This study investigates the association between the expansion of formal finance through the opening of high-speed railway (HSR) and the risk of private lending in China, using data from China Judgments Online. The study employs a difference-in-differences approach and reveals that the cities connected by HSR have a greater risk of private lending and that the formal finance expansion leads to a cream-skimming effect on private lending. The HSR enhances the efficiency of product supply and pricing of formal financial institutions, which results in the expansion of banks. However, private lending relies heavily on social networks, which limits the direct effect of HSR on it. Consequently, the formal finance expansion facilitated by HSR has a significant cream-skimming effect on private lending, which increases the risk of private lending. These results make a significant contribution to the existing literature on the economic implications of formal financial expansion for private lending.

Building on the important study by Allen, Qian and Qian (2005) and Ayyagari, Demirgüc-Kunt and Maksimovic (2010), I examine whether third party guarantors play an effective role in assessing loan risk. Using a proprietary database of third party loan guarantees in China, I find strong evidence that guarantors and banks disagree on pricing loan risk, and that banks can better predict loan defaults than guarantors. I also find that the probability of loan default is affected by the capability of guarantor officers. My findings question the contribution of soft information in the improvement of credit scoring and support the view that informal finance should be limited. This paper also supports the implications of studies on human capital in financial intermediation.