Rural credit cooperatives’ contribution to agricultural growth: evidence from China

Rural credit cooperatives (RCCs) have long dominated China’s rural credit market and met most of agricultural credit demands while the existing literature seldom examines their contribution to agricultural sector. The purpose of this paper is to provide empirical evidence on the contribution of RCCs to agricultural growth, using China’s provincial panel data from 1997 to 2014.

Both static fixed effects models and two-step generalized method of moment dynamic panel data models, which control the endogeneity, are employed to identify the causality from RCC credit to agricultural growth in China.

The results show that the credit from RCCs increases the agricultural output significantly. A 1 percent increase in RCC credit leads to agricultural growth of about 0.08 percent, which is robust to various empirical specifications. Further study shows that the contribution of RCC credit to agricultural growth decreases from the most developed eastern region to the least developed western region and increases over time.

The results imply that RCC credit is critical in financing agricultural activities by relaxing rural credit constraints and intense competition strengthens the contribution of RCCs to agricultural growth by improving managerial efficiency and developing diversified financial products to meet better rural credit demands.

To the authors’ knowledge, this is first empirical study on the effect of RCC credit on agricultural growth despite of many on the role of financial development in agricultural growth.