financial literacy and risky asset holdings: evidence from

Financial literacy and risky asset holdings: evidencefrom China

Li Liaoa, Jing Jian Xiaob, Weiqiang Zhanga, Congyi Zhoua

aPBC School of Finance, Tsinghua University, Beijing, ChinabDepartment of Human Development and Family Studies, Transition Center, University of

Rhode Island, Kingston, RI, USA

Abstract

Although financial literacy is important for participating in financial markets,the level of financial literacy of Chinese consumers is low compared with thosein developed countries. Using data from the 2014 China Survey of ConsumerFinances, we examine the relation between financial literacy and the risky assetholding behaviour of Chinese households, in the context of an emergingfinancial market with a distinct institutional background. The findings revealthat consumers with higher levels of financial literacy are more likely to holdrisky financial assets than those with lower levels. The potential impacts arederived mainly from advanced financial literacy.

Key words: Chinese households; Financial literacy; Risky asset holdings

JEL classification: D12, D14, E21

doi: 10.1111/acfi.12329

1. Introduction

In contemporary China, the financial industry is playing an essential rolein boosting economic growth. The Chinese stock market has risen to one ofthe largest stock markets in the world. The market capitalisation of theShanghai Stock Exchange and the Shenzhen Stock Exchange reached US$6.27 trillion at the end of January 2015, ranking second only to that of theU.S.A. (World Federation of Exchange, 2015). Over the past decade, thegrowing complexity of financial products spurred by financial innovations

The authors acknowledge funding support from the National Natural ScienceFoundation of China (71232003 and 71573147) and China Postdoctoral ScienceFoundation (2016T90073, 2015M570066).

© 2018 AFAANZ

Accounting & Finance 57 (2017) 1383–1415

http://orcid.org/0000-0002-8844-1032

http://orcid.org/0000-0002-8844-1032

has transferred increasing financial risks to households and has imposedenormous pressures on consumers who are expected to absorb these risks.Risky financial assets, such as stocks, mutual funds, corporate bonds andcommodity futures, as well as risk-free bank deposits, are available forhousehold portfolio selection.The goal of portfolio allocation is to maximise the optimal level of growth in

the wealth of a household. The classical portfolio theory implies that riskyassets should be included in the household portfolio (Markowitz, 1952), yetresearch shows that many households do not establish their portfolio allocationin accordance with financial theory. Campbell (2006) observes that Americanhouseholds with less wealth prefer to allocate their assets to vehicles and cashrather than to risky assets such as stocks. Although households tend to holdstocks more than other risky assets when they accumulate wealth, manywealthy households nevertheless do not participate in the stock market.Previous studies have explored factors associated with risky asset holdings. Anempirical study in Europe indicates several determinants of risky assetholdings, including labour income uncertainty and health risk (Atella et al.,2012). Moreover, Cardak and Wilkins (2009) find that financial awareness andknowledge play an important role in determining risky asset holdings amongAustralian households.It is worth noting that despite increasing access to financial markets, risky

financial assets constitute a small percentage of Chinese households’ portfolios,possibly because of the lack of financial literacy. This study examines thepotential effect of financial literacy on the risky asset holdings of Chinesehouseholds. In recent decades, financial literacy has attracted more attentionregarding its great economic significance. Lusardi and Mitchell (2014) proposethe theoretical and empirical importance of financial literacy. They argue thatthe gap between reality and theoretical models may originate in the hypothesis,which states that individuals have the capacity to undertake complex economictasks and possess expertise in engaging with financial markets, a hypothesiscontradicted by findings of prevailing financial illiteracy across countries.Financial illiteracy has been empirically linked to undesirable financialdecisions (Agarwal et al., 2009). Consumers with low levels of financial literacytend to save less and accumulate less wealth (Lusardi and Mitchell, 2007;Jappelli and Padula, 2013). To provide a solution to financial illiteracy, asmuch as 59 economies in the world are implementing or actively designingnational strategies to improve financial education (OECD, 2015). Effectivefinancial education programmes will contribute to higher financial literacy,more desirable financial behaviours, and better financial ability (Bernheim andGarrett, 2003; Collins, 2010; Carlin and Robinson, 2012; L€uhrmann et al.,2015; Xiao and O’Neill, 2016).Based on previous research, we predict that financial literacy is an important

factor for explaining the risky asset holding behaviour of Chinese households,given that China has experienced the transition of economic system, and

1384 L. Liao et al./Accounting & Finance 57 (2017) 1383–1415

© 2018 AFAANZ

therefore, many households remain unfamiliar with the emerging financialmarket and risky financial assets. Consequently, consumers with low levels offinancial literacy may face high costs of participation in risky financial marketsbecause financial literacy could be viewed as costly in terms of human capital.Although research on financial literacy in many countries, particularlydeveloped countries, is growing, the financial literacy research in China islimited. To address this research gap, we use data from the 2014 China Surveyof Consumer Finance to examine the role of financial literacy in determiningthe risky asset holdings of Chinese households.Based on descriptive statistics, we find that financial illiteracy in Chinese

households is both prevailing and severe at the national level. We then employregression models to examine the potential effect of financial literacy on riskyasset holdings. After controlling for the potential endogeneity of financialliteracy and risky asset holdings, the results and robustness checks show thatfinancial literacy is associated with risky financial asset holdings amongChinese households. Moreover, advanced financial literacy is strongly associ-ated with risky asset holdings.Our study contributes to existing literature by adding new evidence from the

emerging market. Although there has been increasing research on financialliteracy and household portfolio, most studies are rooted in the context ofmature markets, both theoretically and empirically (Lusardi and Mitchell,2007; Cardak and Wilkins, 2009; Jappelli and Padula, 2013). However,consumers in emerging markets face more constraints than those in maturemarkets. Take the pension system as an example. The Chinese social pensionaccount is managed as a mutual fund by a specialised government institution.Individual account holders are not in charge of the portfolio allocation of theirown accounts. From the individuals’ perspective, the pension account works asa long-term saving account with a risk-free return. The opportunity forindividual investors to allocate risky financial assets is largely narrowed by thissystematic arrangement. These constraints and special institutional arrange-ments make the asset allocation pattern of Chinese households generallydifferent from that of Western countries. Therefore, it is necessary to examinethe impact of financial literacy on Chinese household behaviour to enrich theliterature of financial literacy, even though there are rich existing studies usingdata from developed economies. To our knowledge, our study is the first tocharacterise Chinese financial literacy using international comparable data.Moreover, previous research has studied the potential effects of financialliteracy on stock market participation (Van Rooij et al., 2011), but littleattention has been given to the entire set of risky financial assets in householdportfolios. This study attempts to fill this gap too.The paper is organised as follows. Section 2 presents a literature review on

financial literacy and risky asset holdings, in which research hypotheses areproposed. Section 3 introduces the survey data, and section 4 describes thefinancial literacy situation of Chinese households. Section 5 reports the

L. Liao et al./Accounting & Finance 57 (2017) 1383–1415 1385

© 2018 AFAANZ

empirical results regarding the association between the financial literacy andrisky asset holdings of Chinese households. Section 6 concludes and discussespolicy implications on national financial education.

