Gao Yang

(School of Economics Shandong University，Jinan Shandong 250100)

Ⅰ．Background

With the rapid development of China’s rural economy and the evolution of farmland circulation policy，the scale of rural land operation is increasing gradually．Up to the end of 2013，China’s transferred farmland had reached a total area of 340 million mu，which equals 3．1 times in 2008．The circulation ratio was 26%，while 8．9%in 2008．More than 2．87 million households were organizing more than 50 mu farmland(Ministry of Agriculture of PRC，2014)．Meanwhile，the financing problem has become an important factor restricting the optimal allocation of farmland and the development of rural economy．

In order to resolve the financing problem of borrowers and promote the rural land mortgage lending，implicit guarantees are often used by the local government．Because China’s rural land is state － owned or community －owned，the basic logic for designing the farmland financing system should be based on using the rural land usage right as collateral．For financial institutions，comparing with the urban construction land usage right，the rural land usage right’s use are limited and the mortgage term are shorter hence harder to be disposed．To alleviate this problem，the local government usually chose implicit guarantee measures．〔1〕

The specific measures are establishing guarantee mechanism to provide guaranties to the borrowers and purchasing debt asset from financial institutions．Examples of the former are Goldland Bonding Company in Zaozhaung City which provides guarantees to farm entities，Xinyuancai Bonding Company in Faku County providing guarantees to agricultural cooperatives and Wuhan Agriculture Guarantee Company in Wuhan City．The above companies are all established by the government and organized as policy－related finance institutions．The latter are usually named collateral disposal fund or collateral financing risk fund．For example，risk fund founded by government of Chengdu City purchases collateral from the lender under the condition of loan defaults(Chan ＆ Lei，2010)．Government of Lishui County in Zhejiang Province founded a collateral disposal fund to purchase forest land usage right which is the breach of collateral(Wu，Xu，Zhang，2007)．By comparison，it’s common for the foreign government to support the agriculture financing with the way of providing subsidized loan，interests premiums，special reserve and setting up land bank etc．(Luo，2005)．

Ⅱ．Review

The existing literature has focused on the influence of government guarantees with the supply of rural credit．Hoff＆ Stiglitz(1990)suggested adverse selection and moral hazard problems caused by information asymmetry between farmers and financial institutions are the main reason of rural financing difficulties．Even the government directly support credit could not solve this problem．Merton＆Bodie(1992)pointed out that the government guarantees can effectively promote the supply of credit but will reduce the enthusiasm of lenders and project sponsors．They measured the value of guarantees with two equations:value of risky loan+value of full guarantee=value of risk－free loan which means value of risky loan=value of risk－free loan+value of full guarantee．For China，it is possible that low farmland mortgage loan interest rate is caused by government guarantees．Based on the incentive compatibility of borrowers，Laffont＆Martimort hold that because of moral hazard and limit-ed liability，the financing contract design should focus on reducing participation constraints of borrowers and raising the assured income of lenders so as to reduce the collateral requirement．The negative effect of government implicit guarantee is that the cost of it cannot be measured and it cannot be reflected in the budget，and meanwhile，it is difficult to be managed effectively(Phaup，2009)．Chabot＆ Moul(2014)studied the Indiana bank panic in 1854 and 1857．The result confirmed that trust is an important trait in a well－ functioning financial system．Once the credit mechanism failed，it may leave long －lasting impacts on the expectations of market participants．

Even though the government implicit guarantees are usually considered as an important policy proposal，but there’s seldom research on the effect mechanism of it．Section 3 focuses on the influence of two kinds of implicit guarantee measures on the financing ability of borrowers．

Ⅲ．Theoretical analysis

1．Model and hypothesis

The theory of financing ability w as set up by Holmstrom and Tirole in 1997．Tirole developed it in 2006．The core idea of it is that in order to solve the problem of moral hazard and limited responsibility of borrow ers，lenders tend to require borrow ers to offer collateral．So the minimum collateral request borrow ers facing could be used to measure their financing abilities．The logic basis of China’s farmland finance system is regarding farmland usage right as an asset because it could generate inw ard cash－flow in the future．The collateral is the future farmland usage right of borrow ers．Once they break the deal，lenders w ill get the right and dispose it．The fundamental model of this section is based on the collateral decision model of Holmstrom and Tirole(1997)．

