Property rights reform and capital adequacy ratios of rural credit cooperatives in China

Numerous studies have focused on bank ownership with a typical focus on analyzing performance issues by using data from commercial banks; however, these do not consider the link between ownership and capital adequacy. Our study fills this gap in the literature by investigating the impact of property rights reform on banks’ capital adequacy in China and heterogeneity across restructured forms of ownership, reform pathways, and time. Using data from rural credit cooperatives in China for 2008–2014, we find that rural cooperative banks have better capital adequacy than banks under two other forms of ownership. We further find that among four possible reform pathways, only restructuring from a rural cooperative bank to a rural commercial bank enhances capital adequacy significantly and that improvements in capital adequacy generally weaken over time. Further analyses indicate that this improvement is primarily attributable to capital injections and removal of non-performing assets by the government. These findings contribute to an understanding of how best to reform rural finance, particularly in developing countries.