Understanding the links between Chinese households' health shocks, financial literacy, and financial decisions

Though China has experienced substantial development in its financial markets, Chinese households’ participation in financial markets is still limited. The reasons for this limited participation and the consequences of financial exclusion are subject to debate. This thesis comprises three empirical studies on household finance and consumption, with financial inclusion at its core. Specifically, we try to unravel the link between health and portfolio choice, the link between financial literacy and online shopping, and the link between financial literacy and borrowing behaviour in the Chinese context. Using three waves of the China Health and Retirement Longitudinal Study, we explore the nexus between health shocks and cash holding of middle-aged and elderly residents in rural China. A dynamic analysis framework is exploited to address state dependence, initial conditions, and unobserved heterogeneity. We find robust evidence that, for middle-aged and elderly people living in rural China, health shocks are associated with a higher probability of holding only cash as safe assets, along with a higher proportion of cash in safe assets. This association operates through the rebalancing of financial portfolios. Individuals who live in large households, are eligible for immediate reimbursement of their healthcare expenses, and have access to bank services, are less affected by health shocks. Using the 2014 wave of the China Family Panel Studies, we estimate how the financial literacy of Chinese urban consumers relates to their online shopping decisions. We find robust evidence that respondents with higher financial literacy show a higher probability of shopping online and spend more online. These effects are stronger for younger respondents, and for respondents with higher levels of income. Using the same data, we examine how financial literacy relates to Chinese households’ use of debt in both formal and informal credit markets. We observe that respondents with higher financial literacy show a lower probability of holding debt, owe a lower level of debt, and are less likely to be financially distressed. We also find that financially literate households prefer formal credit and refrain from informal credit