Chinese farmers need loans. It’s hard for them to borrow from formal lenders like banks or even the rural credit cooperatives. Thus, to satisfy their financial needs, farmers borrow from informal lenders. While farmers have benefited from the post-Mao reform in many respects, financial reforms of the past three decades have failed to create an effective system in which farmers can borrow from formal lenders. To create an effective and efficient financial system that can meet farmers’ needs, it is necessary for informal lenders to play an active role in rural finance. China’s rural finances face four key problems: asymmetric information, a lack of collateral, the unique structure of costs and risks, and the nonproductive use of loans. Informal lenders have an advantage in solving these problems. This article proposes the creation of a financial system in which informal lenders play an active role in lending to farmers and formal and informal lenders cooperate with each other. It develops the argument based on the first author’s field research in the provinces of Guangdong, Henan, Jilin, Shaanxi, Shandong, and Shanxi.
Agabin, Meliza H. ( 1988) "A review of policies impinging on the informal credit markets in the Philippines." Working Paper 88-12, Philippine Institute for Development Studies, Makati , Philippines (June).
2.
Aleem, Irfan ( 1990) "Imperfect information, screening, and the costs of informal lending: a study of a rural credit market in Pakistan." World Bank Economic Rev. 4: 329-49.
3.
Berger, Allen N., Anthony Saunders, Joseph M. Scalise, and Gregory F. Udell (1999) "The effects of bank mergers and acquisitions on small business lending." J. of Financial Economics50 (Nov.): 187-229.
4.
Chandavarkar,Anand G. (1985) " Fund gravity in cities of less developed countries." Finance and Development2: 24-27.
5.
Edin, Maria ( 2003) "State capacity and local agent control in China: CCP cadre management from a township perspective." China Q . 173 (Mar.): 35-52.
6.
Fei, John C.H. and Gustav Ranis ( 1964) Development of the Labor Surplus Economy: Theory and Policy . Homewood, IL: Richard D. Irwin .
7.
Floro, Maria Sagrario and Debraj Ray ( 1997) "Vertical links between formal and informal institutions ." Rev. of Development Economics1 (Feb.): 34-56.
8.
HE Guangwen (1999) " Cong nongcun jumin zijin jiedai xingwei kan nongcun jinrong yizhi yu jinrong shenhua" (Control and deepening of rural finance seen from financial activities of rural residents). Nongcun jingji10: 42-48.
9.
HE Guangwen and LI Lili (2004) "Cong xitonglun shijiao kan nongcun jinrong gaige" (Reform of rural finance from the perspective of system theory). Nongye xiandaihua yanjiu12: 60-61.
10.
HE Liping (1999) " Kefu zhongxiao qiye yu jinrong jigou zhi jian de buduichen xinxi zhang’ai" (Overcoming the obstacles of the asymmetric information problem between small- and medium-sized enterprises and financial institutions). Gaige2: 14-16.
11.
Hoff, Karla and Joseph E. Stiglitz ( 1990) "Introduction: imperfect information and rural credit markets-puzzles and policy perspectives." World Bank Economic Rev. 4: 235-50.
12.
--- ( 1997) "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market." J. of Development Economics52: 429-62.
13.
Huang, Philip C.C. ( 2009) "China’s neglected informal economy: reality and theory." Modern China35, 4 (July): 405-38.
14.
--- [ ] (1985) Huabei xiaonong jingji yu shehui bianqian (The peasant economy and social change in North China). Beijing: Zhonghua shuju.
15.
Khandker,Shahidur R. (2005) "Microfinance and poverty: evidence using panel data from Bangladesh ." World Bank Economic Rev. 19: 263-86.
16.
Larson, Donald W. ( 1988) "Market and credit linkages: the case of corn traders in the southern Philippines." Paper prepared for Citibank/ABT Associates on a Rural Financial Services Project for USAID, Manila.
17.
Lewis, W. Arthur ( 1954) "Economic development with unlimited supplies of labour ." Manchester School of Economic and Social Studies22, 2 (May): 139-91.
18.
--- ( 1955) The Theory of Economic Growth. London : George Allen & Unwin.
