The Causes And Precaution Measures Of Informal Finance Risks In Our Country

Finance is the lifeline of the national economy. As the golden principle of national finance supervision, the safety of finance has always been taken seriously. At present, the management system of divided operation and management has already formed in our financial industry, in which People’s Bank of China, China Banking Regulatory Commission,China Security Regulatory Commission and China Insurance Regulatory Commission play important roles.However, apart from the normal financial management system, some cash flowing channels have been proceeding secretly nationwide. On the one hand, the enormous sum of cash flowing through informal way can provide loan to the medium-sized and small enterprise to solve their extreme urgency, which further promotes the development of national social economy. But on the other hand, we need to know that risks stay together with opportunities. For example, the runaway of the entrepreneur of Wenzhou city as a result of the pressure to repay the loan, brought an unnecessary loss to the creditor, increasing public anxiety about cash safety and worsening investment environment.In fact, informal finance is not the product of market development of new period, but has existed roughly for4000years as far back to Western Zhou Dynasty. At Ming and Qing Dynasty, the explosion of Chinese native bank and exchange shop symbolized the climax of informal finance. After People’s Republic of China founded in1949, the planned economic system formally established, according to which all economical activities should be funded by the country, causing decrease of the need of informal finance. In the beginning of1990s, as the market economic system forming gradually, the development of non-state-owned economy increased the need of informal finance, which resulted in the greater development in informal finance. Until now, the scale of informal finance has been quite astonishing. Informal finance plays an important role in satisfying market financing diversification.Nowadays, financing channels have been changing with each passing day with the technology development, which reflects correspondingly in the area of informal finance. Enterprise loan, private loan, loan agency, enterprise raising fund, rotatory savings, pawnbroking, private bank and other traditional models have still been laying the foundation of informal financial activities. And on this foundation, chamber of commerce and entrepreneur club permeate into informal finance, due to the new platform formed by development of computer network, the loan agency like Sudaibang and the online loan platform, such as B2B, B2C and P2P, play an unforgettable role in reliving the national financial difficulties.For the background on the above, the traditional literature search is the main tool to collect and process data, while the network and databases are also helpful. This paper uses literature analysis to demonstrate that China should establish a system in which participants can prevent the risk by themselves, industry association can play a supplementary role and government supports this.This paper is divided into seven parts. The first part introduces the basic theories of informal finance, including concept, classification, characteristics, causes and other basic elements. From the point of regulatory,the paper defines the concept and adds the development of informal finance under the background of classification of informal finance. The paper suggests that informal finance has the following three characteristics:the rapid development, large scale and the diversification of participants; simple procedure, short term, high interest rates; informal and secretive nature which can hide risks. And the causes of informal finance are mainly financial repression, asymmetric information and high transaction costs.The second part discusses the risks, from the point of policy risks, legal risks and environmental risks to analyze the external risk faced by informal financial, as well as from the point of interest rate risks, exchange rate risks, liquidity risks, credit risks and operational risks to analyze the internal risks faced by informal finance.On this basis, the paper analyzes the causes of various risks and deepens our understanding of these risks.The third part introduces the theories of risk precaution, including the public interest theory, financial fragility theory, economic security theory and the social responsibility theory to find a theoretical basis for the establishment of informal financial risk precaution system.The fourth part, from the the domestic perspective, thinks that in the informal financial sector the means for financial risks precaution are mainly moral constraints, simple certificates, capital and reserve constraints, pledge and financial lease, as well as blacklist system and advanced electronic equipment.In the fifth part,the paper points out that the regulatory body is not clear, the diathesis of citizen and practitioners is low, the legalization of informal finance is slow and there is plight in the reform of regulation. These aspects show the plight in our informal finance fields.The sixth part will be extended to extra-territorial and foreign experiences including legislative activities, market-oriented strongly, diversified financing channels, advanced risk warning method and improved credit system which provide the basis for improvement of informal financial risk precaution.The seventh part puts forward specific measures to establish financial risk precaution system from legislative, administrative and judicial aspects under the background of the analysis of the principles. China should make full use of the existing science and technology to establish a system in which participants can prevent the risks by themselves, industry association can play a supplementary role and government supports this.