Does it pay off to be formal? How different financing choices affect the performance of Chinese private firms

Abstract: This thesis studies the link between private firm performance and access to finance from a formal financial institution in China. Using firm-level data collected by the World Bank from 2700 private Chinese firms in the period December 2011 to February 2013, this paper finds a positive connection between the use of formal finance and private firm performance. This paper also finds a positive relationship between firm performance and the use of informal finance when used to finance the firm’s working capital. Other factors can also be shown to affect both performance and the loan giving. These findings show that firm size and province are important factors that help explain both. Large firms have easier access to formal finance, whereas small and medium-sized (SME) firms have a harder time obtaining formal finance. Firms located in provinces that have a higher degree of marketization are shown to perform better and have easier access to formal finance. The empirical findings suggest that more needs to be done in helping SMEs access the formal financial system and that overall market reforms are needed in those provinces that are less developed.