Curb Financing: The Effects of Informal Finance on China's Economic Growth

Introduction

China's remarkable growth record since 1978 is the foundation upon which its subsequent economic and social development achievements have been built. By the early 2000s, however, it was increasingly clear that the differentiated pace and distribution of development associated with the growth-maximization strategy was the source of economic, social and environmental strains within China.

One of the neglected areas of Chinese economy is the study of problems related to the informal economy. The highly unbalanced nature of economic growth in China is the major source of informal financing in China (Biliang, 112). Informal financing has significantly contributed in the development of SME business in China in last few decades. Following 1980, more than 30 million private businesses were established in China (Chiu, 51). However, majority of private firms were unable to get the benefit from the formal financial system (Chiu, 54).

Curb (informal) finance has become a major financing channel for SMEs in China; arrangements of the formal financial system cannot meet the financing needs of SMEs (Cong, 67). Informal financing is regarded as curb financing activities based on its destabilizing effects. Limited scope of the Chinese state bank system resulted in escalating the curb financing structure (Tsai, 4). This paper presents a critical analysis of curb financing and the extent to which the growing use of curb financing has been impacted China. This paper also explores the impact of curb financing on future market, banks, growth, and economic development.

Curb Financing (Informal Financing)

Curb Financing is also known as informal financing. Informal finance modes include multiple sources such as a money lender, informal bank, financing from self-funded firms, and cooperative agencies. A huge amount of capital stock of private capital to China's banking system consists of formal and informal finance. Financial role in promoting economic growth is financed by the formal and informal financing simultaneously (Wu, 79). However, curb financing development plays a very important role in economic growth of China and laid support system for SME sector growth in China.

Informal financing activities have highly developed in recent years, following the emergence of SMEs since 1980. Informal financing structure has not been approved by regulatory authorities (Wu, 81). However, this mode of financing provides vitality to business financing structure. Major factor for the increase in curb financing is the private economy's development in China, which resulted in increasing the money demand. Informal financing activities share a considerable part for private economic services, to fill the gaps in the market capital supply and demand (OECD, 129).

Parameters of Informal Finance

This section describes the factors that set the parameters of informal finance. China's private economy has developed rapidly since 1980. In year 2001, registered individual businesses in China has reached up to 24.33 million; whereas, the private sector accounted 2.03 million. The SME sector has created a public value of 1.9637 trillion Yuan, accounting for GDP ratio of more than 20%. Retail sales from SME sector reached 1.7744 trillion Yuan of social consumer goods, accounting for 47% ...