Usury, Market Power and Poverty Traps: A Study of Rural Credit in 1930s’ China

• Published in: Frontiers of economics in China Vol. 13; no. 3; pp. 369 - 396
• Main Authors: Chen, Zhiwu, Peng, Kaixiang, Yuan, Weipeng
• Format: Journal Article
• Language: English
• Published: Beijing Higher Education Press 01.01.2018; Higher Education Press Limited Company
• Subjects: Credit; Economic growth; Economists; Enforcement; Exploitation; Farmers; Historians; Interest rates; Monopolies; monopoly power; Poverty; poverty trap; Power; Property rights; Rural areas; Rural communities; rural credit; tenancy; Transactions; Usury; China
• ISSN: 1673-3444; 1673-3568
• DOI: 10.3868/s060-007-018-0019-6

This paper studies the cross-regional variation of interest rates in China in the 1930s. Based on county-level data from the Buck (1941) rural surveys, we examine factors that may have influenced rural interest rates in pre-1949 China. Since the quality of institutions that define property rights and facilitate contract enforcement is important for such transactions as land tenancy arrangements, we treat land tenancy rate (or percentage of owner-farmers) as a proxy for institutional quality. Contrary to the popular belief among historians and economists that usury or high interest rates caused persistent poverty, we find that while the monopoly-exploitation hypothesis has little explanatory power, a region’s institutional quality and income level are persistent and significant determinants of interest rates. Thus, poverty is a key driver of high rates of interest. Economic growth and the development of market institutions are crucial for lowering high interest rates and combating usury.