Digital Financial Inclusion and Consumption Smoothing in China. Issue 1 (16th February 2020)

• Record Type: Journal Article
• Authors: Lai, Jennifer T.; Yan, Isabel K. M.; Yi, Xingjian; Zhang, Hao
• Other Names: Huang Yiping guestEditor.; Shen Yan guestEditor.
• Is Part Of: China & world economy. Volume 28:Issue 1(2020)
• Page Start: 64
• Page End: 93
• Publication Date: 2020-02-16
• Subjects: consumption smoothing -- digital financial inclusion -- insurance -- permanent income shock -- transitory income shock; D14 -- E21 -- F61; Economic indicators -- China -- Periodicals; China -- Economic conditions -- 1976- -- Periodicals; China -- Economic policy -- 1976- -- Periodicals; China -- Commerce -- Periodicals; Economics -- China -- Periodicals; 337.951
• DOI: 10.1111/cwe.12312
• Languages: English
• ISSNs: 1671-2234

Abstract

Abstract: In this paper, we investigate the effect of digital financial inclusion (DFI) on household consumption smoothing in China. We use four waves of the biennial China Family Panel Studies from 2010 to 2016, during which time DFI has significantly developed alongside financial technology across China. We split household income shocks into permanent and transitory components, and evaluate if DFI may help households to buffer against these shocks. We find that households are not able to insure against permanent shocks to income, but they can smooth approximately 70 percent of transitory shocks to income. We also find that DFI has diminished households' ability to insure against transitory income shocks. This is partly because online purchase may lead to the oversensitivity of consumption to income. In addition, we find that contrary to DFI, traditional financial sector development contributes to better household consumption smoothing against transitory income shocks.