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Informal Finance in China: American and Chinese Perspectives$

Jianjun Li and Sara Hsu

Print publication date: 2009

Print ISBN-13: 9780195380644

Published to Oxford Scholarship Online: February 2010

DOI: 10.1093/acprof:oso/9780195380644.001.0001

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(p.187) Appendix B: The Story of an Entrepreneur's Financing Experience in Shanxi

(p.187) Appendix B: The Story of an Entrepreneur's Financing Experience in Shanxi

Informal Finance in China: American and Chinese Perspectives

Guangning Tian

Oxford University Press

This story reveals the difficulties of entrepreneurial financing in China and shows why entrepreneurs depend on informal financing. This is a real story that came out of this author's fieldwork on informal finance in Shanxi in 2005. In this story, there are two individuals named Zaixing Zhang and Junsheng Liu, who are individual entrepreneurs in different businesses. But both had the same experience when their businesses turned from prosperity to financial difficulty.

Deng Xiaoping, when he was in his southern tour in Shenzhen in the spring of 1992, used the following words to describe the role of finance: “Finance is very important; it is the core of modern economy. If finance goes well, the economy can go well.”1 It is also the core of the rural economy. The rural financial system plays an important role in the development of agriculture and rural areas and in improving peasants' income.

In the summer of 2004, Zaixing Zhang's eldest daughter from Zhucheng village was admitted into Hainan University as an eleventh grader. The whole family was very happy, but Zhang was not entirely happy. Tuition and other fees put together added up to 7000 yuan, which was more than his income for a whole year. The transportation to Haikou, the capital of Hainan province, was also very expensive. The girl also needed some new clothes and other necessities. Combining the cash and the deposits, the family only had a little more than 2300 yuan. The term was to begin in 40 days, and so Zhang wondered how he could possibly make so much money.

(p.188) Just past four o'clock in the morning, Zaixing Zhang awakened, but he still did not want to get up. However, thinking about her daughter's tuition, he jolted awake. Hastily putting his bicycle and two big baskets in order, he ate a cucumber and hurried to get onto his bicycle. He would ride two hours to go to an orchard to buy peaches and then would take them to villages to sell. Selling peaches, he could earn 0.2 yuan every half kilometer. If the peaches tasted good, he could earn 0.3 yuan, and they would easily be sold out. Two big baskets of peaches would be sold out before 5 or 6 p.m. Zhang could earn 30 yuan in one day. But he had to go to the far orchard to obtain the best‐tasting peaches, so that customers would buy his peaches again and again. For this, he had to leave at four o'clock in the morning and pedal his bicycle all day. Although it involved a lot of hard work, the income was good. During the midseason that lasted only for a short time in the summer and autumn the fruits came to market. He had to take advantage of it and earn a little more.

Zhang began his fruit business last year because he had no other choice. Before this, he had tried, among other things, repairing motorcycles, collecting scraps, and selling sesame cakes. But he did not succeed in any of these. He had also been a driver, driving a truck and a reaping machine; however, now the truck was sold and the reaping machine was useless. His future was unpredictable. A few years before, he was a famous person in the village since from the end of the 1980s to the beginning of 1990s transporting coal was a profitable business. But it is a dirty, tired, and dangerous job. Zaixing Zhang's family did not want him to buy a truck, for even a second‐hand one was too expensive. Regardless of their objection, Zaixing Zhang borrowed a loan from the rural credit association. And this second‐hand truck changed his life completely in a few years.

During the initial years of his transportation business, he was very young and vigorous, so he worked very hard. Within 5 years, he paid off the entire loan of 70,000 yuan. The living standard of his family improved. His daughter and son were born in succession. Villagers saw his success and some people followed in his footsteps. Several villagers also began to transport coal. They traveled with each other, and the work became easy but less profitable due to competition. With help from his army friend, he joined a new coal mine. After 4 or 5 years he had saved more than 100,000 yuan, but he did not want to continue this line of work. This business was no longer very profitable. Because of his hard work, he usually would not have meals on time, so he came down with a stomach illness. However, he wanted to seek a new line of business to make money.

At that time he was one among the richest people in his village and hoped to build a house. Building or buying a house is the major event in a rural person's life. It symbolizes the wealth of a household and can influence the marriage prospect of one's children. His wife was very sensitive about their reputation and had been hoping to build a new house for a long time. Zaixing Zhang had calculated that to build a very good house, he would need (p.189) 40,000 yuan. This meant that he would still have 600,000–700,000 yuan left, so he decided to lend Sanbao Yang, his neighbor, 500,000–600,000 yuan to buy a joint reaping machine. Both he and Sanbao Yang felt that this machine could make money for them. But Zaixing Zhang and his wife had a big difference of opinion on how to build the house. His wife wanted to build a house like the one she had seen on a TV show, which would require at least 800,000 yuan.