19.
Li Changping and Dong Leiming [eds.] (2004) Shuifei gaige beijing xia de xiangzhen tizhi yanjiu (Studies on the township regime under the influence of the tax-for-fee reform). Wuhan: Hubei renmin chubanshe .
20.
Li Jian’Ge (2003) " Nongmin jiuye, nongcun jinrong he yiliao weisheng shiye wenti de jidian yijian" , (Several opinions on the issues of farmers’ employment, rural finance, and medical and sanitation matters). Bijiao7: 42-47.
21.
LI Jinzheng (2000) Jiedai guanxi yu xiangcun biandong-Minguo shiqi Huabei xiangcun jiedai zhi yanjiu - (Debt and credit relationships and changes in the countryside: a study of rural debt and credit in North China during the Republican period) . Shijiazhuang: Hebei daxue chubanshe .
22.
Lin Yifu , Cai Fang , and Li Zhou ( 1994) Zhongguo de qiji: fazhan zhanlüe yu jingji gaige : (The China miracle: development strategy and economic reform). Shanghai: Shanghai sanlian shudian.
23.
MA Jiujie (2003) " Nongcun jinrong fengxian de chengyin, yingxiang yu guanli celüe" , (Causes, influences and policies of rural financial risks). Guojia ziran kexue jijin yanjiu baogao (Research report of the National Natural Science Foundation). Unpublished.
24.
Montgomery, Heather and John Weiss ( 2005) "Great expectations: microfinance and poverty reduction in Asia and Latin America." ADB Institute Research Paper Series , 63.
25.
Morduch, Jonathan ( 1999) "The microfinance promise." J. of Economic Literature37 (Dec.): 1569-1614.
26.
Oi, Jean C. and Zhao Shukai ( 2007) "Fiscal crisis in China’s townships: causes and consequences." Pp. 75-96 in Elizabeth J. Perry and Merle Goldman (eds.), Grassroots Political Reform in Contemporary China. Cambridge, MA: Harvard Univ. Press.
27.
Ong, Lynette ( 2006) "The political economy of township government debt, township enterprises and rural financial institutions in China." China Q. 186 (June): 377-400.
28.
Park, Albert and Changqing Ren ( 2001) "Microfinance with Chinese characteristics." World Development29: 39-62.
29.
Patten, Richard H., Jay K. Rosengard, and Don E. Johnston , JR. (2001) "Microfinance success amidst macroeconomic failure: the experience of Bank Rakyat Indonesia during the East Asian crisis." World Development29 (June): 1057-69.
30.
Peng Kaixiang , Chen Zhiwu , and Yuan Weipeng (2008) " Jindai Zhongguo nongcun jiedai shichang de jizhi-jiyu minjian wenshu de yanjiu" - (Modern China’s rural financial market system: a study based on private documents). Jingji yanjiu5: 147-59.
31.
Ramirez, Alvaro ( 2004) "The microfinance experience in Latin America and the Caribbean." Paper presented at the Workshop on Modalities of Microfinance Delivery in Asia: LAEBA Research Conference on Microfinance in Latin America and Asia, Asian Development Bank Institute, Manila, Oct. 4-8.
Schreiner, Mark ( 2003) "A cost-effectiveness analysis of the Grameen Bank of Bangladesh." Development Policy Rev.21 (May): 357-82.
34.
Siamwalla, Ammar et al. (1990) "The Thai rural credit system: public subsidies, private information, and segmented markets." World Bank Economic Rev. 4: 271-95.
35.
Stiglitz, Joseph E. and Andrew Weiss ( 1981). "Credit rationing in markets with imperfect information ." American Economic Rev. 71 (June): 393-410.
36.
Tra Pham, Thi Thu, and Robert Lensink ( 2008) "House borrowing in Vietnam: a comparative study of default risks of formal, informal, and semi-formal credit." J. of Emerging Market Finance7 (Dec.): 237-61.
37.
Tsai,Kellee S. (2002) Back-Alley Banking: Private Entrepreneurs in China. Ithaca, NY: Cornell Univ. Press.