2. Literature review and hypotheses

2.1. Research on financial literacy

During the past decade, research on financial literacy has increased.Definitions of financial literacy vary in the literature (Hung et al., 2009).Lusardi and Mitchell (2014) define financial literacy as the ability to ‘processeconomic information and make informed decisions about financial planning,wealth accumulation, debt and pensions (p6)’. To measure financial literacy,they have designed three questions to examine people’s numeracy capabilityand their understanding of concepts such as inflation, interest and riskdiversification. This set of questions is broadly adopted for conductingfinancial literacy surveys in different countries (Lusardi and Mitchell, 2011).Apart from Lusardi’s measurement, the International Network of FinancialEducation (INFE) has decomposed financial literacy into financial knowledge,financial attitude and financial behaviour and developed questions for eachpart (Atkinson and Messy, 2012). To evaluate the level of financial literacy inOECD countries, INFE conducted a massive pilot survey across 14 countriesto collect micro household data. The results show that low levels of financialliteracy generally exist in nearly all OECD or OECD-partner countries. Similarto the findings of Atkinson and Messy (2012), low levels of financial literacyare repeatedly discovered in many countries and areas, including Germany,Italy, Russia, Japan and the U.S.A., which means it exists in developedcountries and emerging markets alike (Bucher-Koenen and Lusardi, 2011;Fornero and Monticone, 2011; Klapper and Panos, 2011; Sekita, 2011;Bumcrot et al., 2013). To our knowledge, no study has examined financialliteracy in China. In this paper, we describe the financial literacy situation ofChinese households with data from the 2014 China Survey of ConsumerFinances.Many previous studies have focused on the consequences of financial

illiteracy. Financial literacy has been shown to exert a positive effect onhousehold financial management and to improve financial well-being. House-holds with higher levels of financial literacy tend to make sound financialdecisions. Bernheim and Garrett (2003) find that people would save more ifthey have received financial education in the workplace. Lusardi and Mitchell(2007) show that people with lower levels of financial literacy have accumulatedless wealth because of their failure to adequately consider retirement planning.Agarwal et al. (2009) find that financial decision mistakes are more commonamong young and older people, and that they usually perform worse onmeasures assessing financial literacy than middle-aged people. Jappelli and


© 2018 AFAANZ

Padula (2013) integrate financial literacy into the consumption model andprovide evidence of a strong correlation between financial literacy and wealthaccumulation. They argue that financial literacy and wealth are endogenousand affected by common factors over a life cycle so that they use instrumentvariable estimates to address the endogeneity bias in empirical analyses.Evidence from emerging markets also confirms financial literacy as a predictorof financial behaviour. Cole et al. (2011) use survey data from Indonesia andIndia to demonstrate that financial literacy is positively correlated with thedemand for financial services and financial products.

2.2. Financial literacy and risky asset holdings

Previous studies have explored the determinants of household holdings ofrisky financial assets. Demographic characteristics, such as age, gender andmarital status of the household head, are considered possible determinants(Poterba and Samwick, 2001; Bertocchi et al., 2011; Halko et al., 2012). Thesestudies reveal that women generally are more risk averse and less likely to investin risky assets. Family changes, including changes in marital status and thenumber of children, would fundamentally affect household portfolio decisions(Love, 2010). Atella et al. (2012) analyse data from ten European countries tostudy the influence of health status on household portfolio choices. They findthat in countries with less protective healthcare systems, the current andexpected health statuses affect the household’s portfolio allocation of riskyassets.Until recently, financial literacy was not valued as an important determi-

nant in the decision making of households in regard to risky asset holdings.Apart from the background risk factors posed by labour income uncertainty,health risk and home ownership, financial awareness and knowledge mayplay an important role in the risky asset holdings of Australian households(Cardak and Wilkins, 2009). Jappelli and Padula (2015) have developed anintertemporal portfolio choice model suggesting that acquiring human capitalin the form of financial literacy may help investors reduce entry andtransactional costs associated with financial markets. Their model predictsthat increased financial literacy would increase stock market participationand commit a larger share of risky assets to a portfolio. This prediction issupported by cross-country data in Europe. Additional evidences fromseveral countries show that both financial literacy and cognitive abilities areclosely linked to decisions regarding stock investments (Christelis et al., 2010;Van Rooij et al., 2011).Based on these theoretical and empirical studies, we infer that a positive

correlation may exist between financial literacy and risky asset holdings ofChinese households. In households lacking formal financial education, whererisky assets are relatively new, higher levels of financial literacy would lower thecosts of understanding risky financial assets. Furthermore, it would eliminate


© 2018 AFAANZ

the obstacle posed by the ambiguity of participating in financial markets.Therefore, we propose the following hypothesis:

H1: Keeping other variables constant, financial literacy is positively correlatedwith risky asset holdings.

2.3. Advanced financial literacy and risky asset holdings

To further scrutinise the influence of financial literacy, we distinguishadvanced financial literacy from basic financial literacy following Van Rooijet al. (2011). Based on Van Rooij et al. (2011), most households are informedof basic financial concepts and ideas, but experience difficulty graspingadvanced professional knowledge. They have distinguished the professionalknowledge (referred to as ‘advanced financial literacy’) from the basiceconomic concept (‘basic financial literacy’) and believe that understandingadvanced financial knowledge will help predict the household’s investmentbehaviour. Households with less advanced financial literacy are more reluctantto participate in the stock market. By including the same advanced financialliteracy questions and some additional items on investment markets andproducts, Balloch et al. (2015) have developed an index of ‘stock marketliteracy’. They relate this measurement of sophisticated financial literacy tostock ownership decisions and find that stock market literacy helps explain notonly the probability of participation but also the share of investments instocks.Advanced financial literacy focuses on specific financial products, while basic

financial literacy covers only fundamental economic concepts, which representdifferent levels of financial literacy. For example, the computation ofcompound interest represents basic financial knowledge, but is not restrictedto the field of finance. This point can be well illustrated through comparisonsbetween National Standards for Financial Literacy (Bosshardt and Walstad,2014) and National Content Standards in Economics (Walstad et al., 2013),which are both published by the U.S. Council for Economic Education. Someeconomic concepts such as interest rate and inflation are required for financialliteracy as well, while the standards for economics include few items aboutfinancial investment products. Hence, it is important to distinguish betweenadvanced and basic financial literacy. Regarding the household asset holdingbehaviour, advanced financial literacy provides core financial concepts moreclosely linked with risky assets. We infer that advanced financial literacy, whichrequires a deeper understanding of financial assets, would exert a greater effecton the household with respect to choosing appropriate risky assets than wouldthe fundamental economic and numeracy capability provided by basic financialliteracy. Hence, we propose the second hypothesis:


© 2018 AFAANZ

H2: Keeping the basic financial literacy constant, advanced financial literacy ispositively correlated with risky asset holdings.

