Editor’s Note:
The four decades since the inception of China reform and opening-up have witnessed a non-stop advance of innovation and evolution of poverty alleviation tools, which have played instrumental roles in the cause of eradicating poverty in different periods. This treatise is intended to give a systematic review on the historical perspective, period-specific features, and evolutionary logic of financial tools for poverty alleviation, and contribute policy recommendations on how to create long term effect and mechanism for the applications of such tools.
About the Author
Mr. Yan Xing is an Associate Researcher at China Institute of Finance and Capital Market affiliated to the China Securities Regulatory Commission, Visiting Researcher at Chinese Academy of Financial Inclusion at Renming University of China, and Visiting Researcher at the Research Center for Financial Law and Regulation at the National Institution for Finance and Development. Mr. Xing’s fields of research cover financial inclusion and financial regulation and his recent research work focuses on capital market’s role in fostering financial inclusion.
I. Introduction
Eradicating poverty, improving people’s living standard, and achieving collective prosperity are among the fundamental ideals of the socialism. Since the founding of the People’s Republic of China and particularly since the inception of the reform and opening-up, while the advance of its market economy has been ever gaining momentum, China’s achievement in poverty reduction has also been conspicuous worldwide. Along with this process, a modern financial system was also erected and macro financial control and regulation continuously enhanced, playing an increasingly instrumental role in supporting poverty alleviation and development.
In a broader sense, finance-supported poverty alleviation is an all-embracing term referring to activities and measures that financial system undertakes to combat poverty. In a narrower sense, it underscores to satisfy impoverished areas’ financial services need and support poor people’s poverty combating efforts and local economic and social advance via the using of various financial instruments. In the period of transforming economy following the reform and opening-up, finance-supported poverty alleviation is part of the government’s policy imperative of poverty relief, and in the ensuing periods, a process of constant applications and innovations of financial tools. Economic development loans for historical revolutionary base areas, ethnic minority areas, border areas, and impoverished areas and property insurance for rural areas, both launched after 1982, are among the earliest examples of tools for financial supported poverty alleviation. After 1986, a multidimensional system of subsidized lending earmarked for poverty alleviation gradually matured and became an archetype of financial-supported poverty alleviation tool. The 1990s witnessed the emergence and innovation of micro loans by both chartered financial institutions and informal finance, experimenting various personal loan models for poor farmers as individuals. Credit insurance and surety for microloans and critical illness insurance for rural residents were introduced around 2010, having ever since been instrumental in providing credit enhancement for poverty alleviation and preventing people from returning to poverty in case of health issues. Starting from 2016, securities and futures were also widely used in poverty alleviation, effectively aligning capital market and development-oriented poverty relief. In four decades, finance-supported poverty alleviation tools have grown from zero to plenty, from being weak to being strong, and from homogeneity to diversity, and a 3-D tool system has primarily taken place.
Looking back at the history of reform and opening-up, we set to summarize the historical perspective, period-specific features, and evolutionary logic of financial tools for poverty alleviation. This paper is intended to make the following contributions:
l Adopting a systematic perspective and based on the general division of financial markets, it tries to depict the evolutionary process from the three tool systems of credit, insurance, and securities and futures;
l It delivers a panoramic view on the new phenomenon of securities and futures-based poverty alleviation tools, from their introduction in the early days to their current state of innovations, performance, and drawbacks;
l Existing literatures in general fail to give a fair share of attention to the rural development and poverty alleviation and their associated applications of financial tools between 1978 and 1985. This paper tries to make up for this deficiency by conducting a thorough analysis of this period’s financial innovations related to poverty relief and their utilization, such as special subsidized loans;
l It also contributes several policy recommendations addressing several pressing issues in order to help bring about long-term effect and mechanism for the applications of financial tools for poverty alleviation.
A scrutiny of the past brings insights into the future. As the war against the poverty is nearing its climax and we need to carry forward the cause and forge ahead, it is the author’s humble wish that this paper may serve as somewhat a work of reference for further studies and policy researches.
II. The Evolution of Lending Instruments for Poverty Alleviation
Banking sector dominates China’s financial system, making bank lending the most prominent among the financial toolkit for poverty alleviation. Particularly prototypical lending instruments for poverty alleviation include special low-interest loans for poverty relief and special subsidized loans for poverty relief, both launched in the early days of the reform, microcredit, which has been ever evolving since 1990s, and relending for poverty alleviation, introduced in 2016 as a reinforcement to the combat against poverty.
1. The Evolution of Fiscal Fund for Poverty Relief and Special Low-Interest Lending for Poverty Relief
In the early days of the reform, funding for rural poverty relief and development mostly came from the “funds to assist the development in underdeveloped areas” and special low-interest loans from the financial sector. In 1980, the State Council mandated that central government treasury set aside development funds earmarked to assist the underdeveloped areas and that such funds be gradually increased to eventually reach 2% of total public spending. The Sixth Five-Year Plan, published in 1982, made further provisions on the usages of the special poverty relief fund, pledging that “RMB500 million per annum be allocated to assist economic development”. In addition to the special fund, the central treasury also pledged an annually escalating fund for extremely impoverished areas such as Hexi and Dingxi in Gansu Province and Xihaigu in Ningxia Hui Autonomous Region.
