Do you always max out your credit card? How much do you owe? What is your ratio of debt to investable assets? How much is your emergency fund?

All these questions are related to an important new topic—financial health.

In the face of unexpected risks, many self-employers and micro and small enterprises (MSEs) are not financially resilient, or risk resistant; they need to improve their ability to use financial services. Financial health has become increasingly important.

A few days ago, Guiping Liu, deputy governor of the People's Bank of China (PBoC), said: "We should enhance residents' and households' awareness of financial health. Based on the wide coverage of inclusive finance at present, we should promote financial health to optimize the financial status of residents and households and stimulate their motivation and potential for innovation and entrepreneurship, thus laying a more solid foundation among the public for common prosperity.”

What is financial health? Why do we need to enhance financial health awareness? How can we improve financial health?

What is financial health?

Financial health is a new term in financial inclusion; it refers to a state of being in which a person, business, or financial institution measures their well-being by the condition of monetary assets and liabilities, such as debt and savings. Quite a few international institutions have paid attention to financial health and conducted relevant assessments on financial consumers. The Chinese Academy of Financial Inclusion (CAFI) at Renmin University of China introduced financial health in The Report of Financial Inclusion Development in China (2019).

According to Mr. Xiugen Mo, Vice President of CAFI, with the advancement of inclusive finance in China, especially with increasing digitalization and convenience, the coverage and accessibility of financial services have been greatly improved in recent years. However, it has also brought an acute problem: accessible financial services may lead to bad financial behaviors such as excessive borrowing, conspicuous consumption, etc., which may result in a debt crisis.

Therefore, financial regulators have begun to pay attention to financial health. "Financial culture emphasizes honesty and trustworthiness, spirit of contract, rational investment and a risk-based approach." Guiping Liu pointed out that both residents and households need to enhance their awareness of financial health.

Specifically, financial health includes the following four aspects. First, to make ends meet. Be it a household or a business, the balance should sustain the normal operation. A stable income is essential as it will make expenditures more predictable.

Second, financial resilience. "Financial resilience is even more important for low-income groups; it is especially important for consolidating the achievements of poverty alleviation." Xiugen Mo said that financial resilience is manifested by sufficient cash and relatively liquid assets that can effectively mitigate the shocks triggered by reduced revenue or increased expenditures. It also refers to the ability to obtain external funds or credit in an emergency, for example, to obtain financial support from financial institutions, relatives, and friends in time.

Third, financial plan and investment capacity. Do you have savings, wealth management products, insurance products, etc.？

Fourth, financial literacy. Specifically, it includes adequate financial knowledge, a positive financial attitude, good financial behaviors, and the ability to use various financial instruments.

Why is financial health important?

“As it works for the human body, financial health is essential for handling various emergencies, fending off unexpected economic losses and recovering quickly from losses." Xiugen Mo said.

First, for market entities, especially MSEs, sound financial health will enhance their risk resilience to cushion the impact of the COVID-19 pandemic, thereby improving their production and operation.

Against the backdrop of the pandemic, MSEs are especially fragile financially. According to a follow-up survey on more than 190 households and MSEs for nearly two years, it finds that most surveyed MSEs cannot make ends meet in the first four months since the outbreak of the pandemic. Later, MSEs still suffered from volatile revenues and most of them did not turn around until July 2021.

There are three prominent problems to be solved for MSEs' financial health. First, the mix of economic activities and family life. Second, the mix of various resources and capital, and of production expenditures and consumption expenditures. Third, the mix of business profits and family welfare when making decisions.

Second, for issues concerning agriculture, rural areas, and farmers, sound financial health helps forestall falling back into poverty and consolidate the achievements of poverty alleviation, thus contributing to the advancement of rural revitalization on all fronts.

As farmers have enhanced their financial health awareness, it will be even more useful to help them pay attention to agricultural insurance to protect themselves from disasters and unforeseen events. According to the Report on Improving the Rural Financial Service System by CAFI, only 35% of surveyed farmers have heard about weather index insurance for agriculture but they knew little about it and they were unwilling to buy it. After researchers explained what it is and how to claim for the loss, about 56% expressed the intention to buy it and 61% believed that the weather index insurance for agriculture can serve as an effective complement to traditional insurance products.

"Currently, the coverage of climate risk-targeted insurance is relatively low in China. Over the past 10 years, only 30% of the climate disaster-triggered losses are covered by insurance globally with about 1.7 trillion USD losses uncovered. The future demand will be even greater." said Yuanqi Xiao, vice-chairman of the China Banking and Insurance Regulatory Commission (CBIRC).

Finally, for financial consumers, better financial health awareness can effectively prevent them from over-indebtedness and overdrafts, improve wealth management capabilities and achieve asset preservation and appreciation.

How to cultivate financial health?

Just like the human body, it is impossible to achieve or improve financial health overnight; it requires long-term exercise, so to speak.

"We should strengthen the top-level design of financial education, systematically integrate financial knowledge into the national education system, and coordinate and provide integrated financial literacy activities to help people keep their money safe." said Guiping Liu.

One of the purposes of financial education is to enhance the financial literacy of market entities. "Multiple measures should be adopted." Ning Che, deputy director of the Research Center for the Rule of Law and Sustainable Development at China University of Political Science and Law, said that government should make financial education a routine work, and industry associations should pool all possible strength to form standards and norms and provide quality contents for financial education.

The next question is how to use financial products and services correctly and effectively. “Financial products are a double-edged sword. As they have certain risks, improper use may lead to negative effects.” Xiugen Mo said. For example, over-indebtedness may deteriorate business operations and living standards. In short, to maintain financial health is to avoid such negative effects.

The major reason for the negative effects is the imbalanced financial services and product structure. For example, some financial services have yet been transformed into financial benefits for MSEs, and some financial services are irresponsible and even detrimental to the financial health of financial consumers, which also threatens financial stability.

How can we solve the above problems? An important means is to further protect consumers’ legitimate rights and interests and ensure the positive effects of financial services. "We will start with the protection of micro-entities' rights and interests to lay a solid foundation for their financial health." Ning Che said that we need to make efforts to protect such basic rights of the consumers and MSEs as the right to know, and right of choice and fair trade, and improve laws and regulations, self-discipline, and norms and standards-setting. At the same time, in key areas such as financial products research and development, marketing, complaints handling, and information security, we must enhance enforcement to create a fair and sound market environment. "Financial health should be seen as an important foundation for financial stability, so we need to do a good job to make sure that it is of high-quality." Xiugen Mo said.

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