3. Data

Data for this study are from the 2014 China Survey of Consumer Finances(CSCF), a national survey on urban household finances. The sample isobtained by probability-proportional-to-size sampling (PPS) with implicitstratification. Administrative units and variables measuring the local economicdevelopment level are used for stratification. The nationally representativesample contains information on 3921 households from 25 provinces ormunicipalities. Populations in these provinces/municipalities constitute 95percent of the national population. The survey collects household finance databy conducting a computer-assisted personal interview, generally lasting30 min. In the 2014 wave of CSCF, a distinct module on financial literacywas added. Most questions in the questionnaire are similar to those in thefinancial literacy modules of the 2005–2006 De Nederlandsche Bank’sHousehold Survey (Van Rooij et al., 2011) and the 2010–2011 OECD/International Network of Financial Education (INFE) Pilot Study (Atkinsonand Messy, 2012). Thus, using the same scoring technique, we are able tocompare the Chinese financial literacy situation with the situation in othercountries. Because CSCF shared samples with the China Family Panel Studies(CFPS), we used additional information on household characteristics availablefrom the CFPS. It should be noted that it is a household survey, and thus, theinterviewee should be carefully selected to ensure that his/her responsesrepresent the household and connected to the household’s financialbehaviours. Instead of randomly assigning a household member within thehousehold, we require that the respondent who answers questions in thefinancial literacy module be the one taking charge of the family financialaffairs. Thus, we assume the respondent’s financial literacy applies to thehousehold financial decisions.The financial literacy questions comprise two categories. The first category

includes basic financial knowledge such as numeracy and common financialconcepts, whereas the second category requires advanced financial knowl-edge. Terms corresponding to types of financial assets, such as stocks andmutual funds, are mentioned in the advanced category. Some questions areclosely related to popular topics in the contemporary financial situation inChina, such as the time deposit interest rate and commercial bank financialproducts. The wording of the questions is shown in Appendix I, and allquestions can be answered with ‘I don’t know’ to discourage guessing,although the ‘I don’t know’ response is not among the alternatives shown tothe interviewee.


© 2018 AFAANZ

4. Financial literacy in China

The responses from our national sample indicate a severe lack of financialliteracy in China. A large number of people lack financial knowledge to supporttheir daily financial activities. Responses to each question are reported inTable 1, which show that the accuracy rates of most questions are fairly low.We use household weights to ensure that all of the below statistics arenationally representative.Respondents are more knowledgeable about the financial matters that they

are involved in. Few financial products were available before the emergingfinancial market launched, and therefore, most households select time depositsas their primary financial asset. It is plausible that the time deposit interest ratemay be one of the financial concepts that Chinese households are most familiarwith. However, only about half (51.32 percent) of the households are aware ofthe approximate range of the 1-year time deposit interest rate, whereas 38.38percent of households do not know the rate. For the computing questions,nearly all participants can perform simple division, while 45.23 percent of them

Table 1

Responses to all financial literacy questions (N = 3875)

Correct Wrong Don’t know

Basic financial literacy

1. Division* 100%* – –2. Interest rate 51.32% 10.30% 38.38%

3. Calculation of simple interest & principal 45.23% 31.19% 23.58%

4. Compound interest 50.33% 24.47% 25.20%

5. Inflation 57.32% 19.17% 23.51%

6. Time-value of money 68.22% 13.21% 18.56%

7. Risk and return 85.13% 5.76% 9.11%

Advanced financial literacy

1. Bank function 33.29% 34.45% 32.27%

2. Risky assets 67.74% 10.57% 21.68%

3. Diversification 35.43% 23.38% 41.19%

4. Knowledge of stock 16.34% 40.55% 43.10%

5. Knowledge of mutual fund 11.17% 31.09% 57.74%

6. Knowledge of commercial bank financial products 28.66% 33.06% 38.28%

7. Knowledge of stock market 28.60% 20.98% 50.42%

This table reports the weighted proportion of households in the survey giving correct/wrong/

do not know answer to each question. Accuracy rate is generally low and there is high

proportion of ‘I don’t know’ reply, reflecting the fact of serious financial illiteracy. *This

question was not asked in the field survey. According to the pilot survey with approximately

1000 responses, the correct rate is 97 percent. To make the results comparable, we retain the

question here. Hence, the score will slightly overestimate the true level of basic financial

literacy. Data source: 2014 China Survey of Consumer Finances.


© 2018 AFAANZ

can compute the simple interest, and 50.33 percent can calculate the compoundinterest. It is striking that more people know about compound interest thanpeople who know about simple interest, which is a less complex calculation andconcept. We are unsure, however, whether this gap in knowledge is caused byparticipants guessing rather than stating that they do not know the answer.Therefore, we consider participants who correctly answered questions on bothsimple interest and compound interest to be those who clearly understandcompound interest, 25 percent of all participants understood both types ofinterest. More participants are familiar with the concepts of inflation and thetime-value of money, 57.32 and 68.22 percent correctly answer the questions,respectively. Finally, most people (85.13 percent) understand that a high returnis often accompanied by a high risk.Table 2 reports the distribution of numbers of correct, incorrect and ‘I don’t

know’ responses. On average, respondents answered 4.35 of seven questionscorrectly in terms of basic financial knowledge but only 2.21 of seven questionscorrectly in the advanced financial literacy category. One-fifth (19.02 percent)of the respondents provided no correct answers to any advanced questions, and12.09 percent reported ‘I don’t know’ to all of the advanced literacy questions.We compare the performance of the Chinese participants with that of people

in OECD/OECD-partner countries in Table 3. The eight questions in the 2010/2011 OECD pilot study are included in CSCF, with seven of the questionscorresponding to the basic financial literacy and one to the advanced category.The questions are modified slightly. We focus on the percentage of peoplereceiving high scores on at least six correct answers of the eight-question total.Panel A shows the comparison. The Chinese performance is lower than that ofmost countries involved in the OECD survey approximately 5 years ago. Onlyone-third (37 percent) of Chinese respondents received a relatively high score.

