A Revisit on China's Rural Financial System Under the Rural Revitalization Strategy


On April 18th, 2023, the first National Rural Commercial Bank Fintech Conference kicked off in Hangzhou, Zhejiang Province. Yanyun Zhang, Current vice governor of Zhejiang Province and member of the party Group of the provincial government addressed the conference. Lei Lu, Deputy Administrator of the State Administration of Foreign Exchange (SAFE) attended the conference.

At the conference, Dr. Duoguang Bei, President of the Chinese Academy of Financial Inclusion (CAFI), delivered a speech entitled "A revisit on China's rural financial system under the rural revitalization strategy", covering topics such as "how should rural commercial banks respond to the big banks serving the rural market", "the development of cooperative finance", and "the significance of fintech for rural revitalization".

Big Banks and Rural Commercial Banks Under the Rural Revitalization Strategy

First, Let's examine the role of big banks in rural revitalization. I have paid some field visits and conducted research on this topic. Now I would like to share with you some of my findings. To start with, big banks need to understand who they serve under the rural revitalization strategy. The scope of the strategy covers a much larger area than the "rural areas" in its traditional sense. Specifically, it covers all county-level areas, namely, all the areas except for a few hundred cities in China. So, big banks do not necessarily need to get into the rural areas in its traditional narrower sense like rural commercial banks do; instead, it is more important for them to undertake larger projects in the county-level areas by leveraging their unique advantages. This is my two cents for big banks. In addition, when we talk about rural revitalization, it is not just about reviving agriculture. It should encompass the revitalization of various sectors, including manufacturing, cultural sector, tourism, and even the social sector. For big banks, they have more opportunities in infrastructure construction projects, which have both public and social nature.


So, when we talk about going to the countryside, in my view, it means that Lujiazui (Shanghai) and Financial Street (Beijing) go to county-level areas, which are critical to China's urbanization drive. At this stage, urbanization does not mean to create a few more megacities. Instead, it is more important to develop county-level cities and even some big towns, so that they can also enjoy urban facilities and welfare. This is where I believe big banks can find enormous opportunities.

Second, what about rural commercial banks? As the name suggests, they are designed to be rooted in rural areas. What have they accomplished? Did they do a good job? Why are they afraid of big banks? Here, I would like to share the story of Prof. Muhammad Yunus from Bangladesh. Prof. Yunus has achieved great success with Grameen Bank, which has earned him the Nobel Peace Prize. I once asked Prof. Yunus, "Were you concerned about large commercial banks and state-owned banks expanding into the rural market in Bangladesh?" "I had no worries. We started from the bottom and have been working at the bottom all these years. We are not afraid of big players coming down as no matter how far they go, they cannot reach where we are. On the other hand, they should be concerned about us moving upward," he answered. I encourage our rural commercial banks to build such a mindset too. If you have a solid foundation down there, big banks will not be your concern. You see rural commercial banks in Zhejiang are one of the best banks in almost all counties and cities across the province. This advantage becomes particularly evident when it comes to rural areas. However, in my view, the biggest challenge for rural commercial banks is not from big banks, but rather the failure to see their positioning. Many rural commercial banks-related banks, including rural credit cooperatives and cooperative banks, focus solely on commercial goals but somehow neglect their social goals. Yet, these social goals are precisely what they can fill in the gap left by big banks. Rural commercial banks are expected to conduct businesses and engage in social programs based on their community ties. These communities involve a lot of social work, namely, the S (social) part of ESG; this is where the competitiveness of community banks lies. So, that is why we suggest that rural commercial banks in China, including cooperative banks and rural credit cooperatives, abandon the sole focus on maximizing the profit or shareholders' interests. In China's rural revitalization, the most needed rural financial institutions are the ones that are market-based and pursue both commercial and social goals. If rural commercial banks across the country can all work together towards this goal, I believe it will lead to fundamental changes in China's rural areas or the countryside at large. In my opinion, the lagging rural areas in the past few decades are mainly due to inadequate financial services, which are the result of incorrect focus and goals. So, we need to learn more from developed countries and mature market economies in terms of community finance rather than blindly following Wall Street, as there is a huge potential for community finance in China.

Next, let's talk about regulation. I once asked Prof. Yunus about the regulatory environment in which Grameen Bank operates. He shared an insightful perspective. He said that it would be challenging for the traditional regulator to effectively oversee banks with inclusive finance as their main business. This is because the traditional regulator is based on standards designed for commercial banks, which would make inclusive finance-oriented banks very difficult to survive. Banks specializing in inclusive finance require a specialized regulator. If it is not feasible, for the moment, to set up such an agency, then at least we can work on a specialized law to regulate financial institutions like rural commercial banks.

Does Cooperative Finance Have a Promising Future in China?

