Back-Alley Banking: Private Entrepreneurs in China

By Sargeson, Sally | The China Journal, January 2004 | Go to article overview

Back-Alley Banking: Private Entrepreneurs in China


Sargeson, Sally, The China Journal


Back-Alley Banking: Private Entrepreneurs in China, by Kellee S. Tsai. Ithaca: Cornell University Press, 2002. xvi + 316 pp. US$35.00 (hardcover).

For some twenty years, economists have been applauding the formation, growth and maturation of China's private business sector. It is all the more remarkable, then, that Kellee Tsai's book is the first major English-language study to examine how Chinese entrepreneurs, denied lines of credit with state banking institutions and prohibited from organizing private banks, have raised capital. Back-Alley Banking offers readers rich empirical data, rigorous new tests of old theoretical frameworks and a smattering of engaging anecdotes from the field. In sum, this is a very fine book.

Tsai's meticulous field research, carried out over several years in Fujian, Zhejiang and Henan, illuminates businesspeople's creation of an impressively diverse curb-market for finance. This market includes everything from legally sanctioned and semi-legal shareholding cooperative financial institutions and rural and urban cooperative foundations to illegal pawn-shops, loan sharks and Ponzi-type pyramidal investment schemes and to rotating credit associations.

While conceding ' that the efflorescence of the curb-market has been "demand-driven", Tsai cautions that its internal diversity, modes of operation and impact cannot be understood solely through the calculus of the market. Nor can it be interpreted simply as evidence of state-directed developmental activity, for "the state" in China is not a unitary entity. Instead, Tsai demonstrates the importance of two key local political factors in shaping informal financial institutions in China. First, local governments' support for private business affects the range and sustainability of informal financial institutions available in different localities. Even within a local government jurisdiction, variation is produced by sections of the government responding to different incentive structures when dealing with informal financial institutions.

Curb-market financiers amplify and operate within the interstices of these incentive structures, generating intra-government competition for rent-seeking opportunities. This is illustrated most clearly in the case of Wenzhou, where the Industrial and Commercial Management Bureau ignored both central government prohibitions and the objections of the municipal branch of the Peoples' Bank of China in approving applications from financial institutions to operate as private businesses. Tsai is undoubtedly correct that self-interest underpinned some of these government actions. However, her argument that all governmental interventions in the Wenzhou curb-market are expressions of self-interested utility maximization that can be modelled through game theory provides a very limited analytical framework with which to explain either how local economies are shaped by government agendas or how China's political system is changing in response to the challenges of financial diversification, deregulatory pressures and intensifying international competition.

The second factor that Tsai identifies as a key determinant in the development of informal finance is the high level of differentiation in local credit markets. Even within a single town, entrepreneurs whom she distinguishes by place of origin, political connections and gender utilize divergent financing strategies. The chapter on Fujian provides a case in point. In explaining women's domination of credit associations in various locations in the province, Tsai draws attention to the importance of long-standing assumptions about women's ability to commit themselves and organize informally and their having the "time and patience to collect spare change" without feeling shame (p. …

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