Table 2

Distribution of correct/wrong/do not know responses (N = 3875)

0 1 2 3 4 5 6 7 Mean


Correct 0 6.53 11.83 14.06 18.94 19.35 14.60 14.70 4.35

Incorrect 36.51 22.74 24.44 11.29 4.27 0.7 0.04 0 1.26

Do not know 51.05 17.96 6.46 6.44 7.11 6.17 4.81 0 1.38


Correct 19.02 21.29 20.78 16.36 10.31 6.98 3.67 1.59 2.21

Incorrect 25.73 20.12 19.56 14.83 11.26 6.05 2.06 0.38 1.94

Do not know 27.60 12.76 10.55 9.90 8.31 9.49 9.31 12.09 2.85

This table reports the distribution of the number of correct/wrong/do not know items with

respect to seven questions in basic financial literacy module and seven questions in advanced

financial literacy module. Data source: 2014 China Survey of Consumer Finances.


© 2018 AFAANZ

The performance on advanced financial literacy questions is compared withresults from the 2005 DHS, as reported in Panel B of Table 3. Of the sevenadvanced financial literacy questions, five are identical to questions adminis-tered by the DHS (see Appendix I). The comparison indicates that the Chineseparticipants lack specialised financial knowledge. For each question, theyreport fewer correct answers and more ‘I don’t know’ responses than peoplefrom the Netherlands. The disparity worsens when participants are asked abouta specific financial product in detail. For example, only 11.17 percent of theChinese households possess a clear understanding of mutual funds, and 57.74percent admitted that they know nothing about mutual funds. These findingssuggest that financial markets and products remain new to many consumers inChina.The above comparisons suggest that Chinese consumers severely lack

financial literacy. Many people experience difficulties determining deposit

Table 3

International comparison of financial literacy (N = 3875).

Panel A: Basic financial literacy

Score ≥6 (%)

China (2014) 37

Armenia (2010) 46

Czech Republic (2010) 57

Estonia (2010) 61

Germany (2010) 58

Ireland (2010) 60

Malaysia (2010) 51

Peru (2010–2011) 41

Poland (2010) 49

South Africa (2010) 33

UK (2010) 53

Panel B: Advanced financial literacy

Correct (%) Incorrect (%) Do not know (%)

CSCF DHS CSCF DHS CSCF DHS

Risky assets 67.74 68.50 10.57 12.70 21.68 18.40

Diversification 35.43 48.20 23.38 24.80 41.19 26.60

Knowledge of stock 16.34 62.20 40.55 25.60 43.10 11.00

Knowledge of mutual fund 11.17 66.70 31.09 11.20 57.74 21.70

Knowledge of stock market 28.60 67.00 20.98 12.90 50.42 19.70

This table compares the performance of Chinese households and residents in some other

countries, based on the similar questionnaire and scoring mechanism presented in

Appendix I. Data source: 2014 China Survey of Consumer Finances; Van Rooij et al.

(2011); Atkinson and Messy (2012). N = 3875


© 2018 AFAANZ

interest, despite possessing good numerical ability. They believe financialconcepts are ambiguous, and few understand the required knowledge neededfor financial products.We also examine sociodemographic differences in financial literacy. Unlike

most findings in other countries, namely that the relation between financialliteracy performance and age can be described by a reverse U-shaped curve, adownward line suggests the monotonous decrease of financial literacy whenageing in China. There exists a large gender gap in financial literacy, with malesgenerally scoring higher on sophisticated questions compared with females.Consumers with lower education and lower income levels also perform worseon financial literacy questions than do consumers with higher education andincome levels.

5. Financial literacy and risky asset holdings

5.1. Descriptive statistics

In the survey, information about risky asset holdings is requested with thefollowing question:

Do you have any of the following financial products in your householdportfolio?1) Stock 2) Mutual Fund 3) Treasury Bond 4) Trust 5) Foreign Exchange6) Other financial assets (e.g. Futures/Derivatives) 7) None of the above

Households that possess at least one of the listed assets except treasury bondsare coded as currently holding risky financial assets. We define risky asset shareas the ratio of risky financial assets to the total amount of financial assets in thehousehold portfolio. Financial asset comprises risky financial assets mentionedabove, as well as safe financial assets including cash, time deposit and treasurybond.Table 4 presents the distribution of household risky asset holdings. Only

12.67 percent of all households report holding risky financial assets. Particu-larly, stocks represent the most popular risky asset among Chinese households,8.21 percent of them participate in the stock market directly. Only 2.76 percentof the households diversify their portfolio by holding two or more types ofrisky financial assets. Most households allocate a small proportion of theirportfolio using risky assets, with almost 90 percent of households holding riskyfinancial asset share lower than 20 percent. These findings suggest that riskyassets have not been widely accepted by Chinese households. The direct stockmarket participation rate (8.21 percent) in China is approximately 40 percentlower than that in the U.S.A. (13.8 percent). Moreover, 48.8 percent ofAmerican households own publicly traded stocks, mainly through pensionaccounts. Data from the Eurozone show that direct and indirect stock


© 2018 AFAANZ

ownerships differ much across European countries. We emphasise that inChina, the opportunity for individual investors to allocate risky financial assetsis largely limited by the national system. The Chinese social pension account ismanaged by specialised government institutions. Individual account holders arenot in charge of the portfolio allocation of their own accounts. This

Table 4

Risky asset holdings of Chinese households

Panel A

Risky asset ownership Risky

asset

Stock Mutual

funds

Trust Foreign

exchange

Other risky

assets

Proportion (%) 12.67 8.21 5.7 0.72 0.27 0.88

Panel B

Number of risky assets 0 1 2 3 4 5

Proportion (%) 87.33 9.91 2.45 0.28 0.03 0

Panel C

Risky asset share 0 (0,0.2] (0.2,0.4] (0.4,0.6] (0.6,0.8] (0.8,1]

Proportion (%)* 87.33 2.57 2.53 1.81 0.70 0.30

Panel D†

Proportion (%) U.S.A. Germany Ireland The

Netherlands

Poland Finland

Stock 13.8 9.6 13.1 8.0 3.5 21.4

Mutual fund 8.2 13.1 3.3 13.3 4.2 27.0

Bond‡ 1.4 4.2 4.5 3.8 1.0 0.9

Voluntary Pension/

Whole Life Insurance§49.2 46.3 10.0 35.3 51.3 23.6

Data source: 2014 China Survey of Consumer Finances; Eurosystem’s Household Finance

and Consumption Survey, the second wave; Bricker et al. (2017) (N = 3875). In this table,

Panel A presents the statistical description on risky asset ownership. We define risky asset

ownership as owning at least one category of the following risky financial assets: stock,

mutual fund, trust, foreign exchange or other risky assets. Panel B indicates the extremely low

level of risky portfolio diversification by reporting the distribution of the number of risky

financial assets that households hold. Risky asset share is defined as the ratio of risky financial

asset to total amount of financial asset in the household portfolio. Financial asset comprises

risky financial asset mentioned above, as well as safe financial asset including cash, deposit

and treasury bond. Panel C shows that most households allocate small proportion of

portfolio on risky asset. Panel D compares risky asset ownership (Participation rate) across

countries. *Do not sum to 100 due to missing values.†Data Source: Survey of Consumer

Finance 2013; Household Finance and Consumption Survey 2013–2014.‡The U.S. term does

not include savings bond. §The U.S. term does not include life insurance.