The earliest poverty alleviation lending instrument is the “economic development loans for historical revolutionary base areas, ethnical minority areas, border areas, and impoverished areas”, low-interest loans earmarked for poverty alleviation, introduced in 1983. To channel funds into and provide services in impoverish areas via lending instruments was an institutional innovation and such lending constituted a critical supplement to fiscal spending for poverty alleviation. The earliest official communique dated back to this period concerning the policy stance on financial sector’s support to poverty alleviation is The Notice on Meticulous Undertaking of the Assistance to Impoverished Households in Rural Areas, jointly published by nine cabinet agencies at the end of 1982, which requires that rural financial institutions “proactively provide lending supports to impoverish households that are bereft of funds for agricultural and sideline production”. In 1983 and 1984, the People’s Bank of China distributed RMB300 million per annum as low-interest loans for “economic development in ethnical minority areas”, specially earmarked for the development in far-flung impoverished areas throughout the nine provinces and autonomous regions in Western China. Local branches of the People’s Bank of China, Agricultural Bank of China, and rural credit cooperatives were the major fund administrators, and China Construction Bank and Industrial and Commercial Bank of China were also involved. After 1985, this lending program was re-branded as “economic development loans for historical revolutionary base areas, ethnical minority areas, border areas, and impoverished areas” (“LSBQ Loans” for short by pinyin abbreviation), increased to RMB1 billion, and expanded to all impoverished counties that were officially recognized by either the State Council or provincial authorities. For the origination of such loans, the People’s Bank of China required that “loans be corresponded to specific projects”. The projects had to be screened and reviewed and the headquarters of the People’s Bank of China would approve the loans within the preset credit lines to those qualified projects.
LSBQ Loans proved highly beneficiary in boosting the economic development and poverty reduction in impoverished areas in late 1980s. For example, between 1985 and 1988, the People’s Bank of China distributed a total of RMB72.76 million to 17 counties of the Lianshan Yi Autonomous Prefecture in Sichuan Province, creating a 97.4% economic effect ratio, adding RMB150 million to local industrial output in 1988 alone, and fostering stable and rapid economic development for the local ethnical minority groups. After 1988, the People’s Bank of China introduced poverty relief loans for county-owned enterprises in impoverished counties, which, along with the LSBQ Loans, are low-interest lending programs for poverty relief directly administered by the People’s Bank of China. By the end of 1992, these two programs had cumulatively supported 28712 projects, originated loans of RMB24.43 billion, and added RMB17.91 billion per annum to industrial output. They also helped invigorate local economic resources and create a considerable number of jobs for impoverished population.
Today the special low-interest lending programs are still in active service but their administration has changed hands several times. Being created in 1994, the Agricultural Development Bank took over the LSBQ Loans and other policy-oriented special low-interest lending programs. However, as the Bank did not have branch network in rural areas, it outsourced the disbursement and collection of the loans to the Agricultural Bank of China. In 1998, as a supplement to the reform of national grain circulation mechanism, all special lending programs, including the LSBQ Loans, were transferred to commercial banks and the Agricultural Bank of China assumed the administration of such programs. Since 2015, the Agricultural Development Bank of China has intensified its efforts in supporting the national poverty alleviation initiative and once again been put in charge of the disbursement and collection of the special lending programs.
2. Special Subsidized Loans as Part of the Development-Oriented Poverty Alleviation Strategy
Special subsidized loans for poverty alleviation is a lending instrument whose interests are subsidized by the central treasury for the specified purpose of poverty reduction, and which are mainly used to support projects that demand limited amount of investment, have short periods, and serve the basic livelihood needs, but cannot be used for catastrophe relief or projects that cannot repay the loans. In 1986, the People’s Bank of China created and financed the majority of special subsidized lending program for poverty alleviation and since then greatly expanded the program’s applicable category of projects, gradually building up a diversified toolkit of subsidized loans for poverty relief. In 1988, special subsidized loans for poverty relief in pastoral areas were added to the toolkit, tailormade for the pastoral areas in 27 counties in 6 provinces and autonomous regions including Hebei, Inner Mongolia, Sichuan, Gansu, Qinghai, and Xijiang. Subsidized lending for state-owned farms in impoverished areas was introduced in 1991, and special program for de-desertification in 1992 for the prevention of land wearing and erosion and environmental degradation in impoverished areas in Western China. RMB100 million were set aside in 1993 for the creation of a special subsidized lending program for rehabilitation, earmarked to help people with disabilities in impoverished areas. Between 1986 and 1994, subsidized lending programs for poverty relief were administered by the Agricultural Bank of China, and since then, the same as the case of LSBQ Loans, their administration has changed hands several times.
Before the restructure of the state-owned banks in late 1990s, the quality of poverty alleviation loans was apparently less than satisfactory, causing significant amount of funds to not rolled over efficiently, and thus worsening the disequilibrium between the supply and demand of fund in impoverished areas. Take Zhejiang Province for example. In 1992, the city of Wenzhou conducted a survey in five impoverished counties and found that among the RMB248.86 million of loans originated, the ratio of low-quality loans was 37.4%. Nationwide, when the subsidized poverty alleviation lending programs were transferred from the Agricultural Development Bank to Agricultural Bank of China, the NPL ratio was as high as 70%. Two major factors can be blamed for such dire result:
l First off, creditworthiness in impoverished areas is in general less than ideal. Many local government functionaries, business owners, and farmers believed that redundancy and default were “profitable” given the low interest rates of such lending programs; and
l Secondly, businesses in impoverished areas are inherently vulnerable to massive losses, severely undermining their solvency when external factors turn hostile.
