title: Essays in household finance in China
Creators: name: Duan, Dongni
Publisher: name: University of Glasgow
Year: 2023

description: This PhD thesis presents three novel essays on household finance in China, using the Chinese Household Finance Survey (CHFS) data of 2013 and 2015. Its identification strategies involve quasi-experimental methods to identify the effects of social, education, and economic reforms on household financial outcomes later in life, along with an inquiry on the impact of financial inclusion and formal financial market participation on the well-being of the Chinese population. All three essays are novelties in the related literature and the use of the CHFS. They offer insights to the academic literature and policy making, regarding the importance of future reforms to household finances and well-being. Reforms that emphasize on the development of skills related to financial knowledge, reforms that aim to strengthen the financial resilience of the Chinese population, and reforms that are conducive to formal financial market participation and behavioural change are likely to be conducive to sustainable development in the Chinese economy, inequality reduction, and welfare enhancement among the Chinese. The first essay examines the effect of education on financial market participation and portfolio choice in China. The identification strategy uses the exogenous variation in years of compulsory schooling that arose from a major reform in the late 1980s, combined with the overlapping single-child policy of 1980, which applied financial constraints on school attendance for noncompliant households. Using a fuzzy regressions discontinuity design that instruments the years of schooling with reform exposure, I find that schooling has a large influence on participation in markets for stocks and risky assets, amounts invested, and portfolio diversification. The effects are larger for males and for residents of urban regions. Causal mediation analysis suggests that increased financial literacy and the decline in Confucian norms of filial piety are the potential channels of transmission through which education affects household financial behavior. The results highlight the importance of educational, social, and market reform in a sui generis environment of limited household participation in financial markets. The second essay investigates the effect of early life exposure to local financial markets using the reform of special economic zones and coastal cities (SEZ) in China that led to differential development of financial markets across Chinese cities. I find that individuals who were still at school during the time and after the reforms are more likely to access finance from formal financial institutions, compared to a control group of individuals born in non-SEZ regions and those who were at post-schooling age during the reforms. Those exposed to local financial institutions early in life are less likely to obtain finance from informal sources and have lower informal-to-total finance ratios. Using difference-indifference estimation, I find a large significant impact of growing up with finance on financial market participation, in terms of stock and risky-asset ownership and holdings, as well as on portfolio diversification. The effects are stronger for individuals who grew up and currently live in SEZ regions, compared to those who moved there from other parts of China. The inquiry suggests that higher financial literacy mediates the effect of early life exposure to financial institutions among individuals living in SEZ regions. The mediating effect is higher than that of financial risk tolerance, peer effects on social interactions, and filial piety, inter alia. The third essay examines the relationship between financial inclusion and happiness in China, I find large effects of financial inclusion on subjective well-being, and those effects are robust to specifications with regional macroeconomic indicators and relative income as well as the usage of proxies for formal and informal finance. The instrumental-variable estimates suggest that the financially included are 10% -20% happier on average, with the financially excluded being 30% - 40% more likely to be unhappy. Causal mediation analysis suggests that financial resilience, in terms of higher liquid-asset ownership rate, is the channel that explains that relationship between financial inclusion and well-being in China.