A Research Of Effects Of Informal Finance On The Growth Of Local Economy

Finance is a key factor in the development of modern economy. Ever since1978, when China started its reform of economic system, non-state-owned economy has contributed over62%of GDP. However, state-owned enterprises get more than70%of the loans provided by the four national banks. As a result, alongside formal financial market, informal finance has been an effective support for non-state-owned enterprise financing and economic development in a non-standard and informal mechanism. In fact, experts have discovered through investigation that informal finance plays an indispensable part in promoting economic development and improving people’s income. Therefore, how to guide informal finance to develop in a standard way becomes an urgent problem to be solved. The paper explores the effects of informal finance on local economy by applying related theories in economics, finance and econometrics, reveals the impact of informal finance on the growth of local economy, discusses future developing patterns of informal finance and based on that puts forward policies and suggestions for the growth of informal finance.The paper consists of eight chapters. Chapter one is introduction. And chapter two are theoretical principles, defining informal finance, dual economy structure and related theories resulting from informal finance, providing follow-up studies with theoretical basis. Chapter three is devoted to the study of universal and endogenous properties of informal finance. Chapter four brings out in theory the effects of informal finance on the growth of local economy. Chapters five and six are empirical analyses of the contribution of informal finance to the growth of local economy. In chapter seven the experience of countries in developing informal finance is reviewed and developing patterns for China’s informal finance to follow in the future as well as policies and suggestions are presented. Chapter eight summaries the whole paper and puts forward research expectations.The research suggests that, in certain conditions, it is rational of one party in informal finance transaction to choose finance in informal credit market when driven by optimal interest, agreeing with the economic hypothesis, which goes "Humans are all rational". It shows that informal finance is efficient in financing and acts as an important approach to China’s imperfect credit market. Our present political system has created system innovation of local government, which has initiated the innovation of informal financial institution in order to better control rare resources and become an organizer in the innovation of informal finance. The study discovers that the development of informal finance has promoted that of local private economy by selecting such variables as regional economic indicators, informal financial development indicators, labor affecting local economy and real estate and using co-integration test and error correction model.The paper also suggests that proposals applicable to China’s informal finance supervision system and related financial reform measures are indispensable. In the long run, finance deepening, integration of informal fiance and formal finance and the evolution and regression of informal finance to formal finance will contribute to weakening financial dual structure and uplifting the efficiency of the entire financial system.