Credit Constraints and Rural Households’ Entrepreneurial Performance in China

ABSTRACT

Based on data from the China Household Finance Survey, this article investigates the relationship between formal sector credit constraints and rural households’ entrepreneurial performance. Using an endogenous switching regression model, we find that credit-constrained entrepreneurial households’ profits are significantly and positively affected by credit access, which is measured by total formal and informal production loans owed. With an extra RMB 10,000 in credit, constrained entrepreneurial households’ average profits would be raised from RMB 10,604 to RMB 10,732 (i.e. by 1.2%). Entrepreneurial profits of households that are not credit-constrained do not depend on loan sizes. Based on our findings, we stress the importance of the development of new-type rural financial institutions, proper compensations for expropriated land, and stimulating savings and investments in different types of assets for improving the performance of rural entrepreneurs.

KEYWORDS:

• Credit constraints
• entrepreneurial performance
• rural households
• China

JEL:

• Q14
• R29

Supplementary material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

1. For details on the CHFS sampling design, see: https://chfs.swufe.edu.cn/.

2. Since there are no questions in the survey asking whether or not the household received the full amount of the loan it applied for, we restrict quantity constrained households to those who are completely constrained in the formal credit market.

3. In the survey, respondents were asked to report the purpose (production, housing, vehicles) of the loans they obtained in the formal or informal markets. Here we focus on total formal and informal loans for productive uses.

4. Data collected from “China Agricultural Yearbook (2011)”.

5. Data collected from “Almanac of China’s Finance and Banking (2011)”.

6. Data collected from “China Agricultural Yearbook (2011)”.

7. Data collected from “China Statistical Yearbook (2011)”.

8. According to the China Banking Regulatory Commission, new-type rural financial institutions refer to micro-credit companies, village banks and rural credit union funds. See http://www.cbrc.gov.cn/chinese/home/docDOC_ReadView/2923.html.

Additional information

Funding

This work was supported by the National Office for Philosophy and Social Sciences (17&ZDA037), Ministry of Education of the People’s Republic of China (18YJC790177), Social Science Foundation of Jiangsu Province (18EYC008), Jiangsu Provincial Department of Education (2018SJA0245).