How Can the Rural Financial System Be Innovated? Agricultural Insurance Cannot Be Rushed
For China to achieve the grand goal of agricultural modernization, an efficient new-type rural financial system is indispensable. The central government supports the development of new-type rural cooperative financial organizations, and proposes that on the basis of farmers' cooperatives and supply and marketing cooperatives that are democratically managed, standardized in operation, and strong in driving force, rural cooperative finance should be cultivated and developed, and the types of financial institutions in rural areas should be continuously enriched; it proposes adhering to the principles of membership and closure, and, on the premise of not absorbing deposits or extending loans externally and not paying fixed returns, promoting the development of community-based rural mutual fund organizations.
The central government also calls for increasing support for agricultural insurance, requiring an increase in the proportion of premium subsidies from central and provincial finances for insurance on major grain crops, gradually reducing or canceling county-level premium subsidies in major grain-producing counties, encouraging insurance institutions to carry out insurance for specialty and advantageous agricultural products, allowing localities with the conditions to provide premium subsidies, and having the central finance support this through methods such as rewarding instead of subsidizing.
Rural finance is a long-standing difficult problem, and how to innovate the rural financial system has long been difficult to advance. To implement the central government's policies on rural financial system innovation, it is necessary to deeply understand the current environment of the smallholder economy, adapt measures to local conditions, seek truth and be pragmatic, and do practical and good things for rural areas and farmers.
I. Establish Community-Based Rural Mutual Fund Organizations
The outflow of people, money, and goods from rural areas has long existed, hence the saying that rural areas are losing blood. Among the channels through which rural areas lose blood, financial institutions are an important aspect. Every year, financial institutions nationwide transfer the vast majority of farmers' deposits into cities. Some believe this is precisely an important reason for the widespread poverty currently appearing in rural areas, causing the issues concerning agriculture, rural areas, and farmers to become deeply entrenched and hard to resolve.
In rural areas today, there indeed exists the problem that farmers deposit at low interest but can only borrow at high interest, or even cannot get loans even at high interest and can only resort to high-interest private lending. Rural areas have enormous financial demand, yet lack formal financial institutions to provide farmers with financial services.
One key reason formal financial institutions are unwilling to provide financial services to farmers is that farmers' financial needs are extremely dispersed and complex, and farmers lack suitable financing collateral and guarantees, so that when formal financial institutions serve farmers, the costs are extremely high and the risks are very large.
Compared with formal financial institutions, rural private lending is very active, with annual interest rates reaching 20% or even higher. Rural private lending easily gives rise to problems. First, the lending interest rate is too high. Second, when borrowing farmers have difficulty repaying, lenders may use any means to force farmers to repay, thereby causing serious incidents.
If community-based rural mutual financial organizations are developed and they provide financing services to farmers who need loans, then because information between community finance and farmers is symmetrical, the moral hazard of farmers not repaying loans is extremely small, and community finance can supervise borrowers at low cost. In this way, on the one hand, the problem of farmers' difficulty in obtaining loans can be alleviated, and on the other hand, community finance can obtain interest income.
How specifically should rural community finance be developed? The embedded rural finance established by Li Changping in some villages in Hubei, Hebei, and Henan is quite reasonable. Take the “Sunset Red Elderly Care Mutual Fund Cooperative” he established in Haotang Village, Xinyang, Henan, as an example. Elderly people in the village pooled funds to establish a financial cooperative, lending only to people in the village, with interest income divided at the end of the year. When villagers borrow from the cooperative, each loan requires guarantees from five members of the cooperative. Over more than four years so far, the cooperative has not had a single bad loan. Li Changping's embedded finance, on the one hand, meets rural areas' demand for funds, and on the other hand, provides rural elderly people with interest income for old-age support. If the state could inject funds into all “elderly care mutual fund cooperatives” spontaneously established by farmers while also supervising them, then a new and good method might be formed nationwide for building rural resources and sending them to the countryside.
Farmers have financial needs, but most of farmers' financial needs are not and cannot be for business undertakings, such as starting businesses and opening factories, building pig farms, or developing specialty agriculture. At present, farmers' financial needs are mainly for living purposes rather than production. Even production-related financial needs are generally only cyclical input of means of production and working capital. If farmers borrow to start businesses, open factories, or develop specialty agriculture, given the high risks in agriculture and the long-standing surplus in agricultural product markets, once they fail, the consequences will not only be severe for the farmers but also pose a severe test for community finance. Therefore, rural community finance should mainly respond to farmers' living-related financial needs, and at most to production needs such as cyclical funds, and must not be greedy for the big and the foreign and drift into business operations.
