Agricultural production decisions in China are usually financially constrained, and the lack of credit often can prevent profitable investment such as farm expansion that generates economies of scale. However, farm expansion is still increasingly observed in China, where more smallholders are expanding farms towards moderate-scale operation, especially in the rice sector. This study investigates this paradox by specifically assessing the impact of credit constraint on farm expansion decisions using a representative household survey of rice farmers in Guangxi Province, China. Farm expansion is empirically measured by both actual expansion in the past five years and the willingness to expand in the near future, which is predicted by a series of factors where the possible endogeneity of credit constraint is accounted for using instrumental variable techniques. It is found that credit constraint negatively and significantly affects farm expansion. Such impact is heterogeneous and is larger among moderate scale holders. Our findings highlight the importance and necessity of offering financial services to relatively small-scale commercial farms in developing countries to relax their credit constraints.
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