Inclusive Finance and China’s Economic Development: Multidimensional Connotations and Empirical Analysis, a paper co-authored by Professor Li Jianjun, Associate Professor Peng Yuchao, and PhD student Ma Sichao from the School of Finance of CUFE, was published in the 2020 4th issue of Economic Research Journal.
[Abstract] Vigorously developing inclusive finance is an inevitable requirement for China to finish building a well-off society in an all-round way and is conducive to promoting the sustainable and balanced development of the financial industry, and improving social equity and harmony. Based on the analysis of the concepts of the development of inclusive finance and traditional finance, the paper comes up with an inclusive finance indicator system integrating broad-based inclusiveness, degree of specific ratios and business sustainability. By using the provincial panel data in 2009-2016, it conducts an empirical analysis of the impact of the development of inclusive finance on economic growth and urban-rural income gaps. The study shows, for every one standard deviation raised in the development level of inclusive finance, the per capita real GDP growth rate will increase by 5.1 percentage points in the eastern region, and urban-rural income gaps in the western region will decrease by 10% on average. Further analysis shows, the development of inclusive finance plays a more obvious role in promoting economic growth in regions with poorer communication infrastructure and more private economy, and a greater role in bridging urban-rural income gaps in regions with poorer communication infrastructure or a higher agricultural output/GDP ratio. Therefore, the paper comes up with the policy proposal that it is important to consider regional differences and adopt targeted policies in promoting the development of inclusive finance so as to better balance fairness and efficiency.
I. Research Background
The United Nations first put forward the concept of “Inclusive Finance” at the “International Year of Microcredit” in 2005, calling for the establishment of a global inclusive financial system. Since then, multiple international institutions including the UN and the World Bank have been proactively committed to the development of an inclusive financial system. Although the size of China’s financial market is already among the world’s largest, some small and medium-sized enterprises and people living in poor areas still have no access to proper financial services during economic operation. It was explicitly put forth to develop inclusive finance at the third plenary session of the 18th CPC Central Committee. It was stated in the Government Work Report of 2015 that we would channel great energy into developing inclusive finance and ensuring equitable access to financial services for all market entities. “Vigorously developing inclusive finance is an inevitable requirement for China to finish building a well-off society in an all-round way and is conducive to promoting the sustainable and balanced development of the financial industry, boosting entrepreneurship and innovation among all the people, contributing to the transformation and upgrading of the economic development mode, and improving social equity and harmony.” Many studies at home and abroad have pointed out that building an inclusive financial system is of great significance. But few scholars have differentiated and analyzed the concepts of the development of inclusive finance and traditional finance, or compared the concepts of the development of inclusive finance in context of China and as defined by international organizations. As a result, the absence of an inclusive finance indicator system that reflects Chinese characteristics leads to inconclusive research results about inclusive finance and China’s economic development.
II. Research Findings
The paper carried out an empirical test of the impact of inclusive finance on economic growth and income distribution with the newly established inclusive finance development index. Empirical results show that, in general, inclusive finance plays a relatively strong role in promoting economic growth, which is more evident in the eastern region; meanwhile, it can alleviate urban-rural income gaps, which is more evident in the western region. For every one standard deviation raised in the development level of inclusive finance, the per capita real GDP growth rate will increase by 5.1 percentage points in the eastern region, and urban-rural income gaps in the western region will decrease by 10% on average. Dimensional regression shows that its role in promoting economic growth is mainly reflected in broad-based inclusiveness and degree of specific ratios. Further research shows, the development of inclusive finance plays a more obvious role in promoting economic growth in regions with poorer communication infrastructure and more private economy, and a greater role in bridging urban-rural income gaps in regions with poorer communication infrastructure or a higher agricultural output/GDP ratio, verifying information and resource allocation channels. Robustness tests considering multiple model settings, different ways of measuring independent and dependent variables, and different control variables have not altered the main conclusion of the paper.
Compared with existing studies, the paper has made the following three contributions. First, it analyzes the difference between the concepts of the development of inclusive finance and traditional finance, and establishes an inclusive finance indicator system in the context of China. Most of existing indicator systems imitate and refer to the inclusive finance indicator system studied and established abroad, thereby more emphasis placed on the measurement of financial intensity and access to finance. In China’s context, the development of inclusive finance puts more stress on providing special financial services to enterprises or groups discriminated against by finance, and values the principle of business sustainability. Therefore, the paper comes up with an inclusive finance indicator system comprising 13 contents and 20 indicators on the three dimensions of broad-based inclusiveness, degree of specific ratios and business sustainability, depicting the connotations of inclusive finance in China. Second, it reveals the heterogeneous impact of the development of inclusive finance on economic development on different dimensions. There are three dimensions for the development of inclusive finance. Existing documents mainly underscore the facilitating role of access to finance (i.e. broad-based inclusiveness) for economic development. On such a basis, the paper finds that the degree of specific ratios works positively on both economic growth and income distribution, but the role of business sustainability is not apparent. Third, it evaluates the effect of the development of inclusive finance in China based on the new indicator system, and provides references for future policymaking. It also finds that building an inclusive financial system is conducive to promoting economic growth and improving income distribution, but attention should also be paid to regional balance and system-related conditions to provide differentiated policy support.
III. Inspirations
Vigorously developing inclusive finance is of important significance to promoting economic growth and improving income distribution, but attention should also be paid to regional balance and system-related conditions.
First, in economically less-developed central and western regions, it is important to deepen the market-oriented economic reform, strengthen the building of supporting systems, improve investment environments, value foreign trade, seize opportunities brought by the “One Belt & One Road” initiative, increase investment opportunities and encourage the development of small and micro enterprises and the private economy. This will help boost the role of inclusive finance in promoting economic growth, and address the issue of regional imbalance in the country’s economic development.
Second, in the economically developed eastern coastal region, it is essential to vigorously optimize the business environment in rural areas, strengthen the construction of rural infrastructure, and actively develop modern agriculture, which helps enhance the economic vigor of rural areas, and boost the role of inclusive finance in promoting agricultural development and rural economic growth, thereby strengthening its role in bridging urban-rural income gaps.
Third, against the current backdrop of integrated urban-rural development, it is necessary to guide migrant workers back home to start businesses through inclusive finance policies, bring urban resources and technologies to the rural economy, and give play to the leading role of urban economic development to drive the development of the rural economy. All in all, promoting differentiated inclusive financial systems in regions with different economic development levels in an orderly and targeted manner while paying attention to improving system-related conditions will help boost balanced growth of the Chinese economy and bridge income gaps, and give consideration to both efficiency and fairness.
