Formal and Informal Credit Markets and Rural Credit Demand in China

This study focuses on the evolving rural credit market in China, where borrowing from the social network has been common, but the recent economic transition has made this informal credit market inadequate in addressing rural credit needs. The study identifies social and economic factors that explain farmers’ credit constraints and influence their decision to switch from informal to formal credit markets.

Credit markets are an essential economic institution. Identifying emerging credit demand and instituting credit supply in a timely manner to facilitate economic transformation is important in developing countries undergoing rapid social and economic transition. The study uses data from a household survey to explore the determinants of credit market choice and credit constraints. Findings indicate that:

• Credit demand is significantly affected by the household’s production capacity;
• Household size, land size and education of the head of the household significantly increase the household’s probability to borrow;
• Credit market influences the Impact of these factors;
• Off-farm employment, land size and cost of credit are the three most important factors that increase the probability of being constrained.