Zhang's wife was sensitive about the family's reputation and the birth of their third child led Zhang to make a concession. He spent a large amount of money to build a top grade house. In 1 year, the new house was built, with wide corridors and wall lamps in every room and ceramic tile on all walls, and it also had all kinds of fashionable electrical equipment. It was exquisitely furnished. The house being the admiration of the neighborhood, the middle‐aged couple felt very satisfied. However, in order to build this house Zaixing Zhang had to borrow 30,000 yuan from the credit association, for 60,000 yuan was all what he had previously estimated for house construction. The excessive expenditure of the new house and the fines for the third child, for violating the population control policy, cost Zhang all his savings.

When buying the joint reaping machine with Sanbao Yang, Zhang spent 130,000 yuan, including a 60,000 yuan loan. Then he borrowed another 70,000 yuan for the new house and for the fines for the third child. He left a good impression on the credit association because he looked very kind and honest, and also had repaid the truck loan of about 70,000 yuan on time; besides, he had a top grade house. So using the reaping machine as collateral, he did not have any trouble in getting the loan. However this new machine was not a good way to make money. He and Sanbao Yang could drive the reaping machine, but they had no customers. Because the land of every household is very limited and scattered, the reaping machine was useless and expensive in this situation. Zhang found he had to default on the loans in that year. Of course, their living standards were declining. Zaixing Zhang considered doing the transportation business again, but he soon decided against it. He was never willing to engage in the long‐distance transportation business again because it was so tiring, and he could not spend time with his family.

He then sold the 10‐year old truck at the price of 20,000 yuan to meet his emergency financial needs. At the beginning of the spring in the next year, he went to nearby counties in Henan and Hebei to find the areas where there was large‐scale planting. Zhang did find some customers and earned 30,000 yuan, but after repaying the loans Zhang's family did not have enough money for their daily life. Gradually his wife grew dissatisfied with the situation. After the summer harvest Zaixing Zhang lost his customers again. The reaping machine he owned was not fit to reap the sorghum, bean, and the corn reaped in the fall. So in the second half of the year they only had payments but no income.

Zaixing Zhang was also very worried. He began to repair motorcycles but this business was very slow. Many households in his village had motors but (p.190) people did not ride them very often, so fewer motors needed to be repaired. He earned only about 1000 yuan for 4 or 5 months and could not support the family this way. In the spring of the third year, he went out to participate once again in the reaping business, but yet again, after the busy summer, he did not have any work. He found gleaning and collecting scraps to be a good business, which did not need any capital but only labor. But the wind in autumn and winter blew the scraps everywhere in the courtyard, and his wife complained that it was too dirty. Also as a new entrant into this business, he was given a hard time by others. His income was still too low to support the family.

In the winter of the fourth year, he had repaid 60,000 yuan but there was still the 70,000 yuan principle and 30,000 yuan interest remaining. Then Zaixing Zhang, who had never cooked before, decided to learn how to cook and sell sesame cakes. That was really a failure. In the city, this business is quite good, since at mealtime people need to queue to buy sesame cakes. Because most people are on duty and do not have time to cook, the business is very prosperous. In Zhucheng village, however, most housewives cook at home and they can prepare many kinds of wheat foods. So only a few people buy cakes. Zaixing Zhang's family had to eat the sesame cake that was leftover everyday, and he did not earn much money. That summer after the reaping, he followed the fruit peddler to peddle fruit. Zhang was able to sell out all his fruit everyday. He had customers buy his peaches again and again, with some even waiting for his peaches. So the business was quite good.

At noon, it was very hot and there were few pedestrians in the street. Zaixing Zhang would rest in the shade, thinking about his daughter's expense. When he repaid the loan after the summer reaping, he wanted to reserve some money for his daughter, but the credit association urged him to repay, seeing his poor situation in recent years. Sitting under a tree, he looked at the pedestrians and waited for them to buy the peaches. He spent his noon like this every day. One day, he saw a man speaking into a mobile phone on the steps of the local branch of the Industrial and Commercial Bank of China. He recalled that the man was a student of his teacher Mr. Shi. The student, Junsheng Liu, was a factory owner. Zaixing Zhang thought he would ask his teacher to tell his situation to Liu and see if Liu could lend him money. He thoughthis teacher could certainly help him with this. That afternoon, he visited his teacher. Mr. Shi was very kind and gave Junsheng Liu's address and telephone number to him.

A few days later, Zhang visited Junsheng Liu with some gifts. He wanted to have a chat and borrow 5000 yuan. He believed that Junsheng Liu being a factory manager would possibly be able to lend 5000 yuan. Zaixing Zhang would promise to repay the loan the next summer.