© 2018 AFAANZ

institutional arrangement makes the asset allocation pattern of Chinesehouseholds generally different from that of Western countries. Therefore, itis necessary to examine the impact of financial literacy on Chinese householdbehaviour to enrich the literature of financial literacy, even though there arerich existing studies using data from developed economies.To measure financial literacy, two methods were used. The first method is to

sum the number of correct answers, as conducted in the OECD pilot study(Atkinson and Messy, 2012). Although the questions are ranked by aprogressive degree of difficulty, it is challenging to determine the exact weight,as each question contains specific information. Therefore, it is reasonable totreat each question equally. The index of financial literacy constructed thus isdenoted the financial literacy_addition. The second method is to conduct afactor analysis on these questions and extract the factor score as the index offinancial literacy (Van Rooij et al., 2011). Thus, factor loadings are designatedas the weights of the questions. This index is denoted the financial literacy_-factor, and the factor loading is reported in Appendix II. It is difficult todiscern which index is superior; hence, both indexes are used in the analyses.The questions in both basic and the advanced categories are pooled toconstruct the index of financial literacy.For control variables, risk attitude is considered first. In the questionnaire,

the respondents are asked: ‘How much risk can you tolerate in your householdinvestment?’ The response choices are ‘1. High risk with high return’; ‘2.Medium risk with medium return’; ‘3. Low risk with low return’; and ‘4. Norisk at all’. A dummy variable for subjective risk attitude is set to 1 if ‘3’ or ‘4’ ischosen, to indicate a household showing a strong risk-averse attitude. We alsoinclude a set of variables indicating sociodemographic characteristics of thehousehold head. A set of dummy variables indicated the level of educationusing five response choices that ranged from ‘below primary school’ to ‘with abachelor degree or above’. The annual disposable income and net wealth of allhousehold members are included. To avoid the influence of outliers, wewinsorise the reported family income and wealth at the top and bottom 1percent. Housing asset plays an important role in household portfolioallocation. The status of owning a house may affect a household’s decisionconcerning risky asset holdings (Fratantoni, 1998). For a household operatinga small business, the financial situation is unique and thus may affect financialdecisions (Heaton and Lucas, 2000). Therefore, a dummy variable is used toindicate whether the household head is self-employed. The household size andstructure are also included as control variables because the number ofhousehold members in the labour force and the dependency ratio are linked tothe household’s financial constraints (Love, 2010). Then, variables are includedto indicate the total number of family members and whether any senior olderthan 60 or child younger than 18 required support in a given household. Healthstatus is also a control variable (Rosen and Wu, 2004). People may consider thepotential shock from the family members’ health status when they face risky


© 2018 AFAANZ

asset holding decisions. In the current medical insurance system, medicalexpenses would be high and uncompensated by insurance in many cases. Thevariable of household medical expenditure in the last year is used to indicate thehealth risk. Moreover, financial service differs greatly among different cities inChina. Household decisions on risky asset holdings may rely on the availabilityand convenience to hold financial assets (Yin et al., 2015). Financial develop-ment is highly correlated with the local economic conditions. Therefore, weinclude GDP per Capita to control the effect of financial availability. Finally, agroup of dummies of provinces is used to control for the region effect.After removing missing values and outliers, 3875 observations are retained

for further analysis. Table 5 presents descriptive statistics of the majorvariables. In the sample, 45 percent of household heads are male. The averageage of the household head is 49, and 21 percent of household heads have

Table 5

Descriptive statistics of main variables (N = 3875)

Variables Mean Median SD P1 P99

Dummy: Risky Asset Ownership 0.13 0 0.35 0 1

Risky Asset Share 0.03 0 0.12 0 0.67

Financial Literacy_Addition 6.57 7 3.11 1 13

Financial Literacy_Factor 0 0.02 0.90 �1.59 1.87

Dummy: Risk Attitude 0.62 1 0.49 0 1

Dummy: Male 0.45 0 0.50 0 1

Age 49.24 49 15.10 21 82

Education Dummy: Below Primary School 0.11 0 0.31 0 1

Education Dummy: Primary school 0.13 0 0.34 0 1

Education Dummy: Junior school 0.30 0 0.46 0 1

Education Dummy: High school 0.25 0 0.43 0 1

Education Dummy: College 0.12 0 0.33 0 1

Education Dummy: University or Above 0.09 0 0.29 0 1

Married 0.81 1 0.39 0 1

Household Income Last Year (Thousands,

Yuan)

64.64 50 51.09 5 300

Household Net Asset (Thousands, Yuan) 529.78 277.35 705.66 �4.08 3475.00

Number of Family Members 3.19 3 1.45 1 8

Dummy: Owning Estate 0.79 1 0.41 0 1

Dummy: Self-employed 0.13 0 0.33 0 1

Dummy: Senior Family Member 0.34 0 0.48 0 1

Dummy: Dependent Children 0.31 0 0.46 0 1

Household Medical Expense Last Year

(Thousands, Yuan)

4.70 1.50 13.05 0 50

Local GDP per Capita (Thousands, Yuan) 65.28 37.68 69.57 5.52 285.16

This table reports the main statistics of variables involved in multivariate regressions.

‘Financial literacy_addition’ and ‘Financial literacy_factor’ are different measurements for

financial literacy. Data source: 2014 China Survey of Consumer Finances; 2010, 2012 China

Family Panel Studies.


© 2018 AFAANZ

completed higher education. 13 percent of the households include risky assetsin their portfolio. On average, households allocate 3 percent of their totalfinancial assets on risky assets. The low participation in risky assets and smallshare correspond to the undesirable performance on financial literacy andstrong risk aversion. On average, 6.57 of the 14 financial literacy questions arecorrectly answered. 62 percent of households in the sample report that theytolerate little risk.

