Household Credit in China: Lessons from Abroad

Bruce L. ReynoldsDepartment of Economics

University of Virginia

February 19, 2005

Prepared in fulfillment of a research grant from the Filene Research Institute, University of Wisconsin

Abstract: This paper summarizes the results of a research conference convened at Beijing University, China, in August 2004, with the financial support of the Filene Research Institute and CUNA-Mutual Inc. The conference asked: How does the consumer lending sector work in the U.S.? What are the key institutional strengths or weaknesses of the U.S. system? What has the Chinese experience with consumer credit been to date? What guidance might Chinese policy makers, academics and consumer lending practitioners gain from the U.S. experience with this sector?

Preliminary: Please do not cite or disseminate the contents of this report without written permission from the author. I owe thanks to Wake Epps and others at the University of Virginia for helpful criticisms, and to Jamie Xu for quick and accurate research assistance.

Introduction

Institutions that foster the intermediation of savings to investors are arguably the

most critical part of the infrastructure of any modern economy. They make possible the

constant increase in the capital-intensity of the production process. More and more, the

capital in question is human capital rather than physical capital. (One recent estimate

asserts that human capital accounts for 95% of the U. S. capital stock.)1 Any sort of

capital creation involves investment. Investment cannot proceed without saving. And so

the market for loanable funds is arguably the most important market in the economy.

It’s also the one most prone to market failure. Financial transactions necessarily

extend across time and space, involve mathematical computations that can be daunting,

and are prey to many other sorts of uncertainty as well – in particular, concerning the true

cost of borrowing, or the ability and willingness of the borrower to repay. Faced with

such uncertainty, rational agents wishing to borrow or to save may well draw back, and

the market for loanable funds may “fail” – that is, fall short of its full promise for raising

human welfare. Virtually every institutional aspect of financial markets – futures

markets, mortgages, securitization mechanisms, etc. – has grown up to avert this failure.

If we consider the three main types of borrowers – governments, businesses and

households – it’s immediately apparent that the potential for market failure is greatest in

the case of household credit. These transactions are on a far smaller scale than others.

Consequently, households can more easily engage in opportunistic default, knowing that

the expected return to the lender of pursuing the defaulter is unlikely to outweigh the

fixed cost of doing so. The fixed costs of each loan evaluation are also harder to spread

out when the loan amount is small. Households are more unsophisticated than businesses

or governments, and thus may themselves be wary of opportunistic behavior on the other

side of the transaction. The largest single household expenditure – on a child’s education

– cannot easily be securitized. Thus, the household credit sector is replete with the

potential for market failure. We should consequently not be surprised to find there a lush

ecosystem of institutional adaptations designed to overcome these problems, such as

consumer credit protection laws, small, non-profit credit unions, and secondary markets

(pioneered by FNMA) that enable mortgages and educational loans to be securitized. 1 Gary Becker, “Human Capital in the U.S. Economy”, in Mulligan (1997).

2

The growth of the consumer credit sector in the U.S. – the steady rise in household

credit’s share of total lending described below – reflects the impact of these institutions,

as well as of technological innovations in the provision of financial services.2

In 1998, a scant two decades after rediscovering the market mechanism, China

opened up the household credit sector. Lending to households is now growing very

rapidly, far faster than lending to business or to government. The rapid rise in Chinese

urban incomes, and China’s openness to new institutions and technologies, presage a

major future role for household credit. Will China move down the same path the U.S.

has followed in consumer credit, developing an analogous repertoire of institutions? It’s

a truism of the modernization process that technology – for example, the infotech that

today enables a credit card the globe on the Internet, buying at will – is far more

transferable than the accompanying institutional arrangements.

In August 2004, some four dozen academics, policymakers and practitioners came

together at Beijing University’s China Center for Economic Research, to review thirteen

formal papers seeking answers to these questions. This paper summarizes the conference

findings. Part 1 reviews the growth and institutional change in the United States credit

sector over the past half century. Part 2 summarizes the growth of China’s household

credit sector since 1997. Part 3 identifies suggestions for Chinese policymakers and

practitioners. In Part 4, a brief conclusion reflects on the complex interaction, in the

formation of financial institutions, between government regulators and the private sector.

2. Household Credit in the United States: Growth and

Institutional Change

This section tries to look several decades into China’s future, asking: What has

been the experience of the United States with consumer credit since World War II? Do

we see patterns that might have predictive power for China as consumer credit expands

there?

2 This report uses consumer credit and household credit interchangeably. Conference participants noted more than once that “consumer credit” suggests credit for the purchase of consumption goods. Since household borrowing is typically for investment activity, many participants preferred to use the term “household credit”.

3

Broadly speaking, over the last fifty years the U.S. experienced steady capital

deepening. Business, farming, government and households all made increasing use of

credit markets. The share of credit flowing to households steadily rose. Today,

households are the primary borrowers in U.S. credit markets, borrowing more than either

government or business. Figures 2.1-2.6 tell this story in more detail.

Source: GDP: U.S. Department of Commerce – Bureau of Economic Analysis ( www.bea.gov/ )Credit: FRB Statistical Release ( www.federalreserve.gov/releases/z1/20040610/data.htm )

Fig. 2.1 shows the rapid rise of total credit outstanding, relative to the slower

growth in GDP, over this half century. This long-term upward trend reflects the

increasing capital-intensity of the technology through which all sectors of the economy –

government, businesses and households – produce goods and services. The underlying

stock of government infrastructure, of business capital stock, and of households’

productive capital (especially human capital) is many times larger than the stock of credit

shown here, since a portion is financed through borrowing. But one conjectures that the

financed share is at least a constant or more likely a rising portion of the whole.

China in the next fifty years can anticipate that this sort of financial deepening

will proceed more rapidly than in the U.S. case. As a latecomer to industrialization,

China’s GDP growth rate will be significantly higher for at least several decades than the

U.S. growth rate in the last fifty years. Furthermore, the financial services technologies

4

and institutions that slowly emerged in the U.S., and that made financial deepening

possible, are already available for appropriate adoption and adaptation in China. China’s

financial system today is arguably somewhere between the U.S. in 1955 and the U.S. in

1985. The data underlying Fig. 2.1 show that total credit in the United States grew at a

6% annual rate in the twenty years beginning 1955, and at 4.5% in the twenty years

beginning 1985. This U.S. growth experience is a minimum estimate of the growth rate

of China’s overall credit sector. Factoring in China’s higher GDP growth rate, I predict a

growth rate for credit of between 9 and 13% per year.

