Rural China suffers from many natural disasters while there is an inadequate supply of disaster risk insurance for Chinese farmers. On the other hand, the microcredit provided by Rural Credit Cooperatives has been popularized in rural China and the law enacted in 2002 guarantees the transaction of the farmland management right among rural households. This study focuses on the effect of the two new institutions on the disaster risk diversification in rural China. The model inclusive of the Rural Credit Cooperative, the private financing sectors and the farmers is formulated to investigate the optimal combination of the microcredit and the private loan in the liquid farmland management right market, which decreases the total amount of the risk premium in the society. It is found that the liquidation of the farmland management right results in decrease in the variance of risks among farmers, and the private financing provided by the traders who have long-term relationship with the farmers mitigates the moral hazard. It is finally concluded that integration of the microcredit, the private loan and the liquid farmland management right improves the social welfare by diversifying the risk and supplying the necessary agricultural loan.
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