When Zhang arrived, two other people were having a chat with Junsheng Liu. They were staff of a credit association, urging Junsheng Liu to repay his loans. Hearing that, Zhang felt it might be hard for him to borrow money since Liu's factory seemed to be in trouble. After the two people left, Junsheng Liu said he also had some financial trouble recently, but he was still willing to (p.191) lend 3000 yuan to him and congratulated his daughter. Zhang very much appreciated that, and asked about his factory.

Junsheng Liu is a straightforward person and he told Zhang his experiences. After his retirement from the army, he worked in a local wine factory. Then he retired again and started a business by himself. Liu was a vigorous, flexible, and social person. He got a loan to start a little toy factory. The turnover of the toy factory was not large but his toys sold very well in towns and villages because of their low prices. After several years he saved 70,000–80,000 yuan. Afterward, the toy market was not as prosperous as it had been before, and he sold the little toy factory. He then came to know that someone made big money by breeding a certain kind of sheep with a short tail. He spent a large amount of money to buy a herd of sheep from Xinjiang. He expected that those sheep could grow up to be sold in 10 months, and he could make the profit of 2000–30,000. But he had never bred any livestock before and had no previous experience. He did learn something on his own but found that was not enough and met with many troubles. Some sheep caught diseases over time, which the local veterinarian had never dealt with before, because those sheep were so different from the local sheep. There was no information in any material he could get about this disease. In a short time 30 sheep died, so he had to sell all the leftover sheep at a relatively low price, losing most of his money. Junsheng Liu was not disappointed and he still believed that market economy would prefer people like him who were full of courage.

Liu thought to himself, people in Shanxi Province would like eating vinegar; every household would eat it everyday. This time he familiarized himself with every aspect of the business, including raw material purchasing, processing, packaging, and marketing. He borrowed 100,000 yuan from the credit association. He cooperated with his friend with whom he was very familiar to open a vinegar factory. In the first 2 years, the output was not large. Their vinegar sold well in nearby counties and their benefits were quite good. Workers could get 400 yuan in one month, much more than workers in collective ownership factories, so some of his friends asked him to employ their sons or daughters. Liu not to offend them employed their sons and daughters, and the workers in the factory increased from 8 to 34 successively. Output was twice what it was before but the sales increased very slowly. So the profit rate of the factory declined. It was still a new brand and not very famous, while there were some very famous brands. Junsheng Liu believed that he could succeed only if his vinegar had some characteristics which those famous ones did not have. But his idea that they could develop a new kind of healthy vinegar, which was based on the trend that most people are more and more sensitive to their health, was opposed by his partner. He worried that this might cost too much and be too risky. They could not persuade each other. His partner used as an excuse his son's wedding and pulled out all his money which was about 30% of the total capital of the factory, but left behind the workers he had introduced. All of this put Liu into a hopeless situation.

(p.192) Junsheng Liu used the vinegar factory as a mortgage to borrow 80,000 yuan to seek a new technical cooperation. At that time he had a 120,000 yuan loan in total and had to pay for about 30 workers. Liu's sincerity made him earn the support of the Institute of Agricultural Science in his province. After this new vinegar was developed, he spent another 200,000 yuan on a new productive machine, and new packing, but his new production was still not accepted as a healthy food by the authority concerned, so this new kind of vinegar could not be sold in healthy food stores. In general, the price of traditional vinegar was 2 yuan for 500 mL, but the price for this healthy vinegar was 3.8 yuan for 280 mL, so this expensive and unknown vinegar could not sell well.

Junsheng Liu spent 300,000 yuan on the new product, but customers did not accept it. Liu believed that capital could help him recover. He could not get a loan from the local credit association again; he had already borrowed money from all his friends who were willing to lend to him, but he did not repay them. Those two people of the local credit association had visited him to ask him to repay part of his loan as soon as possible, for their supervision department would check on their accounts soon, and they promised to loan him money again after the inspection. Junsheng Liu, who was about 50 years old, seemed very tired to handle all these difficulties.

Junsheng Liu's situation made Zaixing Zhang feel very depressed, for they had similar experiences. At first, they had great ambition but all ended in trouble. Zhang knew his problems now; first the reaping machine was not applicable in this area, and second he spent too much on his house. He never had so much money before so he lacked experience in managing his finance. The heavy pressure of daily life expenditures and loan repayments made him lose self‐confidence gradually. But he felt Liu did not commit a serious fault: he had to rely on his social relations to handle all things, so accepting some workers introduced by acquaintances was inevitable. Seeking a new type of production was also wise enough. Zaixing Zhang thought that to get more loans was the best solution, but Junsheng Liu also needed a very capable person to help him with his business. Such a person would usually demand at least 1200 yuan a month, which means three workers would be fired. That was really hard.

Junsheng Liu was still in financial difficulty a year after I had visited him and Zaixing Zhang had borrowed money for his daughter's tuition.



(1.) See Selected Works of Deng Xiaoping Volume 2. Beijing, People's Press p. 366 1993.