Within this stream of borrowing, the role of consumer credit – borrowing by

households – is increasingly important, as Fig. 2.2 shows. In the early 1950s,

government accounted for more than half of all borrowing, followed by business and

household borrowing. Farms, a minor part of the economy even then, essentially

disappear from the picture by the end of the century.

Over time, the role of government in credit markets diminished dramatically.

Even in the Reagan era of heavy government borrowing, the business and household

sectors held their own. By the end of the century, households had emerged as the

dominant borrowers in the marketplace, accounting for more than 40% of all credit

outstanding.

5

Source: Federal Reserve Statistical Release: www.federalreserve.gov/Flow of Funds Accounts of the United States - Annual Flows and Outstandings: Table L.1 Credit Market Debt Outstanding (1)

What accounts for this trend? Did household demand for credit rise quickly over

time, more quickly than demand in other sectors? Or did credit markets over time

become increasingly willing and able to lend to households? The second reason – a shift

in the credit supply to households - seems the more likely. We know that during this

period, the ability of lenders to obtain information on the prior borrowing and repayment

behavior of households increased dramatically, as did their ability to track households

and enforce repayment of debt. Households, in turn, became increasingly aware that

prompt, regular repayment of debt would ensure a strong credit rating, and hence lower

borrowing costs.

Another important change was the development of secondary markets in

securitized debt. In the early decades of the century, because the same bank that

originated a home mortgage carried that mortgage to term, banks required households to

refinance the mortgage every ten years. In the 1930s, due to widespread bank failure,

millions of Americans lost their homes. The Roosevelt Administration responded to this

problem by creating a secondary market, through the Federal National Mortgage

Association (FNMA), within which banks could sell mortgages; the mortgages could then

be bundled into assets with much lower risk, and sold as bonds. Today, the same

approach – the creation of pools of securitized assets – has also dramatically increased

lending for automobile and educational and credit card debt. This pooling and bundling

approach helped to overcome a fundamental obstacle to household borrowing: the fact

that millions of small households are intrinsically more risky (and hence less appealing)

borrowers than thousands of large businesses, or hundreds of municipal, state and federal

governments. As Part 4 notes, in China these secondary markets are still absent.

More generally, this half century tells a dramatic story of the shift between the

state sector and the private sector. The state began the period borrowing more than half

the available credit. By the end of the century, private sector borrowing was more than

6

three quarters of the total, perhaps because private households and businesses were

increasingly credit-worthy. China will experience a similar sort of evolution over the

next fifty years or less.

Fig. 2.2 shows that in the United States, farms in 1955 already accounted for a

negligible share of total borrowing, and by 2004 their share was essentially zero. We do

not expect that this is any sort of prediction for China’s near-term future. On the

contrary, the three conference participants who addressed credit provision to rural and

farm households in China uniformly reported that these borrowers are woefully

underserved in China, particularly since the withdrawal of the Agricultural Bank of China

from rural areas.3 Indeed, the Chinese consumer credit sector described in the next

section is essentially urban consumer credit. In a China where more than 20% of GDP is

still agricultural, and more than 50% of households live in rural areas, it would be

growth-enhancing to devote a larger share of formal lending to rural households, and this

would also mitigate the startling rise in rural-urban income inequality since 1990.

Figure 2.3 shows consumer credit as a percentage of disposable income. This

statistic is sometimes used to assert that households are “sinking deeply into debt” – that

they are borrowing too much. And indeed, Figure 2.3 shows U.S. households borrowing

more and more over time, relative to their incomes. This trend persists despite the fact

that the figure excludes home mortgages; including mortgages would accentuate the

trend. Does this indicate that U.S. households in 2003 faced a debt crisis?

3 See papers by Minggao Shen, Enjiang Cheng, and Mingquan Liu et al.

7

Source:Disposable Personal Income: U.S. Department of Commerce - Bureau of Economic Analysis ( http://www.bea.gov/ ) National Income and Product Accounts Table, Table 2.1 Personal Income and Its Disposition; [Billions of dollars] Seasonally adjusted at annual ratesConsumer Credit Outstanding: Federal Reserve Statistical Release ( http://www.federalreserve.gov/ )

It seems implausible that a trend which persists for more than a half century is a

sign of impending crisis. To gauge that question, the more useful statistics are default

rates, measures of household net worth, and household attitude surveys. Rather, the

rising trend in Fig. 15 simply tells us that as incomes rose, as new technologies emerged

and as credit markets were increasingly open to household borrowers, a rising proportion

of U.S. consumption came to be produced by households, in the form of a flow of

productive services from their growing stock of housing, automobiles, TVs, VCRs,

appliances and human capital. Increasingly this household capital is financed by

borrowing.

What growth rate might the Chinese consumer credit sector experience over the

next two decades? Based on the above reasoning, and extrapolating from the data in

Figs. 2.1 and 2.3, it seems plausible to expect an annual growth rate over that time period

of between 12 and 18% - higher at first, and declining as China’s economy catches up

with the industrialized world.4

4 This is consistent with the prediction in the conference paper by Reynolds, Tu and Wang, which projects near-term growth (2004 and 2008) at 20% per year or higher.

8

Fig. 2.3: Consumer Credit Outstanding as a % of Disposable Personal Income,1945-2003

0

5

10

15

20

25

30

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

(%)

Fig. 2.4 subdivides consumer credit into four major categories, looking at the

flows that finance the purchase of these separate forms of household capital stock. To

give a closer view of the other three components, Fig. 2.5 omits home mortgages. Home

mortgages are over 70% of the total, and that share is still steadily rising, reflecting a rise

in the individual home ownership rate from 44% in 1945 to over 67% in 2001 (CUNA-

Mutual p.6).

Source: Credit Card: Federal Reserve Statistical Release: http://www.federalreserve.gov/Table G.19 Consumer Credit Outstanding – Revolving. Mortgage Credit: GPO Access: http://www.gpoaccess.gov/ TABLE B–75.—Mortgage debt outstanding by type of property and of financing, 1945–2003 Nonfarm Properties: 1- to 4-family houses. Automobile Credit: Federal Reserve Bank of St. Louis - Economic Research: http://research.stlouisfed.org/ Economic Data-FREDII: Commercial Credit: Total Automobile Credit Outstanding. Education Loans: U.S. Department of Education - Financial Aid Professionals: http://www.ed.gov/ OPE Program Data: Federal Student Loans Programs: Table 5 Federal Family Education Loan (FFEL) program annual and cumulative commitments, by loan program type: FY66-FY00. Educational loans for 1960-89 are interpolated from incomplete data. Totals sum to less than 100% due to omitted categories (such as department store credit and home improvement loans).

