China’s digital financial development drives common prosperity
The 2021 World Internet Conference Wuzhen Summit held in Zhejiang Province, featuring the theme “Towards a New Era of Digital Civilization, Building a Community with a Shared Future in Cyberspace” Photo: CFP
The development of the digital economy and digital finance is of great significance to smoothing the new development paradigm of the “dual circulation.” One of the major impacts of the new round of global technological revolutions on production relations is that the resulting digital divide has generally widened the income and consumption gap between residents and exacerbated the imbalance of socioeconomic development. However, the closing of the digital divide in China enjoys its institutional particularity.
Under the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, the great practice of settling the major contradictions in the new era of China’s society is formulating a Chinese model to narrow the digital divide. China’s experience will make important contributions to global poverty alleviation, closing the digital divide and realizing common prosperity.
The founding of socialist new China has created fundamental political conditions for eliminating poverty. At present, the CPC Central Committee has decided to build a demonstration area of common prosperity in Zhejiang Province. It is exploring an effective path of high-quality development and the reconstruction of the system of common prosperity driven by digital reform.
Influence on income and consumption
By combining the Digital Financial Inclusion Index of China and the China Family Panel Studies (CFPS) data, this study finds that the emergence of the digital divide has widened the income and consumption gap between residents, which confirms the negative impact of the expansion of the digital divide. As an important component of the digital economy, the development of digital finance has brought a significant increase in residents’ income and consumption. In particular, the development of digital finance has improved the income and consumption level of families without access to the internet.
For families with access to the internet, it merely has a significant effect on boosting consumption and the increase is lower than that of families without access to the internet. For families with access to the internet, the development of digital finance to boost their consumption through the facilitation of payments and the easing of liquidity constraints. For families without internet access, digital finance has restrained the expansion of the digital divide and its negative impact by promoting the transformation from an agricultural to a non-agricultural employment structure, increasing wage income and agricultural operating income, and promoting consumption.
For families with access to the internet, the development of digital finance has no significant impact on their income level. For families without access to the internet, the income increasing effect of digital finance is significant. This shows that though there is a digital divide, the development of digital finance can restrain the expansion of the digital divide, minimize its negative effects, and bring income spillover effects to such families. Families without access to the internet are often low-income groups. Because the development of digital finance helps to narrow the digital divide, it has improved China’s income distribution.
Despite its failure to increase the income of families exposed to the internet, the development of digital finance has promoted consumption among such families. This means that other variables or mechanisms than income are at work for two possible reasons. First, the development of digital finance has facilitated payments. The proliferation of mobile payments reduces costs and speeds up currency circulation. Second, digital finance strengthens the function of the currency as a means of payment, alleviates the liquidity constraint of purchasing power on consumption, helps consumers smooth intertemporal expenditure, and then increases demand. Therefore, given the income level, the development of digital finance can still promote residents’ consumption.
Particularly, the development of digital finance has significantly increased the income and consumption of families not exposed to the internet. Given that the digital divide widens the income and consumption gap between families, this finding means that the development of digital finance can curb the expansion of the digital divide and its negative effects. From the perspective of the underlying mechanism, families without access to the internet cannot directly enjoy the dividends of the internet and digital finance. The consumption promotion effect of digital financial development on such families should come from the indirect dividends of the digital financial development. The impact of the development of digital finance on the consumption rate of households without access to the internet is not significant. Income determines consumption, which shows that the development of digital finance mainly increases the consumption of families not exposed to the internet by increasing their income.
One possible explanation for the increase of income is that the inclusive nature of digital finance brings regional economic growth and boosts demand, especially in underdeveloped areas. Their economic growth generates job opportunities. With the change of economic structure, it often increases the demand for a non-agricultural labor force and drives up wage levels. Even families without access to the internet may directly or indirectly benefit from rising wages and employment in the labor market.
