Private Credit Of Rural Housholds And Economic Development Of Rural China

The effects of financial development on the economics are debated by researchers and governors. The positive studies show that credit will increase the households'welfare by smooth consumption mechanism, and will draw more the private investment through leverage mechanism, sum up, the credit market improve the economic development. The negative point, however, argue that the poor households or small-medium enterprises(SEMs) are always constrained by the formal financial market, and they has to reduce the investment even though there are profitable project in order to maintain their basic needs, such as food consumption. Hence, the poor or SEMs are restricted to development. On the long-term, there will be a "vicious-circle". That is, the credit constrained poor will become poorer, the poorer are more hardly to get loan, and then they become poorest, we called it "Poverty Trap". The positive literature debates that the negative effect of formal credit on economics are not too serious, because the constrained households or firms can access to the informal credit market, but they can't find the direct evidence to proof their argument because lack the data. The debating is hot nowadays, especially in China.This thesis examine whether the informal credit can improve or hinder the economic development of rural China both in direct (informal credit affect on consumption and agricultural investment) and indirect (determination of informal credit constraint and interest rate) perspectives used two newest micro-data sets conducted by China Household Finance Survey (CHFS)2011, Southwestern University of Finance and Economics, and Rural Finance Survey (RFS)2009, Peking University.We find that,(1) Total expenditure of rural households who can get loan from bank is significantly higher than the credit-constrained households', because non-constrained households will increase agricultural input, investment on education, or decrease the fixed saving holdings. The development of formal credit market increases the rural hoseholds'income significantly. Informal credit, however, affect on the total expenditure is insignificantly, because rural hosehold will reduce their consumption more than agricutral input growth when they borrow forma informal credit market.(2) Both formal and informal credit market constrain the poorer's accessiabilty. The poor donot have extra money to invest on social capital, which the main determination of rural informal financial market. Comparing with richest25%quantile, the poorest25%quantile can not access to the informal credit market, so they can not draw out the poverty. This effect is more serious for those who are constrained by formal bank.(3) Income disparity is the main reason of zero-high interest rate. The poor will pay higher interest rate when they borrow from the rich, because they can not become the social capital of rich, or they are more likely to default. The poor are "discriminated" by both formal and informal credit market, hence, the relative poor household has to drop the profitable project, or get lower profit although they can borrow money because the higher interest rate.(4) The rural households always use the trade credit instead of borrowing, when they rent in agricultural lands, to break the credit constraint and increase agricultural production. Farmland rental and financial market are interlinkage because the financial constraint.Deducing our findings, we can conclude that the poor are constrained both in formal and informal financial market, and have to pay higher interest rate than rich control the profit and risk of project. Only formal loan, but not informal borrowing can increase the total expenditure of rural households, and both formal and informal financial market may explain the poverty trap in rural China. However, the trade credit in farmland rental market affect on the agricultural development significantly positive. These conclude provide the derict evidences for rural firmanice and economic reform.This thesis contributes to the literatures at three pespectives:First, we have three new findings which ignored by previous studies.(1) We confirm that the informal credit market also has the lower boundary to entry. Given the formal financial under-development, the poorest25quatile are hardly to finance from informal market.(2) Income disparity is one of main reasons that the informal interest rate distribute from zero to usery, which explains why poor borrow from poor from the perspective of informal capital pricing.(3) We test the relationship between financial market and farmland rental market, and proof that they are interlikage firstly because the farmer uses trade credit to break the financial constraint.Second, this study uses the two, represented and specialized newest data sets of rural China.these two data sets have advantage and disadwantage respectively. CHFS2011samples are seltected of China randomly, intesitagte the assets, debt, income and expenditures of households, but can not analysis thn informal credit deeply. RFS2009is a specialized survey, which samples are seltected in Heilongjiang, Hunan and Yunnnan province of rural China randomly, but intesitagte the detail information both in formal and informal credit market. Hence, we can find the pattern and understand the informal credit effect on the rural economics when combine these two data in this thesis.Third, we do not use more creative methold to estimation our hypothsis. We only select the stiuable economictrica model, such as, OLS, Probit or Tobit model, to extimate the empirical framework according the data structure and reality problem. We use the distance to bank, risk attitude as instrument variables of formal loan and wealfare respectively, to slove the endogeneity problem. Moreover, we try to use different measurments and thresholds to re-regress baseline models as robustness check, and conduct interaction term, or sub-sample regression to test the mechanisum.This thesis are limited by time and cost, there are four issues need to further discussion in the future:(1) Informal finance effect on the economics are dynamic, not static, the cross-sectional data can't capture the long-term effect.(2) This work only test the informal borrowing and trade credit effect, do not analysis other informal type, although it is only2%of rural households'informal borrowing sorce. e.g., small loan company, internet finance, etc., affects on the rural economics casued by the data limitation. (3) The object of our study is to test whether the informal credit reduce the poverty in rural area, this concludes can not extended to the industrial sector, or urban area.(4) This paper donot test the second order condition according the cross-sectional data, but we provide the first order condition of financial market equilibrium.This work can not explain the informal credit market and economic development pattern of China, but rural area, and it is not used to understand some special case. Please careful to extend the conclusion.