Financial Inclusion in China: Household Access to Financial Services

Financial inclusion can alleviate poverty and foster economic growth by increasing the possibilities for education and entrepreneurship. Limited access to financial services, formal credits in particular, constitutes a potential source of financial vulnerability for individuals, as well as economic loss for a country. Studies from other developing countries have showed that financial services were used only by a section of the population, while few study focused on Chinese populations. China, as the world’s second largest economy, has high rates of savings, but less developed formal credits. It is of great importance to identify the levels of financial inclusion and its determinants in China.

Using data from 2011 China Household Financial Studies (CHFS), this study explores financial inclusion in China, particularly formal credit use. The CHFS is a large national survey that collected data in 2011 among a nationally-representative sample of 8,438 Chinese households. Financial inclusion was measured by ownership of bank accounts and use of formal credits. Formal credit use examined in this study encompassed borrowing from financial institutions such as banks and credit unions; informal credit use includes borrowing from family, friends, or other alternative private lenders. Multiple linear regression and Logit regression are employed to examine the association among financial inclusion and asset ownership.

Results show that, controlling for socio-demographic characteristics, access to financial services is associated with asset net worth (β=5.08, p<.001) and liquid asset (β=.45, p<.001). Access to financial services is also related to socio-demographic variables including age, educational attainment, income level, household registration type, partisanship, and geographic region. Formal credit use is at a low level (15%) and associated with asset net worth (β=1.73, p<.001). Informal credit use is as high as 37.8% and associated with asset net worth (β=-7.55, p<.001), but not with liquid asset. Besides, informal credit use is not related to income levels and educational attainment, but to household registration type (β=-.39, p<.001).

The findings suggest that the pattern of financial inclusion in terms of accessing financial services, and formal and informal credits differs across Chinese households. Most Chinese families have access to financial services, but showed disparity on borrowing sources. Those with a larger asset net worth are more likely to have access to financial services and formal credits, and less likely to use informal credits. Compare to the low level of formal credit use, use of informal credit is prevalent and troubling since it is more likely to reach individuals who are from rural areas, young, living alone, employed with little asset. These characteristic populations are likely financially vulnerable and using informal credits would aggregate their financial hardship further. These findings imply that individual characteristics, especially asset ownership, play a significant role in financial inclusion. It also suggests that promoting financial inclusion in China involves expanding access to formal credit and regulating informal credit.