Rice vs. Wheat: How Rice FarmingShaped Informal Finance in China

Zhang Bo, and Sun Tao*

School of Economics at Shandong University, The Center for Economic Research at Shandong University, Jinan, China

Abstract: China’s financial system is characterized by the coexistence of both formaland informal finance, and informal finance appears to be more prevalent in the south ofthe country compared to the north. In this paper, we use the historical demarcation of ricefarmingregions and the percentage area of rice sown to ascertain the regional distributionof rice farming in the south and wheat farming in the north in order to analyze the role ofrice farming in the evolution of different types of financial institutions in China. We find thatrice cultivation has a positive effect on informal financial development, though its impacton formal finance is insignificant. Unlike wheat farming, rice cultivation requires farmersto collaborate during busy farming seasons and necessitates the construction of irrigationsystems. Such collaboration helped enhance an acquaintance society, in which both partiesto transactions enforced the rules and contract terms of their own initiative, paving the wayfor informal finance. This paper not only demonstrates the cultural roots of the regionalfinancial disparities in China but also expands the research on the ways in which farmingpractices from the past have shaped the development of China’s present financial markets.

Keywords: Rice cultivation, informal finance, formal finance, historical origins

JEL Classification Code: G20, Q14, N25

DOI: 10.19602/j.chinaeconomist.2023.05.05