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 "We've lent out all the money. There's none left," an employee told
Reuters, repeating the explanation given to depositors weeks
earlier.
In the run-up to the holiday in late January, word had spread that
at least three rural cooperatives were running short on funds. In
what the local government described as a "panic", depositors rushed
to withdraw cash. Local officials say several co-op bosses fled
after committing fraud.
Though the incident is modest, it highlights the risk that financial
liberalization intended to channel more credit to farmers and others
who struggle to access loans from big state banks could open
regulatory loopholes that enable a surge in risky lending.
"The core problem is, after using this (co-op) structure to raise
funds, effective regulation is lacking," said Chen Ping, director of
the Farmers' Credit Co-operative Union, an association of
researchers studying rural co-ops.
"Actually a large amount of funding has been shifted into
large-scale projects like real estate."
Depositors would normally be protected by China's banking regulator,
which requires lenders to keep a certain amount of cash on reserve
to meet depositor demand.
But as participants in a pilot program, the depositors quickly woke
up to an unpleasant reality: so-called "Farmers' Mutual Help Funding
Cooperatives" aren't technically banks. Not only did they not have
sufficient reserves on hand, they weren't legally required to.
Officials in Yancheng city told state media that the situation would
be resolved before the holiday, but Reuters found on a recent trip
that two of at least three co-ops that closed their doors before the
holiday remain locked.
ABANDONED IN HASTE
On the city's semi-rural outskirts, the offices of the Yancheng
Environmental Protection Industrial Park co-op appear to have been
abandoned in haste. The lobby, visible behind padlocked glass doors,
was strewn with trash.
In an emailed statement, the propaganda department of Tinghu
district in Yancheng told Reuters that 18.3 million yuan ($3
million) had been returned to depositors of three troubled co-ops
before the Lunar New Year. That compares with 80 million yuan that
state media previously reported had gone missing.
"The related departments of Tinghu district and the co-ops are
working together to take effective measures and actively raising
funds to ensure the timely payment of funds to depositors," the
department said in an unsigned statement.
Farmers' co-ops began appearing in Jiangsu province around 2006,
after the Communist Party issued guidelines encouraging the
establishment of innovative rural financial institutions as part of
a broader "New Socialist Countryside" campaign.
But, like many such policy statements, the document was vague,
setting out broad goals for rural development while leaving specific
agencies to fill in the details.
The government was content to allow co-ops to operate with minimal
supervision because, at least in principal, they are membership
institutions, not banks. Only members who have paid into the co-ops
could get loans, and members assumed the risks from lending to one
another.
Rather than the China Banking Regulatory Commission (CBRC), local
agriculture affairs offices, with little experience of financial
regulation, were tasked with supervising farmers' co-ops.
"These institutions didn't impinge upon the interests of the general
public, so they could be lightly regulated," said He Guangwen,
professor at the College of Economics and Management at China
Agricultural University.
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MISSION CREEP
The idea was to allow farmers who knew one another to co-operate on
financing as well as work together on production. And because each
loan would be small, the co-op's overall portfolio would be
diversified, preventing isolated defaults from bringing down the
whole co-op.
By the middle of last year, 137 such co-ops had been established in
Yancheng, with total membership reaching 170,000, deposits of 2.3
billion yuan, and total loans outstanding of 1.9 billion yuan,
according to figures cited by official media.
But in practice, many co-ops shifted into riskier forms of lending.
Jiangsu, along with neighboring Fujian province, is known for its
vibrant grey-market lending networks, serving small factory owners
and real estate developers who often cannot obtain bank loans.
Informal lending generally occurs through family and friends, but
the rise of farmers' co-ops created a platform for informal lenders
to scale up their operations by collecting funds in a bank-like
setting.
"The revelations of problems in Yancheng is mainly because the
institutions aren't standardized and regulation isn't in place,"
said He. "In China, lots of institutions exist calling themselves
(farmers co-ops), but few are actually based on agricultural
co-operation and sharing funds between members. Most have undergone
mission creep."
Despite the problems, the government is pushing further expansion of
co-ops.
In January, China's cabinet issued new guidelines on rural reform
that called for expanding the co-op system based on "maintaining the
membership system, the principle of closure, and restricting
deposit-taking and loans to members".
At the same time, the government is pushing other financial reforms
designed to expand credit to under-served groups. The internet-based
peer-to-peer (P2P) lending, micro-lending institutions, and
privately-owned banks are among the initiatives the government is
supporting.
Yet there are already signs that the problems afflicting co-ops in
Yancheng may also affect other forms of non-bank lending. Local
media have reported that dozens of P2P lending firms, which operate
fee-based platforms to connect lenders with borrowers, have gone
bankrupt in recent months.
"The truth is that a lot of burgeoning P2P platforms in China have
no basic risk diversification, not to mention risk management,"
Liang Xiaozhong, CBRC deputy director, wrote on the Financial Times
website last week.
($1 = 6.1462 Chinese Yuan)
(Additional reporting by Shanghai
newsroom; editing by Ian Geoghegan and Alex Richardson)
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