Vulnerability, Trust and Microcredit: The Case of China's Rural Poor
This paper investigates economic conditions of rural households in China and the role that microcredit can play in reducing vulnerability and food insecurity. Over 80 percent of rural households in China earn less than 4,500 Yuan in net disposable income each year. For the vast majority of rural households, this disposable income is insufficient to meet food consumption needs. In terms of economic growth distribution, rural households are receiving an ever decreasing percentage of China's growing economy. The paper develops a model that shows how a microcredit market based on trust can co-exist with a commercial collateral-based market. The paper then applies the theoretical model to the case of microlending in China. It explains why:
- Rural credit corporations do not offer loans to the very poor;
- Central party policies on rural credit can actually crowd out MFI and NGO microlending;
- Moneylenders dominate in many of the poorer regions of the country.
From a policy point of view, the theoretical model indicates that trust-based lending, coupled with incentives, can support growth opportunities in rural China and bring the rural poor out of their food insecurity and poverty.
