by local CARDF. To ensure these programs conform to CARDF’s goals, CARDF adopts standard

assessment criteria and management to all programs. Representative national programs include Young Farmers’

Forum, farm economic management programs, and farm debt dispute mediation service, etc.



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There are many other similar development funds, such as Alberta Beef Development Fund established in

2004 with a joint investment of 16.4 million US dollars from provincial government and federal government. This

fund entrust Alberta Beef Producers Association to coordinate, allocate and manage their funds, aiming at

supporting researches conducted to beef industry development. These researches include sustainable beef

breeding, and land and environment management instruments, etc. Another example is the Canadian Agricultural

Adaptation Program launched by federal government. This program has invested 16.6 million Canadian dollars

from 2009 to 2014, which has been allocated to each industry association by Federal Ministry of Agriculture and

Food to help them responds to new opportunities and challenges.

4.2.7 Professional risk management and budget management, and assessment of

the progress towards policy goals

In general, risk-benefit ratio of policy-oriented financing is higher than commercial financing.

Therefore, risk management must be strengthened to achieve the sustainability of policy-oriented

financing programs or institutions. Supervision requirements are set for capital adequacy ratio or

capital ratio to avoid the excessive expansion and risk-taking of policy-oriented financial institutions.

For instance, European Investment Bank is a policy-oriented financial institution engaged in long-term

credits. This bank is prudential in management and focuses on stable development. The stockholders of

European Investment Bank are 27 member nations, but this bank does not pay dividends to its

stockholders and keeps all the profits as reserve. Continuous profits have provided the Bank with huge

amount of reserve. Equity fund of the bank increased from 38.1 billion Euros in 2009 to 40.2 billion

Euros in 2010. The capital adequacy ratio reached 27.2% at the end of 2010 in spite of challenges such

as economic recession and growing default risks.

Policy-oriented financial activities cover a wide range of areas in America. Hundreds of credit

programs are managed by dozens of organizations to serve public goals of the federal government. This

broad and scattered policy-oriented financial system inevitably will encounter many challenges in

management. In response to this, America includes all the credit programs into the scope of budget

management. The Federal Credit Reform Act stipulated the current budget record method for credit

programs in 1990. The government has adopted the method of recording the net present value of future

expenditure and income. If one direct loan is 1000 US dollars, and later repayment, interest, and default

recovered totals 900 dollars, the subsidy for this program is 10%. This can be applied to guaranteed

loans as well. If a guaranteed loan is 1000 US dollars, and the net expense and default cost is 100

dollars, the subsidy ratio for this program is also 10%. A 1000-dollar direct loan or a 1000-dollar

guaranteed loan is required to provide a 100-dollar budget to get support. This kind of budget

constraints can limit the policy-oriented finance to a certain scale, thus avoiding the risks caused by

over-expansion.

From the experiences of developed economies such as America, European Union and Japan,

organizers of policy-oriented financing or supervisors of policy-oriented financial intermediaries will

define the policy goals of programs or intermediaries, and then set up a series of ratio indexes and

quantified criteria to assess the process towards policy goals.



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4.2.8 Adjustment of support focus and support method in accordance with social

and economic development

The aim of policy-oriented finance is to accelerate the development of specific regions or fields

with government funding, and enable them the capability to get commercial financing and adapt to

commercial financial system. By then, policy-oriented financial intermediaries or programs can

complete their mission transfer to a new field or withdraw from the social financial system, and provide

a wider space for the development of commercial finance. Therefore, a nation or region will adjust its

supporting field, capital scale and financing method according to the demands of social and economic

development, and the development status of specific field or region.

For instance, as Japan’s economy and social development reached a relatively high level in 1990s,

its capital supply and demand pattern changed from shortage to surplus; policy-oriented financial

institutions expanded excessively, deeply penetrated into fields that should be operated by commercial

finance and competed with commercial institutions. When economy bubble broken down,

policy-oriented financial institutions in Japan, accumulated large sum of non-performing assets like

these commercial financial institutions did and became the “black hole” of government finance. To

solve these problems, Japanese policy-oriented financial institutions carried out two large-scale reforms

in 1999 and 2008. The old “two banks and nine corporations” were either privatized or merged into one

policy-oriented financial institution– Japan Finance Corporation, and the business scale was also

narrowed.

For another example, direct loans and guaranteed loans are the major methods with which

America develops policy-oriented finance. The credit outstanding of these two methods basically

increased in the same pace from 1970s to 1990s. However, the credit outstanding of guaranteed loans

had grown obviously faster than that of direct loans since 1990s. At present, the ratio of the credit

outstanding of direct loans to guaranteed loans is about 3:7. Guaranteed loans have become the major

method of American policy-oriented program financing. Compared with direct loans, guaranteed loans

have a more notable amplification effect for government budget. The increase of the share of

guaranteed loans has evidently enhanced the leverage ratio of America policy-oriented financial

system.

From 1992 to 2011 fiscal year, American policy-oriented financial business scale continued to

expand with an annual growth of 6%, among which, student loan program was the fastest-growing

program with an annual growth of 12%; small business credit program grew at 9% annually, while the

growth rates of loans for veteran’s housing and USDA’s credit program were relatively low, being 2%

and 1% respectively. These differentiated growth rates indicate that the support focus of American

policy-oriented finance is gradually being transferred to small businesses and education field.

4.3 Conclusions and Lessons

4.3.1 Conclusions

As mentioned above, though the development of agricultural financial institutions and systems



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differs across developed economies, there are many aspects in common that we can learn from.

Firstly, sound agricultural financial laws and regulations, and policy measures supporting

agricultural financial development have played their important roles. For instance, the US

government has stipulated laws to subsidize the farm loan interest rates of some commercial banks to

prevent them from transferring farm credit funds. In addition, the developed policy-oriented

agricultural natural disaster risk insurance and credit risk guarantee system for agricultural deposits and

loans have effectively reduced the risk level of agricultural financial system in the US.

Secondly, finance suppliers, such as policy-oriented financial institutions, commercial

financial institutions, and cooperative finance build upon each other, with their functions

complementing with each other, and form a complete system. Government plays a fundamental role

in promoting the agricultural financial system. Commercial financial institution is the major financing

channel for agricultural market entities. Cooperative finance plays an important supplementary role in

agricultural financial system.

Thirdly, each sector performs their respective duties in the policy-oriented financial system,

each has clear service objects, and administration management is efficient and flexible. In the 12

agricultural credit zones of America, agricultural policy-oriented financial institutions are affiliated to

USDA, and supervised by Farm Credit Administration. Though they are not affiliated to Federal

Reserve System or federal saving banks, agricultural policy-oriented financial institutions are subject to

the macro-control of Federal Reserve System. Such administration system reduces time cost and

institutional cost of multi-level administration, makes the policies more targeted time-efficiency, and

overcomes difficulties in regulation and control caused by regional and seasonal difference of

agricultural production, and thus guaranteeing the efficient operation of farm credit funds. Agriculture

departments of Canadian government also assume management responsibility for agricultural

policy-oriented financial institutions and responsibility for guiding supportive policies for agricultural

finance.

4.3.2 Lessons

1. The government should play a fundamental driven role in the agricultural financial

system

Governments should concentrate on building a multidimensional and multifunctional agricultural

financial system, make policy-oriented finance, commercial finance and cooperative finance

complement and promote each other, and jointly support the development of agricultural entities.

Governments should further strengthen the policy-oriented financial function of agricultural

development banks, encourage these banks to further strengthen their policy-oriented business and

provide policy-oriented support funds to new business entities. Governments should increase their

guidance and support to financial institutions and create sound a policy environment for farm finance

through tax preference, fiscal subsidy, guarantee offer, and regulation stipulation.

