Dual Credit Markets and Household Usage to Finance: Evidence from a Representative Chinese Household Survey
| Author | Li Gan,Nan Gao,Lixin Colin Xu,Robert Cull |
| DOI | http://doi.org/10.1111/obes.12320 |
| Date | 01 December 2019 |
| Published date | 01 December 2019 |
1280
©2019 The WorldBank.
The Department of Economics, University of Oxford ©2019 John Wiley& Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 81, 6 (2019) 0305–9049
doi: 10.1111/obes.12320
Dual Credit Markets and Household Usage to
Finance: Evidence from a Representative Chinese
Household Survey*
Robert Cull,†Li Gan,‡,§ Nan Gao¶ and Lixin Colin Xu†,††
†World Bank, 1818 H Street, NW Washington, DC 20433, USA
(e-mail: lxu1@worldbank.org)
‡Texas A&M University and SWUFE, 1818 H Street Northwest Washington, Washington,
DC 20433, USA (e-mail: gan@econmail.tamu.edu)
§SWUFE, 55 Guanghua Village Road Chengdu, 610074, China
¶Wenlan School of Business, Zhongnan University of Economics and Law, 182 Nanhu
Avenue, East Lake High-Tech Development Zone, Wuhan, 430073, China
(e-mail: gn85779632@163.com)
††World Bank and CCER, Peking University, Beijing, 100871, China
(e-mail: lxu1@worldbank.org)
Abstract
Using a new and representativedata set of Chinese household finance, we document house-
hold usage and costs of finance, along with their correlates. As in many developing coun-
tries, informal credit is a crucial element of household finance, and interest-free informal
loans based on reciprocal personal relationships are highly prevalent in our sample. Not
surprisingly, wealth tends to be associated with greater usage of both formal and informal
finance. Political connections, extensive social networks and certain household demo-
graphic characteristics (such as size) are all positively associated with formal or informal
credit usage (or both). Overall, our findings show signs that a dual credit market is emerg-
ing in China, with the poor, politically unconnected, and those with largerfamily sizes still
heavily reliant on informal finance, most of which are interest-free, while younger,wealth-
ier households with better political connections and financial knowledge are increasingly
using formal finance.
I. Introduction
Household finance can be an important lever to influence policy outcomes. China, for
instance, is hoping to increase household consumption to reduce its reliance on exports
JEL Classification numbers: G00, O17, O53, P34.
*We have benefited from comments of Daniel Berkowitz, Jing Cai, Xiaoning Long, Claudia Ruiz, Thierry Tres-
sel and other participants of the Chinese Economist Society meeting at University of Michigan, and a seminar
at Xiamen University. Funding was provided by the National Natural Science Foundation of China (grant no.
71803194), the Ministry of Education (grant no. 18YJC790033), Zhongnan University of Economics and Law
(grant no. 2722019JCT038). The views are the authors and do not necessarily reflect those of the World Bank, its
executive directors, or the countries they represent.
Dual credit markets and household finance 1281
for growth, and household finance is instrumental in purchasing decisions for housing,
durables, education and medical care. Another key objective emphasized by the Chinese
government in recent years is facilitating the creation of new businesses, especially small
and medium-sized ones, and external finance is often critical to start or grow a business.1
Yet, partly due to the lack of detailed data on household usage of financial services, we have
little in-depth knowledge about household financial arrangements in developing countries
such as China.
In this paper, we rely on a comprehensive new national data set to provide a more com-
plete description of Chinese household finance. In particular, we address the correlates of
a household’s usage of finance, why certain segments use less finance, and how house-
holds use formal and informal finance. We also examine the roles of political and private
networks in facilitating credit usage. The data set we use, the Chinese Household Finance
Survey (CHFS) 2013, is designed to be representative of China through a multi-stage strat-
ified random sampling process. It covers 29 provinces, 262 counties, 28,100 households
and 98,000 individuals, and represents the best source available for studying the above
issues. To our knowledge, this is the most comprehensive attempt to date to study usage
of financial services in China in terms of the number of people covered by our sample and
the range of correlates that are available to describe usage patterns.
Our study contributes to an emerging literature on the relativeimportance of infor mal vs.
formal finance in explaining China’s recent growth. Some studies ascribe more importance
to the role and efficiency of informal sources of finance in explaining the growth of Chinese
firms (Allen, Qian and Qian, 2005) than others (Cull and Xu, 2005; Cull, Xu and Zhu,
2009; Ayyagari, Demirguc-Kuntand Maksimovic, 2010), though in general results indicate
that many firms rely on both sources. Our analysis is somewhat similar to others for China
that examine how political connections and business and personal characteristics affect
the sources of financing used by owners of small private firms (Tsai, 2002; Zhang, 2008).