9

Fig. 2.4: Components of Consumer Credit, 1968-1999

0

10

20

30

40

50

60

70

80

1965 1970 1975 1980 1985 1990 1995 2000

(%)

Credit Card

Mortgage Credit

Automobile Credit

Education Loans

Source: Figure 2.4

When we look in detail at the three smaller parts of household credit, we see that

automobile loans are a relatively constant share, while educational loans rise steadily but

modestly, and credit card borrowing has skyrocketed in the last thirty years. Household

credit as a whole has experienced phenomenal growth in the past fifty years. This is

largely because over time, ways have been found to extend credit for more and more

purposes, and to more and more households: in 1956, only half of all households used

consumer credit, where today more than 75% do (Luo & Sun p.4).

What made this expansion possible? In part, this is a technology story, in particular

the technology of generating credit ratings. Three conference papers (Niu, Shen and An)

focused heavily on the increasing sophistication of U.S. credit scoring methods. The

growing ability of infotech to collect, store, transmit and analyze payment histories, and

the increasing sophistication of statistical models of risk, have fed off each other, until

today most decisions on the extension of consumer credit are made automatically, by

computer, based on nationally standardized data sets and credit scoring models.

The other part of the story, especially for credit card debt, has been the interaction

of the credit card industry and government in developing regulatory institutions. For

example, by 1970, it was increasingly clear that the segmentation of the banking system

embodied in the Glass-Steagall Banking Act of 1933 needed to be reformed. But the

10

Fig. 2.5: Components of Consumer Credit, 1968-1999

0

1

2

3

4

5

6

7

8

9

10

1965 1970 1975 1980 1985 1990 1995 2000

(%)

Credit Card

Automobile Credit

Education Loans

vested interests established by that act – principally the small, local banks – fought a

tenacious rear-guard action in the Congress. In this setting, in the years immediately

following 1970, the credit card sector emerged as a way around the regulators: a way to

have coast-to-coast banking despite Glass-Steagall. To that extent, one can fairly say that

the technological innovation of the credit card, exploited by the private sector, drove

government to reform the banking industry more quickly than might otherwise have been

the case (Luo & Sun Section III).

The story of consumer credit in the United States, then, is a story of changes in

technology, in attitudes, in the nature of U.S. household production, and in institutional

and regulatory practices, all of which have had the effect of dramatically shifting the flow

of credit away from government and toward the private sector. To label the household

portion of this flow “consumer credit” risks missing the fact that investment decisions –

to purchase a house, a car, a VCR, or an education – are being made. The decision-

makers are individual households, rather than government or business. To the extent that

those decisions are based on particular, widely dispersed information that is unavailable

above the household level, we believe that investment funds are being allocated more

efficiently today as a result of the swing toward consumer credit. For example, housing

built in for the home ownership market is more likely to mirror the preferences of the

buyer than housing for the rental market. Education purchased through loans, as opposed

to education freely obtained (because government is doing the educational borrowing), is

more likely to be aimed at increasing marketable human capital with which to service the

loan.

As the final stop on this tour of the U.S. experience, Fig. 2.6 shows the seven

institutional ways in which credit is extended to U. S. households. As we can see,

nonfinancial businesses’ share declined steadily after WWII, as department store

consumer financing was displaced by commercial bank and credit card lending. Savings

institutions never loom large, and since the end of the Glass-Steagall era their share is

withering. Yet amid all this turmoil, credit unions and finance companies have

maintained a consistent market share vis-à-vis commercial banks. Underlying their their

resilience is a lesson for Chinese policymakers.

11

Fig. 2.6: Major Holders of Consumer Credit Outstanding, 1943-2004

0

10

20

30

40

50

60

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

(%)

Finance companies

Credit unions

Federal Government and Sallie Mae

Savings institutions

Nonfinancial business

Pools of securitized assets

Commercial banks

Source: Federal Reserve Statistical Release – G. 19 Consumer Credithttp://www.federalreserve.gov/releases/g19/hist/cc_hist_mh.html

We believe5 that these three institutional forms occupy three distinct market

niches, representing an of institutional response to potential market failure. Some

households may be particularly wary of borrowing because they recognize that the lender

is more sophisticated, and more capable of calculating the true price paid by the

borrower, than they are. These households will naturally gravitate to the credit union

sector. There, because the institution is non-profit and the membership is homogeneous,

they may rightfully expect that they’re protected from opportunistic behavior by the

lender. Meanwhile, the credit union lenders enjoy advantages that offset the extra costs

of their smaller scale of operation. For example, loan delinquencies at commercial banks

are reported to be 34% higher (1.14% vs. .89%) than at credit unions (CUNA-Mutual p .

7). This is very likely due to better information, monitoring, and incentives in credit

union lending.

Similarly, some households are intrinsically worse credit risks than others:

disorganized, irresponsible, and slow to repay. Finance companies, because they are

small-scale and local, can employ a much more intensive and effective monitoring

technology than a commercial bank would use. The higher costs are passed along in the

higher interest rate. The useful lesson from all of this, for China, is that one size does not

fit all household borrowers. On the contrary, government should anticipate that if the

5 Much of what follows flows from helpful conversations with William Kelly.

12

regulatory environment is open to entry, and innovation is allowed or even encouraged, a

usefully wide range of institutional responses will emerge.

Some Chinese observers at the conference wondered whether the different U.S.

institutional forms were specialized in financing different product types – that is, whether

the divisions in Fig. 2.6 reflect the divisions in Fig. 2.5. Such specialization doesn’t seem

a prominent explanation. For example, consumer lending by U.S. credit unions in 2001

spread over automobile loans (40%), mortgages and home equity loans (40%) and

unsecured and other loans (20%) (CUNA-Mutual 8).

On balance, the conference participants viewed the U.S. experience with

household credit as quite successful.6 We now turn to China’s experience.

3. Development of consumer credit in China after 1997

Before the Asian Financial Crisis broke out in 1997, consumer credit in China was

experimental: slow growing, small scale, with few product types (only mortgage loans,

auto loans and student loans). The crisis generated large macroeconomic shocks for

China. Exports sharply decreased, consumption and investment demand declined, and

unemployment increased. In response, the Chinese government carried out macro policies

targeted at increasing domestic demand, including supporting and encouraging

commercial banks in the consumer credit business. Since then, consumer credit has been

on the agenda of the commercial banks. Its development has had the following

characteristics.

