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What Constitutes the Informal Business Sector?







In this post I will discuss why I believe businesses that operate only in China (and are not supported by mainland banks) should be classified as informal. In theory, something like new gambling sites cannot be accessed from Mainland China, even for foreigners, but there are always some plans to get around the visibly enforced regulations, like getting on a boat and heading over to Macao. This is similar to other informal business activities such as selling rice or eggs. These businesses do not have access to business bank accounts, credit and insurance services, or legal protection or property rights. They rely entirely on cash transactions with their customers.

Note: The informal business sector refers to all businesses that only sell their products and services in China and operate primarily with cash. Some businesses operate solely in China. Others have businesses that require them to do their financial transactions outside China.

To be classified as “informal” by Chinese financial regulators and other businesses, businesses should meet the following requirements. These requirements are issued by Chinese financial regulators.

Businesses are identified as “informal” and classified based on the following:

They operate without a fixed and documented agreement with a financial institution. They do not establish a written contract with any of the financial institutions to establish formal business relationships. They use cash in transactions for their businesses.

What Can Businesses Do to Have Better Access to Credit and Insurance?

I believe most of the entrepreneurs who operate in the informal business sector have a legitimate claim to better credit and insurance services. They just do not qualify because they do not have a business account and have not formed any formal financial relationships with Chinese financial institutions. For these businesses, I will suggest some ways to bring their businesses to the formal business sector and make them more accessible.

They can establish business accounts and businesses with Chinese banks. The Chinese banks that are affiliated with the Bank of China (BoC) and other Chinese financial regulators have a substantial customer base. The banks that do not have these affiliations or partnerships are usually smaller Chinese banks that offer a limited range of business services. They usually do not provide business loans to these small business owners. But they will provide free Chinese commercial credit lines to businesses. This credit line allows businesses to finance their business operations while they keep their cash in Chinese banks. Most banks will take money from this credit line, but they will charge a fee for these services.

Entrepreneurs who run businesses that require business loans to be paid off immediately can get loans from banks if they have business accounts. In other cases, financial institutions that do not have formal business relationships will offer to let these entrepreneurs apply for credit if they have a reliable collateral. This collateral is cash in Chinese banks. They can use this collateral to pay for the cost of business loans. The financial institution will charge them a fee for this service.

What Can Businesses Do to Be Identified as Legitimate?

Businesses that only sell their products and services in China (and operate primarily with cash) should not use cash for their transactions. When they do, they become immediately identifiable as operating in a cash-based economy.