This paper analyzes the effects of credit resource distribution on poverty and inequality in rural China through econometric simulations using grouped data from the national household sample survey. It describes the credit resource distribution in rural China and goes on to analyze the effects of credit on consumption and income inequalities. The preliminary findings of the study give a u shaped distribution of credit resources (commercial as well as private) in rural China with the poorest deciles and top one-thirds households taking more loans than the middle class households. It concludes by bringing out how access to credit is an important strategy for the poor in filling existing income deficiencies by reducing consumption expenditure inequalities besides contributing to lower income inequalities.

October 29, 2006.