In addition, it’s worth learning from Canada and America who set up agricultural financial

administrative departments under the Ministry of Agriculture and agricultural financial institutions at

provincial level as well. Agricultural financial administration at central level and provincial level

collaborate in performing their guidance and supervision function, so as to promote the combination of



77

finance and agriculture.

2. The commercial finance should play a dominant role

From the experience of developed economies in modern agricultural development, commercial

finance should strengthen its role in China’s agricultural financial system.

Firstly, China should continue to deepen it reform in RCCs, stabilize the legal person status at

county or city level, and guide RCCs in improving corporate governance structure and allocating

resources according to market-oriented principle. RCCs, as community commercial financial

institutions, should provide services at county level to agriculture, rural areas and farmers. RCCs will

become the major supporter to future new business entities.

Secondly, new rural financial institutions such as village and town banks, loan companies, and

rural fund mutual cooperatives which are independent and flexible in operation, should be encouraged

to develop special loan products for small family farms.

Thirdly, commercial banks should be encouraged to stick to the path of offering multidimensional

financial support and providing small credits, jointly-guaranteed loans, and guaranteed loans to

moderate-scale businesses, with the focus on regional advantages and featured agricultural industries.

3. The supportive function of cooperative finance for farm households, family

farms, and cooperatives should be fully exploited

Since rural China features vast territory and scattered land, cooperative financial institutions can

break through the barriers that traditional financial institutions faced when providing financial services

to scattered farmers and effectively fill the gap left by policy-oriented finance and commercial finance.

There is a lack of certain-scale true cooperative financial organizations supported by government in

agricultural financing since the commercialized reform of RCCs in China. Learning from American

experience, local governments might consider setting up cooperative financial organizations similar to

land banks to provide financial services to family farms. In the meanwhile, it is important to guide

those active financial organizations, including rural fund mutual cooperatives, poverty alleviation

mutual assistance organizations, and other non-government organizations in rural areas to satisfy the

temporary credit demands of their members based on production and credit cooperation, and bring the

important role of cooperative finance to small farm borrowers into full play.



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Chapter 5 Construction of Modern Agriculture Financial Support System and Supporting Measures

The construction of modern agriculture financial support system is in essence to handle the

relationship between government and market. Therefore, the boundaries that separate the applicable

fields for commercial finance, cooperative finance, policy-oriented finance and public finance and the

ways in which financial services of these types of finance can be conducted should be explicitly

defined. On this basis, agricultural financial institutions can be perfected and optimized, and supporting

reform measures can be adopted. Thus, an orderly and cooperative modern agricultural financial

support system that satisfies the capital demands of agricultural entities can be constructed.

5.1 Modes of agricultural financing and functions

Specifically, for fields in which market mechanism functions effectively, their social capital

demands can be satisfied by commercial financial system; for fields in which price mechanism has

serious defects, the resources can be allocated by public finance; for fields in which neither market

mechanism nor government functions, solutions will be proposed through cooperation between

government and market in the form of cooperative finance and policy-oriented finance, so as to solve

the problem of absence or lack of commercial finance and public finance, and realize the integration of

economic effectiveness and social rationality in resource allocation.

In view of this theoretical perspective, some assessment criteria can be adopted to define

respective fields to which policy-oriented finance, cooperative finance and commercial finance focuses

or can be applied, thus forming a financing channel distribution spectrum covering all fields of the

society. Specific assessment criteria include: competiveness, product and service features, ability to

cover costs by charges, risk tolerance, and externality factors.

1. Competitiveness. It reflects the market competition intensity in a field, including the number of

competitors and their ability to deliver services. Fields in which there are a large number of competitors

and the service capability of these competitors is strong can be regulated by market mechanism.

Commercial finance can provide financial services in these fields. For low-profit, high-risk and

low-cost fields with a lack of supply competitors and the demander are able to conduct mutual fund

cooperation, cooperative finance can be applied. For fields with a lack of supply competitors and the

demander are unable to conduct mutual fund cooperation, public finance can be involved. For fields

with a lack of competitors and these competitors are unable to provide effective services,

policy-oriented finance can play its role.

2. Product and service features. Commercial finance can provide services in fields whose

product and service features are obviously private (competitiveness and exclusiveness); public finance

can provide services in fields whose product and service features are public (non-competitiveness and

non-exclusiveness); cooperative finance and policy-oriented finance can provide services in fields

whose product and service features are quasi-public (non-competitiveness and exclusiveness).

3. The ability to cover costs by charges. Commercial finance can provide products and services

in fields that can realize social average return by offering products and services to obtain income and

cover the costs; cooperative finance can provide products and services in fields that may have some

surplus after the costs are covered by the income obtained from offering products and services;



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however, social goal surpasses the enterprise economic goal in these fields, so these fields adopt an

inclusive business model; public finance can cover the costs for fields in which offering products and

services cannot obtain income and the costs cannot be covered; policy-oriented finance can offer

support to fields in which certain amount of income can be obtained, but such income is unable to

cover the costs, and share the costs and benefits.

4. Risk tolerance. The risk tolerance of financing entities is also an important factor that

determines the boundary of government and market. Commercial finance undertakes default losses of

financing entities with equity capital, so it is unwilling to serve financing entities with weak risk

tolerance; whereas cooperative finance and policy-oriented finance are important options. For

financing entities with some risk tolerance but such risk tolerance is insufficient, they can raise their

service levels while adding credit through cooperative finance or policy-oriented finance. For financing

entities fully supported by government, public finance will be applied.

5. Externality. For fields with strong externality and obvious spillover effects, government

intervention is required to conduct regulations or provide relevant products and services; for fields with

weak externality and unobvious spillover effects, commercial finance can offer relevant financial

support; for fields with a certain degree of externality but such externality is not strong enough to

require government intervention or fields in which private sectors are reluctant to be involved,

cooperative finance, policy-oriented finance can offer relevant products and services more effectively.

If weighted scores are given to all social and economic fields according to the five indicators

mentioned above, we can assess and evaluate an operating-level indicator with ranging valuations

theoretically, which can help us make a basic judgment on the applicable fields of commercial finance,

cooperative finance, policy-oriented finance, and public finance, so as to form a full-coverage system,

which is like a seamless “financing” spectrum, in which commercial finance, cooperative finance,

policy-oriented finance, and public finance can offer support or financing services.

Fig5-1 Full-coverage Financing Spectrum

In light of their course of development and practice, commercial finance and public finance in

developed countries have formed a relatively stable and clear service system and scope of application,

but the scope of application and degree of government intervention of policy-oriented finance is

controversial or difficult to settle, especially in developing economies. The requirements for the fields

Public finance……Policy-oriented finance……Cooperative finance……Commercial Finance

Operational index



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in which commercial finance and public finance can function effectively are relatively harsh: if one of

these requirements set by commercial finance is unsatisfied, market participants will be reluctant to

participate or have limited participation, resulting in a shortage of products and services; if none of

those requirements set by public finance is unsatisfied, it will often lead to excessive government

intervention, high costs, undersupply, and unsustainability. As to the fields in which commercial

finance is reluctant to participate while public finance tends to perform exceeding duty, cooperative

finance and policy-oriented finance may provide better solutions. In fact, even in fields that

policy-oriented finance functions, various combination of policy-oriented instruments and market tools

can be adopted according to the policy preference and market preference of their service objects, so as

to provide products and services more efficiently and sustainably.

Of course, the above judgments are subjective to certain extent. In practice, the boundary of

government and market is being adjusted as economy develops, basic social values change, and

technological means innovates. To be more specific, given the international experience, the fields to

which policy-oriented finance can be applied include: infrastructure construction, conservation and

exploration of recourses and energy crucial to the country's security and strategy, rural finance, small

and micro businesses financing, import and export trade and overseas investment, affordable housing,

industry upgrade and technology research and development, regional development, etc. Cooperative

finance also develops well in agriculture.