The Outline for Poverty Reduction and Development in Rural China (2001-2010), published in 2001, highlights the supplemental role of poverty alleviation lending instruments in macro and micro spheres and demands that microcredit serving poor farmers be proliferated and special subsidized loans for poverty reduction be reinforced to serve industries and business located in impoverished areas. The 2008’s Notice on the Comprehensive Reform of the Administration Mechanism of Subsidized Poverty Reduction Loans brought a sea change to how such loans are to be used:
l First off, their administration duties were delegated to local authorities;
l Second, qualified lenders were expanded from Agricultural Bank of China to all commercial banks as long as they volunteer to be involved in the program and engage in fair competition; and
l Third, the target segments encompass impoverished households, businesses located in impoverished areas, and small and medium-sized infrastructure projects.
In 2004, among total lending amount originated under the subsidized lending programs, 15.6% went to households, and the remaining 84.4% included loans for agricultural industrialization, business loans, rural infrastructure, and ecosystem protection. By 2013, cumulative lending of RMB90 billion had been originated, with household loans and project loans accounting for 49.7% and 50.3%, respectively.
3. Microlending from the Informal Sector
Microcredit has been proliferating rapidly in developing economies worldwide since 1970s when Bangladesh’s Grameen Bank had proven the viability of its microcredit model, under which five borrowers were asked to co-sign loans for one another. Starting from 1993, international aid organizations and domestic NGOs joined force to introduce Grameen Bank’s microcredit model into China and experiment with not-for-profit microlending in impoverished rural communities, eventually becoming a supplement to the government-directed subsidized loans for rural poverty relief. In 1990s, amid market economy’s rapid rise, poor farmers began to explore “optimal production options” that match their own development needs, many of them could not tap into the policy-oriented lending programs due to such programs’ restrictions on the nature of the projects or the borrowers’ qualifications. Microcredit, on the other hand, did not impose cumbersome conditionalities and thus became an almost instant sensation. The ensuing years witnessed a constant evolution of informal microcredit sector.
l The Roller coaster ride of NGO-sponsored microcredit
At its peak in 2006, there were 100 microcredit NGOs across China with asset under management topping at RMB1 billion. Since then, however, due to its intrinsic deficiencies in management capabilities, legal status, governance, and funding channels, microcredit NGOs has gradually lost their growth momentum and by 2016, the survival rate of such institutions was merely 50%, and only one of all that adopted Grameen Bank model survived. Nonetheless, exceptions still can be found. Take CD Finance for example. Since launching its pilot program in 1996, this organization has constantly innovated and reinvented itself and by September 2018, undertaken microlending programs in 90000 villages throughout 21 provinces and autonomous regions, having reached 362 thousand individuals, among whom 92% are farmers, 66% women, and 23% members of ethnical minority groups.
l The meteoric rise of for-profit microcredit companies
Drawing upon broadly international experiences, in 2005, the People’s Bank of China spearheaded microcredit pilot programs in five counties, each from one of the five provinces/autonomous region of Shanxi, Sichuan, Guizhou, Inner Mongolia, and Shaanxi. A series of official decrees were jointly issued by the People’s Bank of China and the China Banking Regulatory Commission starting in 2006 regulating the establishment and operations of microcredit companies. The years between 2009 and 2013 were a golden age of breakneck growth of for-profit microcredit companies, but since 2013, a combination of various factors, particularly market competition, has forced the sector into retreat and restructure, the latter of which mostly follow two directions: one is switching from brick-and-mortar to web-based, with many microcredit companies reinvented themselves into online P2P lending platforms; and other is re-defining their target markets and gradually deviating from the sector’s original cause of serving farmers and SMEs, resulting in mission shift. In October 2014, the State Council Leading Group Office of Poverty Alleviation and Development and four other agencies jointly issued the Guiding Opinions on the Innovative Development of Microcredit for Poverty Alleviation, demanding that “financial institutions be guided to boost lending to registered impoverished households”. In 2017, five government agencies jointly issued the Notice on Fostering the Healthy Development of Microcredit for Poverty Alleviation, requiring that “microcredit for poverty alleviation be always precisely targeted at registered impoverished households”. These policies are helpful in correcting microcredit companies’ inclination of “mission shift” and nudging them to return to their original mandate of providing inclusive financial services. By the end of 2017, there were 8551 microcredit companies with total outstanding loan balance of RMB1 trillion, maintaining a trend development of slight decrease in number of player and slight increase in loan balance.
