Does Formal Finance Crowd Out Informal Financial Financing?

After the reform and opening up,the scale of China's financing market continued to expand,and the formal financial sector represented by banks gradually failed to meet the growing financing needs in the market.As a result the private sector has spawned various informal financial models,such as private lending,P2P,and shadow banking.Although these informal financial models can well meet the financing needs of regions and user groups that are difficult to reach in formal finance,their high risk and lack of supervision make them gradually valued by the regulatory authorities.In this regard,the government and the regulatory authorities on the one hand encourage the expansion of the formal financial sector,such as the "Adjustment Opinions on Market Access of Small and Medium-sized Commercial Bank Branches(Trial)issued by the China Banking Regulatory Commission in 2009";on the other hand,it also continuously compresses the informal financial institutions.Or "regularize" informal financial institutions and include them in the scope of supervision,such as the "New Regulations for Asset Management" issued by the Banking Regulatory Commission in 2018;or restrict their development,or even directly ban,such as issued in 2017.Notice on Standardizing the Reorganization of "Cash Loan" Business.This paper will study the relationship between formal finance and informal finance based on this background.This paper firstly based on the theoretical model of Jain(1999),combined with China's relevant policies and reality to explain the rationality of the theoretical model.Then,using the China Statistical Yearbook and the data of Chinese private listed companies,the paper studies the impact of the expansion of formal financial financing on the scale of informal financial financing in the context of rapid bank expansion.The study finds that China's formal finance and informal finance are complementary in scale,that is,the expansion of formal financial financing in China has a "crowding-in effect"on informal financial financing,which is not only characterized by the enterprise.The impact,such as the size of the enterprise,the age of the enterprise and the asset-liability ratio,are also affected by the proportion of heterogeneous borrowers in the market,the difference between the informal financial and formal financial loans,and the probability of successful borrower investment.Finally,this paper argues that although informal finance has a series of shortcomings such as high risk and regulatory difficulties,and the current development of informal finance in China has been suppressed by a large degree of policy,formal finance has not only "squeezed out" informal finance,Instead,the two presents a synergistic relationship.Because informal finance has the advantages of flexibility,innovation,and information advantages that formal finance does not have.It can help the information screening of formal financial institutions in the market,reduce the risk,increase their income,and enable different types of borrowers to obtain the optimal loan contract.Therefore,informal finance,as an important supplement to formal finance,recognizes its market position and implements the policy of informal financial protection and supervision,which not only promotes the healthy development of informal finance,but also contributes to the development of formal finance in China.