Characteristics and Implications of the Transformation of Agricultural Cooperative Finance in Modern China

Agricultural cooperative finance in modern China began with the rural credit cooperative experiment conducted by the China International Famine Relief Commission in Hebei in the 1920s. After the 1930s, as traditional rural finance in China dried up and the economic crisis intensified, cooperative finance was regarded by the Nationalist Government and all sectors of society as an excellent remedy for reviving the rural economy and was extended throughout the country. After the government became involved, it began to use administrative power to push it forward by force and gradually squeezed out social forces. After the War of Resistance, a cooperative finance model completely monopolized and led by the government took shape. Agricultural cooperative finance in modern China started in 1923 and ended in 1949 when the Nationalist government retreated to Taiwan, China, lasting more than 20 years. Depending on the guiding subject, it successively went through three models: leadership by social organizations, joint guidance by social organizations and the government, and monopolistic guidance by government forces. Under the three different guidance models, cooperative finance displayed different development characteristics.

In the 1920s, the credit cooperative cause in Hebei was completely under the leadership of the social organization the China International Famine Relief Commission and did not rely on any administrative coercive force. Precisely because of this, the China International Famine Relief Commission mainly relied on cultivating farmers' cooperative awareness, establishing a sound incentive and restraint mechanism, and improving the quality of cooperative management to attract farmers to join. Therefore, under this model, the development characteristics of cooperative finance were as follows: (1) emphasis on publicity and education about cooperative knowledge, farmers organizing cooperatives independently, and members freely entering or withdrawing from cooperatives; (2) credit cooperation as the only form, with cooperative organizations developing relatively slowly and their regional distribution limited to Hebei Province alone; (3) excellent quality of cooperative organizations, generally strong cooperative awareness among members, and no phenomenon of a small number of bad elements controlling cooperative affairs; (4) establishment of a sound loan risk prevention mechanism, which could be effectively implemented; (5) loan funds mainly relying on relief funds allocated by the China International Famine Relief Commission, without using commercial finance, with a single loan channel and a relatively small loan scale; (6) good performance of cooperative finance, with cooperative loans basically all repaid on schedule and a non-performing loan rate of almost zero; (7) cooperative loans truly used for agricultural production and operation, with no phenomenon of conversion into usury.

In the early 1930s, the rural economy declined and finance dried up, and the government and all sectors of society sought paths to revive the countryside. Because of its successful development, the early rural credit cooperative cause in Hebei was regarded as an excellent remedy for relieving the countryside and was vigorously promoted. Agricultural cooperative finance thus entered a stage of development across many provinces nationwide. During this period, agricultural cooperative finance partly relied on government administrative power but had not yet completely excluded the power of social organizations, and was jointly led by the government and social organizations. However, as time passed, there appeared a trend of government power gradually strengthening and social forces continuously weakening. Under this model, the development of agricultural cooperative finance showed the following characteristics: (1) cooperative organization forms developed from a single credit cooperation into multiple cooperative forms such as production, consumption, and marketing, but credit cooperation remained the main form; (2) although the system retained the principle of members freely joining, the government indirectly exerted influence through administrative power, so to a certain extent there was a coercive nature in making farmers join, which greatly accelerated the increase in cooperative organizations; (3) cooperative publicity and education became a mere formality, members' cooperative awareness was low, and the quality of cooperative management declined; (4) urban commercial and agricultural financial institutions successively joined cooperative lending, producing an upsurge of "commercial capital returning to agriculture," and the loan scale expanded rapidly; (5) the profit-seeking nature of financial institutions led them, in issuing cooperative loans, to excessively avoid risk, emphasize collateral and guarantees, and contract credit loans; the accompanying situation of vicious competition in cooperatively developed areas while backward areas were neglected ran counter to the purpose of cooperative finance, and cooperative finance became alienated into commercial finance; (6) the quality of cooperative loans declined, the non-performing loan rate rose, and in some areas a small number of bad elements controlled cooperative loans and converted them into usury.

In the late 1930s, in view of the various abuses that appeared in "commercial capital returning to agriculture," the Nationalist Government intended to establish a nationally unified cooperative financial system, with the state monopolizing the supply of loan funds, uniformly managing cooperative finance, and completely excluding commercial financial institutions from the field of cooperative finance. After the War of Resistance began, the above plan was implemented in the rear areas of the War of Resistance. Later, cooperative finance was incorporated into the national rural financial system.

Under the government monopoly guidance model, agricultural cooperative finance in China showed the following development characteristics: (1) agricultural cooperative finance was used as a tool to expand rural finance and increase agricultural production, and was completely pushed forward by state administrative force, with the mechanisms of independent cooperative formation and free entry and exit abandoned. (2) Cooperative organizations developed by leaps and bounds in the short term, and their distribution areas expanded rapidly; cooperative organizations completely lost their initiative, developed passively, and were ultimately alienated into a component of the rural administrative system; (3) cooperative loan funds were monopolistically supplied by state financial institutions, the non-performing loan rate was extremely high, capital waste was serious, and sustainable development was difficult; (4) the development of cooperative finance was entirely determined by government will, rising when the government wanted it to rise and declining when the government wanted it to decline; (5) cooperative loans were manipulated by bad elements within the cooperatives and converted into a new type of usury, most of them were not used for agricultural production, and the meaning of mutual aid and cooperation was lost.

Agricultural cooperative finance in modern China was guided by social forces and was a mutual aid and cooperative financial cause spontaneously organized by farmers. Later, because of government intervention, it gradually evolved into something pushed forward by government administrative force and was ultimately alienated into a state financial tool. Along with the transformation of the leading force and the evolution of the guidance model, agricultural cooperative finance in China showed a development trend of gradually accelerating speed and expanding scale, while the quality of cooperative organizations and loans increasingly deteriorated. Through comparative reflection on the three different models of cooperative finance in modern times, and in light of the current real environment of agricultural cooperative finance reform in China, the following implications can be drawn:

First, agricultural cooperative finance is essentially an economic undertaking and should follow its objective laws of development. As a modern form of agricultural finance, agricultural cooperative finance must be rooted in the soil of agricultural economic and financial development, and its development speed and forms of existence both possess relatively strong independence that does not depend on human will. The development course of agricultural cooperative finance in modern China shows that, regardless of the purpose, artificially accelerating or influencing the development of cooperative finance will inevitably lead to a decline in the quality of cooperative finance, increased risk, difficulty in achieving sustainable development, and ultimately trigger the alienation of cooperative finance and deviation from the purpose of mutual aid and cooperative finance.

Second, the quality of agricultural cooperative organizations and social cooperative awareness are the cornerstone of the sound development of cooperative finance. The quality of cooperative management in agricultural cooperative organizations and the level of members' cooperative awareness are directly related to the risk control of cooperative loans and the effective operation of many links such as the distribution and use of cooperative loans. The development of agricultural cooperation in modern China shows that under the government-led model the risk of agricultural cooperative loans was extremely high and loans were alienated into usury. Although this was caused by many factors, its direct cause was the ineffectiveness of the cooperative organization management system. Therefore, in current agricultural cooperative finance management, attention should be paid to standardizing the management of cooperative affairs, strengthening cooperative education, and raising farmers' cooperative awareness, so as to lay the foundation for the sound development of cooperative finance.