4. Microlending from Chartered Financial Institutions
Under China’s current regulatory regime, the state and financial regulatory bodies have to play the leading role in the long-term promotion of microlending. In 1997, government sponsored microcredit pilot programs were quickly launched in over 100 counties across approximately a dozen provinces and autonomous regions, having reached most impoverished areas in Central and Western China. Agricultural Bank of China and rural credit co-ops, among other legacy chartered financial institutions, gradually became major players in originating microloans. Since 1997, in several occasions, the People’s Bank of China has mandated that all rural credit cooperatives nationwide use microloans to escalate their efforts in assisting the farmers. In 1998, the Agricultural Bank of China started directly underwriting microloans, bypassing intermediaries. In 1998, in its Decisions Regarding Several Pressing Issues Concerning Agricultural and Rural Areas, the Central Committee of the Communist Party of China decrees that “best practices in microcredit and other means to channel poverty relief funds to households in need be distilled and promoted”. In 1999, the Central Committee’s Working Conference commanded that “local authorities consider microcredit as an important means to channel loans to impoverished households”. By 2000, nationwide, cumulative microloans originated for poverty alleviation had reached approximately RMB6 billion and reached over 6 million poor farming households and over 30 million individuals. In provinces where impoverished population cluster such as Shaanxi and Guizhou, cumulative amount of loans reached as high as RMB2.3 billion, and the same number in other provinces also reached approximately RMB1 billion. Starting from 2004, the central government’s annual Document No. 1 mentions, without exception, supporting the healthy and sound development of microcredit. In 2014, the government introduced a new poverty alleviation lending program for registered impoverished households, under which no collateral or guarantee is required, only benchmark rate is charged, and the central treasury subsidizes all the interests accrued. In the three years between 2015 and 2017, total cumulative amount of loans originated under this program reached RMB430 billion and over 11 million impoverished households have benefited from this program.
5. Relending for Poverty Alleviation
Relending for poverty alleviation is a quantitative monetary policy tool intended to support the development of distinctive industries and job creation in impoverished areas. In order to amplify the financial support to the combat against poverty, the central government proposed in 2015 a relending program for poverty alleviation, which was officially launched by the People’s Bank of China in the following year. Under this program, agriculture-related loans originated by four types of banking institutions in poverty-stricken areas, including rural commercial banks, rural cooperative banks, rural credit cooperatives, and village and township banks, are entitled to the support of relending. 2017 saw the rapid progress of relending for poverty alleviation in areas where impoverished population cluster or contiguous impoverished regions. A notable example is Guizhou province, which, with total outstanding balance of RMB24.06 billion, ranked number one in the country, followed by provinces of Sichuan, Henan, and Shaanxi, with total outstanding balance of RMB13.52 billion, RMB12.57 billion, and RMB10.44 billion, respectively.
The relending program effectively lowers the financing cost of businesses and farmers in destitute areas. As the interest rates of poverty alleviation microloans that are qualified for the support of relending program is lower than even the benchmark rate, an immediate effect of the relending program is across-the-board decrease of interest rates of poverty alleviation loans. For example, in April 2016, relending worth RMB300 million, the first application of the program in Heilongjiang Province, was granted to the Drbed Mongolian Autonomous County Rural Credit Cooperative to support registered impoverished households’ farming and herding activities and the interest rate was 511 bps lower than that of normal loans of equivalent terms, creating a cost saving of over RMB15 million for local impoverished households.
III. The Evolution of Insurance Instruments for Poverty Alleviation
General insurance was reintroduced to China’s domestic market in 1980 and agricultural insurance 1982. Since then, insurance instruments have been a force to reckoned with in the social and economic development in destitute areas. A diversified and extensive insurance toolkit for poverty alleviation has primarily taken shape, containing in it agricultural insurance, critical illness insurance, and credit enhancement products.
1. Agricultural Insurance for Poverty Reduction
Rural property insurance, covering two classes of properties of the farmers’, namely household properties and production assets, is an effective tool to protect farmers from returning to poverty in cases of catastrophes and also the earliest among the insurance instruments to be applied in poverty alleviation. As early as in the beginning of 1980s, to meet the needs of specialty farming, PICC introduced insurance products covering water melon, cotton, forest, poultry, and pig farming, among other farming and animal husbandry activities. In 1985, typhoon and flood wreaked havoc in massive scale on farm lands in the provinces of Liaoning, Jilin, Heilongjiang, and Shandong. In Liaoning alone, over 500 townships in 13 cities suffered damages. The insurance payout exceeded RMB200 million, significantly lowering the farmers risks of returning to poverty. In the same year, Shuanghechuan Village in Nongan County, Jilin Province was totally devastated by flood. Fortunately, among the village’s 456 households, 408 were covered by rural property insurance and collected timely indemnity of RMB400000, avoiding returning to poverty.
Agricultural insurance is of considerable value to poverty relief because crops and livestock are particular vulnerable to natural disasters. After four decades of innovation and development, corresponding to various subject matters of insurance, poverty alleviation-oriented agricultural insurance has become a catch-all to include traditional agricultural insurance, specialty farming insurance, commodity price insurance, weather index insurance, and agricultural equipment insurance. Between 1985 and 1992, thanks to the policy incentives and fiscal support of the government to PICC, agricultural insurance rapidly proliferated in China and became a positive force in poverty relief. The growth of agricultural insurance climbed up to its zenith in 1992 but also in the same year, the loss ratio reached 116%, making the business in effect a loss leader. The year 1992 also marks the official starting point of China’ socialist market economy and for agricultural business particularly, the government adopted a commercial orientation and started to phase out the policy incentives and fiscal subsidies, leading to a period of contraction of the business between 1993 and 2004. The 2003 premium income of the agricultural insurance was a lackluster RMB460 million, or approximately 55% of 1992’s RMB830 million, severely undermining the insurance’s capabilities in economic compensation and disaster relief.