First, growth has been rapid, and the share of consumer loans in total bank lending

has risen rapidly. The balance of consumer credit in China increased from RMB 17.2

billion in 1998 to RMB 1,573 billion up to the end of 2003(Figure 3.1), increasing by 90

times in five years. The average annual rate of growth was 112%. The growth rate was

326% in the first year, 1998. As the total balance grew, these growth rates gradually

slowed down, decreasing to only 47% in 2003.7

6 Note, though, Nicola Jensch’s paper, which favors European privacy laws over U.S. laws.7 Cheng Jiansheng and Liu Xiangyun, Developing consumer credit and promoting consumption , 2003.7, Research Bureau of People’s Bank of China

13

With such rapid growth, the share of consumer credit in banks’ loan portfolios rose

steadily, from only 0.85% in 1998 to 9.9% in 2003.8 (Figure 3.2) The Construction Bank

of China, the first one to develop consumer credit, had the highest share, 17.1%. In the

Industrial and Commercial Bank of China, whose absolute balance of consumer credit

was the largest, the share in the bank’s portfolio was 12.2%. Consumer credit has now

become an important market for Chinese commercial banks. Each bank has subdivided

their original credit operations, setting up retail divisions, individual financing divisions,

mortgage loan divisions, and bank card centers especially for consumer credit.

Source: People’s Bank of China Annual Reports

Table 3.1: Share of Consumer Loans in Total Bank Loans (1997-2003)

Year %

1997 0.231998 0.851999 1.502000 4.312001 6.222002 8.132003 9.90

Source: People’s Bank of China Annual Reports

8 Data in 1997-2002 have the same source as 1; data in 2003 come from “A report on the trend of consumable good market in 2004”, Commercial Ministry, www.xinhuanet.com, 2004.3

14

Second, the full range of consumer credit loans has emerged, including lending

for mortgages, education, large durable goods，home improvement, autos, travels,

healthcare, real estate deposits and composite consumer loans.9 Fig. 3.2 illustrates this

for 2003.

Source: PBOC data

Individual mortgage loans occupy the biggest share of consumer credit, averaging

75% of the total over 1998-2003. The total for mortgage loans, RMB 1,178 billion at the

end of 2003, had increased 42% over 2002 and 28-fold over 1998, and risen to over 6%

of GDP. Because the term of mortgage loans is long, and also because individual

willingness to repay is stronger than for firms, the non-performing loan (NPL) ratio is

very low, only 0.5%.10 There is no doubt that this delights the state-owned commercial

banks (SOCBs), which are heavily burdened with non-performing loans. Indeed,

individual mortgage loans have become their most important and most hotly contested

product. Of the four SOCBs’ RMB 1,236 billion balance of consumer credit in 2003, the

9 Composite personal loan is an unsecured loan where the purpose of the loan is not specified to the lender. Such loans were widely used to fund speculation, and consequently were abolished in 2001, although some outstanding balances evidently remain on the books.10 Data source: Statistical report of People’s Bank of China

15

share occupied by mortgage loans had risen to 79%. 11 According to a Chinese

government projection, by the end of 2005 housing mortgage lending will occupy 15% of

total bank lending (CUNA-Mutual p. 11).

Auto loans come second. These loans began in the 1990s. The financial

institutions that extend auto loan include commercial banks, the finance companies of

auto conglomerates, and auto finance companies. Since China’s entrance into the WTO,

automobile sales have risen rapidly, and projections are that China will soon be the

world’s fourth largest automobile producer. But as of early 2003, only 10 to 20% of that

spending was supported by loans, compared with 70% in Europe and North America12.

Still, the automobile market has been effectively stimulated by credit availability.13 The

balance of auto loans was RMB 43.6 billion in China in 2001, increasing to RMB 94.5

billion at the end of 2002, and roughly doubled in 2003 to RMB 180 billion.

Credit card credit lending is relatively small, but with a huge growth potential.

The total number of bank cards has grown rapidly, from 8.4 million in 1994 to 496

million in 2002, and total transaction volume increased from RMB 520 billion to RMB

11,560 billion in that time.14 But only 1.6% of this transaction volume in 2002 was

consumer credit, and virtually none of that was revolving credit.15 Bank cards were being

used mainly as electronic currency. Of these bank cards, 95.8% in 2002 were debit cards,

capable of transferring funds and making deposits and withdrawals, but with no credit

element. Even regarding the remaining 4.2%, or 25.9 million, with which credit

purchases could be made, the great majority of these required that a countervailing

balance be maintained on deposit in the bank.16 This slow growth is partly due to

government concerns about the risks of financial instability such as South Korea

experienced when its stock of credit card debt proved to be non-performing. Partly this

reflects the very high rate of household savings, most of which ends up in low-interest

SOCB accounts. Households that have large bank balances in savings accounts would be

foolish to pay high interest on credit card debt rather than using a debit card instead.

11 People’s Bank of China: A investigation report on individual consumer credit market12 South China Morning Post April 23, 2003.13 Su Qin, Problems and Solutions of auto loan market, Automobile Industry Research, 2004.414 Data source: “The three trends of the development of bank cards in China in 2004”, www.chinaunionpay.com15 See footnote 7.16 Data source: calculated from “A quarterly report on the situation of the development of China UnionPay” of the third quarter in 2003

16

During 2003, true credit card lending grew more rapidly. There were about 4.8

million credit cards in use at the end of that year, an increase of 3.25 million over 2002

(or a growth rate of 209%). The average annual transactions amount per card was about

RMB 7,400, far more than that of debit cards.17

The share of student loans is small and has developed slowly. The Chinese

government offers two sorts of student loans: a market interest rate loan (introduced in

the late 1980s) and a means-tested, interest-subsidized loan (beginning in 1999). From

1999 to 2001, the cumulative amount of subsidized student loans was RMB 1.44 billion,

which supported 379 thousand students, with the help of further funding from colleges

and universities. Unsubsidized loans added RMB 1.9 billion.18 By February 2004, these

numbers had risen to RMB 5.2 billion and RMB 2 billion respectively.19 Table 3.2

summarizes this information on the structure of product types in consumer credit.