Most rural areas in China today are not suitable for entrepreneurship. The important function of agriculture itself is to guarantee and maintain, not to develop, and even less to become rich. To expect farmers to develop agricultural production through borrowing, improve agricultural production efficiency, and become prosperous, under the current overall surplus of China's agricultural production capacity, using more financial input to create greater agricultural production capacity will, for agriculture with very low demand elasticity, inevitably result in “increased output without increased income,” and may even bring the severe consequence of increased output, reduced income, and bankruptcy.
II. Agricultural Insurance Cannot Have a Great Leap Forward
Agricultural insurance also faces the problem of how formal insurance institutions connect with the dispersed and complex needs of smallholders. The state provides policy-based insurance for agriculture: farmers pay only 3 yuan in premiums, while fiscal subsidies are 12 yuan, and if grain crops suffer total crop failure or disaster, they can receive disaster compensation of up to nearly 300 yuan per mu. 3 yuan is very little, and 300 yuan in compensation is not small; moreover, agricultural disasters are extremely common, so farmers should welcome agricultural insurance. However, in the smallholder economy, each household has only about ten mu of cultivated land, with family responsibility and intensive cultivation, and can respond quite flexibly to various situations arising in agricultural production. Therefore, under normal circumstances, smallholder agriculture can effectively prevent disasters, and farmers thus lack interest in agricultural insurance.
Another important reason farmers are not enthusiastic about participating in agricultural insurance is that it is relatively difficult for farmers to obtain insurance compensation, and they have to seek claims from insurance companies many times, with the labor spent already exceeding the obtainable insurance compensation. The difficulty for insurance companies is that they must verify the losses from disasters reported by farming households and prevent moral hazard among farmers. How to assess the losses suffered by farmers, and even how to match the plots farmers insured with the disaster-affected plots, is extremely labor-intensive. To put it bluntly, the cost for formal insurance companies to connect with small-scale farming households is extremely high, making agricultural insurance almost impossible to implement under smallholder economic conditions.
Compared with the strong disaster-prevention capacity of smallholders, capital agriculture operating on a large scale and hiring agricultural labor is seriously lacking in flexibility for responding to agricultural production, and any change in natural conditions may cause severe yield reductions. At the same time, capital agriculture is relatively large in scale and relatively standardized in bookkeeping, and has a relatively strong ability to connect with insurance companies. Therefore, capital agriculture has an extremely high demand for agricultural insurance.
In 2010, the author conducted research in Fanchang, Anhui, on about 10 large households that rented more than 600 mu of land. These large households had already farmed for three years and six seasons. Strangely, almost all large households suffered disasters in all six seasons of agricultural production without exception. Fortunately, with agricultural insurance, insurance companies paid each large household insurance compensation per season ranging from as little as more than 100 yuan to as much as 300 yuan, so that they could still barely keep going.
Why are large households more susceptible to natural disasters and agricultural yield reductions? There are roughly three reasons: First, large households that reach a certain production scale have greatly reduced flexibility in agricultural production, and whether responding to market or natural risks, they are “too big to turn around”; Second, one characteristic of hired labor is working according to schedule, far less flexible in operations than family agriculture; Third, capital agriculture generally tends to replace labor with machinery, which both raises machinery purchase costs and, because machinery is less flexible than manual labor, causes agricultural production to appear extensive.
The increasingly strong calls in recent years for developing agricultural insurance are directly related to capital going to the countryside and local governments promoting rural land circulation for large-scale operations. China's traditional smallholders both have an extremely strong ability to cope with natural disasters and lack the ability to connect with formal agricultural insurance. Therefore, they are not interested in policy-based insurance and have even less demand for commercial insurance. What has demand for policy-based insurance is capital agriculture and large-scale operations.
We generally believe that the state giving money for policy-based agricultural insurance is serving farmers, but in fact, the benefits of agricultural insurance are only obtained by capital agriculture, and capital agriculture is far inferior to smallholders in agricultural output. If China's 2.1 billion mu of cultivated land were operated on a large scale by capital, then for agricultural insurance alone, the state would probably have to provide subsidies counted in the hundreds of billions each year. Therefore, capital agriculture, large-scale operations, and agricultural insurance should not be promoted on a large scale.