When Formal Finance Meets the Informal – The Case of Wenzhou

18 Pages Posted: 20 Oct 2019

See all articles by Ding Chen

Ding Chen

University of Sheffield; University of Cambridge - Centre for Business Research (CBR)

Simon Deakin

University of Cambridge - Centre for Business Research (CBR); European Corporate Governance Institute (ECGI); University of Cambridge - Faculty of Law

Date Written: May 31, 2019

Abstract

We examine the causes of the financial crisis of 2011 in the Chinese city of Wenzhou. While the crisis of 2011 has been attributed to weaknesses in the system of informal finance, including predatory interest rates, we suggest that the roots of the failure lay in the way that the formal and informal systems became intertwined in the period following the global financial crisis of 2008 and the expansionary monetary policy initiated by the Chinese authorities to counter its effects. We explore the effects of the over-supply of formal credit in this period and the encouragement of group lending, a practice relatively unknown prior to 2008, and which magnified the effects of the crisis. We suggest that the lesson to draw from Wenzhou is not that informal finance is inherently more instable or inefficient than formal finance, but that encounters between formal and informal finance can trigger instabilities in both.

Keywords: Informal finance; formal credit; Wenzhou crisis; monetary policy; group lending

JEL Classification: o16 o17 o47

Suggested Citation

Chen, Ding and Deakin, Simon F., When Formal Finance Meets the Informal – The Case of Wenzhou (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=3467120 or http://dx.doi.org/10.2139/ssrn.3467120

Ding Chen (Contact Author)

University of Sheffield ( email )

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

University of Cambridge - Centre for Business Research (CBR) ( email )

Top Floor, Judge Business School Building
Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Simon F. Deakin

University of Cambridge - Centre for Business Research (CBR) ( email )

Top Floor, Judge Business School Building
Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+ 44 1223 335243 (Phone)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

University of Cambridge - Faculty of Law ( email )

10 West Road
Cambridge, CB3 9DZ
United Kingdom

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