Table 5-1 Assessment criteria for applicable fields of commercial finance, cooperative

finance, policy-oriented finance and public finance

Competitiveness

and ability to

provide efficient

services

Product and

service

features

The

ability to

cover

costs by

charges

Risk

tolerance

Externality Operating

Commercial

finance

Strong Private Strong Strong Strong Strong

Cooperative

finance

Relatively strong Quasi-public

(neutral to

private)

Relatively

strong

Average Average Average

Policy-oriented

finance

Weak Quasi-public

(neutral to

public)

Relatively

weak

Weak Strong Average

Public finance Weak Public None Weak Strong Weak

5.2 Goals and ideas for finance to support modern agricultural development

5.2.1 Development goals

On the basis that the applicable fields of commercial finance, cooperative finance, policy-oriented

finance and public finance can be basically defined, according to the requirement of ensuing the

sufficiency, convenience, and sustainability of agricultural financial supply, focus should be made on

the perfection of a multi-level agricultural financial system with rational division of labor,

complementary functions, moderate competition and sustainability under the guidance of



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market-oriented and differentiated financial policies by making full use of the market forces, the

positive strength of mutual cooperation, and guarantee offered by public finance, so as to allow

commercial finance, cooperative finance, and policy-oriented finance to function effectively in their

own fields, provide convenient and preferential financial services to agricultural entities with various

ways and from multiple perspectives, and build a well-run, sustainable and stable modern agricultural

financial support system in which commercial finance, cooperative finance and policy-oriented finance

complement with each other effectively.

5.2.2 Construction ideas

Given the five principles mentioned above, the main idea for the construction of agricultural

financial support system is to promote the high-efficiency development of agricultural financial

business guaranteed by mechanism construction and concentrated on institution construction and

product and service innovation on the basis of following the boundaries of applicable fields for public

finance, policy-oriented finance, cooperative finance, and commercial finance, and under the principle

of controllable risks, diversified services, sustainable finance, simplified rules and differentiated

policies.

The focus of mechanism construction lies first in the construction of a risk-sharing mechanism

and interest compensation mechanism among agricultural financial institutions (or tools), government

finance, service objects (enterprises and natural persons) and other interest-related subjects; that is to

say, government should compensate for the losses suffered by financial institutions when they are

developing low-income or high-risk policy-oriented business in a reasonable form, so as to make sure

these financial institutions have stable earnings estimates and strengthen the supply capacity of

agricultural financial business.

Secondly, based on the principle of simplified rules, to simplify the approval procedures for

compensation mechanism, cut the costs of the transaction between policy-oriented institutions and

government, and the transaction between commercial entities and policy-oriented financial institutions,

and enhance the availability of policy support. Thirdly, in the construction of policy-oriented financial

institutions of the external policy environment, to fully focus on the particularity of policy finance, and

offer certain disparate treatment to monetary policy, financial regulation policy, fiscal and tax policies.

Fourthly, to promote the division and cooperation mechanism among the cooperative finance,

commercial financial institutions and policy-oriented financial institutions.

In the aspect of institution construction, first on the basis of integrating the current financial

institutions, to further enhance the capital financing strength, risk management capacity and business

development of the policy-oriented financial institutions. For the field which is severely lack of market

supply, to increase policy-oriented services business, and promote the construction of new-typed

agricultural financial institutions and the innovation of the product service, according to the principle of

diversified services. Secondly, the cooperative financial institutions should focus on improving the

laws and regulations, and exploring the internal and external risk management system. Thirdly,

improving the grass-roots financial system, especially to foster the localization, grass-roots financial

system auto-operated by marketization, such as all kinds of microfinance institutions, internet financial

organizations.

As for business innovation, the first is to strengthen financial innovation products and



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services, according to the characteristics of agricultural credit demand of new-typed agricultural

operators. The second is to further increase the resources of the agricultural loan and mortgage,

and clear legal and institutional barriers. The third is that under the existing legal system, through

the establishment of the coinsurance institutions, community and group trust, to build credit

community. Based on the organic link among industrial chain, dragon-head enterprises and

financial services to accomplish the supply chain financing, to solve the financing difficulties of

new-typed agricultural operators.

5.3 Content of the construction of modern agriculture financial support system

Currently, the service fields and business scope covered by Chinese agricultural financial system

are: agricultural infrastructure construction, working capital in agricultural production, working capital

in agricultural enterprises, etc. Learning from international experience, there are mainly three options

for developing agricultural financial business, namely commercial finance, cooperative finance, and

policy-oriented finance. Considering the international experience in agricultural financial development

and practical problems encountered by modern agriculture demonstration areas, the focus of

agricultural financial system should be made on the match of implementation model of agricultural

financial business with its business scope and the optimization of this match, and the construction of

financial institutions providing relevant services according to the features of agricultural financial

business.

5.3.1 Commercial financial institutions

1. Strengthening the support for policy-oriented agricultural financial business. Besides

Agricultural Development Bank of China, Agricultural Bank of China, China Development Bank,

Postal Savings Bank and Rural Credit Cooperative and other financial institutions have also developed

commercial agricultural financial business widely, among which some are policy-oriented and this kind

of institutions have the experience and strength to develop policy-oriented financial business. Therefore,

appropriate preferential policies can be given to these institutions where possible through shareholding

reform and business integration, so as to help them strengthen their agricultural policy-oriented

financial business.

2. Reconstruction of rural microfinance institutions. The capital needed to conduct agricultural

production or address problems encountered in daily life is relatively small; therefore, it is impossible

to try to arrange a large-scale financial institution to satisfy farm households’ capital needs. As a result,

the construction or reconstruction of rural microfinance institutions can be considered. This institutions

need not to be large-scale as long as they can satisfy the capital needs of local farm households. These

microfinance institutions can have diversified capital resources and its operation model can be

diversified as well; while the finance can promote their development by tax reduction or exemption,

offering interest subsidies for part of the loans and other measures.

3. Exploitation of potentials in advantageous fields. Rural Credit Cooperative is now and will

still be the major force of supply in agricultural financial market, but it should further widened its

channel to make fully use of its advantages, such as matchmaking with new-type rural financial



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institutions (such as rural fund mutual cooperatives and microfinance institutions) to develop wholesale

loan business through specialization and cooperation, thus achieving inclusive development. In

addition, though Agricultural Bank of China has become a profit-seeking commercial bank, it has

obvious advantages with its abundant experience in rural financial business as an agricultural

professional bank and relatively large number of branches in rural areas. In contrast, Agricultural Bank

of China is less competitive in urban areas. Judging from its self-development, Agricultural Bank of

China should continue to moderately adjust its development strategy and continue to make full use of

its traditional strengths.

5.3.2 Policy-oriented agricultural finance

There are at least seven implementation ways for policy-oriented finance within the agricultural

financial system frame: policy-oriented loan, policy-oriented guarantee, policy-oriented subsidy,

special guiding fund, policy-oriented investment, policy-oriented insurance, and bidding and tendering.

These seven ways have their own merits and demerits and applicable fields, and their effects are

significantly related to relevant policy-oriented financial institutions.

1. Reform and optimization of current policy-oriented financial institutions

According to international experience, policy-oriented banks are financial intermediaries

providing indirect financing modes, such as offering loans, to the supporting objects of policy-oriented

finance. The business of policy-oriented banks should be the business that policy-oriented finance

supports and within the areas in which policy-oriented finance operate; fields including agriculture,

rural areas and farmers, import and export, regional economic development, small and medium-size

business financing, and fields whose economic structure has transformed can establish relevant

policy-oriented banks, and for some these fields, there could be more than one bank. The capital

sources of policy-oriented banks mainly include: funds offered by the finance to support

policy-oriented business (which is the capital fund of the policy-oriented bank), re-lending from

Central Bank (which is the important external fund source for policy-oriented banks), preferential loans

offered by international development institutions, and large deposits from enterprises. The business

scope of policy-oriented banks can vary along with the change of focus of policy-oriented finance. Part

of the interest subsidy business conducted by the finance can be handed over to corresponding

policy-oriented banks.

