Article Highlight | 4-Jun-2023

Digital inclusive finance: Promoting household risk mitigation in China

KeAi Communications Co., Ltd.

Digital inclusive finance has emerged as a significant innovation in recent years in China. Access to finance has the potential to offer numerous advantages for households and individuals, including the ability to effectively manage and smooth per capita consumption growth amidst unpredictable fluctuations in per capita income growth.

However, it is worth noting that the domestic financial sector in China is relatively less developed and primarily focused on providing financial services to corporate sectors, particularly large firms and state-owned enterprises (SOEs). Consequently, informal social networks and self-insurance measures, such as accumulating precautionary savings, have become essential informal means through which households partially safeguard themselves against various risks.

To that end, a duo of researchers from the Institute of Digital Finance in Beijing, China, proposed an additional avenue for enhancing and bolstering these informal mechanisms—digital inclusive finance.

“While there has been significant scholarly and policy discourse surrounding this topic, limited research has incorporated the influence of a burgeoning financial paradigm, specifically digital inclusive finance, in the context of analyzing informal risk mitigation,” explained co-author Xun Wang. “Through an examination of a comprehensive panel household survey (CFPS), we shed light on the implications of digital inclusive finance for risk smoothing.”

The researchers analyzed the impact of digital inclusive finance on household risk smoothing in China using the Digital Financial Inclusion Index from their institute and data from the China Household Finance Survey (CHFS) conducted between 2013 and 2017.

“Our approach incorporates a multi-dimensional fixed effect specification that considers household-specific effects and year fixed effects,” shared Xun Wang. “By examining the relationship between digital inclusive finance and the sensitivity of household consumption growth to idiosyncratic income fluctuations, we assess its effect on risk smoothing. We also account for various household characteristics such as demographics, gender, age, occupations of the household head, education level of family members, smartphone ownership, and usage of financial instruments.”

The study, reported the KeAi journal China Economic Quarterly International, provides compelling evidence that in regions with well-developed digital inclusive finance, households facing idiosyncratic negative shocks to per capita income growth experience a notably smaller reduction in idiosyncratic per capita consumption growth.

“Our findings carry important policy implications,” said corresponding author Xue Wang.  “Digital inclusive finance, spearheaded mainly by private big tech companies, has become a necessary complement to China's traditional financial system. To foster its development, regulatory authorities should consistently create favorable conditions and environments for the growth of Fintech. Also, it’s crucial to recognize that digital inclusive finance may also entail costs. Without adequate protection for financial consumers, the rise of fintech platforms can incentivize certain individuals to engage in excessive borrowing, leading to over-consumption beyond their means.”

“Lastly, to facilitate the transition of China's economic development from an investment-based model to a consumption and innovation-based model, market-oriented financial reforms should be promoted. This entails addressing distortions within the domestic financial system and supporting a more balanced and sustainable economic growth trajectory,” concluded Wang.


Contact the author: Xun WANG, National School of Development, Peking University. Email:

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