Farmers' financial choices and informal credit markets in China

Purpose - Informal credit markets are very active in many developing countries, including China. Informal financial associations have become a major channel of borrowing. Using data from the 2006 Rural Household Survey, the purpose of this paper is to investigate farmers' borrowing choices between banks, relatives/friends and informal associations. Design/methodology/approach - A simultaneous equation system is estimated using three-stage least squares to study the determinants of borrowing from varying sources and how they are related to each other. Findings - The results show that the relationship between the probability of formal credit market participation and age follows an inverted U-shaped pattern. Education, which serves an indicator of future income, is not significant in any setting. Borrowing from informal associations seems to stand alone and neither of the other two sources has an effect on its success rate. In addition, borrowing from informal associations works as a substitute for borrowing from relatives/friends but not vice versa. Originality/value - In this paper, borrowing from various sources is incorporated in a system of equations; thereby contributing to a better understanding of credit markets in China by providing a bigger and complete picture.