The Agricultural Development Bank of China (including China Agriculture Industry

Development Fund and Modern Seed Industry Development Fund) has owned a group of personnel

who understand policy-oriented financial business and has rich financial operation experience and a

group of institutions that have been running for many years. Therefore, the reform and optimization can

be a fast and efficient channel to construct policy-oriented financial institutions, and help to form a

nationwide policy-oriented financial institution system that provides financial services pursuant to new

methods in a short time on the basis of current policy-oriented financial institutions by redefining their

business scope, defining capital replenishing methods and reorganizing management and operation

models.

2. Reform of existing quasi-policy-oriented central or local financial institutions

Governments at all levels in China have established investment companies, financing guarantee



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companies and other institutions, which are run in accordance with the principle of marketization.

These institutions are quite familiar with the policy-oriented business in their respective fields, but lack

normalized management and operation, and some of them are partly administrative. As a result, during

the construction of the principal part of policy-oriented finance, the reform of these institutions can

help to set up a batch of agricultural policy-oriented financial institutions. To be more specific,

requirements for financial institutions to be engaged in policy-oriented financial business can be

stipulated in laws and regulations, similar financial institutions can be integrated and their management

and operation models can be reformed, and tasks to conduct various agricultural policy-oriented

financial business can be assigned to these financial institutions.

——Policy-oriented financing guarantee institutions. A policy-oriented financing guarantee

institution is a policy-oriented financial intermediary that offers financing guarantee to supporting

subjects of policy funds. During the investigation, it is found that current policy-oriented financing

guarantee institutions are mainly invested or controlled by governments at different levels, and their

objectives vary. Policy-oriented financing guarantee institutions mainly accept applications of

supporting subjects from policy-oriented finance, and provide them with credit guarantee when they

apply for loans from commercial banks or other commercial financial intermediaries. Policy-oriented

financing guarantee institutions can develop business in fields including agriculture, rural areas, and

farmers, regional economic development, small and medium-size business financing, and affordable

housing, and fields whose economic structure has been transformed.

——Venture capital funds (companies). A venture capital fund (company) is a fund or company

found individually or collaboratively by the government with part of the policy-related investment

funds. Normally, it is owned or partly owned by governments at all levels and relevant government

departments; other capital funds can buy shares upon approval from relevant regulatory agencies. The

major purpose of this kind of institution is to support the development of high-tech and high-growth

small and medium-sized enterprises in a particular region or filed. When the supporting subjects are

confronted with financing difficulties, they can apply for money to the venture capital fund (company),

who will evaluate the application based on its business scope and determine whether to invest or not.

The result of this kind of financing is the venture capital fund (company) will own the equity-like asset

of the supporting subject. Venture capital funds (companies) can develop business in fields including

the high-tech agricultural development areas of the “Three Rural Issues”, small and medium-size

business financing, and policy-oriented finance, and fields whose economic structure has been

transformed.

——Entrusted policy investment management institutions. One of the most important

functions of government is to arrange constructive funds for relevant enterprises and fields with the

authorization from national laws and regulations, so that financial investment business can be

conducted. However, as there is a lack of regulation in the investment business conducted directly by

the finance and the efficiency of the use of funds is not very high, financial sectors can entrust an

entrusted policy investment management institution at relevant level to conduct necessary investment

activities. Entrusted policy investment management institutions can develop business in fields

including agriculture, rural areas and farmers, regional economic development, small and medium-size

business financing and major natural disaster reconstruction financing, and fields whose economic

structure has been transformed,

——Policy-oriented insurance companies. A policy-oriented insurance company conducts



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policy-oriented financial business by virtue of the basic operation principle of insurance.

Policy-oriented insurance companies get access to financing by collecting premium, meanwhile they

have to bear the losses resulted from disasters, but the premium collocated is less than the losses.

Therefore, part of the income of policy-oriented insurance companies comes from the finance or

reinsurance companies. Policy-oriented insurance company can develop business in agricultural

insurance, small and medium-sized enterprise financing insurance, and major natural disaster

insurance.

——Bidding and tendering management institutions for policy-oriented finance. It is

impossible to conduct policy-oriented financial business in the way of bidding and tendering by simply

relying on the funds provided by finance, because the first problem to figure out in order to realize

policy-oriented finance in the way of bidding and tendering is the business scope and realization degree

of it, so that the object of the binding and tendering can be determined. Therefore, bidding and

tendering management institutions should be built to be responsible for refining the object of the

bidding and tendering according to the fund plan proposed by the Ministry of Finance to support

policy-oriented financial business, organizing the bidding and tendering work, and ensuring the work

can be smoothly carried out. Personnel of this kind of institutions must know policy-oriented finance

well, and be able to monitor the implementation of policy-oriented financial business timely; therefore,

they should be highly professional.

3. Establishment of specialized policy-oriented support institutions for

agricultural finance

Currently, many fields are short of agricultural financial institutions, such as binding and

tendering financing business management institution, major natural disasters insurance company, small

and medium-sized financial institution, entrusted policy investment fund management institution, etc.

As a result, corresponding policy-oriented financial institutions should be built according to the

demands for policy-oriented finance and the situation facing policy-oriented finance. This may take

some time, but when these institutions are built, they will conduct more targeted policy-oriented

financial business in relevant fields, thus improving the efficiency of policy-oriented finance.

5.3.3 Cooperative finance

Cooperative finance has shown a trend of diversified development in China. According to the

initiators, it can be classified as: internal credit cooperation of farmers' specialized cooperatives; rural

fund mutual cooperatives that have obtained financial licenses under the framework of CBRC;

community cooperative financial organizations promoted by local governments; village-level fund

mutual cooperatives in poor villages promoted by poverty alleviation department; cooperative financial

organizations started by supply and marketing cooperatives; internet-based new-typed cooperative

finance, such as P2P.

While cooperative finance in agriculture develops, it has several problems: Firstly, there are

relatively high risks in cooperative finance since it is composed of different forms of originations or

institutions and the true may be mingled with the false. For example, some cooperative financial

organizations may absorb social capital in the name of farmer cooperation and misbehave themselves

driven by the pursuit of profits; hence considerable market and ethical risks accumulate; as most of the

business personnel of cooperative financial organizations have low service quality and little



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management experience, and governance structure is imperfect, there exits some operational risks.

Secondly, the quantity and quality of cooperative financial institutions are uneven, and their status

varies a lot. Some cooperative financial institutions grow fast, while some stop examine and approve;

some set high requirements, while some has low threshold; some are legal persons (but their status

varies), while some are not. Thirdly, the regulation efficiency is low while the regulation cost is high.

On the one hand, CBRC does not delegate the review and approval authority of fund mutual

cooperatives; on the other hand, it is neither in favor of nor opposed to the development of rural fund

mutual cooperatives: the deep-seated problem is that CBRC’s regulatory capacity cannot adapt to the

widely developed community cooperative financial organizations. Fourthly, some local government has

intervened cooperative finance excessively.

In that sense, cooperative finance in China is not a matter of development but a matter of how to

develop. Only by solving the above four problems can China’s cooperative finance develop better. In

order to construct true cooperative finance, the reform and innovation need to be implemented as

followed:

1. While developing cooperative finance, government should know what it should do and what it

shouldn’t do. Government should strengthen its support for cooperative finance in making laws,

building rules and regulations, and training and guiding; meanwhile it should be wary of excessive

intervention of local governments, relax control over the entry system, help to obtain status of a legal

person with free registration, and increase policy support to make sure cooperative finance can develop

healthily and orderly.