The model assumes that the whole society consists of the entity sector and the finance sector．The participants of the market are borrowers from the entity sector and lenders from the finance sector．All of them are risk neutral and undertake limited responsibility．Borrowers are enterprises in entity sector such as farmland operators．Every enterprise has the same technique and the only difference among them is the initial personal capital A．〔2〕Their capital is insufficient，so they have to choose the project and borrow from the lenders．Lenders are institutions from the financial sector．Their capital is supposed to be infinite and can get market rate of interest γ from external market if they don’t loan．The economic activity include two periods．In period 1，participants sign the financing contract and make the decision to invest．In period 2，the return of investment is realized and allocated．In period 1，there are projects with the investment I for the enterprise．Every project needs external finance which is I－ A．In period 2，if the project were failed，borrowers and lenders would only get the initial investment I without any profit．If the project were successful，they would share R+I(the return is R(R ＞0))．Enterprises can choose diligence and shirking，shirking lead to personal benefit B，but causes lower success rate of the project．Define the success rate of projects when enterprises choose diligence and shirking to be PHand PL．Obviously，△P=PH－ PL＞0．Financial institutions are perfectly competitive，so the loan profit is 0，the loan rate is the market rate γ．Enterprises choose diligence is economically viable PHR － γI＞0＞PLR － γI+B，that meas(PH－PL)R＞B．

To solve the problem of moral hazard and limited responsibility of borrowers，lenders use financing contracts to constrain them．If collateral is not designed in the contract，borrowers gain 0 and lenders get I when the project is failed．Lenders get I and share the return R with borrowers．They get Rband Rl．Because borrowers undertake limited responsibilities，rational borrowers only choose diligence when the expected return is larger than that of shirking．This means(PH－PL)Rb＞B．If collateral A which is from personal wealth of borrowers is designed in the contract，lenders get I when the project is failed．Meanwhile borrowers transfer collateral A to lenders．The return is the same when the project is failed．When the collateral value is big enough，the expected return of borrowers choosing diligence are bigger than shirking，problem of moral hazard and limited responsibility could be solved．

2．Comparison between different policy measures

The lower collateral requirements for borrowers are，the more agricultural credit demands could be satisfied through farmland mortgage loan．Considering collateral disposal cost，we can confirm that the above two measures both can improve financing ability and reduce the minimum collateral requirements．Compared with collateral disposal fund，policy guarantee mode is more effective．Suppose a policy guarantee institution pays back cash A to lenders，meanwhile charge borrowers when the project fails．Extremely，when ɑ goes to 0，borrowers only lose very little，meanwhile，lenders will be paid by the policy guarantee institutions who undertake the majority of risks．So policy guarantee measures can be applied to solve the severe information asymmetry problem between borrowers and lenders．Worth noticing，if the failure rate of the project is high，the guarantee institutions will face great risks．

From the aspect of limited responsibility and risk sharing，borrowers in policy guarantee model undertake the least risk．In this model，borrowers undertake limited responsibility Rb≥ － ɑA，while in fundamental model and collateral disposal fund model Rb≥ －A．The limited responsibility in collateral disposal fund model is the same as in fundamental model．In fact，the original intention of collateral disposal fund measure is to solve the asset disposal problem of lenders．The harder collateral to be liquidated，the more effective this measure is．

From the aspect of solving the moral hazard in rural finance field，collateral disposal fund measure is better than policy guarantee．In the fundamental mod-el and collateral disposal fund model，incentive compatibility condition of borrowers is PHRb+(PH－ PL)A － PLRb≥B，while in policy guarantee model，it is PHRb+(PH－PL)ɑA －PLRb≥B．It means the latter measure has a lower tolerance for borrowers to choose shirking and less ability to avoid moral hazard of them．

Ⅳ．Conclusion and suggestion

First，as to improving the financing ability of borrowers and reducing the minimum collateral requirement，the method of policy guarantee and collateral disposal fund both work．Take the widely used farmland usage right mortgage loan as an example，because the disposal cost of farmland usage right is higher than the usage right of urban construction land，financial institution dislike the former one．The local governmental policy guarantee method serves the capital demands as supplement for their personal collateral．The collateral disposal fund method serves the capital suppliers to solve assets disposal problem，which encourages financial institutions to accept farmland as collateral．

Second，the negative effect of local governmental implicit guarantee should be treated correctly．The above two methods both increase the implicit debt of governments and have payback risks．If the government expand the policy guarantee range blindly，the minimum collateral requirement of borrowers will be reduced to a very low level．Thus，it might cause a large －scale loan default and crisis of rural financial environment．Collateral disposal fund method also suffers from the difficulty of asset disposal and collusion between borrowers and lenders．

