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formal versus informal finance: evidence from china

formal versus informal finance: evidence from china
Author: Vojislav Maksimovic
Publisher: World Bank Publications
Total Pages: 77
Release: 2008
Genre: Access to Finance
ISBN:
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Abstract: China is often mentioned as a counterexample to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China's growth. This paper takes a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms. The authors find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources. However, the results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, the authors find no evidence that these results arise because of the selection of firms that have access to the formal financial system. Although firms report bank corruption, there is no evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. The findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.

Formal versus Informal Finance

Formal versus Informal Finance
Author: Meghana Ayyagari
Publisher:
Total Pages: 77
Release: 2016
Genre:
ISBN:
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China is often mentioned as a counter-example to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China's growth. This paper takes a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms. The authors find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources. However, the results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, the authors find no evidence that these results arise because of the selection of firms that have access to the formal financial system. Although firms report bank corruption, there is no evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. The findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.

Informal Finance in China

Informal Finance in China
Author: Jianjun Li
Publisher:
Total Pages: 216
Release: 2009
Genre: Business & Economics
ISBN: 0195380649
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Informal finance consists of nonbank financing activities, whether conducted through family and friends, local money houses, or other types of financial associations. It has provided much-needed financing to small and medium enterprises (SMEs) in particular, in the face of a tightly constrained and overburdened formal banking system. Unable to obtain a bank loan, firms have relied upon individuals and informal organizations outside of the banking system to obtain financing for their ventures or working capital (operating funds). Presently there is a scarcity of information on informal finance in China and it is expected to have a significant impact upon GDP and money supply. This book, with contributions from leading scholars, describes the evolution, characteristics, and variation of informal finance in China from American and Chinese perspectives. Literature by Jiang Shuxia, Jiang Xuzhao, and Li Jianjun has heretofore been available only in Chinese, while work by Kellee Tsai, Jianwen Liao, Harold Welsch, David Pistrui, and Sara Hsu has been available in English. For the first time, they come together to discuss informal financing and its many aspects. Most of the essays are based upon original survey research conducted locally, as this type of data is not normally collected by the government. The papers pioneer the description and analysis of the nuances of informal finance from several perspectives; the authors look at the social, cultural, political, and economic causes of informal finance, its many variations, and its economic, personal, and political ramifications.

formal versus informal finance: evidence from china

formal versus informal finance: evidence from china
Author: Vojislav Maksimovic
Publisher: World Bank Publications
Total Pages: 77
Release: 2012
Genre:
ISBN:
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China is often mentioned as a counterexample to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China's growth. This paper takes a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms. The authors find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources. However, the results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, the authors find no evidence that these results arise because of the selection of firms that have access to the formal financial system. Although firms report bank corruption, there is no evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. The findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.

Informal Or Formal Financing? Evidence on the Co-Funding of Chinese Firms

Informal Or Formal Financing? Evidence on the Co-Funding of Chinese Firms
Author: Hans Degryse
Publisher:
Total Pages: 41
Release: 2016
Genre:
ISBN:
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Different modes of external finance provide heterogeneous benefits for the borrowing firms. Informal finance offers informational advantages whereas formal finance is scalable. Using unique survey data from China, we find that informal finance is associated with higher sales growth for small firms but lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Co-funding, thereby simultaneously using the informational advantage of informal finance and the scalability of formal finance, is therefore the optimal choice for small firms.

Does Religion Matter to Informal Finance? Evidence from Trade Credit in China

Does Religion Matter to Informal Finance? Evidence from Trade Credit in China
Author: Kam C. Chan
Publisher:
Total Pages: 47
Release: 2019
Genre:
ISBN:
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Informal finance plays an important role in transitional economies with weak legal institutions, like China. As a major informal finance instrument, trade credit relies on informal institutions and enforcement. We argue that religion enhances the ethical climate in which firms do business, and we predict that religiosity increases trade credit, in that religion enhances enforcement by increasing non-pecuniary cost and reducing risk-taking. The results based on Chinese non-state listed firms between 2003 and 2013 confirm our prediction that firms located in high religiosity regions are associated with more trade credit, especially in regions where formal institutions are weak or formal financing channels are limited. Furthermore, we show that religiosity reduces overdue trade credit. Finally, the results are driven by Buddhism, Taoism, and Christianity but not Islam.

Dual Credit Markets and Household Access to Finance

Dual Credit Markets and Household Access to Finance
Author: Robert Cull
Publisher:
Total Pages: 44
Release: 2018
Genre:
ISBN:
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Using a new and representative data set of Chinese household finance, this paper documents household access to and costs of finance, along with their correlates. As in most developing countries, informal finance is a crucial element of household finance, and wealth tends to be associated with better access to formal and informal finance. Better financial knowledge shifts loan portfolios toward formal sources relative to informal ones. Connections to the Communist Party are associated with significantly better access to finance in rural areas but not in urban areas. A larger social network is positively associated with access to informal finance. Controlling for household characteristics, rural residents pay interest rates on loans similar to urban residents. Younger residents pay higher rates, while households on firmer economic footing face lower rates. Taking financial classes and college education is associated with higher interest rates for urban residents, suggesting perhaps that financial knowledge coincides with greater demand for credit in areas with more economic opportunity. Overall, the findings suggest that Chinese residents face dual credit markets, with the poor, young, those with poor financial knowledge, and those with larger family sizes relying much more on informal finance, while others are better able to access formal finance.

China's Economic Growth

China's Economic Growth
Author: Jun Du
Publisher:
Total Pages: 36
Release: 2008
Genre:
ISBN: 9789292300791
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