5.2 Risky asset ownership

To test the hypotheses, we first focus on the binary choice problem of riskyasset ownership, and then examine the effect of financial literacy on risky assetshare. In the first step, multivariate probit regression analyses are conducted.The empirical model can be expressed as:

Prðrisky asset ownership ¼ 1jXÞ ¼ UðX0 bÞ¼ Uða financial literacy þ x0cþ eÞ ð1Þ

where e ~ N(0, 1).In this model, the financial literacy of a Chinese household is linked to the

portfolio decision on risky financial asset ownership, where x represents the setof control variables.Table 6 presents the results of the probit regression in which the marginal

effect of each explanatory variable is shown.The first model examines the potential effects of financial literacy on

household decisions concerning risky financial asset ownership, where financialliteracy is measured by pooling responses of all questions to obtain the generalfinancial literacy index. Financial literacy is positively correlated with theprobability of household holding of risky financial assets. That is, householdswith higher levels of financial literacy are more likely to hold risky financialassets in their household portfolios. The effect size is large even aftercontrolling for other factors. With one additional point of the financial literacyscore, the probability that the household holds risky financial assets increases2.40 percent on average. This statistically significant effect does not diminish asthe measurement of financial literacy changes. Model 2 adopts the samespecification, except that the financial literacy index is measured by factorscores. Therefore, our first hypothesis is supported. It is worth noting that therisky asset ownership decision is significantly affected by the local economicstatus (GDP per Capita), which indicates that financial service coverage is stillone of the constraints related to household portfolio choice. While thisconstraint and other potential factors being controlled, financial literacy helpsto explain the low participation rate in the risky financial market. Chineseconsumers could be easily prevented from holding risk assets because of theunfamiliarity and ambiguity they feel in relation to the financial market.


© 2018 AFAANZ

Table

6

Resultsofprobitregressionsofriskyasset

ownership

Dependent:RiskyAsset

Ownership

(1)

(2)

(3)

(4)

(5)

(6)

FinancialLiteracy_Addition

0.0240**

*(0.0022)

FinancialLiteracy_Factor

0.0795**

*(0.0076)

BasicFinancialLiteracy_Addition

0.0138**

*0.0115**

*(0.0040)

(0.0041)

AdvancedFinancialLiteracy_Addition

0.0331**

*0.0207**

*(0.0037)

(0.0045)

BasicFinancialLiteracy_Factor

0.0259**

*0.0238**

*(0.0076)

(0.0076)

AdvancedFinancialLiteracy_Factor

0.0741**

*(0.0079)

AdvancedFinancialLiteracy_Unknown

�0.0189**

*(0.0037)

AdvancedFinancialLiteracy_Factor2

0.0876**

*(0.0083)

StrongRiskyAversion

�0.0550**

*�0

.0567**

*�0

.0530**

*�0

.0529**

*�0

.0484**

*�0

.0494**

*(0.0120)

(0.0120)

(0.0120)

(0.0120)

(0.0119)

(0.0119)

Male

�0.0302**

�0.0283**

�0.0330**

*�0

.0321**

*�0

.0340**

*�0

.0318**

*(0.0119)

(0.0119)

(0.0119)

(0.0119)

(0.0119)

(0.0119)

Age

0.0176**

*0.0178**

*0.0175**

*0.0176**

*0.0172**

*0.0173**

*(0.0031)

(0.0031)

(0.0031)

(0.0031)

(0.0031)

(0.0031)

AgeSquared

�0.0001**

*�0

.0001**

*�0

.0001**

*�0

.0001**

*�0

.0001**

*�0

.0001**

*(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

EducationDummies(Base:Below

Primary

School)

Primary

school

0.0146

0.0157

0.0142

0.0159

0.0087

0.0072

(0.0276)

(0.0272)

(0.0271)

(0.0265)

(0.0301)

(0.0307)

(continued)


© 2018 AFAANZ

Table

6(continued)


Ownership

(1)

(2)

(3)

(4)

(5)

(6)

Juniorschool

0.0450*

0.0472**

0.0464*

0.0493**

0.0320

0.0294

(0.0241)

(0.0237)

(0.0238)

(0.0233)

(0.0264)

(0.0269)

Highschool

0.0576**

0.0610**

0.0571**

0.0599**

0.0409

0.0398

(0.0250)

(0.0246)

(0.0246)

(0.0242)

(0.0271)

(0.0276)

College

0.0796**

*0.0845**

*0.0787**

*0.0820**

*0.0643**

0.0657**

(0.0292)

(0.0289)

(0.0289)

(0.0285)

(0.0306)

(0.0309)

University

orabove

0.0746**

0.0809**

0.0697**

0.0725**

0.0571*

0.0600*

(0.0318)

(0.0317)

(0.0313)

(0.0309)

(0.0329)

(0.0333)

Married

�0.0111

�0.0106

�0.0094

�0.0081

�0.0065

�0.0052

(0.0192)

(0.0193)

(0.0189)

(0.0189)

(0.0191)

(0.0193)

Ln(H

ousehold

IncomeLast

Year)

0.0543**

*0.0551**

*0.0548**

*0.0554**

*0.0529**

*0.0531**

*(0.0116)

(0.0117)

(0.0114)

(0.0114)

(0.0113)

(0.0114)

Ln(H

ousehold

Net

Asset)

0.0309**

*0.0313**

*0.0306**

*0.0307**

*0.0307**

*0.0316**

*(0.0063)

(0.0063)

(0.0062)

(0.0062)

(0.0062)

(0.0062)

Number

ofFamilyMem

bers

�0.0152**

*�0

.0155**

*� 0

.0154**

*�0

.0157**

*�0

.0152**

*�0

.0157**

*(0.0052)

(0.0052)

(0.0051)

(0.0051)

(0.0052)

(0.0052)

OwningEstate

0.0264

0.0261

0.0280*

0.0281*

0.0297*

0.0310*

(0.0170)

(0.0170)

(0.0170)

(0.0169)

(0.0171)

(0.0171)

Self-em

ployed

�0.0299

�0.0309

�0.0286

�0.0292

�0.0293

�0.0304

(0.0202)

(0.0202)

(0.0201)

(0.0201)

(0.0199)

(0.0198)

SeniorFamilyMem

ber

�0.0140

�0.0138

�0.0132

�0.0129

�0.0114

�0.0104

(0.0153)

(0.0154)

(0.0152)

(0.0152)

(0.0151)

(0.0152)

DependentChildren

0.0079

0.0083

0.0073

0.0079

0.0035

0.0028

(0.0150)

(0.0150)

(0.0149)

(0.0149)

(0.0148)

(0.0148)

Ln(H

ousehold

MedicalExpense)

�0.0011

�0.0011

�0.0010

�0.0010

�0.0010

�0.0010

(0.0018)

(0.0018)

(0.0018)

(0.0018)

(0.0018)

(0.0018)

Ln(LocalGDPper

Capita)

0.0353**

*0.0352**

*0.0367**

*0.0364**

*0.0353**

*0.0351**

*(0.0089)

(0.0090)

(0.0088)

(0.0088)

(0.0089)

(0.0090)

(continued)


© 2018 AFAANZ

Table

6(continued)


Ownership

(1)

(2)

(3)

(4)

(5)

(6)

DummiesonProvinces

Yes

Yes

Yes

Yes

Yes

Yes

Obs.

