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Building index system on citizens’ financial literacy

XIN ZIQIANG | 2022-01-06 | Hits:
(Chinese Social Sciences Today)

Workers from Hunan Xinshao Rural Commercial Bank shares financial knowledge with the locals in Shaoyang City, Hunan Province, on Jan. 13, 2021. Photo: CFP

Financial literacy is essential for citizens to adapt to an increasingly complicated economic world in modern times, and is of great significance to ensure financial well-being for individuals, promote common prosperity for all, and sustain the macro economy’s healthy operation. 


In recent decades, especially in the aftermath of the global financial crisis of 2008, the issue of financial literacy has received greater attention from government departments of various countries, academia, and the public.
Key to common prosperity
In a recent meeting focused on Chinese citizens’ financial literacy, Liu Yuanchun, vice president of Renmin University of China (RUC), said the fact that the Sixth Plenary Session of the 19th Central Committee of the Communist Party of China (CPC) emphasized a people-centered philosophy  indicates that it is important to promote the well-rounded development of the people. 
Liu was convinced that in a socialist market economy with Chinese characteristics, and in a globalized economic and financial system, citizens may face a high income trap if their financial literacy is very low despite an enviable GDP level. 
For example, some oil-exporting countries have high revenues, but their citizens’ financial literacy, especially their individual financial literacy, does not match, leading to a sluggish economic cycle for the whole society, a lack of social innovation power, social modernization failure, and the inability to achieve true prosperity and improve the people’s happiness. 
Therefore, a very important foundation for common prosperity is the overall improvement of citizens’ financial literacy.
Yin Youping, deputy director of the Financial Consumer Rights Protection Bureau of the People’s Bank of China (PBOC), said that financial consumers are the foundation of the financial industry, and only when the “foundation” is solid can the “industry” prosper. Good financial education for consumers is the cornerstone of financial market stability. 
One basic measure to guarantee good financial education is to measure citizens’ financial level (or financial literacy) dynamically, to continuously improve the relevance and effectiveness of financial education. 
Financial literacy and financial education are not only related to the vital interests of every consumer, but also to the people’s personal wallets and their yearning for a better life. 
Financial education and financial literacy cannot be improved without the participation of all sectors of society. Each of us should contribute our own share to improving financial literacy, guarding against financial risks, promoting financial health, and achieving common prosperity.
Understanding financial literacy
I led a project titled “The Development of Financial Values Tests for Chinese Citizens,” which is the only major project on financial literacy funded by the National Social Science Fund of China. At the seminar, I introduced my team’s triarchic structure of financial literacy. 
Although Western scholars have been studying people’s financial literacy for nearly 30 years, they tend to interpret it as the financial knowledge and capability needed for a person to engage in financial activities, while excluding people’s financial values from the picture. This narrow perspective does not fully demonstrate the nature of financial literacy. 
In comparison, China’s traditional and socialist concepts of justice and interests have always emphasized value orientations in people’s financial activities. Abiding by this philosophy, my team combined perspectives from many disciplines, including economics and psychology. 
Based on dual assumptions about human nature, “Homo Sociologicus” and “Homo Economicus,” the team came up with a theory with Chinese characteristics: the triarchic structure of financial literacy. Namely, financial literacy is the synthesis of financial knowledge, capability, and values. 
Based on this theory, my team developed “Financial Values Tests for Chinese Citizens,” which consists of three tests for each aforementioned part. Specifically, the test of people’s financial values evaluates people’s values for money management, financial ethics, and their value of wealth. 
These tests can not only be used to assess participants’ financial literacy based on their performance on each test, but also their comprehensive financial literacy. 
Based on the dual assumptions about human nature, the tests evaluate a person’s financial literacy based on indices for “Homo Sociologicus” and “Homo Economicus.” The higher score one receives on their “Homo Economicus” index the more likely they are to have advanced money management values, financial knowledge, and financial capability, and the more likely they are to value and excel at wealth management. 
In a way, these people are better at gaining income. The higher one scores on the “Homo Sociologicus” index, the more likely it is for the participant to have more advanced values regarding wealth and financial ethics. This type of person is able to look beyond money, and pursue more long-range social goals. 
Meanwhile, they place greater value on financial norms and ethics. The truly finance-savvy should balance both; they are not only good at earning profits, but also acquiring money ethically. 
Yin added that the PBOC also applies similar methods when carrying out surveys on consumers’ financial literacy, such as through evaluating consumers’ financial knowledge, skills, attitudes, and behaviors. 
Liu agrees with my assessment that Western scholars’ definition of financial literacy is too narrow. From the perspective of traditional Chinese culture, we believe that “a gentleman makes money through honorable means.” 
“Through honorable means” is very important, reflecting a view of justice and interests with Chinese characteristics. If we lose our morality and ethics, our values, or the view of  justice and interests by simply pursuing profit, it will be difficult to achieve true happiness or to achieve common prosperity and sustained growth under the guidance of the “invisible hand.” 
Regional polarization 
The meeting released the results of the financial literacy survey which included over 10,000 people in 31 provinces, municipalities, and autonomous regions across China. The survey reveals Chinese citizens’ financial literacy status quo, especially the division of individuals, communities, provinces, and regions in their “Homo Economicus” and “Homo Sociologicus” scores. 
For example, the ranking of provinces and regions for these two indices are evidently different: Shanghai, Fujian, Zhejiang, Shandong, Tianjin, Beijing, Guangdong, Hubei, Jiangsu, and Shanxi ranked top ten successively under “Homo Economicus.” In contrast, those that ranked highest in “Homo Sociologicus” are Tibet, Qinghai, Xinjiang, Guangdong, Ningxia, Henan, Yunnan, Jilin, Zhejiang, and Shaanxi provinces. 
The “Homo Economicus” and “Homo Sociologicus” scores from the surveyed 31 provinces and regions are negatively correlated, with the correlation coefficient being -0.53. 
That is to say, the higher a province or region scores in the former, the lower it scores in the latter. The two indices deviate, or split significantly from one another. This means that often the two fail to see balanced development.
This result reminds us that during policy design for financial literacy improvement, we should give consideration to both, and abandon the narrow understanding of financial literacy which only included the perspective of financial management knowledge and ability in the past. 
We should carry out systematic education on financial literacy for children, adolescents, financial consumers, and all citizens. We should not only pay attention to cultivating their characteristics as “Homo Economicus (financial management values, financial management knowledge, and financial management abilities),” but also their characteristics as “Homo Sociologicus (advanced values for wealth and financial ethics),” so as to guide them to take into account both justice and interests, and form a comprehensive financial literacy.
Hu Ping, a RUC professor, commented that these research findings effectively realized the intersection of psychology and economics and proposed a Chinese theory of financial literacy different from the Western one, which provides a construction path toward common prosperity from a psychological perspective.
Xin Ziqiang is a professor from the Department of Psychology at Renmin University of China.
Edited by WENG RONG