Farmland transfer and rural financial structure: Evidence from China

This paper studies how farmland transfers (renting) have affected rural micro-financial structure in China. China has implemented the farmland titling policy since 2009 that promoted farmland transfers affecting factor allocation, production structure, and financial structure in the agricultural sector. We use the instrumental variable model to address the endogeneity issue associated with farmland transfers based on in-person interview survey data collected from a random sample of farmers in nine Chinese provinces. We find farmers who choose to transfer-out farmland lend more funds to other individuals. In contrast, farmers who transfer-in farmland i) borrow more from informal than formal financial sources, ii) increase deposits to formal financial institutions, and iii) increase agricultural investment. These changes affect rural funds supply, prompt credit to switch from consumption to production, improve operating efficiency and optimize the rural micro-financial structure. We propose the implementation of roundabout transactions as a solution to bridge the gap between formal and informal finance, thereby facilitating rural revitalization and fostering improved economic prospects in rural areas.