3875

3875

3875

3875

3875

3875

PseudoR-squared

0.296

0.293

0.299

0.300

0.310

0.311

Robust

standard

errors

inparentheses.*p

<0.1;**p<0.05;**

*p<0.01.This

table

reportstheresultsofprobit

regression.Forbetter

interpretationontheeff

ectondependentvariable,marginaleff

ectofeach

explanatory

variable

isreported

insteadoftheestimatedcoeffi

cient.

Models1and2showtheestimatedeff

ectoffinancialliteracy

onhousehold

riskyfinancialasset

ownership.Financialliteracy

isdecomposedinto

two

parts:

thebasicand

advanced

component.

Models3and

4are

employed

toexaminetheireff

ecton

riskyfinancialasset

ownership

simultaneously.Models5and6includetheinform

ationof‘donotknow’reply.Largeproportionoftheadvancedmodulereceived

‘donotknow’

response.Thenumber

of‘donotknow’reply

intheadvancedfinancialliteracy

module

isusedasanegativeindicatorofadvancedfinancial

literacy.Thisinform

ationisalsoconsidered

inthefactorindex

‘advancedfinancialliteracy_factor2’.Thefinancialliteracy

ispositivelycorrelated

withtheriskyfinancialassetsownership.Beyondbasicfinancialliteracy,advancedfinancialliteracy

isfurther

required

andexertslarger

effecton

riskyassetsownership.Data

source:

2014ChinaSurvey

ofConsumer

Finances;2010,2012ChinaFamilyPanel

Studies.


© 2018 AFAANZ

Financial literacy could help reduce feelings of uncertainty and ambiguity,hence encouraging acceptance of risky financial assets.In Models 3 and 4, financial literacy is decomposed to examine potential

effects of the basic and advanced components separately. Both estimates onbasic and advanced financial literacy are significantly positive. One additionalscore point achieved in basic financial literacy would increase the chance ofholding risky financial assets 1.38 percent on average when advanced financialliteracy and other factors are controlled. The effect of advanced financialliteracy is 3.31 percent. The difference in marginal effects of the two levels offinancial literacy implies that their functions in promoting risky asset holdingsdiffer. We thus infer that, in addition to basic financial concepts, advancedfinancial knowledge is needed to accept risky financial assets. Thus, the secondhypothesis is also supported.Additional effort ismade to refine the financial literacymeasurement in the final

two models (i.e. Models 5 and 6). A large percentage of ‘I don’t know’ responseswere recorded for nearly every advanced financial literacy question. We believethat the ‘I don’t know’ response provides additional information aside fromindicating the accuracy of an answer. Hence, we include the variable ‘AdvancedFinancial Literacy_Unknown’ to indicate the number of ‘I don’t know’ responsesto advanced financial literacy questions. This variable is used to measure thefeeling of ambiguity towards financial products. The factor index of advancedfinancial literacy is correspondingly revised to incorporate ‘I don’t know’responses, denoted as ‘AdvancedFinancial Literacy_Factor2’. The factor loadingsof ‘I don’t know’ responses are negative, as reported in Appendix II. Becauseonly a small fraction of the sample responded ‘I don’t know’ to the basic financialliteracy questions, the index of basic financial literacy remains unchanged. Theresults ofModels 5 and 6 in Table 6 support the hypotheses by providing similarresults. InModel 5, the effect of advanced financial literacy is again confirmed bythe positive coefficient estimate of ‘AdvancedFinancialLiteracy_Addition’ and thenegative coefficient estimate of ‘Advanced Financial Literacy_Unknown’. With anadditional ‘I don’t know’ response, the propensity to hold risky financial assets inhousehold portfolios decreases 1.89 percent on average. In Model 6, the effect ofadvancedfinancial literacy is integrated into the coefficient of ‘AdvancedFinancialLiteracy_Factor2’. The positive marginal effect on the factor index indicates thatfinancial literacy remains positively correlated with the household holding ofrisky assets.The estimates of the control variables highlight several sociodemographic

factors that may encourage households to hold risky assets. The risk attitudeis shown to be a key variable for explaining a household’s probability ofholding risky assets. As the regression coefficients indicate, households withstrong risk-averse attitude are separated from their low risk–averse counter-parts by approximately 5 percentage points. Households with female headsare more inclined to hold risky financial assets, which is different from mostempirical studies in other countries (Barber and Odean, 2001; Halko et al.,


© 2018 AFAANZ

2012). This may be caused by the interactive effect of gender and marriage.As shown by Bertocchi et al. (2011), married women invested more in riskyassets than single women. Most women in our sample are married, and therole of household head may make them less risk averse when takingresponsibility of the household portfolio. The estimates also show thathouseholds with higher levels of income and wealth are more likely to holdrisky financial assets. Households with heads with a higher educational levelare more likely to hold risky financial assets because education cultivatescognitive abilities. The study by Christelis et al. (2010) has reported a positivecorrelation between cognitive abilities and stock holding. Large families withgreater numbers of old family members and children to support are lessinclined to hold risky financial assets. These findings are consistent withprevious research concerning background risk factors that are commonlylinked with risky asset holdings.

5.3. Risky asset share

As financial literacy contributes to holding of risky financial assets, will ithave effects on the risky asset share in the total financial assets? In this step, thedependent variable is the risky asset share, and explanatory variables remainthe same as those in the binary choice problem. We conduct Tobit regressionswhich are left-censored at zero. The model can be expressed as:

risky asset share ¼ X0 b ¼ a financial literacy þ x0cþ e;

where e�Nð0; 1Þ ð2Þ

The results are presented in Table 7. Similar to the results of the probitregression, the coefficient on financial literacy remain significantly positive,indicating a positive correlation between financial literacy and the risky assetshare, which also supports our hypotheses.When other potential factors are controlled, one more score point on

financial literacy questions would promote households to allocate 1.04 percentmore of the financial asset on risky assets. Advanced financial literacy mayexert a larger effect than basic financial literacy. Households who get one morecorrect answer on basic financial literacy intend to allocate 0.55 percent moreon the risky financial asset, while the effect of advanced financial literacy is1.48. Households with one more ‘I don’t know’ answer would decrease therisky asset share in their portfolio by 0.84 percentage point. Again, differentindexes on financial literacy are employed to avoid bias caused by measure-ment, and control variables are included to isolate the effect of financialliteracy. Table 7 adds to the evidence with data from Chinese urban householdsindicating that financial literacy is positively correlated with risky financialasset holdings.


