ABSTRACT
Farmers and small and medium-sized enterprises have an important position in the Chinese rural economy, but evidence suggests their role is impeded by limited access to formal finance and the general underdevelopment of rural financial markets in China. This paper attends to the matter and discusses means to establish a comprehensive and efficient rural financial system able to provide finance to both the agricultural and non-agricultural sectors of the rural economy. We review existing rural finance paradigms and propose an alternative paradigm, the Local Knowledge Paradigm, based on Hayek’s notion of local knowledge. The new paradigm suggests that further diversification of rural financial institutions and the formation of a competitive rural financial market are important prerequisites for farmers and small and medium-sized enterprises to be able to fully capture the benefits from their economic activities. By employing this new paradigm, we further analyze the structure of China’s rural financial system, the demand of China’s rural financial services, the development of rural formal, semi-formal and informal finance and some considerations of how to improve China’s rural financial market.
