Banking Competition and Households’ Informal Financing: Evidence from China Household Finance Survey

ABSTRACT

This study explores the relationship between Chinese banking industry competition and Chinese households’ informal financing behavior. Using the China Household Finance Survey and bank branch data, this study uniquely provides insight on the so-called Chinese growth miracle, despite its underdeveloped formal financial system. Its results suggest that banking competition significantly impacts informal financing adoption, and that householders choose informal financing when they are formally financially constrained. This study has significant implications for policy makers as formal financing systems engage with the existing informal financial market, suggesting that policy makers should endeavor to balance and regulate this relationship.

KEYWORDS:

• Financial development
• banking competition
• informal financing

JEL:

• G11
• G12
• G21

Acknowledgments

The authors are indebted to two anonymous reviewers for their constructive comments on this study. The authors would like to acknowledge the support of Beijing Municipal Social Science Youth Foundations (19YJC026) and National Natural Science Foundation of China (71903137).

Notes

1. China Banking Regulatory Commission Report.

2. CHFS’s question about risk attitude is “If you have an asset, which investment project will you choose? 1. Risk, high return project; 2. Slightly high risk, slightly higher return project; 3. Average risk, average return item; 4. Slightly low risk, slightly lower return project; 5. Unwilling to take any risks.” We define options 1 and 2 as risk preferences, option 3 as risk neutral, and options 4 and 5 as risk averse.