Table 3.2 The Structure of Consumer Credit, 2001-2003(%)

Year type Mortgage loan Auto loan Student loan Other composite loan

2001 82.95 6.23 0.40 10.42

2002 77.4 10.78 0.50 11.32

2003 74.87 11.44 0. 42 13.27

Sources: 2001-2002: Cheng JianSheng and Liu Xiangyun, Developing consumer credit and promoting consumption, 2003.7, Research Bureau of People’s Bank of China. Education loans for 2003 is calculated by subtracting the additions to educational loans in January and February, 2004 from the stock at the end of February, 2004.

17 Data source: “The three trends of the development of bank cards in China in 2004”, www.chinaunionpay.com18 Monetary Policy Office of People’s Bank of China, A report on the development of consumer credit in China, 2002.319 Statistical Data form the headquarters of People’s Bank of China, Financial Market Office of People’s Bank of China

17

In Section 2, we saw that in the United States, consumer credit is provided by a

range of financial institutions. In China, by contrast, consumer credit is monopolized by

the four large state-owned commercial banks (SOCBs). Through the end of 2002, they

accounted for 85.6% of the total, and 81% of auto loans as of November 2003.20,21 The

Bank of China has been particularly successful at expanding its market share, extending

RMB 94B in mortgage loans in 2003, a 36% growth over 2002.22

The two other delivery vehicles for consumer lending, credit unions and finance

companies, which are so persistent in the U.S. case, are basically absent in China. The

Chinese analogue of the U.S. finance company sector is the gray-market lending sector,

described in the conference paper on informal mutual finance associations (Mingquan

Liu et al). But this sector is small, and barely tolerated by the government. Indeed, in

one of the strongest exchanges at our conference between “officials” and “activists”, a

representative of the Chinese Bank Regulatory Commission (CBRC) insisted vehemently

that any lender that was not regulated by the government was “illegal”.

As for credit unions, the Rural Credit Cooperatives (RCCs) would appear to be the

Chinese analogue of U.S. credit unions. But the coincidence of names is deceptive.

RCCs were genuinely cooperative institutions when first established, before World War

II. But the RCCs in China have been completely absorbed into the government banking

system. Indeed, at one point in the 1990s they were explicitly merged into the

Agricultural Bank, before being moved in 1996 to the PBOC, and from there to the

CBRC in 2001.

20 Cheng Jiansheng and Liu Xiangyun, Developing consumer credit and promoting consumption, Monetary Policy Bureau of People’s Bank of China, 2003.721 Commercial banks will fade out from automobile sector, Shanghai Securities News, 2004.1.522 He Ping: Bank of China has extended nearly 100 billion loans, Beijing Xianzai Commercial News

18

Enjiang Cheng knows the Chinese RCC sector intimately. His paper for the

conference describes the needs of the sector, its limited potential, and the frequent

reforms of the RCC system in the past ten years. He concludes that the RCC reforms are

“crippled by fundamental problems and contradictions”.

The sad state of the RCC sector also means that relative to urban areas, the rural

areas, where more than half the population lives, are starved for consumer credit. A 2003

survey in Shandong showed that 70% of the peasants there were eager to access

consumer credit.23 A county-based survey showed that more than 90% of consumer credit

goes to towns and less than 10% to the countryside. The only promising, market-oriented

and potentially profitable part of the RCC sector is the urban RCCs in large cities such as

Beijing, Shanghai and Shenzhen (see CUNA-Mutual p. 15-18).

3. Suggestions for Policymakers and Practitioners

A. Regional and urban-rural inequality

Development of consumer credit in China is regionally uneven. It is growing

quickly in the developed coastal areas, and slowly in the central and western areas.

Nationally in 2001, consumer lending as a percentage of all loans was 6.5%. But

the four heavily populated central provinces of Hubei, Hunan, Hebei and Henan

averaged little more than 2%, while the average was nearly 10% in the rapidly

growing and highly commercialized provinces of Guangdong, Fujian and Zhejiang

and the cities of Beijing and Shanghai (He p. 16). These five regions, with 14.7% of

China’s population, were absorbing 61% of consumer credit (RMB 192 billion) as

23 Data source: Project team of the subbranch of People’s Bank of China in Yishui County, Shandong province, A simple anal ysis of the development space of rural consumer credit market, China Rural Credit Cooperatives, 2003.2

19

of November 2000.24 Some types of credit are simply unavailable in some

regions. For example, student lending has still not been launched in some western

areas, so students there cannot get student loans.

One major reason for this state of affairs is that government regulations restrict

mortgage and other lending to the region where the financial institution is located.

To some extent this reflects an implicit market-sharing agreement among the

SOCBs. To some extent, provincial protectionism is to blame. Chinese regulators

could reduce regional inequality if they broke down those barriers.

The problem of rural access to credit is less tractable. This inequality stems in part from

the problems of rural poverty in general. Banks can’t easily be induced to lend to

households with low incomes, low education, and little or no credit history. But part of

the problem is also institutional: the rural credit cooperative (RCC) sector.

Consider these institutions. There are 50,000 of them. Each absorbs farm savings

within its district, and is prohibited from lending outside its district. RCCs have no real

owners: the directors and managers have no real stake, and the link to supervision from

above has shifted five times since 1996: from the ABC to the Inter-ministry Rural

Financial Reform Group, to the PBOC, to the CBRC, to the RCC Federation. The moral

hazard problems here are far more severe than with the SOCBs, because of the small

scale, diffuse supervision, and a clear policy commitment to protect the savings of poor

farm households. Thus one first step in providing rural credit would be to create

institutions that were actually expected to conserve assets carefully and lend them wisely.

This would require that they be permitted to make a profit, as RCCs today are not.

One study estimates that given their high risks and transactions costs, RCCs need to

charge a 12-15% interest rate to break even. Currently RCC rates are capped at 10%

(Cheng and Xu).

B. Information Problems

24 People’s Bank of China: A report on the development of consumer credit, 2001

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China has no nationwide consumer credit reporting system. In June 1999, a credit

reporting agency (Shanghai Credit Information Services) was established experimentally

by the Shanghai PBOC branch. It now reports on five million households, with

comprehensive access to their payment histories. In Beijing, similar experimentation

started in 2002. Shenzhen has written regulations permitting the sharing of payment

records (Jentszch). But aside from Shanghai, these steps have been rather slow and

halting. The lack of a uniform nationwide consumer credit rating system clearly limits

the household credit sector.

The government understands this, and in 2003 the PBOC instructed the four SOCBs

to construct a national system “within two years. A new 17-digit individual ID number is

now in use. But we expect that progress in this area will be slow, in part because of a

widespread view among Chinese that lenders should not share payment histories with

others. Thus up to the present, information in the hands of employers and vendors on

individuals’ payment behavior cannot be shared with banks.

