The Impact of Financial Inclusion on Household Incomes in China: An Empirical Study

Abstract

Financial inclusion is considered one of the important determinants for improving the incomes of households. This research analysis is to estimate the impact of financial inclusion on household incomes in China. The data was obtained from China Household Financial Survey (CHFS) for the year 2017. This paper measures financial inclusion through its four dimensions, namely formal account, formal saving, formal credit, and formal insurance, based on the definition of financial inclusion by the World Bank, 2017. Three different econometric techniques, namely Ordinary Least Squares, Quantile Regressions, and Instrumental variable methods, are used to empirically test the influence of inclusive finance on income in China. The instrumental-variable method was used to cope with the problem of endogeneity. The results of this research showed a significant relationship between households’ incomes and formal accounts, formal savings, formal credit, and formal insurance in China. This study found that the main driver of household income is financial inclusion, as these two are positively correlated. The main determinants of financial inclusion are significant variables for households’ incomes in China. Thus, this study concluded that financial inclusion helps to reduce income inequality. Hence, this research work recommended that policymakers in China should devise such policies to further improve the status of financial inclusion, ensuring a reduction in income inequalities.

DOI: https://doi.org/10.52783/pst.927