| China's economy has been developing rapidly since reform and opening up. However, the rural economy that covers vast majority of the population, significantly developed more slowly than the urban area, and urban-rural income gap continued to widen. The lag of rural finance and its maladjustment with rural economy was one of the reasons for the low growth of rural economy. Since the reform of rural financial markets in 1996, it had gradually formed a co-exist market situation, which covered policy-oriented banks, commercial banks and cooperative banks. However, the rural financial system was still under financial repression, and it was difficult to play an effective financial function to allocate the rural funds. With the new reform of the China Rural Credit Cooperatives (CRCC) in 2003, the reform of rural financial domain advance rapidly. The Joint-stock reform of the China Agricultural Bank (CAB), the business expansion of the China Agricultural Development Bank (CADB), the establishment of the China Postal Savings Banks (CPSB), and the implementation of rural finance "New Deal" in 2006, these changes has improved the capability of rural financial system to service "three rural".However, the new development will inevitably be affected by the shackles of the previous system, and along with some new problems. The author suggests deepening the reform from both horizontal and vertical at the same time. Horizontal reform emphasizes a breakthrough on rural financial system: to innovate and consolidate the "stock" reform, and vigorously introduce "increment" reform. Vertical reform emphasizes an improvement on the rural financial mechanism, the key in which is to guide the funds back into the rural areas, and invested the credit funds effectively to the "three rural" economy. One effective way to achieve this is to vigorously develop micro-finance, and to create a nicer financial ecological environment.On the ground of reviewing the status quo and problems of China's rural financial reform, this paper researches the problems of rural finance form the two angles of system breakthrough and mechanism improvement. The main contents are as follows:(1) The relationship between rural financial development and rural economic growth. Through studying the interaction between the two by canonical correlation analysis and Granger causality analysis, and the contribution efficiency of the former to the latter by multi-variable VAR system cointegration analysis and the three-variable error correction model (VEC), we found that it had not realize the main stream viewpoint of "The relationship between financial development and economic growth is evidently positive, and the financial development promote economic growth" in China's rural area, but the incredible reverse conclusion. In fact, the rural formal finance was born exogenously with the rural economy, there was a deviation for the aims of China's rural financial development, and that brought on an imbalance between its structure and functions, They together result in the lack of efficiency that rural finance should be to rural economy growth and the increase of farmers' incomes. Therefore, we should hold the long-term goal of servicing rural economic production and increasing peasant incomes at the beginning of rural financial reform, and revise the deviation of aims, structure and functions in the development of rural finance.(2) The current demand for rural finance is bloom, wide and with distinct levels. Different needs require different capital supply main body. However, in the rural financial system, various banks had vague and crossing business position, that caused an insufficient rural financial market which can't meet the different demand for customers. Hence, there should be some matching between the rural finance demand levels and different business types of rural financial institutions. So that it will ultimately form a market situation that various main bodies co-exist, have their own focus, and moderately compete with each other.(3) The reform of traditional financial institutions. The new reform of the CRCC has been achieve initial result, the effect of "paying for mechanism " policy has been appear, too. The further directions of deepening CRCC's reform are to improve the corporate governance structure, maintain and hold the independent legal status of the county-level associations, implement policies of community financial institutions and enhance functions of servicing "three rural". The CADB has constructed the "One Body ,Two Wings" overall business arrangement. It need to adjust its function orientation further more, adapt to new situations of grain circulation system reform, carry out a management system reform with divided policy and mercantile business, try commercial and market-oriented operation. The CAB has finished its Joint-stock reform, but it need to face to the "three rural", implement the county "blue ocean strategy": to highlight its differences, and establish and maintain a leading competitive position in the high-end rural financial market, consummate the idea of "One Bank, Two System", Keep the independence of the "three rural " business, dredge up the market space of county Blue Ocean, widen the channels for rural financial services business.(4) Rural credit union funds (RCUF) is a typical rural cooperative finance, it can strengthen co-operation of rural financial markets. The issues of the pilot include the slow growth of the share capital, lack of deposit, difficulties of external financing, and so on. Lack of fund support policies is the key point for the RCUF's unsustainable plight. To resolve this problem, first, it should play the role of guiding for the monetary policies. Second, the differential deposit interest rates need to be implemented. Third, it needs to set up mutual benefit mechanisms between commercial banks' wholesale business and the RCUF's Retail business, and and related security system.