Consumers’ very understanding of the nature and importance of credit is itself weak.

Loan applicants regularly falsify their income levels. Some borrowers, although perfectly

able to repay, deliberately default. In sum, there is severe information asymmetry and

consequent risk among banks, consumers and products providers. The conference

presenters included specialists with much to teach China about the technologies and

methodologies for generating credit scores (papers by An, Shen and Niu). As this

institutional and regulatory vacuum became clear to us, those papers seemed very

premature.

C. Product diversity and transaction costs

Consumer credit in China consists mainly of residential and auto loans. Within

these two categories, almost all lenders adopt a common installment structure, without

the variations that might accommodate differing income levels or preferences.

China’s banking sector traditionally engaged in wholesale loans to enterprises. The

consumer credit business is still a novelty to them. Banks thus lack management

experience and specialists in this area, which deals with thousands upon thousands of

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families. This makes banks hypersensitive to risks when extending consumer loans.

They become strict about qualifications and procedures, requiring collateral, assessments

and insurance for each and every loan, making loan application procedures complex and

burdensome. For example, to get durable goods credit, banks now require applicants to

provide a residence as collateral, or deposit receipts or T-bonds as collateral security, or a

firm acceptable to the bank that will act as guarantor. The ”Regulation on Individual

Mortgage Loans” prescribes that when used as collateral, a house must carry additional

insurance. In addition, mortgage loans face numerous taxes: 3-6% of the purchase price

as a credit investigation fee; 11% as a house assessment and registration fee; 2-9% as a

comprehensive security fee (for borrowers without a third party guarantor); a loan

contract notarization fee; and so on and on.25

D. The secondary market in securitized assets

Consumer credit is characterized by small scale, high costs and great risk. Credit

risk is especially high for residential and auto loans in China. The fluctuation and

instability of personal incomes in some sectors and regions is severe, increasing default

risk for mortgage loans. In some developed countries, commercial banks sell consumer

credit packaged or securitized to cash high-risk and low-liquidity assets in a secondary

market, which properly matches assets with debts and risks with returns. But thus far

there is no secondary market for consumer credit instruments. Banks can control risks

only by collateral or through third party guarantee.

These two methods both have obvious defects. First, the liquidity of collateral is

low. Provision 53 in the “Assurance Act of the People’s Republic of China” says that if a

creditor is not repaid when the obligation becomes due, he can negotiate with the

mortgager to liquidate the collateral through sale or auction it to repay, and that if

negotiation fails, the creditor can appeal to the courts. But in practice, because of this and

that reason, banks find it hard to reach agreement with mortgage holders, and the courts

always give priority to the problem of social stability when passing judgment.

Regulations on consumer credit are few, and vague. For example, when borrowers

25 An in-depth analysis of the costs of mortgage loan, People’s Daily, 2001.11.28

22

default, regulations offer little guidance on how to deal with particular problems such as

converting collateral and collateral security to compensation for interest and principal. It

is difficult for banks to even begin the process with no legal support. Even when banks

get permission to dispose of collateral, it is difficult to liquidate it collateral for the full

value when collateral trading is still not marketized, regulated and institutionalized.

Banks management costs are high.

Secondly, third party guarantees cannot fully compensate for consumer credit losses.

Banks usually require an insurance company to provide coverage when the banks extend

residential or auto loans. But there are some circumstances under which the insurance

companies will not compensate for losses caused by borrowers’ default, and in any event

they seldom compensate at full value. Particularly because of the severe moral hazard to

policy-holders, and the widespread fraud in automobile insurance claims in recent years,

insurance companies are mostly unwilling to offer automobile insurance.

E. Privacy legislation26

As noted above, surveys in China regularly reveal a widespread public view that

personal financial information should not be revealed to lenders, and consequently a

public confidence that a bad payment history will not restrict their ability to borrow. One

institutional response to this situation in other countries has been the passage of privacy

legislation that spells out clearly what sorts of personal information can be transferred or

sold to a third party, under what circumstances.

No such systematic law has yet been passed in China. There exists only an

incoherent and scattered legal basis for privacy. Constitutional clauses (Articles 37-40)

protect privacy of various sorts, and China’s Supreme Court has several times stipulated

that a privacy right exists, but it has never squarely defined that concept. Administrative

regulation of the banking industry protects information about deposits. But nowhere does

civil or administrative law address the question: where does this vaguely defined right to

privacy end, and where does the public interest in free information flow begin?

26 This section follows the paper by Jentszch

23

Aspects of China’s culture, history and legal tradition stand in the way of

developing such a law. It’s not easy to find language in Chinese that captures the idea of

“personal information that appropriately remains secret”, as distinct from “shameful

personal information that only the individual would wish to hide”. This combines with a

legal tradition within which the county magistrate, the local arm of an all-powerful

emperor, routinely used torture to extract information from any and all parties to a court

dispute. This traditional and cultural bias toward very low privacy protection readily

supported the invasive institutions of the Maoist era - for example, the ubiquitous

neighborhood committees, “to whom all desires were known and from whom no secrets

were hidden”.

It’s entirely understandable, then, that this generation of Chinese, clear privacy

legislation seems to be neither a routine law to write, nor a reliable bulwark once written.

Still, until such legislation emerges, spelling out what information can be transmitted and

what cannot, banks and other credit providers (aside from a few experiments such as

Shanghai) have been understandably loathe to test the limits. China’s interest in a range

of international treaties since 1997 signals an intention to work through these issues – for

example, it has signed the International Covenants on Economic, Social and Cultural

Rights, and on Civil and Political Rights, with implications for privacy issues.

In these and other areas, the non-Chinese conference participants were extremely

reluctant to be dogmatic in prescribing solutions for China’s household credit sector. We

were mindful that China shares with other industrializing countries a long history of in

appropriately borrowed institutions and technologies. In the end, these systems must

always grow up through a long process of experimentation, with which the foreign

practices and prescriptions can be compared with the actual experience in China, and

government-designed institutions can provoke, and be modified by, the reactions of

private market participants. Section 4 concludes by elaborating on these ideas, using the

experience of the U.S. credit card sector as an example of that interaction.

