Formal and informal finance in china and its relationship to household wealth: an empirical analysis based on micro data

A key feature of China’s financial market is the coexistence of formal and informal financial markets. The purpose of this study is to examine the relationship between household wealth and both types of finance and clarify the different roles they play in household finances. Using nationally representative household survey data from China Household Finance Survey (CHFS) 2017 and 2019, this study follows a two-stage selection bias correction method in a multinomial logit framework to estimate and compare the effects of household wealth on the amount of borrowing from formal and informal finance. Our findings indicate that as household wealth increases, the likelihood of using formal finance rises, whereas reliance on informal finance declines. However, after correcting for selection bias, we observe a positive association between borrowing amounts and household assets and income across both financial sources. This finding challenges the traditional perspective that informal finance primarily serves vulnerable groups. Our findings suggest that informal finance may play a dual role, potentially facilitating both investment and consumption smoothing. This study contributes to the literature by illustrating how informal finance, rather than being a mere substitute for formal finance, operates as a complementary mechanism with unique functional advantages.