2. The internal governance system of cooperative finance is to be constructed and perfected,

including democratic management system, information disclosure system, and the distribution system

of the surplus return. Keep the homogeneity of the members in the system, and be wary of the

excessive participation of corporate fund and the distortion of governance structure and variation of

organization that is likely to happen.

3. The mode of regulation is to be innovated so as to reduce regulatory cost. Industry regulation or

a third party regulatory system may be introduced to address the regulatory problems of personal

inadequacy, heavy workloads and high cost facing county-level regulatory administrations, meanwhile

solve the low efficiency drawback resulted from unprofessional regulation.

4. The control and prevention of internal and external risks are to be strengthened, which include

the implementation of credit guarantee system, credit guarantee or warranty for loans so as to ensure

the capital adequacy ratio and loan loss reserve adequacy ratio, and matchmaking with policy-oriented

agricultural insurance to integrate financial cooperation and industry cooperation, and cooperate with

external financial institutions to develop wholesale loan business of large scale banks so as to

differentiate its business and reduce and control financial risks.

5. The mutual-aid and cooperative insurance is to be speeded up and improved. Vigorously

support the development of mutual cooperation insurance organization in the field of agricultural

insurance. Compared with the commercial insurance companies, mutual system and cooperative system

of agricultural insurance organizations have the obvious advantages in the protection of farmers'

interests, disaster prevention and mitigation, and the reasonable disposal of company’s surplus,

meanwhile the central government has repeatedly encouraged to develop the mutual cooperation fund

of insurance in rural areas. Therefore, to develop agricultural mutual cooperation insurance should be



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the focus of the system innovation of agricultural insurance organization.

5.4 Supporting measures: comprehensive reforms on land, social security and rural finance

Rural financial system is an important component of the whole economic system, and the

performance of its functions cannot be separated from the synchronous perfection of supporting

systems. Only in this way will finance plays its role in promoting modern agricultural development.

There are mainly three supporting reform measures related to rural financial system: perfection of rural

social security system, moderate rural land reform, and further improvement of rural financial system.

5.4.1 Perfection of existing agricultural financial system

Deposit insurance system: It is a marketized risk compensation mechanism, and its effective

operation can develop the insurance capacity of deposit-taking financial institutions. Rural financial

institutions that buy deposit insurance and pay insurance premium will benefit from the protection of

their depositors’ interest, and help to form an effective risk elimination and market exit mechanism for

rural financial institutions. The limited compensation mechanism can also help depositors the raise

their risk awareness, and help market play its role in restraining rural agricultural institutions.

Agricultural futures market and agricultural insurance market: The development of

agricultural order-based documentary agricultural insurance is encouraged. Commercial insurance

companies are also encouraged to further explore the rural insurance market. Relevant credit market,

insurance market and futures market can be further perfected, and a rural financial market system with

complete functions, specialization and cooperation, and moderate competition can be built.

Guarantee mechanism: A joint-stock guarantee fund or guarantee company funded by

government with equity participation from farmers and rural enterprises can be funded to drive the

development of various guarantee institutions. The scope of valid collateral can be extended by

including inventory collateral, account receivable collateral and other movable property collateral and

rights pledge. Priority right to be repaid of secure claims should be protected. Agricultural credit

insurance should be explored and developed, and the guaranteeing function of insurance in rural credit

should be performed.

Policy support for the development of agricultural finance: More credit investment from

financial institutions can be drawn to agriculture and rural areas by financial subsidy, guarantee or tax

reduction or exemption and other measures. Tax policies that support rural financial institution

development should be implemented, and financial institutions should be guided to conduct business in

rural areas.

Adapting to the features of rural financial organizations, strengthening and improving

financial regulations: Rural financial organizations are widely distributed with different sizes and

forms, so we need to adapt to these features and strengthen and improve financial regulation.

Differentiated policies should be implemented to financial institutions of different types. What’s more,

we should strive to explore the coordination of monetary policy, fiscal taxation policy, market access

policy, and regulatory policy, and build an incentive effective, risk controllable, and coordinated policy

support system.



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5.4.2 Binding rural land system reform, social security system reform and

financial system reform together

Land is the most important means of production for famers and the most important resource in

rural areas; finance is the source of rural funds and the blood in rural economy; social security is the

fundamental way to settle farmers’ troubles back at home and get them off the land. The three reforms

are preconditions of each other and interact on each other. Only by considering them as a whole and

advancing in a coordinated way can we get twice the result with half the effort. Therefore, appropriate

fiscal incentive and compensation policy can be made to encourage a comprehensive pilot reform in

rural social security, land circulation, and rural finance. First, fiscal incentive and compensation policy

for promoting land circulation, famers’ participation in social security and famers’ house construction

or purchase should be made. Second, tax reduction or exemption can be offered to famers who start

business, obtain jobs or live in small towns. The land scale management, farmers' urbanization, and

asset diversification can be advanced and farmers’ mortgage loan capability and

consumption-investment level can be raised by tax policies, so as to create the conditions for financial

institutions to provide rural financial services. Third, on the basis of pilot experience, the land

contractual management rights of qualified farmers who have participated in urban social security and

the spare farm house and house site of farmers who have access to basic social security and own two or

more houses can be included into the scope of loan collateral, so as to greatly improve famers’

mortgage loan capability, and fundamentally solve the problems in getting loans for farmers.



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Chapter 6 Conclusions and Policy Suggestions

6.1 Main conclusions

6.1.1 On the conception and positioning of agricultural and rural finance

Rural finance refers to the financial services such as various types of loans, deposits, exchanges,

investment and financing targeted to the demands of agricultural sectors (including rural areas,

agriculture and farmers). Rural finance is not different from urban finance in its essence. Both of them

are based on a certain degree of commitment (credit), and adjust the distribution of resources among

time, space, and different groups of people through the currency circulation between the creditor and

the borrower, so as to optimize the distribution of resources. The function of rural financial

organizations is the same with that of urban financial organizations, which is to bring the resources

(credit) together and redistribute them (it). Similar to urban financial system, rural financial system also

consists of financial institutions (special institutions that offer financial products), financial market

(trading market for financial products), financial regulation (to properly handle the relationship among

risk, cost, and sustainability with financial policies, maintain market fairness, and adjust capital flow

and the total amount of money allocated to different fields with macro-control tools), and sub-systems.

Different from the category of rural finance in general sense, the study of modern agricultural

financial support in this report focuses on the capital supply and acquisition of capital; that is to say,

only financial services related to the production and development of agriculture and rural areas are

studied. From the perspective of division of the three industries, they can be called agricultural finance.

Judging from this, agricultural financial services cover the field of production in agricultural

industry, and they serve all main practitioners of agricultural industry, which covers plantation, forestry,

animal husbandry, fishery and other industries horizontally, and tertiary industry, which includes

production, agricultural processing, scientific research and consultation, and warehousing and logistics.

To be more specific, capital demands mainly come from the following four aspects during the

economic operation process: capital fund, working capital, infrastructure construction, and purchase

and maintenance of production equipment.

The suppliers of agricultural finance include: functional departments of government, various

types of financial institutions, and private lenders. Accordingly, the capital sources of agricultural

finance include: financial funds (including policy-oriented financial funds), commercial financial funds,

and private funds. There are many ways to get these funds, such as project fund, government-funded

interest discount, bank loans, and private financing.

The demanders of agricultural finance include: government departments (especially local

governments), agricultural enterprises, farm households and other rural economic entities. Among these,

the demands of government departments are embodied in creating basic condition for the development

of agricultural industry, such as agricultural infrastructure construction and agricultural financing

services.