Starting from 2003, to tackle the constant contraction of agricultural insurance, the government adjusted its policy stance.
The first measure is to switch to policy orientation from commercial orientation, drawing on developed economies’ experience. In 2004, the China Insurance Regulatory Commission launched pilot programs of policy-oriented agricultural insurance in nine provinces and autonomous regions.
The second measure is to establish specialized shareholding agricultural insurers such as Shanghai-based Anxin Agricultural Insurance Co., Ltd., and experiment with a hybrid model that combines fiscal subsidies and commercial operations. In 2007, a pilot program was launched in six provinces and autonomous regions, under which the central government treasury set aside RMB1 billion to subsidize agricultural insurance premiums and continued to promote the fiscal subsidy model.
The third measure is to allow the entry to agricultural insurance market foreign players such as France’s Groupama to nurture a diversified competitive market.
Thanks to a series of major reforms, from 2007 till now, the land mass and farmers covered by agricultural insurance have increased dramatically, making China the world’s second largest agricultural insurance market. In 2016 alone, agricultural insurers paid out RMB34.8 billion in indemnity in 45 million claim cases, or approximately RMB760 per case. Between 2007 and 2017, the government subsidies to agricultural grew 26% per annum on average. Total amount of subsidies reached RMB18 billion in 2017, amplified into RMB2.8 trillion worth of risk coverage, and premium income of agricultural insurance reached RMB47.77 billion, or 104 times of that of 2003. In 2018, 16 categories of agricultural insurance products are qualified for government subsidy, dwarfed by U.S.’s 130, indicating that there is still ample space for policy-oriented agricultural insurance to grow in China.
2. Critical Illness Insurance
Along with agricultural insurance, critical illness insurance is among the essential insurance instruments for poverty alleviation, protecting the insured from returning to poverty in case of medical conditions. Under the umbrella of poverty alleviation critical illness insurance are critical illness insurance for urban and rural residents, emergency medical assistance mechanism, supplemental insurance for critical illness, and commercial critical illness insurance.
Among the country’s registered impoverished population, over 40% were those who return to poverty due to medical conditions, making illness the prominent among all poverty-inducing factors, and accentuating critical illness insurance’s import in combating poverty. As early as in 2000, urban areas in parts of China had started to built critical illness insurance mechanism, supplemented by commercial health insurance. Rural areas, especially those in destitution, however, had a late start. By 2003, nationwide, 86.7% of rural population were not covered by any health insurance at all. At the end of 2002, the central government commands that farmers be encouraged to join the New Rural Cooperative Medical Insurance program, which essentially works as a social pooling for critical illness and is funded by premia paid by the insured, collective contributions, and support from the public finance. For a prolonged period, however, the New Rural Cooperative Medical Insurance program suffered several drawbacks, including lack of infrastructure, narrow scope of risk coverage, and low reimbursement ratio, making it rather rudimentary in poverty prevention.
In response to pressing issues concerning the critical illness coverage in the New Rural Cooperative Medical Insurance program, the August 2101’s Guiding Opinions on the Undertaking of Critical Illness Insurance for Urban and Rural Residents suggested that for-profit insurers be involved, critical illness insurance be introduced, and the focus of rural health insurance be shifted to critical illness insurance. In 2013, emergency medical assistance program was introduced for those in distress and in urgent need of medical care to supplement the basic health care and critical illness coverage. Some regions established supplemental insurance for critical illness, under which health care expenses can be re-reimbursed, in effect increasing the actual medical care reimbursement ratio for poor people. By 2016, critical illness insurance has been launched in 31 provinces, municipalities, and autonomous regions and covered over 1 billion urban and rural residents. Different regions adopted diverse approaches towards premium and indemnity payment. In general, co-insurance ratio for poor people is between 10% and 20%, and the maximum coverage ratio can reach as high as 90%. Take the impoverished areas in Garze Tibetan Autonomous Prefecture of Sichuan Province for example. The going coverage ratio in those areas is between 65% and 85% and between 2013 and 2017, critical illness insurance plan paid out RMB160 million in indemnity to 49500 insured parties, having played an instrumental role in the prevention of poverty induced by health conditions.
3. Banking-Insurance Collaboration and Credit Guarantee Insurance for Microloans
Poverty alleviation-oriented joint operations between banking and insurance institutions (banking-insurance collaboration), credit guarantee insurance for microloans, and agricultural insurance policy loan are among the insurance-based credit enhancement products, the major functions of which are to share among multiple parties the credit risks associated with poverty alleviation lending products, facilitate fund circulation with cost efficiency, and thus channel credit resources to impoverished areas. In general, lending institutions’ concerns on poor people’s solvency is the major reason behind their hesitance in lending to poor people. The poor people, on the other hand, due to their limited scope of productive capacities, are also concerned about their ability to repay the loan principals and interests accrued and therefore, often depress their own effective financing needs. Not only does credit guarantee insurance for microloans help improve poor farmers’ creditworthiness, but also allows insurers to join force with agricultural authorities and businesses involved to provide guidance to farmers and thus increase the efficiency of funds.