The increase of agricultural operating income can be explained from the perspectives of intensive margin and extended margin. From the perspective of intensive margin, the inclusive nature of the above-mentioned digital finance will help families with operational businesses to expand the market scale and improve their operating income. From the perspective of expanding margin, the improvement of domestic demand brought by the development of digital finance can strengthen farmers’ entrepreneurial behaviors and increase their operating income. Although there is a significant primary digital divide in rural China, families without access to the internet may still overcome the digital divide through the facilities provided by China Post and agricultural cooperatives. By the end of April 2021, there were 2,259,000 farmers’ cooperatives registered in accordance with the law nationwide, with an average of more than 3 in each village, which can provide rural families with sales channels for agricultural products, smooth circulations, and reduce the profit margin of brokers. This is an important institutional feature of the socialist market economy with Chinese characteristics that distinguish China from other developing countries.
The development of digital finance has increased the wage income and agricultural operating income of families not exposed to the internet. It can be expected that the income effect generated by the development of digital finance will inevitably be accompanied by the employment effect, which may lead to the adjustment of family employment structure. The development of digital finance does promote the transfer of the agricultural labor force to non-agricultural sectors, especially from agricultural self-employment to non-agricultural employment, and the transfer or urbanization of the agricultural labor force is a typical feature of the transformation of the urban and rural dual economic structure. Therefore, the development of digital finance can help families without access to the internet increase their income and improve their consumption by promoting the transformation of the economic structure.
Digital financial development can accelerate economic growth, improve residents’ income and consumption, curb the expansion of the digital divide and its negative effects, and smooth the domestic and international dual circulations. Therefore, it needs to be vigorously promoted. Special attention should be paid to the role of the digital financial development in the transformation of employment structure, which is an important mechanism for the development of digital finance to bring income effect and boost domestic consumption demand.
Tightening regulations
The virtual space of digital financial development, especially the digital financial platform, also brings a series of major financial risks. We must strengthen government supervision, prevent its operation from disorderly development, and guard against and resolve systemic financial risks. Digital finance is essentially a platform economy. The marginal cost of its business expansion tends to be zero, which is easy to create a monopoly pattern in which “the winner takes all.”
It is not conducive to the protection of innovation and consumer rights and interests. Therefore, it is necessary to strengthen the government’s anti-monopoly regulation to prevent the disorderly expansion of capital. In the process of promoting financial services, digital financial platforms usually collect a large amount of data and infringe on customers’ privacy. While fully cultivating the market for mining data, government regulation should protect data security and personal privacy, curb the abuse of data monopoly to seize illegal excess profits, and treat the digital financial platform as a financial institution to obtain the necessary information for financial risk control in a timely manner. Although the development of digital finance can better identify customer risks with the help of internet technology and information, a large number of digital financial platforms continue to amplify adverse selections and aggravate financial and moral risks through peer-to-peer (P2P) online lending platforms in the name of “sci-tech innovation.” Since the 19th CPC National Congress, China has taken preventing and resolving major risks as the first of the three key battles to secure the decisive victory in completing the building of a moderately prosperous society in all respects. The end of 2020 witnessed substantial progress made in preventing and resolving systemic financial risks. The P2P online lending institutions actually operated in China have completely returned to zero, and the digital financial risks have been effectively controlled. Obviously, digital platforms involved in banking or financial businesses need to be strictly regulated in terms of reserves, capital, leverage ratio, and liquidity.
At present, financial supervision still lacks forward-looking early warning of financial risks of super-large internet platforms. For digital financial innovation, it is advisable to consider establishing a financial technology “regulatory sandbox” system to provide security simulation tests in advance for such activities. For the possible risks brought by digital financial innovation, we should closely follow the trend of sci-tech development and vigorously promote intelligent and scientific supervision. Moreover, based on the safety simulation tests, according to the specific characteristics of financial innovation activities, we can establish early warning and risk measurement mechanisms, strengthen cross-industrial comprehensive supervision, and adhere to the equal emphasis on safety, controllability, opening-up, and innovation, thereby achieving the goal of common prosperity.
Zhang Xun is an associate professor from the School of Statistics at Beijing Normal University, Wan Guanghua is a professor from the Institute of World Economy at Fudan University, and Wu Haitao is a professor from the School of Business Administration at Zhongnan University of Economics and Law.
Edited by ZHAO YUAN