Financial innovations such as farmland usage right mortgage loan，government collateral disposal fund etc．contribute to the farmland revolution．Farmland financial system should take collateral disposal problem into consideration and choose a variety of methods to promote the market allocation to reduce the disposal cost of it．When the local government use implicit guarantee method to develop the rural credit，they must stick to the marketoriented and appropriate－ scale principle．On the one hand，the government should encourage the market－oriented guarantee agency to enter the rural credit market．On the other hand，it is indispensable to standardize the operation of policy guarantee mechanism，make the use range of risk fund and disposal fund clear，and avoid the blindly expansion of rural credi t．

〔1〕Guarantee law of the People’s Republic of China prohibits the local government from using direct guarantee．

〔2〕This initial personal capital is different from the one of Holmstrom ＆ Tirole(1997)．It includes cash and entity asset which are valuable for the enterprises，The valuable is measured as A，and could be disposed with a extra cost．

Notes:

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〔2〕Cui Huixia，On the Rural Financial Effect in Land Circulation， Shanghai Finance，2009，30(1)，pp．93 －95．

〔3〕Kong Zugen，Building the Mode of Rural Inclusive Finance， China Finance，2013，64(5)，pp．71 －72．

〔4〕Ma Li，Yin Hongju，Containing Matthew Effect of Financial Poverty Alleviation in Income Distribution，Special Zone Economy，2012，30(2)，pp．144 －146．

〔5〕Hong Zheng，Wang Wanfeng，Zhou Yihai，Moral hazard，Supervision Structure and Rural Financing Mechanism Deigning — The Reform of Rural Financial System in China， Journal of Financial Research，2010，31(6)，pp．189 －206．

〔6〕Hong Zheng，Is the New Type of Rural Financial Institutions Reform Feasible?— Based on the Perspective of Supervision Efficiency， Economic Research Journal，2011，57(2)，pp．44 －58．

〔7〕Luo Jianzhao etc．， On Farmland Financial System of China，Beijing:China Agriculture Press，2005，pp．84 －85．

〔8〕Luo Jianzhao，Nie Qiang，Zhang Yinghui，Game and Equilibrium:Performance of Rural Financial System—Case Study of Meitan County of Guizhou Province and a General Policy Conclusion， China Rural Survey，2003，24(3)，pp．43 －51．

〔9〕Shi Yuefeng，Zhao Liming．Path Selection of Rural Financial Supply Innovation in China:Based on the Perspective of Land Circulation， Journal of Central University of Finance ＆ Economics，2010，30(11)，pp．27 －32．

〔10〕Yao Yang，F(xiàn)armland System in China:An Analysis Framework， Social Sciences in China，2000，21(2)，pp．54 －65．

〔11〕Zhou Qiqing，Case Study on the Problem of Financial Support in Rural Land Circulation， Economic Review，2010，26(2)，pp．55 －57．

〔12〕Hoff，K．，Stiglitz，J．，Imperfect Information and Rural Credit Markets:Puzzles and Policy， World Bank Economic Review，1990，4(3)，pp．235 －250．

〔13〕Holmstrom，B．，Tirole，J．，F(xiàn)inancial Intermediation，loanable Funds，and the Real Sector， The Quarterly Journal of Economics，1997，112(3)，pp．663 －691．

〔14〕Laffont，J．J．，Martimort，D．，The Theory of Incentives:The Principal－ Agent Model， Journal of Economics，2003，80(3)，pp．284 －287．

〔15〕Merton，R．C．，Bodie，Z．，On the Management of Financial Guarantees， Financial Management，1992，21(4)，pp．87 －109．

〔16〕Phaup，M．，F(xiàn)ederal Use of Implied Guarantees:Some Preliminary Lessons from the Current Financial Distress， Public Administration Review，2009，69(4)，pp．651 －659．

〔17〕Chabot，B．，Moul，C．C．，Bank Panics，Government Guarantees，and the Long － Run Size of the Financial Sector:Evidence from Free － Banking America， Journal of Money，Credit and Banking，2014，46(5)，pp．961 –997．

〔18〕Tirole，J．， The Theory of Corporate Finance，Princeton and Oxford:Princeton University Press，2006，pp．157 －177．