A Study Of Coherency Between China’sInformal Finance And Monetary Policy

With the outbreak of informal credit crisis all over the country, informal finance re-entered the public view, at the same time, the informal financial legalization is once again on the agenda. The informal finance, from administrative point of view, are those financial activities and institutions which have not been approved by the central government and are not in the control of the government supervision, this concept now also includes those informal financial activities dominated by the formal financial institutions as the continuous development of the economy.The traditional theory insist that the informal finance generate under the circumstance of financial repression, which led to the insufficient supply of formal financial market and result in a funding gap, in addition, the financial resource allocation has a strong policy guidance underneath the long term dual economic system in China, so that the rural economy and private economy are difficult to obtain funding from the formal financial institutions. It is in this context, to emerge a market which can meet the demand for the surplus funds of financial market, while is different from the formal financial market, thus forming in China the dual finance system in the coexistence of formal and informal finance.Compared with the formal finance, informal finance is more good at handling "Soft information’’, therefore, in a certain range, the informal financial market can effectively overcome the moral risk, achieve the lower marginal cost of loans. In addition, the informal financial market can absorb the disengaged capital to meet the urgent demand for borrowers, so as to achieve the effective allocation of social resources role. However, on one hand, along with the expansion of the scope of participation, informal finance’s advantage in overcoming the moral risk will disappear; on the other hand, with the informal financial market high yield return temptation, more and more people involved in the informal financial activities, so that informal financial market risks gradually accumulated in the absence of regulation and penetrate into the formal financial system,which will bring tremendous potential threat for finance stabilityTherefore, this paper is made to analyze the current trend in informal finance, make clear whether there is a correlation between the informal finance and the monetary policy? If there is, then what is the relationship? More importantly, thinking whether informal finance should be legalized? whether there still exists some problems that can not be smoothly legalized? What countermeasures can we offer for these problems?This paper is divided into six parts. Introduction to the first part mainly explain the informal financial background, at the same time do a general literature review of informal finance from three aspects of the existence、interest rates and macroeconomic relevance, in addition, the chapter also explains the intention and method to be used.In the second part, this paper give a definition of the informal finance while introduces several common informal financial organization form, in addition, this part summarizes the existence theory of informal finance and made evaluation of the theory.The third part is about China’s informal finance development path, this part review the development of informal financial organization form and show a visual and concise graphical display of the process. In addition, this part also discussed new trend of informal finance in China, thinking the informal finance have accumulated a lot of potential risk due to growing speculation and diversified participants.The fourth part of this paper focuses on the influence monetary policy made on China’s informal finance. this part logically has two layers, one layer explain that under the condition of interest rate control, formal financial market will always produce the funding gap, resulting in the high interest rates of informal financial market; the other layer illustrate,with this funding gap, as a formal financial market and informal finance exist at the same time, whether monetary policy tightening or loosen, informal financial interest rates and informal financial interest rate always change to the same trend.The fifth part show how informal finance in China affect monetary policy both from analysis and empirical research, the following three aspects completed this part of the study:firstly, explained that informal finance can affect the real money supply, monetary circulation speed and monetary policy direction theoretically; Secondly, use certain method to estimate the informal financial credit and made an analysis of the estimated results; thirdly, do the empirical analysis by using estimated informal financial credit results and M2. generally, this part argues that the informal finance can increase the money supply, but it could not be observed so that it will bring certain influence to macro-economy and is not conducive to the implementation of monetary policy.In the sixth part, this paper further analyzes the current problems facing the informal finance legalization are financial institutional long-term monopoly and legislation rules difficult to reach consensus, for the future legalization way, this paper puts forward a point of view, namely that the informal finance should develop expertise law, while develop deposit insurance institutions as its last lender.Through the six part of the paper, this paper comes to the point of view:the monetary policy affect informal financial market rates, and informal finance can expand the money supply but this effect cannot be reflected in the statistics of M2, thereby restraining the implementation of monetary policy, in view of this, the informal finance should be put into the regulatory system.This paper has three characteristics. firstly, this paper uses the theoretical model to illustrate that the informal finance and the monetary policy has the relation of mutual influence; secondly, this paper use income and expenditure law to estimate data of informal finance credit, on the basis of this law, the informal finance credit scale estimation was extended to2009; at last, this paper uses econometric method to demonstrate the influence informal finance made on money supply and monetary policy, concludes that informal finance makes monetary policy effect difficult to control.Of course, this paper have some shortcomings, such as the original data are lacking so that we can not estimate the last two years of informal finance credit, at the same time, the estimation with short-term data may underestimate the results; furthermore, in this paper, without considering the effect other factors bring to M2, the model results may not accurate. These are also the paper itself should improve in the future.