As part of suggestions, it is necessary to make a summary of the features of agricultural and rural

finance involved in this report, which should be one of the foundations upon which suggestions are



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proposed. It is held in this report that agricultural and rural finance has two features that are quite

different from urban finance and industrial finance:

1. Rural financial services are high-quality public goods.

There is obvious spillover of benefits in agricultural and rural finance; that is to say rural finance

is a product with positive externalities. However, as financial resources are scarce, it is necessary for

the government to provide public financial products to promote agricultural development.

Government-dominated preferential policies for agricultural and rural finance have ensured the

advantages of indirect finance; financial market entry, business scope, low interest rate and foreign

exchange control have restricted competition and made sure profits can be obtained; powerful

administrative guidance has ensured the full embodiment of government will. Such kind of financial

system arrangement is one of the important bases to encourage agricultural investment, moderately

integrate funds for agricultural development use, ensure the overall stability of financial market, and

drive economic growth.

2. There is serious information asymmetry in agricultural and rural financial

services market.

Since the basic production units in rural China are farm households and small and micro

agricultural businesses, there is serious information asymmetry between scattered individuals and

concentrated financial institutions that depend on economies of scale. On the one hand, it is impossible

for the bank to collect enough information to identity the credit of large numbers of scattered clients as

the cost is too high; therefore, when agricultural loans extend beyond the boundary of valid credit

constraints, moral risk may incur, resulting in bank losses. On the other hand, due to the

unpredictability of agricultural production, farm households’ lack of valid collateral or guarantee, and

the information asymmetry between the household and the bank, the regulatory cost of the bank is quite

high. While under the condition that interest rate is non-marketized, it is difficult for commercial credit

to afford such a high transaction cost; as a result, formal commercial rural finance keeps shrinking. As

the transaction cost for a farm household’s single loan is relatively high, banks gradually lose their

enthusiasm. These problems call for government intervention, and need to be addressed by providing

rural financial services.

Accordingly, the development of agricultural and rural finance cannot be separated from

government guidance, and in some phrases, it may be government dominated before it is well

developed; after that, it will become market-dominated. To be specific:

Firstly, for a long period of time, the agricultural and rural financial system in China will develop

and become matured with the support from government. This kind of support is reflected in the

government’s input in agricultural production, and its efforts in accelerating the growth of farmers’

income, as well as government’s offering of policy-oriented financial services to agriculture, rural areas

and farmers.

Secondly, the construction and perfection of China’s agricultural and rural financial system should

be conducted from several aspects. An ideal rural financial system balancing fairness and efficiency

should include policy-oriented rural finance, mutual-aid financial institutions, microfinance institutions,

and commercial financial institutions with respective responsibilities and specialization and

cooperation.

Thirdly, we should make use of the market, actively cultivate and develop rural mutual-aid

cooperative organization, and improve the basic condition for agricultural production and agricultural



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products circulation.

6.1.2 China has basically established an agricultural and rural financial system

combining policy-oriented finance, commercial finance, and rural cooperative

finance.

China launched the reform in agricultural finance in the 1990s. In 1994, the Agricultural

Development Bank of China was established and agricultural policy-oriented business was separated

from Agricultural Bank of China and Rural Credit Cooperative and exclusively handled by Agricultural

Development Bank of China; meanwhile, China accelerated the commercialization of Agricultural

Bank of China, conducted commercialization reform of Rural Credit Cooperative, and established

county-level rural credit cooperatives. In 1996, according to the Decision on the Reform of Rural

Financial System enacted by the State Council, Rural Credit Cooperative separated from Agricultural

Bank of China, and county-level rural credit cooperatives and People's Bank of China began to take

charge of the business management and financial regulation of Rural Credit Cooperative and the

cooperative system was adopted. In 1997, the Central Financial Work Conference defined the basic

strategy requiring all state-owned commercial banks contract their braches at county-level and below,

develop small and medium-sized financial institutions, and support local economic development. Four

major state-owned commercial banks, including Agricultural Bank of China, began to contract their

branches at county-level and below. In 2005, China started to explore pilot reform of new-type rural

financial intuitions in some areas, allowing the establishment of village and town banks, loan

companies, and rural mutual fund cooperatives; meanwhile it loosened the merger and reorganization

policy for existing banking financial institutions in rural areas and encouraged commercial banks to set

up braches in rural areas. The pilot work for new-type financial institutions was expanded to 31

provinces (autonomous regions and municipalities) in October 2007. Postal Savings Bank of China was

formally established at the beginning of 2007 and started its commercial operation. In 2013,

Agricultural Bank of China set up the Finance Division of “Agriculture, Rural Areas and Farmers”, and

began to conduct business in agricultural fields.

At present, China has realized the separation of agricultural policy-oriented financial business and

commercial financial business. The system construction of agricultural organizations has been

constantly improved, and an agricultural and rural financial system combining cooperative finance,

policy-oriented finance and commercial finance has gradually formed.

6.1.3 Formal financial institutions are the major suppliers of agricultural and

rural financial services in China, while private loans cannot be neglected.

The agricultural and rural financial organization system in China includes: Rural Credit

Cooperative (including Rural Commercial Bank and Rural Cooperative Bank), Agricultural Bank of

China, Agricultural Development Bank of China, agricultural credit business of China Development

Bank, and other relevant agricultural investment companies. Rural Credit Cooperative (including Rural

Commercial Bank and Rural Cooperative Bank), Agricultural Bank of China, and Agricultural

Development Bank of China are formal participants of rural finance, but it is Rural Credit Cooperative

that have performed a wide range of functions in providing agricultural and rural financial services.

1．Rural Credit Cooperative of China. Rural Credit Cooperative is the most basic level of formal



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rural financial institution in rural finance with the largest number of branches. Its branches has almost

covered every town, even all rural areas in China, and it is also the only financial institution among

those formal rural financial institutions that has direct business with farm households. Rural Credit

Cooperative is the core strength for formal rural financial institutions to provide financial services to

rural areas and agricultural economy.

2．Agricultural Bank of China. Reestablished in 1979, Agricultural Bank of China is one of the

four largest commercial banks in China. The reestablishment was originally designed to support the

production and sales of agricultural products, but in fact its business barely had direct relationship with

farm households, and most of its loans were invested in state-owned agricultural operation institutions

and rural industrial enterprises. After the year 1997, the bank began to accelerate the separation of its

policy-oriented business, and its operation became profit-oriented gradually. However, so far some of

the bank’s loans are still policy-oriented (such as loans to supply and marketing cooperatives and some

poverty alleviation loans), and its daily operation is inevitably intervened by local authorities.

Agricultural Bank of China has gradually shifted from rural to urban areas, and its role in promoting

rural economy growth is becoming smaller and smaller.

3．Agricultural Development Bank of China. Agricultural Development Bank of China is a

significant measure to realize the separation of rural policy-oriented finance and rural commercial

finance during the rural financial system reform. It is a policy-oriented bank that supports the

development of agriculture and rural areas on behalf of China. As an agricultural policy-oriented bank

in China, Agricultural Development Bank of China has played an irreplaceable role in realizing the

separation of rural policy-oriented financial business and rural commercial financial business,

deepening rural financial system reform, regulating financial resources allocation, implementing

government’s agricultural development policies, channeling funds to agriculture, supporting and

protecting agricultural development, promoting overall development and poverty alleviation, especially

in realizing its specialization in the supply and management of purchasing funds for grain, cotton, and

oil, supporting the circulation system reform of grain and oil, and enhancing the stamina for

agricultural development. The business of Agricultural Development Bank of China does not directly

involve farm households either. Its major task is to undertake policy-oriented financial business

according to the regulations of the state and act for the government to appropriate fiscal funds for

assisting agriculture.

Apart from formal financial participants, the position and influence of private loans in rural

financial market cannot be neglected either. The major form of private financing in rural areas is the

debt financing between the capital supplier and demander or the debt financing obtained through

private financial intermediaries, mainly including financial service offices, foundations, private banks,

various rotating savings and credit association, and other private financial institutions. The gap between

system supply and demand of informal rural finance is the source of rural private finance.

