Back-Alley Banking: Private Entrepreneurs in China

by Kellee S. Tsai

Chinese entrepreneurs have founded more than thirty million private businesses since Beijing instituted economic reforms in the late 1970s. Most of these private ventures, however, have been denied access to official sources of credit. State banks continue to serve state-owned enterprises, yet most private financing remains illegal. How have Chinese entrepreneurs managed to fund their operations? In defiance of the national banking laws, small business owners have created a dizzying variety of informal financing mechanisms, including rotating credit associations and private banks disguised as other types of organizations.

Back-Alley Banking includes lively biographical sketches of individual entrepreneurs; telling quotations from official documents, policy statements, and newspaper accounts; and interviews with a wide variety of women and men who give vivid narratives of their daily struggles, accomplishments, and hopes for future prosperity.

Kellee S. Tsai's book draws upon her unparalleled fieldwork in China's world of shadow finance to challenge conventional ideas about the political economy of development. Business owners in China, she shows, have mobilized local social and political resources in innovative ways despite the absence of state-directed credit or a well-defined system of private property rights. Entrepreneurs and local officials have been able to draw on the uncertainty of formal political and economic institutions to enhance local prosperity.

Genres: China

336 pages, Paperback

First published July 1, 1902

Reviews

[Jesse Field · Rating 5 out of 5]

A friend in Shunde mentioned this title as we were walking along the sidewalk there and I noticed the relative prevalence of pawnshops. And I’m glad he did! The work is an exacting social science project to interview hundreds of the “micro” entrepreneurs who were driving private-sector growth in China during the 1980s and 90s, yielding an eye-opening account of the true complexity of how states and private markets relate; it is never truly a free market or a command economy, but rather a back-and-forth dance between state financial institutions trying to steer a national agenda, driven forward in fits and starts by ordinary people driven to make ends meet:

The importance of disaggregating both the state and the private sector, is that breaking down these broader conceptual categories exposes microlevel interactions between political and economic actors which are typically obscured by conventional economic or state-centric approaches. Entrepreneurs and bureaucrats are not single-mindedly motivated by, respectively, profit-making and policy implementation. They face a multidimensional array of constraints, opportunities, and incentive structures that vary by locality. For these reasons, entrepreneurs and state actors must be seen in both their local political economic contexts and their individual networks. Informal institutions at these lower levels of analysis constitute the unarticulated rules of a game that its players take for granted on a day-to-day basis—and that political scientists tend to ignore.

The fact that informal finance increased rapidly during the Reform Era in China shows the national government’s awareness of its own limits and the need to encourage, or at least turn a blind eye toward rural cooperative foundations, shareholding cooperative enterprises, so-called “red hat” enterprises, and a wide variety of financial or capital mutual assistance societies and associations, pawnshops and professional brokers and loan sharks. The evolution of rotating credit associations, and the fact that many of the participants in these were women entrepreneurs, was an interesting theme woven throughout the author’s travels and interviews in Fujian, Henan, and Hebei.

Although the book is full of tables and data, and some of the discussion has the dry tone of the social science researcher, a surprising amount of space is given to the colorful and even moving stories of the entrepreneurs and the obstacles they overcome, from larger-scale Town and Village Enterprises like the Sea Star Seafood Village in Changle, or Ms. Xie of Hebei who worked her whole life in a state-supported job, but then decided to start a shoe store in her late 50s when she found herself without state housing and given only a small retirement pension. Also in Changle, a town on the Fujian coast, people pool their money to finance illegal emigration — Tsai cites another study, Chinatown Gangs, “that found 95 percent of all illegal Chinese immigrants to the United States in the 1990s left from Changle.”

Tsai has tunneled deep into her subject, but also alludes to the synchronic and diachronic dimensions of such work. Pawnshops and money lenders of all kinds form a rich part of the history of old China, before the revolution. And contemporary “curb markets” are important in many parts of the world. Informal finance dominates the economy of Chad, the state institutions being mostly devoted to one SOE. The Grameen Bank model was brought to Hebei and Henan Provinces from Bangladesh, which apparently officially supports informal finance. Pyramid schemes that appeared in Wenzhou resembled those that afflicted Albania in 1997 — there is apparently a Christian Science Monitor article on how the Albanian state essentially failed in the wake of the scandal. (And there is a novel about pyramid schemes in Wenzhou: Guai tai, by Li Tao.) On a more positive note, legal and financial institutions in Taiwan were robust enough to forestall panic and prosecute KMT leaders for corruption and mismanagement of gray-market financial institutions in 1985.

Near the beginning, Tsai cites work by Karl Polyani and others suggesting that the advanced liberal economies all apply extensive intervention by a regulatory state; thus the China story may be a fragment of a world economy going in more or less a single direction, toward optimized (one would hope) varieties of state capitalism. And all the stories of entrepreneurs call to mind reflections on the topic of meaningful lives and work. Over and over, we meet Chinese people who put in 14 hours a day, and organize themselves to finance shoe stores and duck farms and such-like, all in quest of bettering themselves and securing some stability for their families. Did these people suffer from alienation as is so often described in Harvey and Zinn and in other places? Or were they fulfilled by the constant signs of improvement? And if so, are the new patterns of financing and growth since 2001 able to keep up the good feelings? One wants to Google and Google, and keep on reading!

Once again, to read such stuff is to be very happy to have chosen China and come here when we did. There must be few better posts from which to reflect on political economy, human nature, the environment, and our common future.