Dual Credit Markets and Household Usage to Finance: Evidence from a Representative Chinese Household Survey

Using a new and representative data set of Chinese household finance, we document household usage and costs of finance, along with their correlates. As in many developing countries, informal credit is a crucial element of household finance, and interest-free informal loans based on reciprocal personal relationships are highly prevalent in our sample. Not surprisingly, wealth tends to be associated with greater usage of both formal and informal finance. Political connections, extensive social networks and certain household demographic characteristics (such as size) are all positively associated with formal or informal credit usage (or both). Overall, our findings show signs that a dual credit market is emerging in China, with the poor, politically unconnected, and those with larger family sizes still heavily reliant on informal finance, most of which are interest-free, while younger, wealthier households with better political connections and financial knowledge are increasingly using formal finance.