Precursors of banking-insurance collaboration first emerged in various parts of China as early as in mid-1980s. For example, Macheng City in Hubei Province launched a pilot program of “collaborations among insurer, bank, and bureau of animal husbandry” and expanded its application afterwards. In this model, PICC underwrote insurance policies to herders, bureau of animal husbandry took responsibility of livestock epidemics prevention and control, and the Agricultural Bank of China provided business loans to herders. The Bank would not have to worry about loan repayment in case of epidemics or disease outbreaks as the herders were insured. In late 1990s, Wujiang City in Jiangsu Province experimented with a “three-party collaboration among microcredit, fiscal subsidy, and insurance” model, the essence of which was a fair sharing of risks among lenders, government, and insurers. In practice, rural credit coops lent microloans to impoverished farmers for their farming and animal husbandry ventures, local government subsidized the loan interests, and two insurance companies, namely PICC and China Pacific Insurance, provided insurance coverage to the farmers’ ventures. Recent years have witnessed continuous innovations of such banking-insurance or fiscal authorities-banks-insurance companies collaboration models, which began their evolution towards credit guarantee insurance. For example, in 2015 and 2016, Hunan Province introduced in 51 impoverished counties a poverty alleviation pilot program based on fiscal authorities-banks-insurers collaboration. Under this program, codenamed “Credit Guarantee Insurance of the New Types of Agricultural Operations Entities for Targeted Poverty Alleviation”, local government establishes a special risk indemnity fund for credit guarantee insurance and encourages farmers (“new types of agricultural operations entities”) to borrow from banks against their agricultural insurance policies, eventually mobilizing bank lending to be involved in targeted poverty alleviation.
China’s first credit guarantee insurance for microloans in real sense can be traced back to 2008. While under a typical banking-insurance collaboration arrangement, only a farmer’s produces are insured, credit guarantee insurance covers a much wider array of subject matters and risks associated with farmers’ failure in repaying the loans. In 2008, Ping An Insurance introduced “government-guarantor-insurer” credit guarantee insurance for agricultural microloans, and in 2009, Ningbo City launched a “government-bank-insurance company” pilot program for urban and rural microloans. By 2016, pilot programs of credit guarantee insurance for microloans had been conducted in 26 provinces and autonomous regions across China with value insured at RMB34.86 billion, providing a powerful credit enhancement for farmers and SMEs in impoverished areas. In 2017, many impoverished counties, a notable example being Laiyuan County in Hebei Province, established finance-supported poverty alleviation platforms, which, following the principle of “government invests, market capitalizes, and insurance provides safety nets”, experiment with a new finance-supported poverty alleviation model in which credit guarantee insurance for microloans serves as a foundation, “government and banks provide double scrutiny, and guarantee center and insurance company provides double protection”.
IV. Innovations of Securities and Futures Instruments for Poverty Alleviation
Unlike the cases of lending and insurance, securities’ and futures’ involvement in poverty alleviation is still a rarity.
Since 1999, China Securities Regulatory Commission has been paired with four impoverished counties in Yunnan and Anhui but much of its effort in poverty alleviation is pro bono in nature. In 2014, poverty alleviation microloans-backed securities began trading at the Shenzhen Stock Exchange as an early example of securities and futures as a poverty reduction tool. In 2016, China Securities Regulatory Commission issued the Opinions on Capital Market’s Role in National Strategic Imperative of Combating Poverty and since then securities and futures have made great inroads into the poverty alleviation sphere.
1. Stock Offerings
Public offering or listing at a bourse is a crucial means for companies to access long-term capital and companies going public could have positive impact on a region’s economic development. In impoverished areas, however, few companies can meet the listing requirements of organized exchanges. Prohibitively high nurturing cost and time cost of waiting in the IPO queue make it next to impossible for those companies to resort to equity financing. In 2016, China Securities Regulatory Commission granted “green passage” to companies incorporated in impoverished areas, allowing them to jump queues of review and approval process when filing for IPOs, stock listings on National Equities Exchange and Quotations (NEEQ) System, bond issuance, and mergers and acquisitions, and encourages securities houses to provide matching services, significantly lowering the time cost for impoverished areas-based businesses to tap into capital market for financing.
When initially announce, the green passage provoked much controversy in the industry and academia as well. Some pundits questioned whether it was fair, effective, or legitimate. In practices, however, securities regulators do not compromise IPO requirements for preferential treatment’s sake when dealing with companies incorporated in poverty-stricken areas. For example, all IPO filings of impoverished areas-based companies are subject to on-site scrutiny, whereas normal IPOs are only randomly picked for scrutiny. In 2017, the approval rate of IPOs of impoverished areas-based companies was only 54%, compared to the approximately 80% overall approval rate. On January 24, 2017, Anhui Genuine New Materials Co., Ltd., based in Taihu, an impoverished county, successfully launched its IPO on Shanghai Stock Exchange, marking the first fast-tracked IPO case since the green passage was introduced. By the end of 2017, ten companies from impoverished counties had launched their IPOs and raised RMB 3.2 billion. Another 63 companies had initiated IPO process. 82 companies from impoverished counties listed their stocks on NEEQ, adding to the 258 impoverished counties-based companies already listed on the board, and 83 stock offerings were launched in 2017, raising RMB6.52 billion. Poverty area-based companies’ going public has a significant impact in poverty alleviation. For example, the November 2017 IPO of Panlong Pharmaceutical Group, based in Zuoshui County, Shangluo City, Shaanxi Province, on Shenzhen Stock Exchange directly led 2000 people out of poverty.
