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Formal versus Informal Finance: Evidence from China


Meghana Ayyagari


George Washington University - School of Business

Asli Demirgüç-Kunt


World Bank - Financial and Private Sector Development; World Bank

Vojislav Maksimovic


University of Maryland - Robert H. Smith School of Business

January 1, 2008

World Bank Policy Research Working Paper No. 4465

Abstract:     
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.

Number of Pages in PDF File: 77

Keywords: Access to Finance, Banks & Banking Reform, Debt Markets, Bankruptcy and Resolution of Financial Distress

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Date posted: January 8, 2008  

Suggested Citation

Ayyagari, Meghana and Demirgüç-Kunt, Asli and Maksimovic, Vojislav, Formal versus Informal Finance: Evidence from China (January 1, 2008). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2008. Available at SSRN: http://ssrn.com/abstract=1080690

Contact Information

Meghana Ayyagari
George Washington University - School of Business ( email )
Washington, DC 20052
United States
Asli Demirgüç-Kunt
World Bank - Financial and Private Sector Development ( email )
United States
202-473-7479 (Phone)
202-522-1155 (Fax)
HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/
World Bank ( email )
1818 H Street, NW
Washington, DC 20433
United States
Vojislav Maksimovic (Contact Author)
University of Maryland - Robert H. Smith School of Business ( email )
Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)
HOME PAGE: http://www.rhsmith.umd.edu/finance/vmax/
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