Xiao Junyan, Research Department of Rural Economy of DRC

Research Report No.143, 2005

There has been much discussion about the goals of the reform of the Agricultural Development Bank of China (ADBC). The goals could be approximately summarized as follows: firstly, keeping the current organization of the bank, adjusting its functions and expanding its business scope from the current support on circulation of grain and cotton to other fields; secondly, merging with the grass-roots agencies of the Agricultural Bank of China and the Rural Credit Cooperative to establish a "Rural Regional Development Bank"; thirdly, merging with the National Development Bank or the Agricultural Bank of China; fourthly, transferring the business of grain, cotton and edible oil to the other policy banks and turning it into a development bank for the under-developed regions; fifthly, transferring the business of grain, cotton and edible oil to the other policy banks and setting up a rural credit guarantee bank or a credit guarantee bank for rural small and medium-sized enterprises. The best option should be made in light of the rural economic development and the development of the rural financial system.

I. Background

With the deepening of the reform of the grain circulation system, the Agricultural Development Bank has gradually gone into a dilemma: the marketization of grain circulation has been sped up; the policy-based purchase of grain and storage has been shrunk; there has been a huge suspense account due to deficit accumulated in the past years and misappropriated funds; as the business of ADBC has dwindled, and its position as a policy bank has been lowered, the bank is eager to seek a way out. Viewed in the overall situation of rural economy and rural finance, the main problems of ADBC are:

1. The bank has no specific responsibilities to fulfil

As a "state bank for the procurement of grain, cotton and edible oil", ADBC[1] is responsible for guaranteeing the safety of loans, ensuring sufficient reserve and providing accurate information. But ADBC has hardly fulfilled these responsibilities. As the interest relationship involving the grains is complicated, people from outside (including the macro control decision-makers) can hardly know about the operation in the sector. The State Grain Administration’s statistics show that by the end of 2001, the total suspenseloan due to deficit and misappropriated funds reached 279.4 billion yuan. The commodity grain and stale grain that cannot be sold at favorable marketing price are expected to cause a loss of more than 50 billion yuan. ADBC should be largely held responsible for it. Since ADBC was founded in 1994, the grain purchase and reserve policy has seen twists and turns, leaving difficulties for the bank to fulfil its duties. And the bank found it hard to control the actions of state grain-trading enterprises and local governments. But anyway, the loans are controlled by ADBC. With the support of the central government and its own intensified credit management, the situation could have been much better. But this is not the case. What happened in 1998 reflected the typical situation of the sector. In 1996, the deficit and misappropriated funds reached 51.7 billion yuan. By the end of March 1998 (the fiscal year for grain sector is April to March of the following year), the state granted 543.1 billion yuan of loan for the procurement of grain while the grain’s reserve value was only 329.1 yuan, which meant that the deficit and misappropriated funds totaled 214 billion yuan. This was to some extent caused by the increase of bank interest and storage costs as a result of the growth of grain purchase and grain stock. But the bank should largely be blamed for its ineffective supervision and management. The central government had already predicted the changes and prepared enough financial subsidy funds. Even if the fund was in short supply, the central government should solve the problem. ADBC should not grant a large sum of 121 billion yuan of suspense loan; the other 80 billion yuan of misappropriated funds was a result of ADBC’s violation of the State Council regulations, granting loans for grain-trading firms to buy cars and other consumer goods, build houses, start sideline businesses, buy stocks and futures and lend their employees to do business.

2. The bank has not fully performed its functions

In name, the bank’s business should cover the finance services relating to the agricultural development. But in actuality, its scope of service has been very narrow, only covering the procurement of grain, cotton and edible oil and storage. Of the loans it grants, grain and edible oil make up more than 80% while cotton only accounts for 15%.

The funds cannot be given full play as the business scope has been too narrow. Most of the funds of ADBC could only be used for the purchase and storage of grain and cotton. The bank cannot use various types of financial instruments and means of credit to create multiplier effect. Therefore, ADBC can hardly play the guiding role in rural financing and the role in pooling social funds.

II. Main Problems

1. The reversed pressure transmission mechanism in the interest relationship within the grain sector

In the past decade, the central government has demanded that a balance be maintained between grain security and grain supply and demand, which should be covered by a "provincial governor responsibility system". But in actuality this has not been practiced. The grain security is still in the charge of the central government, which has adopted a system centered on administrative planning and supported by a guarantee of monopolized operation right and funds (loans and subsidies). Then a game relationship has been formed between the central government and the other grain-related interest parties (local governments, state-owned grain trading system and the bank). Other interest parties can all exert reversed pressure on the central government. The reversed press transmission mechanism is composed of three aspects: firstly, sufficient funds must be offered to the implementation of grain procurement and reserve plan, otherwise you are not attaching enough importance to agriculture, farmers’ protection and stability of the grain market; secondly, local governments, state-owned grain system and the bank form a joint interest unity. The more the grain purchase and reserve are increased, the more loans and subsidies will be granted and the more important local governments, state-owned grain system and bank will appear to be. Then their staff and organizational expansion will be made legal, and more deficits and fund misappropriation are likely to occur; thirdly, the central government can only rely on local governments, state-owned grain system and the bank to execute the policy for millions of farmers. It has to yield to their "hunger for funds". Pressured by this mechanism, the central government has increased loans and subsidies and adopt a laissez-faire attitude over the loopholes that have caused major losses.

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[1] According to the annual report of ADBC for 2002, ADBC’s business mainly covers: 1. Handling the loans for the procurement, reserve and distribution of grain, edible oil and cotton set by the State Council; 2. Handling the loans for the state’s special reserves of meat, sugar, tobacco leaf and wool; 3. Handling the allocation of the subsidy funds from the central finance for above-mentioned agricultural products and setting up special accounts and handling the allocation for the risk grain reserve fund jointly set up by the central and provincial finance; 4. Handling the loans for grain trading enterprises to build simple granaries; 5. Handling the deposits of the enterprises and institutions engaged in the relevant business; 6. Handling the settlements of the enterprises and institutions that open accounts in the bank; 7. Issuing the financial bonds; 8. Handling the international settlement under the items of import and export for the enterprises using the policy loans for grain, cotton and edible oil procurement as well as the foreign exchange deposits, foreign exchange remittance, inter-bank foreign exchange lending, foreign exchange transaction service and sale and purchase of foreign exchange; 9. Handling the other business approved by the State Council or the People’s Bank of China.