World Bank

The fast growth of Chinese private sector firms is taken as evidence that informal finance can facilitate firm growth better than formal banks in developing countries. We examine firm financing patterns and growth using a database of twenty-four hundred Chinese firms. While a relatively small percentage of firms utilize bank loans, bank financing is associated with faster growth whereas informal financing is not. Controlling for selection, we find that firms with bank financing grow faster than similar firms without bank financing and that our results are not driven by bank corruption or the selection of firms that have accessed the formal financial system. Our findings question whether reputation and relationship-based financing are responsible for the performance of the fastest-growing firms in developing countries. (JEL G21, G30, O16, O17) Financial development has been shown to be associated with faster growth and improved allocative efficiency.1 While the research focus has been on for-mal financial institutions, the literature has recognized the existence and role played by informal financial systems, especially in developing economies.