China Rural Financial System

Three dimensional rural issues are of great importance which are concerned with China’s ongoing reform, development and stability. One of the reasons that these issues arise is the unbalance between the rural financial institutional supply and demand. As a fact of that, in the current stage of rural financial reform, it is of practical significance to define gain and loss of this process based on the perspective of institution supply which could also provide future ideas.This paper is based on the concept of transation costs and Institution Change Theory of New Institution Economy, first we give the definiton of transaction costs, define the relation between transaction costs and institution change and give a brief literature review. Institutions will affect transaction costs and motivate mechanism, and then resource allocation efficiency. The effects of institution changes can be shown in two aspects: related financial trasacion costs and efficiency of allocation of financial resources. In the next part, this paper divide1979-2010China’s rural financial change into three phases and conclude the signitures. Base on retrospection, this paper analyse mathematical relations between transaction costs and allocation efficiency changes before and after financial institution changes, which turns out that institutions intending to reduce transaction costs can lower financing thresholds and raise allocation efficiency. So far a lot of disagreements still exist in the field of trasaction costs definition and measurement. To avoid the dispution, this paper trying to build up a index system to do indirect transaction cost measurement. According to preexamination of indexes, this paper choose two integrate indexes which are transaction costs related to financial institutions and to government financial instituion arrangements. Then this paper calculate variables and the two indexes with principal component analysis, and figure out the efficiency index of financial resources allocation in the similar way. After that this paper examine the results combined with rural financial size, efficiency and structure and their connections. This paper comes to a conclusion that as the underdevelopment of rural financial market and the size of financial institution related transaction costs have not reach the level to obstruct. But transaction costs related to government institution arrangements began to fall since2006. They both show that it is necessary to promote the diversification in number and functions of rural financial institutions as well as the level of rural financial market.