A Tentative Study On China's Informal Finance And Regularization

Since the end of 1970's, along with the graduate and continuingdevelopment of China's economic structure reform, a gap between financialsupply by the normal system and financial demand of all social fields hasoccurred and unceasingly expanded, which, as a matter of fact, providesinformal finance with a cause as well as impetus for its formation andexpansion in China. The formation and expansion of China's informal financecan be studied by different economic embranchment. Firstly, looked at fromsocial economic background, informal finance was a unique result of the periodthe previous social system transferring into the new one in China. Secondly,analyses according to system economy. Due to the true existence of financialdepression in China, the compulsive transition of financial system broughtvillages, middle and small enterprises and collectivistic enterprises hugefinancial needs, which could not be satisfied by the financial supply of thenormal financial system. This impelled those villages, middle and smallenterprises and collectivistic enterprises to make up some other market-friendlyand profitable system. Its diversity in form and flexibility in financing modenicely met the system desire, and thus informal finance began to grow up inChina. Lastly, analyses from the angle of information dissymmetry. Due toregional, vocational or kinship reasons, it is relatively easier for the lender ofinformal finance system to know about the borrower's credit condition, income,and ability to pay off, which is helpful for avoiding or reducing all kindsproblems brought by information dissymmetry. On top of that, both parties ofinformal finance have a more frequent contact, and it is easier for the lender toacquire information about the borrower. Thus, in monitoring the usage of theloan, the lender may relatively be sure with the possibility that each repaymentshall be paid on time; otherwise, the lender may take some measure. It is thanksto the advantage it has in resisting information dissymmetry that informalfinance came into being and gradually developed on this land.The formation and expansion of China's informal finance is closely-relatedwith it's advantages. It's advantages have five points: Firstly, it has anadvantage in morality risk and overcoming converse choice caused byinformation dissymmetry; secondly, it is more convenient, flexible andtimesaving; Thirdly, the cost for the dealing is relatively lower; Fourthly, ratechange is closer to the market need in informal finance market; Fifthly, publicopinion exerts more function in monitoring and restriction. Disadvantages ofinformal finance have five points too: Firstly, its application and administrationare not standardized; secondly, it is at a disadvantage in government laws andregulations; Thirdly, its limitation in size and area is against risk dispersion;Fourthly, it may arouse social phenomena such as speculation or deception;Fifthly, its expansion in size will diminish its advantage in informationdissymmetry and cost.Just because disadvantages of informal finance will bring harmfulinfluence upon the stability of China's financial order, sound progress of thefinancial market, and the execution of national policy in this industry, somepersons claim to restrain informal finance. However, to restrain is infeasible andit will only make informal finance more concealed and growing in the directionof gray finance or even black finance, so that governmental department still cannot control and supervise it. Therefore, the best way to treat it is to regularize it,put it under government control and supervision, and lead it by necessarymethods into a right path.Speaking Concretely, Specific steps to regularize informal finance concernfive: Firstly, perfect and strengthen the administration and supervision system.