China’s Informal Economy: Ethical, Economic, and Empowerment Considerations
By Solveig Baylor
Abstract China’s rapid growth has lifted millions out of poverty in the countryside. However, many rural borrowers have been excluded from the formal financial sector, forcing them towards unregulated and potentially exploitative lenders. Rural women struggle for financial security when facing formal sector obstacles and China’s patriarchal customs. An analysis grounded on ethical, cultural, and structural perspectives yields recommendations that empower rural women and strengthen China’s financial sector.
Introduction
In China, 800 million people have been lifted out of poverty because of the country’s staggering growth. China averaged 9.8% annual GDP growth in 2018, spurring the World Bank to characterize it as “the fastest sustained expansion by a major economy in history.” Growth has slowed greatly, however, with economists predicting a rate of 5.5% in 2024.[i] This slowing leads to two questions: what is the next growth sector for China, and how can the Chinese financial system work better for those who no longer struggle with poverty?
The answers to both questions lie in China’s countryside. Currently, China’s rural population is 39.2% of its overall population.[ii] Yet, in 2009 urban residents received 2.33 times the earnings of rural residents.[iii] Many escaped poverty yet rural real incomes have been falling since 2014, decreasing as much as 20% from 2018 to 2019.[iv] While only 0.5% of China’s population live under global standards of poverty, how and why is the existing financial system leaving rural Chinese households behind?[v]
One key answer lies in access to capital through banks. The formal financial sector, comprised of large state-owned banks, usually lends to big corporations with high growth potential, little risk, and sizeable accounts. Rural firms and small and medium sized enterprises (SMEs) tend to be the opposite: relatively low growth potential, high risk of default, and small account values. The formal financial sector ignores rural firms for these and other reasons, creating a capital shortage in the countryside. Because this money is vital to household and business survival, many turn to the informal financial sector instead. Family and friends, loan sharks, pawn shops, and underground banks compose the illegal, unregulated informal financial sector. SMEs account for 60% of GDP, 75% of the workforce, and 90% of new positions created, but as of 2012 they only received less than half of bank loans.[vi] Many are lost in the cracks between the formal and informal financial sectors.
There exist a concerning number of ethical problems in both financial sectors, particularly in the case of a vulnerable demographic in China: rural women. These cultural influences hold stronger in the countryside where often local rules have stronger influence than the laws. Rules like land rights being allocated toward male heads of household, men being the locals with more social capital, and assumptions of less credit-worthiness of women, keep women financially dependent on their male relatives. Rural women might also have fewer acceptable forms of collateral for banks because they lack private land rights and carry the burden of a disadvantaged financial situation. As one of the largest financially vulnerable demographic segments in the world, an ethics analysis to assess this particular group’s current position is certainly helpful, even necessary, accompanied by a set of recommendations going forward.
