Impact of Financial Literacy on Retirement Financial Portfolio: Evidence from China*

• Published date: 01 December 2021
• Author: Ruiting Sun,Huanhuan Zhang,Calum G. Turvey,Xueping Xiong
• Date: 01 December 2021
• DOI: http://doi.org/10.1111/asej.12256

Impact of Financial Literacy on Retirement

Financial Portfolio: Evidence from China*

Ruiting Sun,

1

Huanhuan Zhang,

2

Calum G. Turvey

3

and

Xueping Xiong

1

Received 6 May 2021; Revised 28 October 2021; Accepted 31 October 2021

Financial literacy is an important factor that affects f‌inancial assets saved for

retirement. Based on the China Household Finance Survey (2017) data and the

two-stage life cycle model, we study the impact of f‌inancial literacy on retirement

f‌inancial portfolios. The f‌indings are as follows: (i) f‌inancial literacy has a signif‌i-

cant positive impact on the choice of wealth management products, risky f‌inancial

assets and the total amount of retirement f‌inancial assets, but it has a negative

impact on the choice of bank savings; (ii) f‌inancial literacy has a signif‌icant nega-

tive impact on the proportion of savings but has a signif‌icant positive impact on

the proportion of wealth management products and risky f‌inancial assets; and

(iii) using a different f‌inancial literacy index, considering selection bias and the

inf‌luence of f‌inancial practitioners in the household, we prove the reliabilityof the

above results. The paper highlights the importance of f‌inancial education and pro-

vides strong support for public (government) involvement to strengthen f‌inancial

literacy education and improve the awareness of retirement f‌inancial planning to

reduce the f‌inancial pressures faced by many of China’s elderly citizenry.

Keywords: China, endogenous, f‌inancial literacy, retirement f‌inancial portfolio,

two-stage life cycle model.

JEL classif‌ication codes: G11, H55.

doi: 10.1111/asej.12256

I. Introduction

Since 2000, China’s aging population has grown rapidly. The proportion of peo-

ple aged above 65 rose from 6.96 percent in 2000 to 13.5 percent by the end of

2020. According to the United Nations, this proportion will rise to approxi-

mately 30 percent by 2060 and remain high thereafter. Compared with devel-

oped countries, the aging problem facing China is not only ‘coming early’;itis

also ‘coming fast’, and it is expected to accelerate in the future (Dou, 2019).

Meanwhile, the elderly dependency ratio rose from 11.9 to 17.8 percent between

*Sun and Xiong (corresponding author): College of Economics and Management, Huazhong

Agricultural University, Wuhan, China. Email: xxp@mail.hzau.edu.cn. Zhang: School of Economics,

Guizhou University, Guiyang, China. Turvey: Dyson School of Applied Economics and

Management, Cornell University, Ithaca, New York, USA

© 2021 East Asian Economic Association and John Wiley & Sons Australia, Ltd.

Asian Economic Journal 2021, Vol.35 No. 4, 390–412 390

2010 and 2019 and is predicted to reach 27.9 percent by 2050. It is not suff‌i-

cient for the elderly to rely on the basic retirement security. Because the aging

of the population will increase the expenditure of basic retirement security, and

the total quantity of pension cannot meet the subsequent payment. To cope with

the economic pressure of aging and improve the quality of life for the elderly,

f‌inancial preparation for retirement is critical.

Research has shown that Chinese citizens lack awareness of the f‌inancial prepa-

ration required for retirement. According to the China Ageing Prospect Survey

Report (Fidelity International and Ant Fortune, 2018), most respondents believed

that they needed to save between 1.63 million and 1.84 million RMB for retire-

ment. However, the report also revealed that 71 percent of respondents’retirement

savings were less than 0.5 million RMB, and 81.9 percent of the elderly people’s

prepared f‌inancial savings had not reached the targeted level. Although more and

more citizens have invested in f‌inancial assets, such as commercial endowment

insurance or stocks, their f‌inancial preparation for retirement still mainly depends

on bank savings.

Why does Chinese citizens’f‌inancial preparation for retirement remain insuf-

f‌icient? In the context of rapid development of f‌inancial markets and increas-

ingly complex f‌inancial products, it is diff‌icult for individuals to develop sound

investment strategies for retirement. In the absence of extensive f‌inancial literacy

opportunities, it is diff‌icult for Chinese citizens of retirement age to navigate

modern f‌inancial markets and understand the nature, risks, and rewards of f‌inan-

cial products. According to the life-cycle hypothesis and the theory of precau-

tionary savings, individuals are rational and will arrange or balance their

consumption and savings activities according to their lifetime income, and maxi-

mize their lifetime utility. Both of the above theories assume that each person

has a reasonable understanding of economics and f‌inancial markets. The cogni-

tive deviation of f‌inancial products and f‌inancial services caused by the lack of

f‌inancial literacy will affect people’s utilization of f‌inancial services and f‌inancial

resources, which leads to irrational retirement f‌inancial portfolio decision-mak -

ing. Therefore, this paper analyzes the impact of f‌inancial literacy on retirement

f‌inancial portfolios.

The remainder of the paper is organized as follows. Section II reviews the rel-

evant published literature. Section III provides a theoretical analysis. Section IV

presents the research design. The empirical results are presented in Section V.

Section IV concludes and provides policy implications.

II. Literature Review

II.1 Measurement of f‌inancial literacy

Financial literacy is the ability to process economic information and make

informed decisions about f‌inancial planning, wealth accumulation, debt and

RETIREMENT FINANCIAL PORTFOLIO 391