Chinese Informal Financial Systems and Economic Growth --A Case Study of China's Small and Medium Enterprises

Cong Ji
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Cong Ji: Associate Professor, Senshu University

Public Policy Review, 2009, vol. 5, issue 1, 63-88

Abstract: This paper analyzes the role of China's informal financial system that supports small and medium enterprises (SMEs). China has experienced a transition from a planned economy to a market economy. During the course of this, its financial system has gone through many reforms. Despite the fact that the shift lacked consistency and coherence, because it was a series of trial and error patchworks, there is no doubt that China's strong growth is largely supported by SMEs. The author points out that the existence of informal rules based on relationships of trust such as reputation, geographical or family ties ("reputation and relationships") has not only helped financing SMEs which are suffering from asymmetry in information, but has also worked as an efficient engine to drive the growth of SMEs. Thus the informal financial system based on "reputation and relationships" is working as an important apparatus to complement inefficiency in the formal capital market.

JEL-codes: G14 G28 G32 (search for similar items in EconPapers)
Date: 2009
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