<p>The functioning of rural markets and the impact of modernization on them in modern China has long been controversial. This study revisits this issue drawing on micro-survey data collected by the Manchuria Railway Survey Department of Japan in modern Northeast China during the 1930s. Specifically, we systematically test whether rural markets were complete exploiting newly developed methods in agriculture economics and investigate how the progress of modernization affected these markets. The results show that even in the Northeast, where land is relatively abundant, rural markets did not conform to the assumption of complete markets, and excess labor was still prevalent among farm households. We also find that cash crop cultivation significantly contributed to factor allocation efficiency, but modern industrial and commercial development did not have this effect due to its failure to absorb labors sufficiently. Finally, an intertemporal comparison using data from contemporary rural households reveals that the remarkable success of non-farm labor transfers has brought contemporary rural markets closer to complete markets. This study not only provides new evidence concerning the controversy of rural markets’ function in modern times, but also provides insights to promote structural transformation and factor allocation in developing countries.</p>