In the past two decades, the private sector in China has created more than 30 million new businesses, a stunning feat given that most entrepreneurs have no access to financing from state-sanctioned banks and China lacks a coherent system of private property rights. How has the engine of China's economic miracle flourished in the absence of capital and reliable legal protection?
Kellee Tsai, an assistant professor of political science at The Johns Hopkins University, spent years investigating this question. She conducted more than 500 surveys and in-person field interviews with entrepreneurs and local officials from all over China. Many of the interviews were hard to get, as entrepreneurs were suspicious of her intentions and at times reluctant to talk to a stranger, especially in back alleys.
"Private entrepreneurs have devised an amazing array of informal financing mechanisms," Tsai writes in her new book, Back Alley Banking: Private Entrepreneurs in China (Cornell University Press, July 2002). These financing schemes range from "interest-free interpersonal lending and rotating credit associations to more institutionalized financial intermediaries such as private money houses and credit cooperatives."
"Most of these credit facilities are creatively organized, community-based and convenient for the small business owners," Tsai continues. "Most are also explicitly banned by the People's Bank of China." And surprisingly enough, the book shows that most forms of informal finance in contemporary China have found their way to other parts of the world, including the United States.
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