Business and financial risks of small farm households in China

The purpose of this paper is to investigate the relationships between business risks and credit choices of 400 farm households surveyed in Shaanxi province in October 2007 in the Yangling district. More specifically, this paper investigates whether or not rural farm households in China balance business risks from agricultural production with financial risk from the use of debt.

The data were collected through a survey of 400 farm households in Shaanxi province conducted in October 2007. Four separate regressions are run using a credit measure as the dependent variable and measures of profitability, risk, risk aversion, and demography, and debt source (formal versus informal lending) as independent variables.

The model shows evidence of risk balancing. That is, there is strong evidence that Chinese farmers reduce credit use and financial risk, as business risks increase.

The results suggest that Chinese policy makers could encourage the use of finacial leverage and prudent debt use by offering risk reducing programs such as crop insurance, weather insurance, or price insurance.

This paper uses a unique survey form to collect production risk data as well as gather information on credit use and sources. Data were collected so that risk measures could easily be computed using a triangular distribution. Furthermore, this is believed to be the first empirical validation of the risk balancing hypothesis.