Rural credit constraint and informal rural credit accessibility in China

Abstract

This paper investigates the effects of rural households' demographic characteristics on formal credit constraint, and explores the relationship between informal and formal lending in rural China. Using 2013 China's Household Finance survey data, the authors apply probit regression models to investigate the effects of demographic factors on formal credit constraint and the household's decision to borrow from informal credit sources. In addition, the endogenous switching regression model is applied to evaluate the impact of credit constraint on the welfare of rural farm households. The empirical evidence confirms that age, family size, annual household nonagricultural income, level of education, and history of informal borrowing have significant influence over credit constraint. Moreover, annual household nonagricultural income, the presence of children, borrowing from social networks and monthly communication expenses significantly impact rural households' decision to utilise informal borrowing. Results from the endogenous switching regression model suggest that credit constraint by formal credit sources has no impact on household consumption.