Financial literacy is an indispensable factor in household asset allocation, but market-oriented reforms are also an external factor that cannot be ignored. Using data from the 2013 and 2019 China Household Financial Survey (CHFS), this paper investigates whether the individual’s ability or the market system hinders rural households’ participation and asset investment in the financial market. Findings reveal that both marketization and financial literacy positively affect residents’ financial activities, but the roles of the two are not the same. Financial literacy is an essential factor in increasing participation in the financial market. Moreover, marketization and financial literacy significantly affect rural financial asset allocation decisions in four ways: changing risk preference, using the Internet, alleviating liquid constraints and increasing education expenditure on offspring. Besides, households’ financial behaviors exhibit a stronger correlation with improved network infrastructure, robust legal frameworks, favorable business credit environments, higher social media penetration, and enhanced human capital.
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