6.1.4 Problems of insufficient supply, inconvenience, and poor sustainability exist

in the development of China’s agricultural finance

Although great progress has been made in China’s agricultural and rural financial services, many

technical flaws and system defects still exist, specifically shown as:

1． The coverage of China’s agricultural financial services is inadequate.



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Based on the cost-benefit analysis, large-scale commercial banks have been making great effort in

revoking and merging branches in rural areas and some county-level branches, and small-scale Rural

Credit Cooperative (including Rural Commercial Bank and Rural Cooperative Bank) with weak

strength has become the major supplier of formal financial services in rural areas. Financial institutions

truly serving agriculture and rural areas are insufficient. Private finance is active, but it lack regulations,

and the deposit and loan interest rates are relatively high, presenting relatively large financial risks. In

addition, there is still a shortage of such non-banking financial institutions as rural securities, trusts,

and insurance, and no financial innovation and electronic product has been made.

2． Financial institutions have a strong inclination of leaving agriculture.

Practice indicates that large-scale commercial banks have no competitive advantage in providing

financial services in rural areas, and their business is unable to adapt to small-peasant economy or settle

problems such as the high risk and huge cost caused by serious information asymmetry. China does not

lack large-scale banks, but it lacks small and medium-sized financial institutions that are close to grass

roots, especially micro-financing organizations that are rooted in rural areas. Relatively speaking,

small-scale legal persons (community financial institutions whose services are provided to the whole

county) that are more close to farm households and satisfy the basic needs of rural areas are more

suitable for serving locals, but the number of corporate financial institutions at county-level is still

insufficient.

3． The operating efficiency of rural finance is low.

The rural financial market is underdeveloped, relying mainly on indirect financing, and personal

investment channels for farmers are limited. Large number of low efficient and invalid investments,

unsmooth transform from savings to investment; on the one hand, rural enterprises and farm

households face the difficulty in getting loans generally; on the other hand, there is a serious

urbanization of rural capital and some rural financial institutions have large sum of idle capital.

4． There is imbalance between the supply and demand of rural financial services.

This is presented outstandingly as the incoordination between rural financial structure and rural

economic structure. As secondary and tertiary industries develop, production and operation scope and

scale of farm households keep expanding, agricultural enterprises and rural enterprises continue to

grow, and the proportion of private economy and share economy adds, new financial demands occur.

However, current rural financial services are unable to meet these demands. As stated before, among

the leading planting and breeding households investigated, 72.2% said it was difficult for them to get

access to financing from formal financial institutions in time, and was more difficult for low income

families and small farm households.

6.2 Suggestions on promoting the development of agricultural finance in China’s MADAs

6.2.1 Institutional construction

1. To clearly define the function positioning of major agricultural finance suppliers and

avoid absence of government in supporting rural finance. In view of the public goods attribute of

agricultural and rural finance and the serious information asymmetry, during the development of

agricultural finance, the role of government should be effectively and moderately strengthened.



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Governments at all levels and relevant functional departments such as agricultural sector, development

and reform sector, financial sector, system of People’s Bank of China and regulatory sector, should

reposition their functions, which should focus on the prevention of exceeding performance of duty,

instead of function absence.

2. To optimize the way of fiscal support to the development of agricultural and rural

financial services. Incentive and compensation policies for agricultural financial institutions should be

halted and tax exemption policy for agricultural business should be implemented instead (the current

business tax is 3%). Meanwhile, agricultural financial institutions should be required to lower their

loan interest rates appropriately or reduce direct subsidies to relevant suppliers and demanders, and

replace them with discount interest and guiding funds, so as to drive financial funds to invest in

agriculture and rural areas and make full use of the leverage effect.

3. To strengthen the support for agricultural finance. Of the future increment of funds used for

supporting agricultural development, the proportion for supporting the development of agricultural and

rural finance should be increased, such as increasing the support to policy-oriented agricultural

insurance.

4. To build and perfect the rural land-based financial system. Rural land finance refers to the

financing with rural land (home site) as the credit guarantee (collateral). Essentially, this kind of

finance is to perform the property function of lands, restart the funds fixed on lands, and put them into

circulation, so as to expand the source of social funds.

It is suggested that rural land finance cooperates with current pilot work for rural land contractual

management right mortgage, select some regions in which local governments and financial sectors

jointly establish land contractual management right settlement institutions, which are responsible for

the management of land contractual management rights of farm households who are unable to pay off

their loans and returning them to farm households when mortgage term expires, so as to address the

problem of realization of land contractual management right mortgage.

5. To strengthen the guiding role of policy-oriented finance. As the only agricultural

policy-oriented bank currently, Agricultural Development Bank of China should gradually change into

a comprehensive policy-oriented bank. Agricultural Development Bank of China should improve and

perfect its policy-oriented financial services, continue to support the construction of grain and oil

reserve system, and conduct policy-oriented business such as supply and governance of grain, cotton,

oil purchasing funds. As to business development, the bank should adjust and enrich its business scope

based on its current situation, actively provide loans for industrialized operation of grain and oil,

reposition its role in the market, adjust its credit structure, and shift its focus from supporting

agricultural products circulation to agricultural production, thus making it a comprehensive

policy-oriented bank supporting rural development. At the same time, Agricultural Development Bank

of China should widen its business coverage and enhance its ability to serve agriculture by adding

basic-level outlets, and taking over some basic-level outlets of state-owned commercial banks and

making them its own braches. What’s more, the bank should start offering poverty alleviation and

development project loans, comprehensive agricultural development loans, rural basic construction

loans, and technical transformation loans gradually. By issuing agricultural financial bonds and setting

up agricultural development funds, it can widen its fundraising channels.

6. To steer commercial banks to develop business of agricultural and rural finance. Various

preferential measures and policy orientation can be used to guide commercial banks to expand business



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that support agriculture in rural financial market, narrow down the difference between deposit and loan

rates in rural financial market, exert its solid strength, and contribute to agricultural and rural economic

development. Meanwhile, the commercialization principle should be followed to promote the reform of

post savings, develop postal savings banks, and guide the capital of postal savings to support

agriculture, rural areas, and farmers. In addition, although Agricultural Bank of China has become a

profit-seeking commercial bank, it has obvious advantages with its abundant experience in rural

financial business as an agricultural professional bank and relatively large number of branches in rural

areas. In contrast, Agricultural Bank of China is less competitive in urban areas. Judging from its

self-development, Agricultural Bank of China should continue to moderately adjust its development

strategy and continue to make full use of its traditional strengths.

7. To build and perfect the system of laws and regulations for agricultural finance. First of all

it is recommended to formulate the Agricultural and Rural Investment Act, and make mandatory

provisions requiring all national financial institutions own a certain number of branches or a certain

amount of asset, and spend a proportion of funds in supporting rural economic development in proper

manners.

Secondly, it is suggested to offer a loose policy of deposit reserve to rural financial institutions

with good creditworthiness. Lowering deposit reserve ratio can enhance the fund supply capacity of

rural financial institutions quickly and effectively. On the basis of current differential deposit reserve

ratio policy for rural financial institutions, a more powerful reserve ratio policy can be considered, and

all loanable funds increased from this should be used in rural fund supply. In the meantime, as an

encouragement, the deposit reserve ratios of financial institutions can be bound with their proportion of

agricultural loans.

Thirdly, it is suggested to loosen the market entry threshold for agricultural and rural finance.