Zhang (2008), for instance, uses survey evidence to examinereliance on for mal vs. informal
financing in Chengdu, one of China’s most important inland cities. He finds that proxies for
reputation and relationships play crucial roles in explaining firms’ usage of formal finance,
though those factors are typically associated with usage of informal finance. Because our
survey is more detailed, we are better able to test whether proxies for social networks and
other household characteristics describing reputation and relationships are related to usage
of both formal and informal finance. Another difference between that study and ours is
that Zhang (2008) focuses on small private firms whereas the household is our unit of
observation, though we admit that household and small business finance are often deeply
intertwined. Nevertheless, our key advantage is that we rely on nationally representative
data for China enabling us to compare financial usage patterns across regions and to
examine usage by different types of households within the same types of environments
(e.g. rural vs. urban).
Our investigation yields several insights about how household finance works in China,
many of them similar to those in other developing countries, but others that are distinctly
Chinese. As in other contexts, informal finance proves to be of critical importance for our
1Admittedly, some very small businesses receive no external capital, but we wouldargue that is likely to impede
their growth.
©2019 The WorldBank.
The Department of Economics, University of Oxford ©2019 John Wiley& Sons Ltd.
1282 Bulletin
understanding of household finance, especially in rural areas. For example, we find that
a larger social network (as measured by the number of siblings of the household head
and his/her spouse) is positively linked to the prevalence of informal finance. Informal
social networks can facilitate trade where legal enforcement of property rights is weak
or uncertain (McMillan, 1997). For example, social networks based on family ties have
been shown to support extension of credit in Thailand (Townsend, 1995) and Vietnam
(McMillan and Woodruff, 1999).These social networks need not be based solely on kinship.
For example, McMillan and Woodruff (1999) find that business networks comprised of
unrelated members who knew each other well were effective in promoting trade credit
in Vietnam, even more so than family-based social networks. Given the nascent state of
formal credit markets in many of the locales that we study, informal credit proves to be
relatively cheap, and with longer de facto maturities than many forms of formal credit.
Indeed, one of our key findings is the prevalence of informal loans that carry no interest
rate in our sample. These loans are rooted in long-term personal relationships based on
reciprocity, which are common both historically in China (Brandt and Hosios, 2010) and
in other developing countries (Udry, 1990, 1994; Fafchamps, 2011). In our sample, these
arrangements are a common way to facilitate large purchases (for land, homes), though
they can also serve as informal insurance when a household suffers an economic setback.
Our data also enable us to describe in detail the types of households that rely on interest-
free informal lending. We find, for example, that these arrangements are somewhat more
prevalent in rural areas, and among larger families with more extensive social networks.
In urban areas, interest-free informal borrowing is more common among households with
less education.
Another key finding is that connections to the Communist Party (the dominant party in
China) are associated with greater usage of credit. A branch of the literature on firm creation
and growth has emphasized the importance of government connections, particularly in
obtaining loans. In developing economies, politically connected firms are more likely to
obtain loans (Claessens, Feijen and Laeven,2008; Fan, Rui and Zhao, 2008; Li et al., 2008)
and to invest via equity markets (Boubakri et al., 2012), and are more likelyto be bailed out
when facing financial stress (Faccio,McConnell and Masulis, 2006). In the Chinese context,
government intervention has long biased credit allocation towardstate-owned enterprises.2
Among private Chinese firms, political connections are also associated with better access
to credit (Choi and Zhou, 2001; Cull et al., 2015) and to equity markets (Francis, Hasan
and Sun, 2009), and a growing literature indicates that government connections play a
key role in explaining firm investment behaviour (Chow and Fung, 1998; H´ericourt and
Poncet, 2009; Poncet,Steingress and Vandenbussche,2010; Guariglia, Liu and Song, 2011;
Cull et al., 2015) and profitability (Choi and Zhou, 2001). Recent evidence also indicates
that Chinese government bureaucrats themselves receive greater amounts of credit and on
more favourable terms than other borrowers (Agarwal et al., 2018). Our analysis, which
is focused on household usage of financial services, confirms that political connections to
the Communist Party are associated with greater usage of credit, especially in rural areas.
2See Brandt and Li (2003), Huang (2003), Bai, Lu and Tao(2006a), Li et al. (2008), Cull et al. (2009) and Gordon
and Li (2003).
©2019 The WorldBank.
The Department of Economics, University of Oxford ©2019 John Wiley& Sons Ltd.
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