38.
Udry, Christopher R. ( 1994) "Risk and insurance in a rural credit market: an empirical investigation in northern Nigeria." Rev. of Economic Studies61 (July): 495-526.
39.
Wen Tiejun ( 2001) " Nonghu xinyong yu minjian jiedai yanjiu: nonghu xinyong yu minjian jiedai keti zhu baogao" : (Research on credit for rural households and informal lending and borrowing: a report from the project group on credit for rural households and informal lending and borrowing). http://chinesetax.com.cn .
40.
Wen Tiejun and Feng Kaiwen ( 1999 ) "Jinfang chongdao jiu Zhongguo nongcun pochan de fuzhe-cong gongshang, jinrong ziben dui nongcun de guoliang boduo tanqi" - , (Avoiding making the same mistake as the past bankruptcy of rural China: from the perspective of exploitation of the rural sector by industrial and financial capital in the countryside). Zhanlüe yu guanli32, 1: 1-11.
41.
Whiting, Susan H. ( 2004) "The cadre evaluation system at the grassroots: the paradox of party rule." Pp. 101-19 in Barry J. Naughton and Dali L. Yang (eds.), Holding China Together: Diversity and National Integration in the Post-Deng Era. New York: Cambridge Univ. Press.
42.
World Bank (1989) World Development Report 1989. New York: Oxford Univ. Press.
43.
Xie Ping ( 1996) Zhongguo jinrong zhidu de xuanze (The choice of China’s financial institutions). Shanghai : Shanghai yuandong chubanshe.
44.
--- ( 2001) "Zhongguo nongcun xinyong hezuoshe tizhi gaige de zhenglun" (Debates about the reform of China’s rural credit cooperatives regime). Jinrong yanjiu1: 1-13.
45.
YU Yong (2001) "20 shiji 30 niandai nongcun jinrong jiuji huodong de qishi" 20 30 (Lessons from rural finance activities in the 1930s). Nei Menggu shida xuebao1: 58-65.
46.
Zhang Xiuying and Liu Jinling ( 2004) Zhongguo xibu diqu xiangzhen fuzhai wenti yanjiu (A study of the township debt problem in China’s western region) . Beijing : Renmin chubanshe.
Zhou LI (2003a) "Gaige qijian Zhongguo guojia caizheng nengli yu jinrong nengli bianhua" (Changes in China’s fiscal and financial capacity during the reform period). Caimao jingji4: 44-51.
50.
--- ( 2003b) "Gaige qijian Zhongguo jinrongye de ‘di er caizheng’ yu jinrong fenge" " " (The "second budget" of China’s financial industries during the reform period and financial segmentation). Shijie jingji6: 72-78.
51.
--- ( 2004) Zhongguo ge diqu jinrong fazhan yu jingji zengzhang (1978-2000) (1978-2000) (Financial development and economic growth in China’s regions, 1978-2000). Beijing: Qinghua daxue chubanshe.
52.
--- ( 2006a) "You shengcun jingji kan nongcun gaolidai de biaoda yu shijian" (The presence and practice of rural usury as seen from the survival economy). Caimao jingji4: 64-69.
53.
--- ( 2006b) "Zijin huzhu yu qiongren shengji-7 sheng 11 jia nongmin hezuoshe diaocha" -7 11 (Mutual financing and the poor: an investigation of eleven rural cooperatives in seven provinces) . Dangdai Zhongguo yanjiu94, 3: 155-60.
54.
Zhou LI and HU Angang ( 2002) "Zhongguo jinrong fazhan de diqu chaju fenxi: 1978-1999" : 1978-1999 (An analysis of regional disparity in financial development in China, 1978-1999). Qinghua daxue xuebao2: 60-74.
55.
Zhou LI and Lin Ronghua ( 2005) "Xin yi lun nongcun lilü gaige chengxiao yu jingji jieshi-Mindong diqu diaocha yu longduan shichang fenxi" - (The new rural interest rate reform and its economic interpretations: research in the Mindong area and analysis of monopolistic markets). Caimao jingji5: 7-13.