(5) Village and town banks (VTB) is a typical rural commercial financial services. In its pilot, the VTB has created a variety of credit models, promoted competition of rural financial markets, and also promoted the regularization of non-governmental finance. There are some problems in VTB's development, first, it lacks profit potential, and its sustainability will go through facings; Second, its deposit and loan further expansion faces difficulties; Third, the efficiency for support agriculture is weak, the phenomena of " disgusted with agriculture " and "abandoning agriculture " makes us worrying; Fourth, lack of supporting policies and supervisal resources. Recommendations to breakthrough these problems are widening the channels of funding, liberalizing the interest rates, innovating products and services, supervising inside and outside, and so on so forth.(6) Farmers' household financial behaviors. Through establishing simultaneous equations (GMM estimates) to study farmers' household financial behaviors and their income disposing behaviors, the author finds: There was a positive relationship between farmers' household savings and the benchmark deposit interest rates, as well as rural financial development. Farmers' household investments had a negative relationship with the benchmark loan interest rates, but were positive with rural financial development. There were some disjoints among farmers' financial behaviors, credit demands, and the rural financial system. Therefore, it's better to expand the scale of rural finance institutions, improve their operational efficiency, and speed up market-oriented interest rate reform at the same time.(7) The research of the financing plight of rural small and medium-sized enterprises (SMEs). The specific causes of China's SMEs' financing plight include: commercial banks' withdrawing and merging, credit control, a unified monetary policy, indistinguishable credit policy, as well as the security system with limited capacity, and so on. From an economic point of view can be summarized as follows: the "credit rationing" caused by the credit risk liability institution and the SMEs' lack of honesty, as well as the "interest rate suppression" caused by the excessive concentrated credit management and high rates of non-performing assets. The recommendations for deconstruction of the SMEs' financing plight set in two sides: to establish a multi-level system of bank financing, and carry out more substantial credit infrastructure construction.(8) The researches of the rural funds outflow problems and its return mechanism. Through estimating the Panel Data Model by the regional data of 1998-2006, the author finds three factors, farmers' income, the added value of the rural economy, and rural loan repayment rate, are influential to the rural funds outflow. However, in different regions, these three factors have different impact on extent, direction with their own characteristics. In developed areas, the increasing of the added value of the rural economy and the improvement of loan repayment can significantly reduce the outflow rate of rural funds; In the underdeveloped areas, it has greatly increased the outflow rate of rural funds to increase the farmers' incomes. At present, there are questions as ambiguous measures, lack of incentive and evaluation mechanisms about the rural funds return mechanism. By analyzing the theory of mechanism design and the basic model of the incentive mechanism, the author established a theoretical mechanism model to improve the rural funds outflow. To guide the funds back, we should emphasize some several key aspects about the mechanism improvement: the credit environment for the operation of financial institutions, and their own anti-risk abilities, the yield of credit funds in rural and county areas, as well as the encouragement, compensation and support from the policy authorities.(9) From the 80's of 20th century to today, the development of China's micro-credit covered three stages, the main characteristics are as follows: its function has changed gradually form poverty alleviation to financing; its operations rely on the CRCC, with obvious top-down government-oriented; non-governmental micro-credit gradually be taken seriously, the government has tried to steer micro-credit into the epoch of competitive market. The development of China's micro-credit has helped farmers out of poverty, increased their income, been against the loan-sharking activities, and promoted the rural financial market competition and credit environment improvement. For the further development of rural micro-credit, we should consider the regional differences, choose development models fitting the local economic level; innovate functional credit products enclosing micro-credit to realize the micro-credit functional goal; adopt a flexible and differential interest rate pricing strategies; optimize micro-credit supervision.(10) It needs a good financial ecological environment (FEE) for rural finance to support rural economy development. To quantitatively study the rural FEE will be propitious to help investigating some subsystem that affects a county's FEE, so that we can improve the weak points pertinently, boost the efficiency of improvement. The suggestions of the FEE construction are as follows: First, promote multiple and orderly competitive main bodies of rural financial ecology; Second, optimize the rural economy structure, tamp the economic bases of rural and county areas; Third, improve the financial legal environment; Fourth, push forward the construction of rural credit system; Fifth, strengthen local government's organization and leadership with the FEE construction; Sixth, standardize and strengthen the social intermediary services for the FEE construction; Seven, deepen economic reform, effectively safeguard the financial debts rights.
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