Alex's China & the World Economy Part A: Housing Sector I. Explaining the high saving rates in China - 3. The role of financial inclusion

Question 1

Introduce the topic of & paper of ‘Financial inclusion and saving behavior in China’

Answer 1

Guariglia, Horsewood & Li (2016) investigate how access to formal and informal finance affects saving.
Financial inclusion = access, availability, and use of formal financial services at affordable costs.
Despite high bank account ownership (64%), China has:
Low formal credit use (7% vs. 12% global avg)
High informal finance use (33% of households)
Key facts:
2013: Household saving rate = 38%
Investment = 50% of GDP; consumption = 36%
Research questions:
What determines financial inclusion?
Is informal finance a complement or substitute to formal finance?
Can financial inclusion reduce saving and boost consumption?

Question 2

Informal vs. formal finance in Chinese households

Answer 2

Data: 2011 China Household Finance Survey (CHFS), 8,438 households across 25 provinces.
Indicators:
Financial inclusion: bank account, credit card, bank loan, composite index.
Saving: binary (save or not) and saving ratio (S/Y).
Findings:
Informal loans are complements to formal loans (Floan).
Informal loans are substitutes for other financial services (accounts, credit cards).
Effects stronger in rural areas (except for credit cards).
Supports Hypothesis 1 (H1):
Informal finance complements long-term services but substitutes short-term ones.

Question 3

How does financial inclusion influence the likelihood and intensity of household saving?

Answer 3

Regression results (Tables 3 & 4):
Financial inclusion is associated with:
Lower probability of saving
Lower saving ratio
Effects are stronger for saving ratio than for binary saving decision.
Results hold across full, urban, and rural samples.
Supports Hypothesis 2 (H2):
Financial inclusion reduces saving, potentially boosting consumption.

Question 4

Policy implications of financial inclusion

Answer 4

Key conclusions:
Informal finance is positively linked to formal loan access but negatively linked to other financial services.
Financial inclusion reduces both the probability and intensity of saving.
Policy implications:
Low financial inclusion may explain China’s high saving rate.
Promoting financial inclusion could:
Reduce precautionary saving
Boost domestic consumption
Help rebalance China’s economy away from investment/export dependence