Caixin
Oct 09, 2020 07:29 PM
FINANCE

Exclusive: China Takes Another Step Toward Fixing Its Corruption-Plagued Rural Credit Unions

There’s no “standardized answer” for the latest reform on provincial rural credit unions, a senior regulator told Caixin
There’s no “standardized answer” for the latest reform on provincial rural credit unions, a senior regulator told Caixin

China is set to carry out a long-anticipated reform of rural credit unions, in a move to further clean up the country’s banking sector.

More than 10 provinces have submitted their reform plans, which require the approval of banking regulators, Caixin has learned from sources with knowledge of the matter. The provinces of Henan, Jiangsu, Guizhou, Zhejiang and Guangdong might be among the first to test out reforms.

Most provincial rural credit unions were formed after China in 2003 decided to authorize local governments to manage the sprawling rural financial sector. The credit unions were generally set up with funds from lower-level rural credit cooperatives and rural commercial banks with an aim to manage and appoint leadership of cooperatives as well as arrange funds to aid struggling member institutions.

“Provincial rural credit unions are like central banks of rural commercial banks. When rural commercial banks have spare idle funds from deposits, they would hand in the money to the credit unions and in turn obtain some interest. For those rural commercial banks that are in need of money, the credit unions can lend them money with higher interest,” a source close to financial regulators in Jiangsu said.

However, as some cooperatives have transformed into joint-stock rural commercial banks, a portion are hesitant to hand their money to provincial rural credit unions as the unions’ investment decisions weren’t necessarily in line with the interests of the rural banks, said Liao Zhiming, an analyst at Tianfeng Securities Co. Ltd.

Nepotism is also an issue for provincial rural credit unions, as they can appoint leadership at lower-level rural commercial banks and rural credit cooperatives. “There are more and more relatives of provincial leadership being appointed who don’t even have the professional capabilities to do their jobs, making it worse and worse,” said a source who once worked at a provincial rural credit union.

The situation has given rise to a number of corruption cases. Since April, a number of executives of the Anhui Rural Credit Union have been placed under investigation for “serious violation of (Communist Party) discipline and law.” In July, a multibillion yuan corruption scandal involving the Shanxi Rural Credit Union led to investigations into several officials.

There’s no “standardized answer” for the latest reform on provincial rural credit unions, a senior regulator told Caixin, adding that the reform will adhere to the “one place, one policy” strategy. Local governments are in charge of drafting reform plans to be approved by the China Banking and Insurance Regulatory Commission (CBIRC) and the central bank.

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Rural credit unions in Henan, Jiangsu and Guizhou will likely adopt a “banking holding group” model, forming a provincial holding company to hold stakes in member institutions, the sources said.

The rural credit union in Guangdong plans to transform into an industry association, reducing its management function, which is more in line with the central bank’s vision, the sources said.

The Zhejiang rural credit union plans to adopt the “consortium bank and banking holding group” model. The credit union will likely become a consortium bank with stakes held by its member institutions, while it invests in its member institutions and becomes their largest shareholder.

At the end of last year, among China’s roughly 4,600 banking institutions, there were nearly 1,500 rural commercial banks and 722 rural credit cooperatives, according to CBIRC data (link in Chinese).

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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