China anti-poverty loans go to favored
business By Lynette Ong
CHENGDU - When one enters the building that
houses the Poverty Alleviation Office in a poor county
in rural Sichuan, the polished floors and
air-conditioned offices catch one by surprise. In no way
is the comfortable and well-appointed office indicative
of the nature of this organization that has been given
the mission of helping the massive number of poor in
this "poor county by national standards" with an average
per capita income of about 1,000 yuan (US$120).
The definition of a "poor county by national
standards" can be misleading and unclear because it
depends not only on the poverty level of the area but
also the locality's bargaining position in Beijing's
elite policymaking circle. Most local authorities lobby
for the poor-county title to qualify for soft money from
the central government. However, this particular county
in Sichuan is indeed "poor by national standards", since
its economy depends to a large extent on the remittances
from local residents who work in other parts of the
country. These migrant workers constitute more than half
of the county's total workforce.
Director Yu,
giving only his family name, of the Poverty Alleviation
Office was quick to impress a foreigner with the massive
sum of money the Chinese government has set aside every
year to help improve the standard of living of the rural
poor, as well as the magnitude of funds the county -
despite its poverty it has good representation in
Beijing - has managed to secure from the central
authority. Allocations from the central Ministry of
Finance for poverty-alleviation projects in the county
are no less than 15 million yuan ($1.8 million) a year.
Poverty-alleviation projects are mostly for
infrastructure building, such as construction of roads
and water tanks, as well as for health care and
education. That aside, another 100 million yuan ($12
million) of subsidized poverty loans has been made
available for the county. Yu became reticent when Asia
Times Online inquired to whom the poverty loans have
been disbursed, and at what loan-repayment interest
rates.
The subsidized poverty loan program is a
centerpiece of the Chinese government's policies to
alleviate poverty and to narrow the wide gulf between
the rich and the poor. Since its inception in 1994, its
implementation has been plagued with problems, including
deciding the agency best suited for delivering the
loans, the criteria for selecting the loan recipients,
and its very low repayment rate, which is officially
estimated at around 50%, but in fact could be as low as
20-30%, according to informed sources familiar with the
program.
The Agricultural Development Bank of
China (ADBC), a non-profit-making policy bank, was
originally charged with delivering the poverty loans.
Nonetheless, after a massive corruption scandal in 1998,
the delivery was transferred to the Agricultural Bank of
China (ABC), a state-owned commercial bank. On a
nationwide scale, the ABC is responsible for disbursing
10 billion yuan a year to poor agricultural households
that are in need of credit for investment in agriculture
and animal husbandry. Borrowers pay a subsidized
interest rate of 2.88% per year, while the central
Ministry of Finance in turn compensates the ABC for the
difference in monetary value between the market and the
subsidized rates.
Based on my interviews with
hundreds of poor households over a three-month period in
rural Sichuan, most of them have not even heard of these
anti-poverty loans, and very few have actually benefited
from the program. Ironically, the beneficiaries are
those with good guanxi (connections) with the
relevant officials. Some studies suggest that less than
10% of the loans nationwide have actually reached the
hands of the households.
A fundamental problem
with most subsidized loans is the incentive issue. The
borrowers have little incentive to repay the loans since
they face no legal consequences for their non-payment,
and their delinquency or bad credit does not affect
their ability to borrow from other sources. In rural
China, where legal enforcement is almost non-existent,
collateral and guarantors that are common in Western
societies mean nothing to the creditors. On the other
hand, the bank officers in charge of disbursing the
loans have little incentive to ensure prompt repayment.
They probably gain more by colluding with the borrowers
who could offer them some rewards in exchange for access
to the subsidized credit. In essence, the subsidized
loan program in China suffers from serious lack of
supervisory and regulatory mechanisms that provide
appropriate "carrots and sticks" for both lenders and
borrowers.
Another problem with subsidized
credit lies with the organization design that is unique
to China. The credit program is jointly managed by the
Agricultural Bank of China and the Poverty Alleviation
Office: the former takes control of the funds, and is in
charge of disbursement and collection, while the latter
is responsible for giving its formal approval in order
for the ABC to obtain interest subsidies from the
central finance. The Poverty Alleviation Office is led
by the State Council in Beijing, but at the county
level, it reports to the Poverty Alleviation Office at
the prefecture level (one level above county) as well as
to the county party committee and county government.
The "dual leadership" structure, or
shuangchong lingdao, is a characteristic of all
administrative units in China. In a similar fashion,
though all ABC branches throughout the country are
managed by the headquarters in Beijing, those at local
levels are highly influenced by the local governments.
What this means is that loan allocations often suffer
from "administrative inference" by local authorities.
In this particular county in rural Sichuan, the
totality of poverty loans, about 100 million yuan a
year, is now lent to an electricity plant, a major
project approved by the county party committee. When
Director Yu was asked why this profit-maximizing
company instead of the poor households deserves the
interest-rate subsidies, he said, "Well, upon
completion, the plant is able to contribute
significantly to the county government's tax revenue."
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