History, Culture and the Rise of Informal Finance in China

Abstract

This working paper was written by Jinyan Hu (Shandong University), Chicheng Ma (Shandong University) and Bo Zhang (Shandong University).

This paper examines the long-term effect of historical financial institutions on the development of informal finance in contemporary China. By using data on 137 counties in north China, our analysis finds that the density of local financial institutions (qianzhuang and diandang) in the late Qing period (circa 1911) has a positive effect on the number and total assets of Small Loan Companies, a dominant institution of informal finance today. This finding is robust to the inclusion of a variety of confounding variables and instrumenting historical financial institutions using the frequency of crop failures in the Qing period. We also find that the persistent effect of historical financial institutions can be explained by Confucian culture, which instills integrity, lineage solidarity and acquaintance networks.

Keywords: Informal Finance, Small Loan Companies, History, Confucian Culture, China

JEL Classification: G21, N25