Rural Financial System Innovation

The economy and society of China rural area are developed slowly, the increase of peasants' income has been slowed down, and the gap between urban and rural areas has been expanding gradually. These problems become huge obstacles which are restricting the sustainable development of China. In order to speed up the rural economic and social development and also to realize coordinated development of the urban and rural economy and society, the 5th Plenary Session of the 16th Central Committee of the CPC has brought forward the proposition of building new socialist countryside. Building new socialist countryside needs large amount of money. It is far from the demand if we only depend on capital accumulation by the countryside itself and the state financial input. Finance is the core of the modern economy. Without strong support of the finance, we can not put the great strategy into effect. However, the finance in the rural area has been restrained strictly. The rural financial organization system is unsound, the financial business is unitary, the financial service is undersupply, the financial management is rough and the financial risk has been highlighted. These problems have been the bottlenecks of the rise of rural economy. Therefore, exploring the right direction of the rural financial system innovation and creating the new institutional arrangement to ensure the rural financial system development, pushing forward the development of rural financial market, will be the urgent works and will have great realistic significance.The causes of China's rural financial inhibit are complex and varied. In this paper, I've used several kinds of research methods, such as empirical analysis, static and dynamic analysis, comparative analysis, policy studies and literature research methods, to analyse from both demand and supply aspects systematically. In accordance with the causes of problems, I've proposed the targeted ideas for the rural financial system innovation.The economic development causes the birth of the finance. The present development level of rural finance depends on rural economy directly. The financial demand of the rural area has vital influence to the financial service arrangement. The rural market-oriented economy has been developed for more than two decades. At present, two kinds of main financial demand body, the household and rural enterprises came into being gradually. By analyzing the status and characters of financial demand and also the behavior logic hiding behind, I've drawn the conclusion that the rural finance effective demand is not sufficient by now. The fact that the main rural economy bodies do not need financial support can not be the reason for the rural financial insufficient effective demand. It is the fact including the slow development of the rural economy, the disperse of the economic entities, the diseconomy of scale and the high cost of market transaction that leads the insufficient of the financial demand of the economic entities which have the abilities to pay. Compared with modern commercial agricultural loan system, China's rural areas prefer the assisting agricultural credit system.On the whole, China's rural financial services are provided by both of the formal and informal financial organizations.The formal finance of rural area is seriously undersupplied both in the total amount of the fund and in the supply structure. I've discussed it from both vertical and horizontal dimensions. From a vertical perspective, by exploring the rural financial institutional change, I have found that the formal financial system changes of rural area has the following characteristic: in the government-led mandatory system changes, the main rural economy body is a passive recipient all the time, so that the system arrangements can not reflect and meet the system demand of the micro-main bodies. Gradual incremental reform of the system can not directly touch the deep-seated problems, so as to postpone conflicts, accumulate problems and financial risks in rural areas. In the reform of the system, people have paid more attentions to the form of rural financial institutions and confined to the internal repair of the current financial structure. We have neglected the multi-level demands for financial resources in rural economy as well as the role of rural financial institutions as a whole. The rural financial system change could not catch up with the economic system change. Owing to all above characteristic, during the long period of time, the China's rural finance system was inefficient. From the horizontal perspective, the formal finance supply in rural area has various shortcomings, mainly because of the strict financial controls and high cost of rural financial transactions and lack of the risk-sharing mechanism on the rural financial market. The paper indicates that the "three-rural" is not the most efficient economic field. It is unrealistic that mature modern commercial financial institutions which serve as the mainstay can meet the financing demand of the rural economy .Foreign rural finance theory achievements and practical experience have indicated that rural cooperative finance and policy-oriented finance are with the "three-rural" development in line. Therefore it is necessary to analyze the supply situation of China's rural cooperative and policy-oriented finance. The analysis has shown that China's rural credit cooperatives had some institutional limitations including the vague relation of property rights, the faulty of corporate management structure, the inside people controlling, management system going not smoothly, lack of legal protection system, and so on. Furthermore, China's policy-oriented finance has some defects including excessive narrow targeted financial functions, functional malposition,inefficient operation mechanism of the Agricultural Development Bank, its imperfect financial operation mechanism, the lack of legal norms, and so on.The fact that rural formal finance has been deviated from the rural financial demand forces the main bodies of rural financial demand to resort to the informal finance. At present, China's rural informal finance gradually has expanded its scale, and enhanced the degree of organization obviously. Because the rural informal finance has several advantages, including clear property rights, perfect excitation and restraint mechanisms, fully elastic interest rate, low transaction costs, flexible mortgage mechanism, endogenous risk control mechanism, and so forth. It matches the characteristics of the financial demands of farmers and small and medium enterprises in the rural area. It has already been an important financial channel for a majority of main bodies of rural financial demand. However, the development of informal finance is subject to certain restrictions due to its small activity range, small scale, informal organization, a certain spread, lack of national policy and legal support, etc.To sum up, it is obvious that China's rural financial suppression is not only due to the demand-side reasons, but also the supply-side reasons. We must systematically innovate on rural financial institution to carry out financial deepening for financial restraint. Firstly, the rural financial infrastructure institution should be improved through establishing the mechanism of market competition, building risk-sharing mechanisms, establishing support system of national policy, improving the rural financial supervision system and other measures. Perfect foundation for the rural financial institution plays a supportive role in running the rural financial institution. It could improve the allocation efficiency of rural financial resource, reduce the risks of rural financial market and improve the earning ratio. Secondly, it is necessary to reshape the organizational system of rural finance. The rural financial organizational system with mutual complementary functions and moderate competition can ensure the finance to play the role in the rural economy. While adhering to commercial reforms of the Agricultural Bank, we should actively develop and improve the financial organizational forms lacking in the rural financial market, including cooperative finance, policy-oriented finance, small and medium local commercial banking system, small credit and other forms of financial organization. It is necessary to develop the rural capital market and standardize and guide the rural informal finance step by step. Lastly, we need promote organizational degree of farmers'financial behavior. It is an effective way to promote the efficiency of financing in the rural financial market, since the systematism of farmers can make them be more rational and powerful. And farmer organizations can share the risk of their loans, enhance their credibility and improve their repayment ability. In current rural financial market, there are many farmer loan-guaranteed associations, mutual organizations of rural funds, financial institutions + leading enterprises + farmers, and other model of farmers'financial organizations. In the future, the government should play a constructive role in promoting systematism of farmers.