Informal Household Finance and Kinship Networks in Rural China

Despite the expansion of formal financial institutions, traditional informal practices, such as borrowing from friends and family or private moneylenders, remain a crucial component of household finance in the developing world. Described variously as all “non-bank” financial activity (Hsu 2009) and transactions that take place outside the regulated sector (Portes and Sassen 1987), informal finance has been linked with growth factors for private businesses (Ayyagari and Demirguc-Kunt 2010) and the alleviation of household poverty (Li, Gan, and Hu 2011). There is, however, substantial variation in the prevalence of informal versus formal finance both regionally (Tsai 2009) and within the same localities (Moheidlin and Wright 2000).

In explaining this variation, much of the literature has treated informal practices as inefficient and predatory “leftovers” from the traditional economy, destined to be replaced by rationalizing institutions from the formal economy with development (Portes and Sassen-Koob 1987). Within this tradition, neoclassical economic accounts point to household-level credit constraints (Moheidlin and Wright 2000) and the imperfect penetration of formal financial institutions to explain this persistence. An alternative perspective, however, suggests that informal practices remain important because informal and formal financial institutions serve different consumer needs (Tsai 2004) and because informal financial practices vary contextually, including by regional histories of economic policy (Tsai 2009).

This paper takes seriously this notion of the heterogeneity of informal finance by examining the connection between social networks and access to informal finance, using kinship networks in rural China as my case. Despite massive migrations in the past fifty years and attendant shifts in the makeup of China's countryside, kinship remains an important organizing principle in rural areas. In the sample of the villages used in this project, half of the villages had forty percent or greater of the population belonging to the same kin group. There is reason to expect that kinship networks would support informal finance, as kinship groups may provide a wider network from which potential borrowers can draw and stronger enforcement mechanisms, making informal lending more attractive. Existing research demonstrates the connection between economic activity and kinship networks in China, including evidence that areas with stronger kinship networks had greater development of rural industry (Peng 2012) and ability to implement official development projects (Tsai 2002). 

This project uses data from the China Family Panel Study, a nationally representative and longitudinal survey of Chinese households with waves from 2010, 2012, and 2014. Examining both within and between village variation, I will show that there is greater access to and preference for informal finance in villages where there is a kinship group with a significant proportion of the village as its members. I will also compare within those villages with a dominant kinship group the access to informal institutions for households who are members of the dominant group versus those who are not. The prevalence of informal finance cannot solely be explained in reference to the formal sector, but necessitates examining variation in the informal sector itself.