During the Politburo’s 40th Collective Study Session in April 2017, President Xi delivered a speech on strengthening the Party’s leadership over financial affairs, particularly over the financial mechanisms used to stimulate economic growth. In response to President Xi’s call to action, local party committees across China have launched a variety of party membership-based loan programs. These programs give qualified party members and private businesses easy access to designated pools of often collateral-free capital at exceptionally low-interest rates, thus making party membership an important indicator of creditworthiness.

The proliferation of various party membership-based loan programs reveals that local party committees are utilizing financial instruments not only to stimulate economic growth, but also to solidify party control over financial affairs. This allows the CCP to enhance its relevance and appeal to Chinese people in a most practical way—access to low-cost capital. Programs such as these provide additional evidence that the Party plays a central role in selecting which individuals and companies can be granted access to low-cost capital.

Most of these party membership-based loan programs are launched as a partnership between local party committees and rural commercial banks (农商银行) or rural credit cooperatives (农村信用社). My Internet-based survey found that since 2017, such programs have been launched in more than 40 Chinese cities and counties across at least 13 provinces or provincial-level administrative regions, including but not limited to Fujian, Gansu, Hubei, Jiangsu, Liaoning, Guizhou, Guangdong, Guangxi, Qinghai, Shandong, Shanxi, Yunnan, and Zhejiang.[1] Local party committees hope that these programs will support the entrepreneurship of party members, provide seed capital for their business plans, or finance rural party members’ agricultural production. Existing programs can be divided into two major categories: “Rural Party Member Entrepreneurship Loans” and the “Party Building Plus” model. The primary difference between these two categories is that the second category is conditioned upon advancement within the Party and party building efforts.

“Rural Party Member Entrepreneurship Loans” (农村党员创业贷款)

This type of loan program has existed under various names since Reform and Opening Up. The idea behind this type of loan is to reduce poverty in rural China by encouraging and incentivizing the entrepreneurship of party members. These loans are typically provided as small and micro loans to provide liquidity and meet cash flow needs. For instance, in Fuding County, Fujian Province (福建省福鼎市), the average loan size is approximately RMB 70,000-80,000 (approximately USD 9,800-11,250) with 3-year maturity and interest of 0.675% (approximately 0.224% annual rate), considerably below the prime lending rate of 4.35%. This model has been practiced by many counties and villages in a number of provinces. The most reported cases are found in Yunnan Province, Guangdong Province, and Zhejiang Province.

As noted previously, this type of loan program is organized by local governments and local party committees in partnership with local rural commercial banks, local rural credit cooperatives, or local postal savings banks. In some cases, the local party committee allocates a portion of party membership dues to subsidize interest payments. Between 2011 and 2013, for instance, the provincial-level party committee in Guangdong allocated RMB 20,000,000 (approximately USD 2,810,700) from party membership dues to fully subsidize interest payment for party member entrepreneurs in need of capital. To a certain extent, this reduces the risk of the borrower defaulting and therefore the credit risk faced by banks, which incentivizes participation.

This type of loan program is nothing new: at all administrative levels, the Party considers leading economic growth its mission and local party committees have long sought to mobilize party members to take initiative in developing small businesses. Scholars have found empirical evidence that party membership “helps private entrepreneurs to obtain loans from banks or other state institutions, and affords them more confidence in the legal system.”[2]

The “Party Building Plus” Model (党建+)

The second category, the “Party Building Plus” model, is fundamentally different in that it conditions creditworthiness upon the individual or company’s history of political support for the CCP. This type of loan program rewards party members with exemplary performance reviews and private companies with good party building track records with access to loans.[3] The “Party Building Plus” model (“党建＋”) is thus a broader initiative aimed at strengthening the Party’s comprehensive leadership over all aspects of social and economic life.

This type of loan program exhibits two primary features: it is collateral free and has low interest rates. To qualify for this loan, one only needs to show proof of being a good and credible party member. In many cases, such proof is found in the party member evaluation system: the higher the party member’s evaluation score, the lower the interest rate. This is essentially equivalent to using party membership as collateral. The score of the party membership rating measures the quality of the “collateral,” inherently placing a financial value on the previously meaningless party membership rating.

