Financial Deregulation, Capital Drainage, and Agricultural Labor Productivity: Evidence from County-level Analysis in Rural China

China’s rural transformation has been accompanied with rapid growth in agricultural productivity, rural incomes, and rural-to-urban migration over four decades, yet the role of financial deregulation remains underexplored. This study develops a theoretical framework to examine how financial reforms affect agricultural labor productivity (ALP) via farmers’ asset choices and its impact on resource reallocation. Using a balanced panel data for 1,474 rural Chinese counties from 1993 to 2016, we leverage the Postal Savings Bank of China (PSBC) reform — expanding branch networks and authorizing credit services — as a natural experiment. A generalized triple difference-in-differences approach reveals an 8.2% ALP increase, driven by an 11.6% rise in technological productivity, offset by a 3.4% reduction in capital and land deepening due to capital drainage. The reform diverts investment from agriculture by lowering non-agricultural asset costs, reducing land returns under rigid institutions, particularly for large farms, thus hindering consolidation. These findings inform sustainable rural development strategies for China and beyond.