How does digital finance affect rural capital misallocation? Evidence from China

Digital finance can take advantage of new financial services to support economic growth. Its effect on rural capital misallocation is valuable to be discussed as rural capital misallocation has severely restricted rural development worldwide. This paper, with data from Chinese counties, studies the effect of digital finance on rural capital misallocation and further analyzes how it acts by exploring the moderating role of industrial structure upgrading. The system GMM method is applied to resolve the path dependence and identify the dynamic effects of capital misallocation. The findings include that (1)rural digital finance has reduced the capital misallocation for the rural area in China; (2)industrial structure upgrading will strengthen the negative effect of digital finance on capital misallocation which is more significant in the eastern and western regions, as well as in the capital over-allocation regions in rural China; (3)the impact of rural digital finance on rural capital misallocation has a spatial spillover effect, and digital finance has reduced capital misallocation not only in the local but also in neighbouring regions. This study contributes to the existing rural digital finance literature and will help regions reduce capital misallocation by improving rural digital finance.