Economic Analysis Of Incomplete Formal Financial Markets In Rural China

After the reform and opening up in 1970s, with the rapid development of society and economy, a series of social problems have emerged, including widening income gap, significant urban-rural dual structure and serious "three agricultural problems". How to solve these problems is not only a major requirement of building a harmonious socialist society, but also related to fund supporting. For an ordinary farmer, there are three main channels for financing, i.e., to borrow from relatives and friends, from formal financial institutions, and from informal financial. As the most professional and largest financing channel, the contribution of the financial support from formal financial institutions should be the largest, but the real situation is not. The problem is well worth considering.This paper was started from definition of concepts about rural finance and rural formal finance, combined with domestic and foreign related research studies, studied the status of supply and demand by practical research. On the demand side, firstly I did some investigation through questionnaires and collating the statistics get the conclusion that the recent formal financial demand is not large, then analysis the reasons by the method of normative and empirical approach. It is found that the reasons of it are demand structure of financial demand and larger cost of formal finance. On the supply side, this paper firstly introduced the China's rural formal financial situation and some problems found by survey, then analyzed through establishing a game model about the loan direction choices of formal financial institutions and get a balanced solution of the game. The result showed that the constraints of China's rural financial supply are the risk of lending and commercial banking business of the business strategy choice.After analysis the status quo of China's rural formal financial, this paper analysis the effect of rural formal financial market incomplete. Applying the data of 24 years from 1983 to 2006 and co-integration theory to analysis the effect, it was found that the income of farmers, agricultural output had the same direction of changing with the rural formal financial supply.Based on the analysis above, the end of this paper makes some suggestions about expansion of rural formal financial demand and supply. In other words, we should expand the consumption of farmers, encourage financial innovation to reduce the transaction costs. For expansion of supply, we should make sure the formal financial as the leading role, introduce finance and insurance mechanisms to reduce the risk of loan, and subsidize the rural finance if needed.