2. Poverty Alleviation Bonds
Bonds and asset-backed securities (ABS) have become important tools for projects and business based in impoverished areas to raise funds. Such projects include relocating the poor, shantytown redevelopment, rural infrastructure, and other public goods initiatives.
The majority of poverty alleviation bonds are issued by policy-oriented financial institutions, supplemented by poverty relief commercial papers, enterprise bonds, corporate bonds, and private placement bonds. By June 2018, nationwide, issuance of poverty alleviation bonds had cumulatively raised RMB291.8.
l Revenue bonds for relocating the poor. A class of enterprise bond, these debt instruments are issued to raise fund for relocating the poor in poverty-stricken areas by s companies established for this special purpose. In September 2015, the National Development and Reform Commission spearheaded a pilot program in Cangxi County, Sichuan Province to try out revenue bonds for relocating the poor and since then issuing bonds has become a viable option to fund relocating programs.
l Special financial bonds for poverty alleviation. In April and July 2017, the Agricultural Development Bank of China and China Development Bank for the first time issued special financial bonds for poverty alleviation on interbank market, raising RMB10 billion and RMB5 billion, respectively, for relocating the poor in destitute regions. Combined, by June 2018, the two policy-oriented banks had raised RMB159.04 through issuing special financial bonds for poverty alleviation. In addition, as China’s largest issuer of poverty relief bonds, the Agricultural Development Bank of China have raised RMB79.8 through designing and issuing in-depth poverty alleviation bonds, targeted poverty alleviation bonds, and common poverty alleviation bonds.
l Poverty relief commercial papers. In March 2017, the first super short-term poverty relief commercial paper and the first medium-term poverty relief note were issued on the interbank market, raising RMB200 million and RMB1 billion, respectively. The former was to finance the relocating the poor program in Qianjiang District, Municipality of Chongqing, and the latter highway construction projects for targeted poverty alleviation in poverty-stricken counties in Guizhou Province.
l Special corporate bonds for poverty alleviation. The first such bond was listed on Shanghai Stock Exchange in November 2017 and raised RMB3oo million, which directly benefited 12312 registered impoverished households in Wufeng County, Hubei Province.
3. Poverty Alleviation ABS
Projects and companies based in poverty-stricken regions, provided that their future revenue streams are reasonably stable and predictable, can resort to issuing asset-back securities (ABS) in order to capitalize on their existing resources and finance their needs. In December 2014, CD Finance issued the first batch of special nonprofit microlending asset-back plans worth RMB500 million to finance its microlending to farmers in impoverished counties, the first such offering since the China Securities Regulatory Commission issued its new rules on asset-backed securitization. In February 2017, Freshwater Origin PPP Asset-Backed Securities (ABS backed by the revenue from sewage treatment) was listed on Inter-Institutional Private Placement Securities Quotations and Services System (InterOTC). The country’s first PPP-ABS, it is a remarkable financial innovation of the securities industry to serve the economic development in border areas. In January 2018, Yaonong and Xiangshuidong hydroelectric power plants, both located in Rongshui County, Guangxi Zhuang Autonomous Region, started to design their own future revenue securitization products. In general, ABS further improves the flexibility of poverty alleviation-oriented financial tools.
4. “Insurance + Futures” for Poverty Alleviation
Agricultural commodity futures have long had high threshold to entry, hindering farmers in impoverished regions from effectively using it for hedging. Agricultural commodity price index insurance, on the other hand, has to tackle challenges such as difficulty in determining target prices and lack of catastrophe risk sharing mechanism. “Insurance + futures” (agricultural commodity futures price insurance), drawing on the experience of the United States and other developed economies, taps into futures market to hedge fluctuations in produce prices and achieved scaled-up risk sharing, effectively remedying the inherent deficiencies of legacy financial instruments. In August 2015, PICC Property and Casualty, Xinhu Futures, and relevant agribusiness companies signed the first “insurance + futures” agreement at Dalian Commodity Exchange to use futures market to hedge indemnity risks stemming from acute price volatilities. For three years from 2016 till 2018, the central government’s annual Document No. 1 without exception demanded that “pilot programs of ‘insurance + futures’ be steadily expanded’ and in the ensuing years, this new model has been making gradual inroads into agricultural sector in impoverished regions. In 2017, Dalian Commodity Exchange alone launched 32 “insurance + futures” pilot programs which cover an assemblage of produces including eggs, corn, soybean, and rubber, among others, providing effective protections for the farmers in impoverished areas to increase their income.
It has to be pinpointed that there are still drawbacks that hinder the continuous usage of “insurance + futures” instrument. So far in most of the pilot programs, farmers only have to pay 20% of the premium or don’t have to pay at all, whereas futures exchanges, local authorities, and futures companies have to make up the rest. From a cash flow perspective, given that local authorities at impoverished counties are hardly capable of subsidizing it, the sustainability of some pilot programs may be questionable. Several futures companies enter into collaborations with rural credit coops and other depository institutions to form special “insurance + futures” funds to subsidize the premia in plot programs. However, given the considerable regional differences, it probably would not be feasible to establish such funds nationwide. A more viable future option to promote the use and spread of “insurance + futures” tool would be to substitute local government subsidies with central treasury.