Restrictions on rural financial market access can be relaxed, and diversified financial organizations

including non-governmental microcredits and other private financial cooperative organizations can be

introduced. We can encourage the establishment of private financial institutions, which can be privately

owned banks, cooperative banks, credit unions, or cooperative foundations, thus creating a healthy

competition among different arrangement of rural financial system. Moderate competition is sure to

improve the efficiency of rural financial services, expand rural financial service supply, satisfy

demands for financial services at different levels, and finally realize the “generalized system of

preferences and broad coverage” of rural finance.

6.2.2 Mechanism innovation and business innovation

1. To build and Standardize a GEM (growth enterprise market) for agricultural industry. It

is suggested that the growth enterprise market for agricultural industry be created and regulated by

agricultural sector, and provide direct financing to agricultural entities with certain size within modern

agriculture demonstration areas, since there is a bottleneck in current indirect financing in agricultural

industry. Specific solution and risk prevention can be learned from the operation experience of

second-board market for industrial enterprises and a new three board market for Science and

technology enterprises.

2. To develop agricultural futures market. The development of agricultural futures market can

effectively optimize the allocation of agricultural resources, and is helpful to the sustainable



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development of agriculture. As agricultural futures price is predictable, it can make up for the

deficiency of spot price, so producers can take advantage of futures market’s forward price and arrange

production, which can not only realize the reasonable allocation of resources, but also reduce the

cyclical fluctuation of agricultural product price, thus ensuring normal agricultural production and

agricultural income.

Agricultural futures market in China is far less from developed, and its function in stabilizing

agricultural product price and optimizing agricultural resources is quite limited. Therefore, we should

encourage the development of new types of agricultural futures, perfect the structure of the market

varieties, timely promote forward option, set up pilot futures investment funds, study the QFII system

introduced to futures market, and encourage agricultural products producers to enter futures market and

conduct hedging operations.

3. To develop financial business based on features of agricultural industry. Given the features

of agricultural production, financial institutions are encouraged to provide seasonal working capital

loans to agricultural industry, medium and long term agricultural infrastructure loans, inventory pledge

loans, etc. For seasonal loans, it is suggested that People’s Bank of China offer preferential reloan

policies to relevant financial institutions; for medium and long term agricultural infrastructure loans, it

is suggested that lower deposit reserve ratios be carried out among relevant financial institutions.

6.2.3 Institution building

For many years, China has been paying great attention to financial services that support

agricultural and rural development. However, there is a big gap between actual situation and what has

been expected. To address the problems in agricultural and rural areas, agricultural sectors should play

the main role, and appropriate leading coordinating institutions should be established. The functions of

various rural financial institutions should be clearly positioned, and the current rural financial system

should be perfected. Meanwhile, innovation of rural financial organizations should be actively

promoted, and rural financial organization system should continue to be perfected.

1. To establish an Office of Promoting Agricultural Financial Development. It is suggested

that the State Council establish the Office of Promoting Agricultural financial Development, which is

administered under the Ministry of Agriculture. Its members should include: Ministry of Agriculture,

People’s Bank of China, China Banking Regulatory Commission, China Insurance Regulatory

Commission, China Securities Regulatory Commission, Ministry of Finance, and National

Development and Reform Commission.

Duties of this office include: studying relevant national policies and suggestions to promote the

development of agricultural and rural finance, making suggestions in amending and making laws and

regulations in accordance with relevant procedures, guiding the work to promote the development of

local agricultural and rural finance, following up and investigating the development of agricultural and

rural finance, and finding out problems and proposing countermeasures.

2．To perfect the guarantee mechanism and innovate guarantee organizations. A nationwide

agricultural industry guarantee fund led by Ministry of Agriculture and Ministry of Finance can be

funded to provide guarantee for local governments when they apply for bundling agricultural loans to

the headquarters of financial institutions. County-scale agricultural industry guarantee funds or

guarantee institutions can be set up to make full use of the information superiority of basic-level



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governments. It is suggested that on the basis of the real-name deposit system, interest tax be levied

based on progressive taxation, and the income generated can be the capital source of those guarantee

institutions. Governments at county-level can invest an appropriate proportion of share capital to these

guarantee institutions. If there is some surplus of the funds for assisting agriculture, it will be used in

the guarantee platform. The remaining capital source of these guarantee institutions may come from

farm the capital raised collectively by farm households and local enterprises on their own will.

6.2.4 To promoting construction of trustworthy culture for agricultural and

rural financial development

1. To enhance the publicity of integrity and establish integrity awareness. A development

strategy for developing integrity in rural financial market should be implemented. While focusing on

the institutional characteristics of integrity, we cannot ignore its moral and cultural sense at the

psychological level of social values, from the perspective of which, integrity is the reflection of the

internalization of credit relation as the values of the trader.

Firstly, integrity and faithfulness should be included into the main content of promoting cultural

and ideological progress, so as to enhance the incentive and constraint functions of social public

opinions.

With various mass media represented by newspaper, television, broadcast, and network, timely

publication of advanced figures with integrity and trustworthiness, advanced units, exemplary deeds in

a matter-of-fact matter, disclosure of malicious defaults, loss of credibility, following up of the

investigation and settlement of major cases of loss of credibility, disclosure of information about

authorities’ credit, promotion of contract spirit, creation of a credit culture and ethical trend full of

integrity and trustworthiness, the motivation and restraint force of public opinion can be strengthened.

To escort for the construction of social credit.

Secondly, the financial credit system should be comprehensively strengthened. On the basis of

scientification and legalization, credit assessment and credit rating should be conducted to each region

and each industry. An example of good credit and an example of bad credit can be set up and subjected

to surveillance by public opinions, and different credit qualification and correspondent awards and

punishment should be considered.

Thirdly, the corporate culture construction and integrity cultural construction are to be combined.

Led by industrial associations, it is suggested to conduct vocational ethics education and corporate

cultural construction, centering on integrity and faithfulness, thus developing an “integrity-based”

culture that advocates honest behavior, creditable business-founder, and honors integrity and dishonors

promise breaking.

Lastly, integrity education at different levels should be conducted from the perspectives of ethics

and finance. International experiences can be learned to conduct vocational credit education and

short-term trainings, especially the in-service credit education targeted on government officials and

business managers. In ethic sense, credit education should run through the entire process of moral

education. We should conduct study on credit management from both theoretical and practical aspects,

so as to provide theoretical and empirical basis for law-making, system construction, policy design,



98

credit education and publicity of public opinions. We should also conduct study on law system, policy

design, and credit education based on the real situation in China.

2. To build a perfect rural credit system with strengthened credit-loss punishing regulations.

To build the punishing and warning regulations for loss of credibility, we should first of all build a

systematic laws and regulations system for credit, based on which can we strengthen the incentive and

restraint mechanism for integrity, and punish those who lose their credibility and increase their default

costs. International experiences can be referred to prepare the Fair Credit Reporting Act and

corresponding individual bankruptcy system and credit guarantee system, and perfect our punishing

and warning system for loss of credibility.

While perfecting the systems, we should also strengthen the authority of relevant laws and

regulations, and enhance the punishment on those who lose their credibility. We can consider to add a

provision for punishing malicious loss of credibility, and regularly conduct specific rectification of

financial cases. Meanwhile, on the one hand, we should set up the conception that credit information is

an important resource, and coordinate judicial departments, financial departments, tax departments,

industrial and commercial departments, metrological service departments and other government

departments with modern electronic information tools. With identity card, business license or

organization code of enterprise and organization as the unified credit information code and the credit

records of rural finance demanders, we can build an authoritative credit archive and realize the

electronization, networking, authorization, openness and legalization of credit information. At present,

we can start from building an inter-bank credit information union and share the credit information of

their clients. On the other hand, we should consider “integrity” as a parameter that influences

agricultural enterprises and farm households’ participation in social economic activities, conduct credit

assessment regularly, systematize credit assessment, apply "One-vote veto" principle to the examination

of agricultural project loans, and make credit a kind of qualification.

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