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4. Some Conclusion

The standard approach within economics to understanding the nature and role of

institutions – a literature alluded to at the beginning of this paper - follows Ronald Coase,

Oliver Wiliamson, Douglas North and the theory of transactions costs. But there is a

simpler, more direct way to understand the nature of institutions and the interplay

between institutional change and technological change. The production process through

which human societies ensure and improve their material existence was initially and

primarily a matter of individual people interacting with the material world – the farmer’s

hoe, the forester’s ax. But any production process other than Robinson Crusoe’s also

involves interaction among people. The farmer sells some grain to others, in the town

where the forester buys his ax blade from others.

Unlike a tree or a lump of sod, people are profoundly unpredictable. Wherever the

production process depends critically on human interactions, institutions emerge to cope

with that unpredictability, laying down rules, norms, habits of behavior on which we can

all depend. Market institutions – our readiness to accept fiat money for goods, our very

understanding and acceptance of what a price is – are so universal and familiar that we

hardly notice them as institutions at all. They are like the air we breathe.

Thus all productive activity goes forward only through a mix of technology and

institutions. Although we may think of ours as increasingly a “hi-tech” economy, the

truth is that over time, that mix has been weighted ever more heavily towards institutions

rather than technology. The shift from an agricultural to an industrial society entailed

economies of large scale production, and large scale meant complex human interactions.

The shift from an industrial to a service society continued this process. Characteristically,

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a service involves not so much an interaction with the material world – wresting a crop

from the soil, or felling a tree – but some more subtle activity such as bringing the crop to

market at retail, or storing the wood for later sale.

Now consider the financial services sector. At the heart of any financial product lies

nothing material at all, but merely an idea: a promise to repay, a commitment to complete

a transaction at some future date. Like some Texan rancher who is “all hat and no

cattle”, surely at this point we come close to a production process that is “all institutions,

no technology”.

China has been preoccupied with technology borrowing for the last 150 years, ever

since British gunboats on the Pearl River emphatically demonstrated the importance of

technology to national sovereignty. That borrowing process has accelerated dramatically

in the last fifty years, and especially since 1978. The primary reason that it has taken so

long is that technological changes demand institutional changes as well – changes in the

rules governing human interaction, in China’s cultural norms and social compact. Such

change is slow. Like other latecomers to development, China’s acquisition of industrial

technology was difficult and delayed. But now China is approaching the technology

frontiers. The best evidence of this is her growing ability to absorb and implement

financial services technologies, which are so institutionally saturated.

At that point – when the potential for growth through technology borrowing

approaches exhaustion – China faces a critical transition: from borrower to innovator.

The work of Alexander Gerschenkron (1961) and his intellectual descendents taught us

that borrowers heavily use government to catch up. The role of government in China’s

modernization is surely the best support to date of that theory. But the hand of

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government, so strong and effectual in forcing high saving rates after 1949, in crafting

special economic zones and putting together a modern central bank after 1978, can be a

heavy hand, a deadening presence, when the need is to foster and stimulate individual

initiative and domestic innovation.

This theme arose often in our conference papers, and particularly in those papers

that charted the role of government in creating and regulating the institutional

arrangements in the U.S. financial sector. Consider the birth of the credit card industry in

the twenty years after 1958 (Luo & Sun). In the heavily regulated environment of post-

Depression banking, Diners Club and American Express in the 1950s exploited a

definitional loophole, reintroducing a form of interstate banking by defining their card as

providing merely “payment services” rather than credit. In 1958, BankAmerica

borrowed the business concept of revolving credit, married it to this household credit

instrument, and used the franchise method to create a true nationwide credit card.

Through the 1960s, as banks rushed to exploit the potential of this new market, a

classic, chaotic, unregulated free-for-all ensued. BankAmericard and MasterCharge

mailed out cards to any and all, with no risk management systems, leading to high credit

risk, widespread fraud and massive losses. In 1970, the key institutional breakthrough –

a non-stock, member-owned, for-profit licensing agent, National BankAmericard Inc. -

transformed this troubled product into today’s credit card.

No government agency issued rules describing these new institutional forms,

perhaps because the idea of “economic deregulation” was already in the air. Instead,

market competition and lawsuits within the private sector forged the new structures. Not

until 1998 did the Justice Department enter the fray, filing a lawsuit to pry open a

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competitive space, within which four card providers may perhaps thrive instead of

today’s big two.

What lessons can China learn from this experience and others? First, in the area of

effective government regulation of the financial sector, the United States holds no

monopoly on virtue. In the 1950s, the post-Depression Glass-Steagall regulatory

structure was clearly undesirable, and yet it persisted for another two decades, a vivid

illustration of the ability of regulations to create vested interests that then forestall needed

change. Indeed, that tension, between an obsolete regulatory structure and the financial

needs of a national economy, partly explains the explosive growth of the credit card form.

A more important conclusion is this: institutional and technological innovation

proceeds best in an environment where government’s regulatory hand is light and

indulgent. The Justice Department held its hand for twenty-five years, declining to

intervene in 1974, and then eventually doing so in 1998, without losing its ability to

regulate effectively.

In thinking about optimal institutions for household credit, then, China might wish to

imagine the challenge as a two-stage one. The particular, detailed institutions may best

be worked out at the grass roots level, through fractious interaction of private agents and

local governments, at times calling on the court system as mediator. The task of the

national government might best be thought of as creating a meta-institution: the rules

governing how government regulates. And the best rules will enable all parties, private

and public, to actively articulate their positions and pursue their interests.

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Works Cited

A. Papers from the August 2004 Conference on Household Credit

Mark An: Consumer Credit and Residential Mortgage Finance in the U.S.

Enjiang Cheng: Expanding Microfinance Through Rural Credit Cooperatives

Nicola Jentzsch: Privacy Protection in the U.S. and Europe: Lessons for China

Mingquan Liu, Jiantuo Yu, and Zhong Xu: The Impact of Mutual Finance Associations on Farm Consumption

Zhigang Liu: The Development of Mortgage Loans in China

Jack Niu: Managing Risk in the Consumer Credit Industry

Minggao Shen: Are Rural Households Credit Constrained?

Bruce Reynolds and Wenli Li: Student Loans and Equality of Higher Education Access

Bruce Reynolds, Yonghong Tu and Yu Wang: Applying the U.S. Experience to China: 5-year and 50-year Predictions

Bingxi Shen and Xianting Wu: Consumer Credit and Regional Development in China

Edward Shen: Risk Management for Deposit Accounts in U.S. Commercial Banks Companies

Guofeng Sun and Yanchun Zhang: The Linkage between Household Credit and Macro Control

Sherry Sun and Ning Luo: Interplay between Market Forces and the Legal-Regulatory Framework in China and the United States

Zhong Xu: Consumer Credit, Domestic Savings and Small and Medium Enterprise Financing

B. Other References

CUNA-Mutual. 2002. Report of the Joint Project Team on RCC Consumer Lending and Insurance.

