The Risk Management Mechanism of China’s Bidding Rotating Savings and Credit Association: A Case Study of Chengnan Village in Wenzhou

ABSTRACT

China’s rural economy growth since the reform has been very rapid. The informal finance including the bidding Rotating Savings and Credit Association (ROSCA) has emerged to meet increasing funding needs of rural residents. This paper conducts a survey on Chengnan Village in Wenzhou to analyze how bidding ROSCA operates and the roles bidding ROSCA’s participants play as investors and borrowers, and thus to identify the potential risk. By explaining bidding ROSCA’s both internal and external risk management mechanisms, it finds that village ethical community is the informal institutional foundation of risk management.

KEY WORDS:

• bidding ROSCA
• operating mechanism
• risk management
• village ethical community

JEL CLASSIFICATION:

• O16
• O17
• G2

Acknowledgments

We thank Zhejiang Provincial Natural Science Foundation of China for financially supporting the research. We would like to thank all the respondents for help in conducting the survey and gathering the data. We would also like to thank the reviewers for the most valued comments.

Notes

1. ROSCA in which funds are obtained in a prearranged order is called rotating ROSCA; ROSCA in which funds are obtained in an order determined by rolling a dice is called rolling ROSCA; ROSCA in which funds are obtained by means of bidding is called bidding ROSCA.

2. Biaohui (bidding ROSCA) is a kind of fraternity in China, while fraternity has no unified name in the domestic academic circles; it is also commonly called “Hehui”, “Qianhui” in China; it is called in different ways in various parts of China, for example, it is called “Qinghui”, “Juhui”, “Jihui” in Shandong and northern Jiangsu; it is called “Dahui” in Anhui, Jiangxi, and Hunan; it is called “Yuehui” in Hubei; it is called “Zuohui” in Guangdong; it is called “Shehui” in Yunnan.

3. The outbreak of systemic bidding ROSCAs defaults, and it indicates that the initiators or some members of bidding ROSCAs fled after immediate fund collection.

4. To protect the identity of individuals, we do not report their surnames and indicate them by using the symbol of “*”, similarly hereinafter.

5. Generally, only the initiator has a net aggregated cash flow of zero during various phases and can be considered to be able to obtain interest-free loans, so the initiator becomes a borrower, while the net aggregated cash flow of the remaining members during various phases is generally not zero; if it is zero, they are considered borrowers for ease of analysis, which is totally different from that of the initiator.

6. “Daohui” means “collapse” literally, and it indicates that the initiator or some members of the ROSCA fled after immediate fund collection.

7. Sun (2009) compared the interest rate in commercial banks, RCC (rural credit cooperative) and a typical ROSCA in Wenzhou, and the lending rates are 5.84%, 6.91%, and 3.75%, respectively.

Additional information

Funding

This work was supported by Zhejiang Provincial Natural Science Foundation of China under Grant No. LY19G030007.