The Path Outbreak Of Rural Financial Market Institutional Transformations

The rural financial system in China has undergone several times' institutional enforced transformations under the guidance of Chinese government since its opening and reform. All these transformations are the stock reforms under the institutional framework with multiple interest pursuits. The mechanism design lead to high information transfer costs among the participants in the rural financial market. Financial institutions lack the incentives to supply their services in the rural regions, which left local financial services blank and deviated from the goal of rural financial reforms, i.e. "serving for the needs of three agricultures". As an incremental transformation outside the existent system, the new rural financial reform serves as a path outbreak from the former changes. With an innovative mission pursuit and the societal goals of serving for the "three agricultures", the mechanism design of the current reform can efficiently solve the problem of high information transfer costs between financial institutions and rural financial consumers. With the incentive compatibility under the new framework, not only the participants in the rural financial market realize their own interests, but the desired societal goal of the reform can also be realized.This paper is divided into four parts. The first part presents an overview of the mechanism design theories. In particular, it illustrates how mechanism design theories explain the issues of information and efficiency. The second part reviews the transformation experiences of rural financial institutions in China with explanations via mechanism design theories. In the third part, the paper explains the new rural financial reforms under the framework of mechanism design theories. It points out that the new reform is an outbreak from the former rural financial transformations by solving the problems of information and incentives through mechanism design. The fourth part will select the rural fund mutual cooperative in Shilin and present a case study of the new rural financial reform. It explores the governance mechanisms in the rural fund mutual cooperative and argues that such a mechanism design has its unique advantages to end the supply shortages of rural financial services.