Digital Finance, Digital Divide and Household Financial Portfolio Effectiveness — An Analysis Based on the Perspective of Urban-rural Differences

Abstract

Constrained by disparities in urban-rural and regional development, traditional financial services still face challenges of low coverage and high financing costs, hindering their effective role in promoting agricultural, farmer, and rural development. However, the emergence of digital finance, resulting from the fusion of finance and technology, is reshaping the operational landscape of the financial industry. Digital finance addresses longstanding issues such as the lack of standard collateral and information asymmetry in financial services for agriculture, farmers, and rural areas. Its advancement is anticipated to bridge the digital gap between urban and rural regions, empowering farmers to benefit from reforms and development, thereby serving as a potent instrument for rural revitalization and fostering shared prosperity.

This study employs data from the Peking University Digital Financial Inclusion Index of China (PKU-DFIIC) and the China Household Finance Survey (CHFS) 2019 to comprehensively analyze the impact of digital financial development on urban and rural household financial asset portfolios. The findings indicate that while digital financial development enhances the effectiveness of both urban and rural household financial asset portfolios, it disproportionately favors urban households, potentially exacerbating the urban-rural gap in portfolio effectiveness. Specifically, greater utilization of digital finance and the level of inclusivity in its digitalization amplify the effectiveness of urban and rural household financial asset portfolios, predominantly benefiting urban households.

Furthermore, to delve deeper into the influence of digital finance on optimizing household financial asset portfolios, this study dissects the digital divide into primary and secondary levels. It explores the prospect of narrowing the effectiveness gap in household financial asset portfolios between urban and rural areas by bridging different levels of the digital divide. The research underscores the digital divide as a critical impediment to digital finance’s role in enhancing household financial asset portfolios. Notably, digital financial development significantly boosts the effectiveness of household financial asset portfolios in both urban and rural areas once households overcome primary and secondary digital divides. Thus, the key to leveraging digital finance for enhanced portfolio effectiveness lies in mitigating the digital divide.

Moreover, this paper quantifies the secondary digital divide based on digital finance usage and further delineates it into digital finance and digital credit divides. It delves into the distinct roles of bridging the digital finance and digital credit divides in augmenting the effectiveness of urban and rural household financial asset portfolios amid various barriers to digital financial service usage. This expands the research and policy scope of digital finance. The policy implications underscore the imperative to expedite the construction of an inclusive digital finance pathway, establish robust institutional mechanisms for nurturing digital and financial literacy among urban and rural residents, continually narrow the digital divide between information-rich and information-poor demographics, and enhance the effectiveness of residents’ household financial asset portfolios.