In addition to being collateral free, the interest rates charged on these loans are generally much lower than market rates. For instance, in Lishui City of Zhejiang Province (浙江丽水市), the interest rate was lower than the market rate by a third with a maximum amount of RMB 300,000 (approximately USD 42,160). In Zhejiang’s Linhai City (浙江临海市), the monthly interest rate was no higher than 0.5365%, which was about 40% lower than market rate, a record low for the bank that issued the loans.

Private enterprises that have demonstrated high-quality party building efforts can apply for “Red Impetus Loans” (红色动力信用贷) or “Red Credit Loans.” Similar to loans for individuals, these loans are collateral free and charge low interest. For a private company to be qualified, it has to have an exemplary in-house corporate party organization. For instance, at the end of 2018, the party committee in Yuyue County (禹越镇) in Huzhou, Zhejiang Province (浙江省湖州市) launched a new financial product based upon on the “Party Building Plus” model. Within three months after this product was launched, two private companies were able to take out collateral-free, low-interest loans from local banks by demonstrating their commitment to party building. Moreover, the procedure for obtaining these loans is fairly straightforward. Money can be received within three days of submitting a loan application.

Conclusion

Financializing party membership and corporate party building activities increases the Party’s practical relevance. Good party member performance evaluations and enthusiastic party building activities allow individual party members and private companies to take out loans at well below market interest rates with no collateral needed. This makes party membership financially appealing because the norm used to be that only state-owned enterprises could get cheap and subsidized loans from state-owned banks.

These party membership-based loan programs also reveal a weakness in China’s financial market in that they potentially introduce financial risk into China’s local banking system. This party membership-based measurement arbitrarily equates good party member evaluations with good creditworthiness, revealing that the Chinese capital market lacks a credible system to measure the creditworthiness of an individual or business. Although the loans are mostly micro loans, the aggregate level of these loans are sizable. For small local banks like rural commercial banks, rural credit cooperatives, or local postal savings banks, it is entirely possible that an increase in defaults could strain the solvency of these banks.

In fact, several Chinese rural commercial banks have recently been downgraded due to a severe increase in their non-performing loans. The primary examples of these are Zouping Rural Commercial Bank (邹平农商行), Xiuwu Rural Commercial Bank (修武农商行) and Guiyang Rural Commercial Bank, all of which have party membership-based loan programs (see the table below). Although at this stage it is unknown to what extent the party membership-based loan programs have contributed to the increase in the non-performing asset ratio, one can be certain that in case of default there is no collateral that the banks can seize to recover the loss.

Three Rural Commercial Banks that Experienced

Major Increase in Non-performing Asset Ratio (2016-2017)

[Source: Pengpai News]

Moreover, the bigger concern is that there are signs that local governments and local party committees are entering a competitive race to develop loan programs tied to party membership or party building activities as a way to demonstrate commitment to answering President Xi’s call to strengthen the Party’s leadership over financial affairs. This could potentially increase financial risk in China’s local banking system, increasing the likelihood of another central bank liquidity injection in case of another small bank failure.

[1] Data is available upon request.

[2] Hongbin Li, Lingsheng Meng, Qian Wang, and Li-An Zhou, “Political Connections, Financing and Firm Performance: Evidence from Chinese Private Firms,” Journal of Development Economics Volume 87, Issue 2, October 2008: 283-299.

[3] Several counties in Zhejiang Province and Shandong Province have launched such programs; these counties are Haining (海宁), Huzhou (湖州), Gaomi (高密), among others.

Zongyuan Liu holds a Ph.D from the Johns Hopkins School of Advanced International Studies (SAIS) specializing in International Political Economy with regional expertise in Asia. Her research focuses are Asian energy security, political risk in Asia, China-Middle East relations, and China’s overseas infrastructure investment. Her dissertation examines the politics and economic fundamentals of foreign exchange reserves management in China and Japan and its global implications. Zoe holds an MA in International Affairs from George Washington University’s Elliott School of International Affairs. In addition, she took the CFA Level III exam in June 2018 and is a part-time consecutive/simultaneous translator for visiting Chinese government and business delegations to Washington DC.