Capital Formation in New Cooperatives in China: Policy and Practice

Abstract

This paper aims to fill one knowledge gap on understanding the issue of capital formation in new co-operatives in developing countries. By doing so, it presents the main findings of capital formation and investment in a small sample of horticulture shareholding co-operatives in rural China, because shareholding co-operatives, as one best example of new multi-stakeholder co-operatives in China, have become a vehicle to mobilize additional resources. To better understand shareholder co-operatives’ stakeholder heterogeneity, two main groups of stakeholders are identified, namely, member stakeholders (investor-members and patron-members) and non-member stakeholders (non-member investors and non-member donors/grant-givers). Following a brief theoretical overview concerning co-operative multi-stakeholdership and capital acquisition and constraints, I then analyze both the rules-in-form and rules-in-use with respect to the co-operative stakeholders’ capital involvement in China.

Cases observed indicate a hybridization feature of the co-operative capital base, including member contributions, public subsidies, income from the market sale, institutional capital and social capital. There exist at least four ways to raise equity capital from co-operative members. External capital comes mostly from direct government support in the form of grants and project funding, and indirect financial support through preferential treatment and policies. Different from the situation in the West, debt capital does not appear to be a widely-used traditional financing source. New co-operatives in China have difficulty even in borrowing short-term debt, not to mention receiving long-term loans. Also specialized/non-traditional external capital sources such as those provided by co-operative banks do not suffice. Co-operative banks are not always ready to provide micro-credit to co-operatives. Only when the government plays an active role, this lending process is facilitated. Many innovative financial systems are also observed in the field, which facilitate the mobilization of more external capital for co-operatives.

Keywords: Capital Formation, Co-operative, Multi-stakeholder, China

JEL Classification: H44, K29, O13, P13, P26, Q13, Q18