CAFI Insight | Are smaller households keeping up in financial management capacity? — the Report of Financial Inclusion Development in China (2022)

Households in China are becoming increasingly smaller and older. Households are becoming smaller because there are more singles, people are getting married later, birth rates are lower, and there are fewer extended families. Population aging is a global phenomenon and China is aging even faster. By the end of 2020, people aged 65 and above in China accounted for 13.5% of its total population.

Smaller households may mean that mutual support from family members is likely to be reduced and the mutual support in economic resources and risk buffers may get weaker. For instance, singles do not have support from their partners; families with fewer children may have limited assistance in their later years; one-generation households may have difficulty accessing immediate help from close relatives. In addition, rapid population aging is accompanied by smaller households. According to Stephanie Kramer (2020), in wealthier countries, older adults more frequently live alone. From a demographic perspective, the trends of smaller and older households will pose significant challenges to social dependency relationships.

How will these two trends affect household finance?

First, solo and smaller households need to rely on themselves for managing their family financial affairs and using financial instruments wisely to achieve their development goals.

Second, although China is known for its high savings rate, there is a pressing need for improvement in household finance such as income and expenditure management, financial planning, debt and credit management, insurance coverage, and financial stress management.

The above findings are based on surveys and research conducted by the CAFI research team in 2022, with the support of its partners. The study surveyed over 200,000 low- and middle-income micro and small businesses and vulnerable groups, including fixed-income earners, flexible workers, and the self-employed. Through a detailed analysis of 67,316 fixed-income earners and 72,895 flexible workers[1], we have identified six key findings:

Finding 1

Some fixed-income earners and flexible workers struggle to make ends meet.

1、Middle- and high-income≠income and expenditure balance

2、The middle-aged group bears a heavier financial burden.

3、Some flexible workers can barely keep their heads above water.

Finding 2

Regular financial planning is often overlooked.

According to the data, only about 20% on average of both fixed-income and flexible workers engage in regular financial planning in their daily lives. It is evident that education plays a significant role in the financial planning habits of flexible workers, as better-educated people tend to engage in daily financial planning more. In contrast, such a correlation is not found among fixed-income earners. It is worth noting that even for those with graduate degrees and above, only about 30% regularly engage in financial planning.

Finding 3

Low-income and flexible workers face greater debt challenges.

The data show that two years into the COVID-19 pandemic, household debts saw a substantial increase in both absolute and relative terms. If consider shadow lending, the figure can be even larger.

Finding 4

Low- and middle-income and flexible workers still face significant risk exposure.

Less than 20% of individuals earning less than 200,000 yuan annually, whether they are fixed-income earners or flexible workers, have comprehensive household insurance that can protect them from a wide range of risks.

Finding 5

Financial stress disproportionately falls upon poorly-educated, low-income, and young and middle-aged individuals.

Approximately 40% to 50% of both fixed-income and flexible workers report experiencing financial stress "frequently" or "constantly". Overall, poorly-educated, low-income, and young and middle-aged individuals face the highest levels of financial stress.

Finding 6

Half of the flexible workers struggle to live solely on savings or borrowing for three months.

About 60% of fixed-income and flexible workers who earn less than 50,000 yuan annually are unable to cover their household expenses for three or more months using savings alone. However, having good credit and access to borrowing can boost one’s financial resilience in the face of financial shocks.

To sum up, household finance in China needs greater support and protection in response to the trend of smaller and older households. However, most of them are ill-prepared. Even among the middle- and high-income groups, a notable proportion struggle to make ends meet, particularly middle-aged individuals who have the added responsibility of supporting their children and flexible workers with fluctuating incomes. However, most households do not engage in regular financial planning. Low-income and flexible workers face greater challenges in managing their debts and risk protection. Among both fixed-income and flexible workers, the poorly educated, low-income, and young and middle-aged tend to experience higher levels of financial stress. It is worth noting that flexible workers may face more challenges than fixed-income earners in saving and borrowing for emergencies due to their unpredictable income and limited credit. Therefore, a dynamic and mobile labor market is crucial to the financial resilience of flexible workers.

[1]The income group percentages of fixed-income earners are as follows: those with an annual income of less than 50,000 yuan (26.1%), 50,000 to 100,000 yuan (34.5%), 100,000 to 200,000 yuan (28.4%), 200,000 to 300,000 yuan (7.7%), 300,000 to 500,000 yuan (2.4%), and over 500,000 yuan (0.9%). The income group percentages of flexible workers are as follows: those with an annual income of below 50,000 yuan (51.8%), between 50,000 and 100,000 yuan (26.2%), between 100,000 and 200,000 yuan (13.9%), between 200,000 and 300,000 yuan (4.4%), between 300,000 and 500,000 yuan (2.5%), and over 500,000 yuan (1.2%).