Formal Versus Informal Finance : Evidence from China
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 secto...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2008/01/8916707/formal-versus-informal-finance-evidence-china http://hdl.handle.net/10986/6462 |
| Summary: | 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. |
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