A Study On Informal Finance To SMEs In China

SMEisthe core element in achieving sustainable economic development in China.It contributes to the Chinese employment, income raising, technology innovation,economic development and social security. Whereas, SMEs in China bear the brunt offinancial dilemma，however, external finance is the key to their further development.The formal financial sector is inaccessible to SMEs and the informal finance is theprimary finance approach. Therefore, this paper aims at objectively addressing thecurrent role of informal finance to SMEs in China.Through the economic model analysis, the information asymmetry is theunderlying factor, which accounts for SMEs financial dilemma.Informationasymmetry between lenders andborrowers causes“adverse selection”before thetransaction and “hazard risks” after thetransactionthat hinders the loan from financialinstitutions to SMEs. In addition, Financial repression takes SME to the arm ofinformal finance. Financial repression in China is mainly reflected in governmentinterventions by regulating domestic interest rate and controlling dominating bankingsystem. All the structured factors contributeto imperfect financial market in China,which the formal financial instrument such as banking, equity and bond market,cannot serve the entire economy. Most SMEs are rejected by the formal financialsector. Whilst, which financial method the SMEs will choose, depends on costanalysis directly. A series of collaterals requirements of banks add additional cost onSMEs and beyond their profitability. Therefore, Informal Finance, under the imperfectfinancial markets, plays a complementary role of the entire economy; especially theimpact on the early phase of SMEsdevelopment is particularly evident.Nonetheless, approved by the empirical analysis ofWenzhou city in ZhejingProvince, where is famous for SMEs development,informal finance has its duality.Itmeans informal finance plays a significantly positive role in economic growth, as well,distortes the development if there is lack of rational economic behavior andreasonable regulation.Comparison with SME finance in the USA, the UK, Japan, on the contrary，formal finance such as banks, stocks, is the leading way to SME indeveloped countries. What makes the differences is quality of enterprises, policysupport, credit system and so forth.A conclusionshould be drawn here is constructive informal finance could be acomplementary tool when under supervision and protection by laws andregulations.Meanwhile, it is necessary to improve the finance environment, expandthefinancial channels and enhance financial innovation, in order to solve SME financeproblems effectely and efficiently.