The Household Finance Issues in China

Over the past half century, rapid technological progress and the globalization of social finance have created tremendous economic prosperity for China while also deeply embedding Chinese households in modern financial systems, becoming an important factor affecting the productivity and quality of economic development of the entire nation. Currently, the total wealth of Chinese households is experiencing explosive growth. According to the Global Wealth Report 2022, the size of Chinese household wealth has increased to $85 trillion (about RMB 600 trillion). China’s per capita wealth has reached $76,639 (about RMB 540,000), more than 10 times what it was 21 years ago. Data from the China Wealth Report 2022 also confirms that in 2021, the total amount of household wealth reached RMB 68.7 trillion, ranking second in the world, next only to the United States; household assets averaged RMB 1.34 million. On a structural level, physical assets (primarily real estate) account for 69.3% of total wealth, while financial assets account for 30.7%; financial assets of household residents are still concentrated in low-risk financial assets such as cash, demand deposits, and time deposits, accounting for about 53%, while equity assets and public funds account for about 19%.

As digital technologies continue to permeate the financial sector, the FinTech industry has entered a phase of rapid evolution. Presently, these technologies serve as a pivotal catalyst, broadening the reach of financial services, optimizing their efficiency, diminishing transaction costs, elevating the overall user experience, and fostering innovation in financial products and services. However, alongside these advantages, the application of digital technologies also introduces a spectrum of new risks and challenges.

Financial consumers are the main participants in the financial market and the main driving force for the healthy, orderly and sustainable development of the financial industry. Whether it is a one-person household or a multi-person household, financial behaviors and decisions are actually undertaken by individual financial consumers. Therefore, strengthening of financial consumers protection is an important means to boost household financial investment confidence, enhance household financial risk management capabilities, and allow households to fully enjoy the benefits of financial development. In order to protect the legitimate rights of financial consumers, regulate the behaviors of financial institutions in providing financial products, maintain a fair and just market environment, and promote the healthy and stable development of the financial market, The Chinese government has successively issued a series of guidelines and management measures, including Guiding Opinions of the General Office of the State Council on Strengthening Financial Consumers Protection, Implementation Measures of the People’s Bank of China on Financial Consumers Protection, and Measures for the Administration of Consumer Protection in Banking and Insurance Institutions. In addition, local governments of China have also taken the lead in formulating local financial consumer protection guidelines based on their own actual conditions, basically establishing a financial consumer protection policy system that is in line with China’s national conditions and covers a wide range of areas.

With the vigorous development of the Chinese financial market, family financial transactions have been increasing, and financial products continue to permeate into social production and daily life. The accumulation of family wealth allows more and more families the opportunity and ability to purchase financial products, thereby obtaining risk protection and property income. Family financial investment behavior refers to the financial behavior of investing family assets into various financial products to achieve value preservation and appreciation. This behavior has a significant impact on individual living standards and the overall strength of the country. Since the 1970s, research on family finance has been continuously deepening. Scholars generally believe that Chinese family financial investment behavior has the characteristics of “heterogeneity” and “limitedness”, that is, different families show significant differences in financial asset investment behavior, such as the proportion of financial assets in total wealth, types of held financial assets, and the proportion of risky financial assets. At the same time, the participation of family risk assets in the market is very limited in terms of breadth and depth.

It is well known that the past decade has been a golden period for Chinese real estate development in China. Houses, as a major asset class, have become a guarantee for the appreciation of residents’ wealth. In recent years, guided by the policy of “housing for living, not for speculation,” the contribution of real estate to wealth is decreasing. Chinese households are gradually shifting their asset allocation from physical assets like real estate towards financial assets. Citic Securities predicts that Chinese households will transfer $18 trillion USD into financial products over the next nine years. This structural shift in asset allocation is beneficial not only for increasing household property income but also for adjusting income distribution gaps and promoting macroeconomic growth.

With the progress of urbanization in China, the demand for land for urban construction continues to increase. Many households are involved in government land acquisition and housing demolition issues. The aim of this study is to examine the impact of the demolition of residential houses on family financial risk asset investment. We analysed data from the 2017 China Household Finance Survey, including 1,046 households that experienced demolition and received monetary compensation and 1,137 households that experienced demolition and received housing compensation. The results show that compensation for demolished homes and high demolition compensation significantly increase the possibility of family investment in financial risk assets and also increase the proportion of family financial risk asset investment. The underlying logic is that the more compensation received by the family, the more disposable income is available, and under the influence of psychological accounts, the high demolition compensation, as a “windfall,” leads to a decrease in its psychological value, thereby motivating families to make more financial investments.

Household financial behavior is an essential component of economic cycles and the functioning of financial systems. Encouraging household financial investment and safeguarding financial health are crucial forces for unleashing the potential of domestic demand and ensuring the healthy development of the economic and financial sectors. However, in recent years, with the increasingly prominent characteristics of small-scale and aging households in China, more individuals and families need to take responsibility for managing household finances and using financial tools effectively to achieve their development goals.

Innovation and entrepreneurship are powerful drivers of economic development and essential engines for national and social progress. Since the introduction of the national “mass entrepreneurship and innovation” development strategy in 2014, the entrepreneurial market in China has grown rapidly, with a significant increase in the number of self-employed individuals and new businesses. According to data from the State Administration for Market Regulation, in the first three quarters of 2020, the number of new market entities nationwide reached 18.45 million, with an average daily increase of 67,600.

The outbreak of the COVID-19 pandemic at the end of 2019 posed severe challenges to the national economy and social operations, profoundly impacting China’s employment situation. “Stabilizing employment” has become one of the important tasks for economic development at all levels of government. The 20th National Congress report of the Communist Party of China clearly stated the need to “implement a strategy of giving top priority to employment, strengthen policies prioritizing employment, and provide opportunities for everyone to achieve self-development through diligent work.” This highlights the core essence of focusing on people in employment efforts.