Financial Literacy: The Case of China

• Published date: 01 September 2022
• Author: Yanna He,Muzaffarjon Ahunov
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/cwe.12438

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 75–101, Vol. 30, No. 5, 2022 75

Financial Literacy: The Case of China

Yanna He, Muzaff arjon Ahunov*

Abstract

We scrutinized determinants of fi nancial literacy in China – the largest developing

economy, and one with a rapidly expanding fi nancial landscape. We used the China

Household Finance Survey’s 2013 and 2015 waves, which included the so-called

“Big Three” financial literacy questions that test individuals’ understanding of

compound interest rates, infl ation, and risk. We found that fi nancial literacy in the

country was low. Our results showed that, unlike in developed countries, risk literacy

in China was high and fi nancially illiterate people’s awareness of their own lack of

fi nancial skills was high. Importantly, we showed that female, old, less educated, and

low-income people were increasingly lagging in gaining financial skills. This was

especially true for the western and central regions of China. Our study complements

a limited number of studies on the fi nancial literacy of the middle class in developing

economies.

Keywords: China, fi nancial development, fi nancial literacy, gender gap, risk literacy

JEL codes: D14, G53, O12, P23

I. Introduction

Literature that scrutinizes how fi nancial literacy aff ects people’s decisions in China, the

world’s largest developing economy, has surged in recent years. These studies suggest

that fi nancially literate individuals are more likely to have a long-term fi nancial plan,

hold a private pension (Ni u et al., 2020), and participate in the stock market (Zo u and

Deng, 2019; Pan et al., 2020). Moreover, fi nancially literate people better understand

fi nancial advice and therefore have more diversifi ed investments than their illiterate peers

(Pan et al., 2020). Financially literate households are more likely to “choose a much

smoother consumption plan after experiencing negative external shock” (Zh ang et al.,

2020, p. 2), invest in more risky assets compared to their illiterate peers (Liao et al., 2017),

and entrust part of their investment decisions to investment professionals (Chu et al.,

*Yanna He, Faculty member, School of International Programs, Guangdong University of Finance, China.

Email: 47-269@gduf.edu.cn; Muzaffarjon Ahunov (corresponding author), Assistant Professor, Endicott

College of International Studies, Woosong University, South Korea. Email: mahunov@gmail.com.

Yanna He, Muzaff arjon Ahunov / 75–101, Vol. 30, No. 5, 2022

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

76

2017). Finally, financially literate informal entrepreneurs are more likely to have

a formal bank loan (Xu et al., 2020). Although all the above studies suggest that

fi nancial literacy has a signifi cant impact, we found that only Jiang et al. (2020) and

Niu et al. (2020) scrutinized determinants of fi nancial literacy in the context of China.

However, Jiang et al. (2020) focused on Chinese retail investors, and therefore their

data did not include people with no mutual fund investments. Likewise, the China

Family Panel Study, which Niu et al. (2020) used, only administered fi nancial literacy

questions among urban people. Niu et al.’s (2020) sample missed rural areas where

40 percent of China’s 1.393 billion population live (World Bank, 2017). We therefore

aimed to identify factors that explain fi nancial literacy in China, where the world’s

largest population without bank accounts lives (Demirguc-Kunt et al., 2018).

It is important to understand determinants of financial literacy in the context

of China – the largest developing and transition economy, as Fungáč ová and Weill

(2015) call it – using nationally representative data that include the population of all

income groups. The fi rst reason is, as Grohmann (2018, p. 129) explains, that “papers

on fi nancial literacy have either looked at populations in industrialized countries . . . or

focused on the poor living in developing countries.” Studies that include the middle class

in developing economies are missing (Grohmann, 2018). Thus, our first contribution

is to scrutinize determinants of fi nancial literacy in the context of the world’s largest

developing economy using data on all income groups, including the middle-class

population.

Understanding determinants of financial literacy in the context of China is

also crucial for several other reasons. First, people in China lack modern financial

decision-making experience due to their long experience under the centrally planned

system, where the state guided most economic decisions (Niu et al., 2020). Second,

people in China save significantly more of their rapidly growing income than their

peers in developed countries (Fungáčová and Weill, 2015). For instance, Choi et al.

(2017, p. 635) reported that “[f]rom 1989 to 2009, the household saving rate in

China averaged slightly over 20 percent of disposable income. This saving rate is

high by international standards and contrasts sharply with the 4 percent average in

the United States over roughly the same time period.” Thus, demand for financial

decision-making is high. Third, unlike other economies, China has experienced a

rapid improvement in fi nancial depth, access, and effi ciency in the fi nancial sector, as

shown in Figure 1. The fi nancial development index improved from 0.5 in 2008 to 0.64

in 2019. In contrast, fi nancial development for the US stayed at the same high level.

Financial literacy is therefore critical for making such a speedy transition smooth and

sustainable (Niu et a l., 2020).