Financial inclusion towards economic inclusion: empirical evidence from China’s rural households : A thesis submitted in partial fulfilment of the requirements for the Degree of Master of Commerce and Management at Lincoln University

Abstract

Financial inclusion, defined as the access to and use of formal financial services, has gained growing interest among regulators, governments and researchers. A wide range of literature revealed that financial inclusion is imperative for financial stability and economic growth. The concepts and measurements of financial inclusion vary among past studies and the level of financial inclusion is different across regions and economies. Only a few studies have focused on the level of financial inclusion in rural China where financial deprivation is most prevalent. Research on its associated determinants and pathways from inclusive finance to household welfare at the micro-level is scarce and lacks empirical support. This study uses the probit model and ordinary least squares method with the China Household Finance Survey (CHFS) data carried out across 29 provinces in China to construct a comprehensive financial inclusion index to examine the extent of financial inclusion in rural China. We investigate the factors underpinning financial inclusion at the household level. The results demonstrate that the use of formal financial services is minimal among rural households and there is substantial inconsistency across regions. The eastern provinces exhibit the highest level of financial inclusion and the central region displayed the lowest level. Rural household characteristics such as family size, household head’s education level, income level, employment status and financial literacy are significant determinants of financial inclusion whereas factors like household head’s age, gender and communist party membership are insignificant. The OLS results reveal that being financially included has a significant positive impact on household welfare measured by household annual consumption expenditure. For each financial service usage indicator, the use of a savings account, mobile payment account, credit card and commercial insurance raise household consumption expenditure by 7.8, 34.5, 29.2, and 22.4 percent, respectively. These provide an insight into the trajectory of economic inclusion that can emerge from an inclusive financial system at the household level.