Housing Provident Fund, Risk Preference, and Financial Investment Engagement: An Asset-Building Perspective

Background and Objective: The asset income gap, stemming from disparities in asset ownership, acts as a significant driver of economic inequality and social polarization. Income from assets originates from the proliferation and realization of these assets, with financial investment providing the foundation for converting household assets into asset income. Yet, the depth and breadth of Chinese households' engagement in the financial market remain relatively limited. The institutionalized mechanisms of wealth accumulation play a vital role in enhancing household asset growth. As an integral part of China's social welfare and security system, the housing provident fund policy is another such mechanism designed to encourage asset building. This study explores the relationships between the housing provident fund, individual risk preferences, and financial investment behaviors.

Methods: The study uses cross-sectional data from the China Household Finance Survey Project (CHFS 2019), a nationally representative data including more than 34, 000 households and 100 thousand individuals. We limit our analyses to household heads aged between 16 and 80 years living in urban China (N = 34,643). The major independent variable is housing provident fund holding status (Yes/No). The dependent variable is household financial investment engagement, indicated by the number of financial investment products (including internet finance, stocks, mutual funds, and bonds) owned by the household (ranging from 0-4). Risk preference is measured by a three-level categorial variable (risk appetite, risk-neutral, and risk-averse). Weighted mediation test is conducted to examine the role of risk preference between housing provident fund ownership and financial investment. A series of demographic and socioeconomic characteristics are controlled in analyses.

Results: The mean number of financial investment products is 0.845( 0 to 4), 8% of households exhibit risk appetite, 20% are risk-neutral, and 72% are risk-averse. 24% of households have a housing provident fund.The results indicate that, after controlling for demographic characteristics, the holding of housing provident funds is positively correlated with the financial investment engagement( β = 0.071, p < .001) and the risk preference of household heads (β = 0.032, p < .05). In addition, risk preference has a positive relationship with household financial investment engagement. The risk preference of household heads partially mediates the relationship between housing provident fund and the financial investment engagement of residents (0.008, 10%, p < .05).

Discussion: Study results suggest that the housing provident fund serves not only as a means of individual and household asset building but also influences their attitudes toward risk. Therefore, it further affects individuals' financial investment behaviors. The study offers empirical evidence on one pathway to increase asset income through social policy provisions and institutional saving mechanisms. The public sector and policymakers should optimize asset building policies to promote household investment engagement in financial assets. This approach holds the potential to increase residents' asset income, alleviate economic inequalities, and narrow income gaps. Additionally, future research should explore the potential investment risks associated with household heads’ risk preference boosted by asset building in housing provident fund accounts.