Gerschenkron, Alexander. 1961. Economic Backwardness in Historical Perspective. Harvard University Press.

Mulligan, Casey. 1997. Parental Priorities and Economic Inequality. Chicago U Press.

Liping He and Fan Gang. 2002. “Consumer finance in China: Recent Development Trends”, China & World Economy November 6 2002

29

International Workshop on Household Credit

CONFERENCE PROGRAMME

Organized by

China Center for Economic Research, Peking UniversityDepartment of Economics, University of Virginia

Sponsored by

August 7, 2004 China Center for Economic Research, Peking University, Beijing, China

30

International Workshop on Household Credit August 7, 2004

China Center for Economic Research, Peking University, Beijing, China

CONFERENCE PROGRAMME

08:00-08:30 Registration

08:30-08:45 Opening RemarksChair: Jianglian Wu Professor, DRC

Speakers:Justin Yifu Lin Professor and Director, CCER, Peking UniversityBruce Reynolds Professor, Department of Economics, University of Virginia

08:45-10:45 Panel I. What Institutions Are Critical to the Consumer Credit Sector, and How Have They Evolved?

Chair: Gang Yi Professor and Director, Monetary Policy Department, PBOC

08:45-09:10 Managing Risk in the Consumer Credit IndustryJack Niu Executive Vice President, MBNA AmericaDiscussant: Guochu Tang Credit Evaluation Department, China Industrial and Commercial Bank

09:10-09:35 Risk Management for Deposit Accounts in U.S. Commercial Banks CompaniesEdward Shen Vice President, Consumer Risk Management, Wells Fargo BankDiscussant: Jian Wu Risk Management Department, China Construction Bank

09:35-10:00 Consumer Credit and Residential Mortgage Finance in the U.S.Mark An Director of Economics Research, Credit Policy, Fannie MaeDiscussant: Xianxin Zhao Debt and Asset Management Department, Bank of China

10:00-10:25 Interplay between Market Forces and the Legal-Regulatory Framework: Case Studies in the Development of the US Credit Card IndustrySherry Sun and Ning Luo Vice Presidents, Risk Management, Citi Cards, Citigroup

Discussant: Qun Xie Associate Professor, School of Economics and Management, Tsinghua University

10:25-10:45 Open Discussion

10:45-11:00 Coffee Break

11:00-12:30 Panel II. Consumer Credit and ChinaChair: Kang Jia, Professor and Director, Institute of Fiscal Policy Studies, Ministry of Finance

11:00-11:25 Development Trend of Individual Consumer Credit in the Coming Five Years in ChinaBruce Reynolds Professor, Department of Economics, University of Virginia;

31

Yonghong Tu Associate Professor, School of Finance, People’s University; and Yu Wang Professor, Financial Markets Department, PBOCDiscussant: Zhenhua Mao President and CEO, China Chengxin Credit

Management

11:25-11:50 Information Privacy: Best Practices for the Chinese Consumer Credit Reporting Industry

Nicola Jentzsch Free University of BerlinDiscussant: Cunzhi Wan Deputy Director, Credit Information System

Department, PBOC

11:50-12:15 Does a Large and Expanding Consumer Credit Sector Increase or Decrease the Ability of Monetary Policy to Ensure Smooth Economic Growth?Guofeng Sun PBOC and Yanchun Zhang Assistant Professor, San Francisco State University Discussant: Jianhuai Shi, Associate Professor, CCER, Peking University

12:15-12:30 Open Discussion

12:30-13:30 Lunch

13:30-15:00 Panel III. How Severe are Rural Credit Problems, and How can the Consumer Credit Sector Help in this Area?Chair: Jun Han, Director, Department of Rural Economy, DRC

13:30-13:55 Credit Constraint and Household Financing: Panel Data Evidence From Rural China

Minggao Shen CCER, Peking UniversityDiscussant: John Giles Assistant Professor, Department of Economics, Michigan State University

13:55-14:20 Mutual Finance Associations and Farm Household Expenditure PatternsMingquan Liu Professor, Nanjing University, Jiantuo Yu Nanjing

University, and Zhong Xu Associate Professor, Financial Stability Bureau, PBOCDiscussant: Jianbo Chen Professor and Division Director, Department of Rural Economy, DRC

14:20-14:45 Expanding Microfinance Through Rural Credit CooperativesEnjiang Cheng Senior Research Fellow, University of VictoriaDiscussant: Junfeng Li Deputy Director, Cooperative Finance Supervision Department, CBRC

14:45-15:00 Open Discussion

15:00-15:15 Coffee Break

15:15-17:15 Panel IV. Broader Policy Issues Raised by the Growth of Consumer CreditChair: Bing Xia, Director, Institute of Financial Studies, DRC

15:15-15:40 Consumer Credit and Regional Development in ChinaBingxi Shen Deputy Director, Financial Markets Department, PBOC and

32

Xianting Wu Financial Markets Department, PBOCDiscussant: Fuan Li Deputy Director, Supervisory Rules and Regulations, CBRC

15:40-16:05 The Development of Mortgage Loans in ChinaZhigang Liu Governor, Hebei Branch, Industrial and Commercial Bank of China

Discussant: Mark An Director of Economics Research, Fannie Mae

16:05-16:30 Consumer Credit, Domestic Savings and SME FinancingZhong Xu Associate Professor, Financial Stability Department, PBOC

Discussant: Jun Wang Senior Economist, Beijing Office, The World Bank

16:30-16:55 A Preliminary Analysis on Student Loans and Access Equality in ChinaBruce Reynolds Professor, Department of Economics, University of Virginia, and Wenli Li, Associate Professor, School of Education, Peking University

Discussant: Andrew Watson, Professor and Chief Representative, Ford Foundation Beijing Office

16:55-17:15 Open Discussion

17:15-17:30 Coffee Break

17:30-18:30 Summary Session and Roundtable Policy Discussion

Justin Yifu Lin Professor and Director, CCER, Peking UniversityBruce Reynolds Professor, Department of Economics, University of Virginia

18:45 Banquet

Abbreviations:

DRC The Development Research Center of the State Council, ChinaPBOC The People’s Bank of ChinaCBRC China Banking Regulatory Commission

33