Rural Households Financial Institutions In China: Change, Efficiency And Pareto Improvement

Rural household financing system is one of the hot and difficult issues in rural financial field of China. Since 1979, with the great revolution of China's rural economy and the financial system, rural household financing system has changed frequently and has experienced the process of several "locks" and "restarts" which is currently continuing. Scholars have done a lot of research on rural household's formal and informal financing and have drawn some important conclusions. However, there are still a number of shortcomings: too much Countermeasures research and too little theoretical studies, system research and dynamics research is not enough; there are seldom study done on the equilibrium of rural household financing system from the perspective of supply and demand and financing system and the efficiency of rural financing system has not answered.In the light of the institutional change theory of New Institutional Economics, and as compared with rural householes' demand to financing system it reviews and assesses the historical changes of rural household financing system in supply since 1979. On this basis, it evaluates the efficiency of several main financing systems and concludes with a number of possible alternatives of Pareto improvement. The core of this paper is as follows:1. The supply and evolution of rural household financing system. In the general theoretical framework, chapter Three makes a historical assessment of the supply and evolution of the formal and informal rural household financing system respectively using literature and statistical analysis. It shows that: (1) rural household financing system shows the following three characteristics: in quantity, excess supply and undersupply exist at the same time. Although the government has crafted a formal financing system for the rurak households, they do not adequately take use of it, excess supply of formal financing system coexists with insufficient financial resources per capita and the difficult situation of financing for rural households; In terms of evolution, it has always followed the mandatory path, and has protected the interests of advantaged groups, Peasants have less to say; unique characteristics of rural financial system has not been embodied, peasants' passive adaptation has been emphasized too much, the basic characteristics of peasants and rural areas have been neglected. (2) In the evolution of informal financing system, the spontaneously friendship loan among peasants is still of great vitality, but with the gradual transition of rural community, the system is also in the process of evolution; and microfinance provided by the government and international agencies has cost advantages of system innovation, however, the system is still in the stage of "trial and error" and "blood transfusion".2. The demand features of rural household financing and the direction of system demand in the present peasant household financing system. Chapter four summarizes the reality demand of peasant household for financing system by reviewing the literature. Summarized analysis shows that demand characteristics of China's peasants in the current financing system: (1) demand for financing has been gradually increasing; (2) informal loans works as the preferred financing channels, the share of loans from credit cooperative and other formal financial institutions has been decreasing; (3) the short duration of formal financing is comparatively short, and there is no specific deadline for free loans among peasants; (4) peasants have sustained demand for non-productive loans; (5) the rural households' financing demand has lower interest rates elasticity; (6) relational financing is changing into lease financing . This paper further considers that the above conclusions are based on the existing peasant household financing system which cannot be changed by the peasants, farmers can not change the system of financing basis of the farmers were forced to choose, Several conclusions have not reflected the initial demand of peasants. To confirm this conclusion and enrich the existing empirical research, it analyzes rural households financing situation by 198 sample in Tianmen, Hubei. According to empirical analysis and the above conclusions, it considers that the direction of system demand is : (1) formal financing system is the important institutional arrangements to meet the peasants' financing demand; (2) non-productive loans is the main function of financing system; (3) the peasants need competitive and liberalized interest rates and financing system.3. The fifth chapter evaluates the efficiency of rural household financing system and it comes to the following conclusions : (1) the whole rural household financing system is inefficient, mainly shown in the single supplier in formal financing system and lack of proportion between supply and demand of formal financing system and the informal system; (2) although the overall efficiency of rural household financing system has improved, there is great difference among regions, mainly because of the difference in transaction costs and risk-control system; (3)the free lending system among peasants is more efficient, but faced with the trend of decreasing efficiency. Therefore, there is space for Pareto improvement of the efficiency of peasant household financing system, the bottleneck for improving is too high transaction costs and the focus of improvement should be on formal peasant household financing system.4. The alternatives for the Pareto improvement of rural household financing system. Chapter Six puts forward a number of possible strategies for the improvement of peasant household financing system by case study and game theory, lease economics. (1) to raise farmers' trading frequency with financial institutions through reforming incentive mechanisms of the credit cooperatives and activating peasants' potential demand for credit; (2) to establish automatic compliance mechanism and reduce supervisory costs by the identity of peasants and their reputation; (3) to establish peasant credit-inspection system to reduce information searching cost of financial institutions.