Let's take a closer look at cooperative finance. Many of us assume that developed countries are all about market-oriented finance, joint-stock banks, and commercial banks. However, interestingly we find that many developed countries, such as the United States, Germany, France, and the Netherlands, have a significant presence of cooperative finance in their rural areas. Why does cooperative finance still thrive today? With well-established capital markets, why do developed countries still have cooperative finance? This is a thought-provoking question. I believe everyone here is well aware of the evolution of cooperative finance in China. During our field visits in rural areas, I found that many colleagues vividly remember the transformation of cooperative finance from rural credit cooperatives to the current commercial banks during the decades of reform. We need to ask ourselves some questions: Why do rural credit cooperatives still exist in China? By the way, the provincial rural credit unions are also a kind of rural credit cooperatives. But do we really have cooperative finance? Or in other words, do they truly embody the essence of "cooperative"? To be honest, many colleagues of mine are skeptical. Is cooperative finance dying in China? We do have quite a few experts, scholars, and practitioners dedicated to promoting cooperative finance in China and some real cooperative financial institutions too. However, they are never the mainstream in China's rural revitalization. Why? We are still looking for the answer. Let me use an analogy. A tree needs good soil to grow. Likewise, cooperative, mutual-aid, and collectively-owned finance needs a nourishing social governance structure. Unfortunately, such a structure is yet to be established in China. We have to see that clearly.


How Can Digital Finance Contribute to Rural Revitalization?

Lastly, let's touch upon today's topic: how can digital finance contribute to rural revitalization? Previous speakers have all mentioned the rapid development of fintech in China over the past decade, which, I believe is a gamechanger. Today, 87% of personal consumption payments are made digitally on platforms like WeChat and Alipay. Beyond transactional convenience, the potential of digital payments extends to realms such as digital credit, digital insurance, and digital wealth management. This journey has just started and there is a lot more to unfold.

Sure, we heard a lot of controversy over tech giants in recent years. Here I would like to share my two cents. In my view, these platforms have two distinctive roles that set them apart from other institutions. Firstly, as empowerers, they team up with small and medium-sized banks, which, thus gain a better understanding of fintech and embark on digital transformation. Such collaborations are well underway. Secondly, as facilitators, they assist financial institutions in playing a bigger and better role in providing financial services. In many countries, fintech is replacing traditional banking. Take Kenya for instance, where only 30% of the population has access to banking services. However, a local Alipay-style fintech company—M-PESA manages to serve 70% of the Kenyan population. But unlike Alipay and WeChat, which actually serve their customers via banks at the back end, M-PESA and many fintech platforms in other countries have, to some extent, replaced traditional banks. While in China, interestingly, nearly all fintech platforms collaborate with banks at various levels. In other words, fintech platforms in China are rooted in and built upon traditional banking. Specifically, co-lending has greatly helped small and medium-sized banks expand their services to long-tail customers and MSEs. So, these tech platforms can help traditional banks play a bigger and better role. I am not saying that they have no problems. But new things or financial innovations are bound to create new problems. We should not lose the big picture. Therefore, I believe that fintech is still quite robust.

Moreover, for rural commercial banks, Zhejiang Province has set a good example of O2O services. In 2018, Gang Yi, Governor of the People's Bank of China (PBoC) announced that all 600,000 administrative villages in China have access to withdraw cash. However, there is another side of the story. In our survey, we found that a considerable number of such terminals in rural areas are not viable, as they have to pay significant costs. In Zhejiang, through platforms like Fengshou Stations and Comprehensive Financial Service Stations, the information systems of mobile banking, e-commerce, express delivery, and government affairs are integrated on one platform to provide comprehensive services. These explorations offer China's solutions to address the global challenge in the last mile of inclusive finance. Other countries around the world are also exploring similar methods called petty cash transactions. However, so far no country is as successful as China on this matter. This can be attributed to China's institutions and strong government support. It is precisely because of these factors that we offer O2O services with our rural commercial banking systems. If it works out in China, it can serve as a valuable reference to other developing countries.


In summary, instead of building a zero-sum game for the rural commercial banking system, we should nourish a comprehensive and complementary ecosystem that encourages differentiation and heterogeneous competitions. Competitions are essential. Even in a county, we cannot have just one dominant rural commercial bank, as lack of competition would undoubtedly incur problems over time. However, competition should be regulated by law. Why? Because when rural commercial banks give equal weight to both financial return and social good, it would be unfair to ask them to compete with other purely commercial banks. Moreover, we need to encourage differentiation. Different banks should serve different groups of customers instead of engaging in a rat race. More importantly, our regulation and policy should not encourage price competition, the flaws of which are criticized by most economics all over the world. Instead, we should encourage quality competition. It is unfair and unreasonable to ask rural commercial banks to compete with large banks that can afford a price war. To conclude, what we need is a sustainable and sound ecosystem that fosters service-oriented, differentiated, and regulated competition.