V. Policy Recommendations for Further Unleashing the Effects of Financial Instruments for Poverty Alleviation
As we honor the fortieth anniversary of China’s reform and opening-up, the war against poverty is also entering a critical juncture. Based on our analyses on the evolutionary paths of various poverty alleviation-oriented financial instruments and pressing issues, we would like to propose the following policy recommendations that we believe could help create long-term effect and mechanism for such financial instruments.
1. Optimize financial ecosystem and enhance the sustainability of poverty alleviation lending tools
Financial ecosystem and financial infrastructure in most of the impoverished regions are not well developed, impeding financial tools to realize their full potential. Remedies include:
l Improve credit reference system so that customer due diligence cost can be lowered, risks and expected returns of lending instruments better matched, and banks’ and microcredit companies’ intrinsic motivation to serve the cause of poverty alleviation be enhanced;
l Tolerance on non-performing loans should be reasonably lifted in impoverished areas and those who dutifully perform their functions should be exempted from liabilities so as to incentivize first-line employees’ commitment to poverty alleviation; and
l Awareness of creditworthiness in impoverished areas should be improved through the proliferation of financial knowledge. Timely coverage by mainstream media outlets on finance-supported poverty alleviation models should be encouraged to help nurture a strong atmosphere for credit-enabled poverty alleviation. At the same time, training and capacity building for local government functionaries and first-line loan managers should be reinforced in order to improve their risk awareness and abilities to use various financial instruments. Review and approval process for poverty alleviation lending should be streamlined and corresponding resolution mechanism of non-performing assets should be introduced.
2. Adopt Differential Regulatory Regimes and Activate the Potential of Securities and Futures Instruments in Poverty Alleviation
In the past two years, while working on capital market’s serving the cause of combating poverty, the author has witnessed several challenges including lack of branch network and professional staff in impoverished regions, lengthy period of nurturing before companies can go public, and market’s lukewarm reception of poverty alleviation bonds (including ABS). Differential regulatory approaches should be adopted to tackle those challenges.
l First off, securities and futures institutions should be incentivized to open more branches in a sensible manner in impoverished areas and approval to open such branches be fast-tracked;
l Secondly, considering the special characteristics of impoverished areas-based companies and projects, differential regulatory net capital requirements for securities and futures institutions operating in such areas should be adopted;
l Third, securities and futures regulators should consult with tax authorities to grant appropriate degree of tax exemption to the securities and futures institutions’ branches in impoverished areas in order to enhance their intrinsic incentive to conduct business in such areas; and
l Provided that risks are well contained, banks, insurance companies, and mutual funds should be encouraged to elevate the priority level of the purchase of bonds (including ABS) from impoverished regions so that the market’s lack of enthusiasm of such bonds can be properly addressed.
3. Improve Product Design Capability and Poverty Alleviation Insurance Instruments’ Precision and Inclusiveness
In recent decade, the policy-oriented agricultural insurance mostly adopts a “broad coverage, weak protection” approach, which bears inherent deficiencies: in cases of catastrophe or other shocks, compensation per capita is rather limited; and rural critical illness insurance is still in its infancy and its commercial sustainability has yet to be optimized. We suggest that:
l Corresponding to regional differences, deficiencies of agricultural insurance in impoverished areas should be remedied, for example, by enhancing the compensation power to local specialty industries, improving the precision and efficacy of poverty alleviation insurance, lowering by appropriate degree premia charged in impoverished areas, increasing fiscal subsidies to premia paid by registered impoverished households, in order that poor farmers’ willingness to purchase insurance be improved and the long-term effect of agricultural insurance in poverty alleviation be achieved; and
l The pooling level of critical illness insurance should be steadily increased and emphases should be put on developing upgraded pooling items so as to strengthen the insurance risk sharing capacity. Development of critical illness insurance information system should be accelerated in order to overcome the obstacles of seeking medical care or claim indemnity in different locations.
4. Build Coordination Mechanism and Information Sharing Platform to Facilitate the Collaborations and Complementarity among Different Financial Tools for Poverty Alleviation
In many regions, each of different types of financial institutions tends to fights their battle in terms of project choice, risk assessment, and fund provision, lacking coordination and collaborations among different poverty alleviation financial instruments. There is no cohesive and uniform information sharing system among public authorities, financial institutions, and regulatory bodies, nor adequate effective communications among banks, securities companies, insurance companies, and other types of financial institutions. A possible outcome of such situation is that financial institutions could not obtain detailed information concerning poor households in a timely manner, resulting in blind spots of services and repeat services, lowering the overall efficiency of financial instruments in combating poverty. We suggest that:
l A coordination mechanism between poverty relief, public treasury, central bank, financial regulators, and financial institutions, among other poverty alleviation entities, should be steadily upgraded and the development of a poverty alleviation information sharing platform accelerated;
l Single views of registered impoverished households should be accessible all financial institutions involved so that different types of financial institutions could collaborate and supplement one another while combating poverty; and
l On this basis, poverty alleviation big data should be formed to comprehensively evaluate the characteristics and demand profiles of different businesses and farmers in impoverished areas so that poverty alleviation financial instruments can be tailormade and offered in accordance to individual characteristics and by doing so, targeted poverty alleviation can be achieved.
The original Chinese-language version of this article was first published at Journal of Sichuan Normal University