© 2018 AFAANZ

Table

7

ResultsofTobitregressionsofriskyasset

share


Share

(1)

(2)

(3)

(4)

(5)

(6)

FinancialLiteracy_Addition

0.0104**

*(0.0011)

FinancialLiteracy_Factor

0.0343**

*(0.0039)

BasicFinancialLiteracy_Addition

0.0055**

*0.0043**

(0.0020)

(0.0020)

AdvancedFinancialLiteracy_Addition

0.0148**

*0.0093**

*(0.0019)

(0.0022)

BasicFinancialLiteracy_Factor

0.0099**

*0.0086**

(0.0038)

(0.0037)

AdvancedFinancialLiteracy_Factor

0.0330**

*(0.0040)

AdvancedFinancialLiteracy_Unknown

�0.0084**

*(0.0019)

AdvancedFinancialLiteracy_Factor2

0.0388**

*(0.0043)

StrongRiskyAversion

�0.0219**

*�0

.0226**

*�0

.0212**

*�0

.0212**

*�0

.0188**

*�0

.0192**

*(0.0061)

(0.0061)

(0.0061)

(0.0061)

(0.0060)

(0.0060)

Male

�0.0072

�0.0062

�0.0087

�0.0081

�0.0087

�0.0073

(0.0060)

(0.0060)

(0.0059)

(0.0059)

(0.0059)

(0.0059)

Age

0.0067**

*0.0068**

*0.0067**

*0.0068**

*0.0065**

*0.0065**

*(0.0015)

(0.0015)

(0.0015)

(0.0015)

(0.0015)

(0.0015)

AgeSquared

�0.0001**

*�0

.0001**

*�0

.0001**

*�0

.0001**

*�0

.0001**

*�0

.0001**

*(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

EducationDummies(Base:Below

Primary

School)

Primary

school

0.0002

0.0009

0.0001

0.0011

�0.0026

�0.0033

(0.0159)

(0.0158)

(0.0156)

(0.0154)

(0.0165)

(0.0167)

(continued)


© 2018 AFAANZ

Table

7(continued)


Share

(1)

(2)

(3)

(4)

(5)

(6)

Juniorschool

0.0041

0.0054

0.0052

0.0068

�0.0020

�0.0030

(0.0137)

(0.0136)

(0.0136)

(0.0134)

(0.0143)

(0.0144)

Highschool

0.0145

0.0163

0.0143

0.0158

0.0064

0.0060

(0.0138)

(0.0137)

(0.0137)

(0.0134)

(0.0144)

(0.0145)

College

0.0197

0.0221

0.0198

0.0217

0.0127

0.0132

(0.0156)

(0.0155)

(0.0155)

(0.0153)

(0.0159)

(0.0159)

University

orabove

0.0158

0.0189

0.0140

0.0155

0.0081

0.0098

(0.0166)

(0.0166)

(0.0163)

(0.0162)

(0.0168)

(0.0169)

Married

�0.0057

�0.0054

�0.0050

�0.0045

�0.0036

�0.0030

(0.0099)

(0.0099)

(0.0098)

(0.0097)

(0.0097)

(0.0097)

Ln(H

ousehold

IncomeLast

Year)

0.0298**

*0.0304**

*0.0298**

*0.0303**

*0.0285**

*0.0286**

*(0.0062)

(0.0062)

(0.0060)

(0.0060)

(0.0059)

(0.0060)

Ln(H

ousehold

Net

Asset)

0.0109**

*0.0112**

*0.0107**

*0.0108**

*0.0104**

*0.0107**

*(0.0031)

(0.0031)

(0.0031)

(0.0030)

(0.0031)

(0.0031)

Number

ofFamilyMem

bers

�0.0083**

*�0

.0086**

*�0

.0081**

*�0

.0082**

*�0

.0080**

*�0

.0083**

*(0.0026)

(0.0026)

(0.0026)

(0.0026)

(0.0026)

(0.0026)

OwningEstate

0.0125

0.0124

0.0137*

0.0139*

0.0143*

0.0148*

(0.0083)

(0.0083)

(0.0082)

(0.0082)

(0.0083)

(0.0083)

Self-em

ployed

�0.0081

�0.0084

�0.0081

�0.0083

�0.0079

�0.0080

(0.0104)

(0.0104)

(0.0103)

(0.0103)

(0.0101)

(0.0100)

SeniorFamilyMem

ber

�0.0032

�0.0031

�0.0032

�0.0031

�0.0023

�0.0018

(0.0080)

(0.0080)

(0.0079)

(0.0079)

(0.0078)

(0.0079)

DependentChildren

0.0038

0.0040

0.0032

0.0033

0.0015

0.0012

(0.0076)

(0.0076)

(0.0076)

(0.0076)

(0.0074)

(0.0074)

Ln(H

ousehold

MedicalExpense)

�0.0005

�0.0004

�0.0005

�0.0005

�0.0004

�0.0004

(0.0009)

(0.0009)

(0.0009)

(0.0009)

(0.0009)

(0.0009)

Ln(LocalGDPper

Capita)

0.0171**

*0.0170**

*0.0180**

*0.0179**

*0.0173**

*0.0171**

*(0.0046)

(0.0046)

(0.0045)

(0.0045)

(0.0046)

(0.0046)

(continued)


© 2018 AFAANZ

Table

7(continued)


Share

(1)

(2)

(3)

(4)

(5)

(6)

DummiesonProvinces

Yes

Yes

Yes

Yes

Yes

Yes

Obs.

3678

3678

3678

3678

3678

3678

PseudoR-squared

0.296

0.293

0.301

0.301

0.311

0.311

Robust

standard

errors

inparentheses.*p

<0.1;**p<0.05;**

*p<0.01.This

table

reportstheresultsofTobit

regression.Thelist

of

explanatory

variablesisidenticalto

thatoftheriskyasset

ownership

problem

inTable

6.Models1and2show

theestimatedeff

ectoffinancial

literacy

onriskyfinancialasset

share

inthehousehold

portfolio.Models3and4examinetheeff

ectofbasicandadvancedfinancialliteracy

on

riskyfinancialasset

share.Models5and6modifythemeasurementoffinancialliteracy

byincludingtheinform

ationof‘donotknow’reply.The

resultdem

onstratesfinancialliteracy

issignificantlypositivelyrelatedto

thehousehold

riskyasset

share,whichaddsto

theevidence

from

Chinese

urbanhouseholdsthatfinancialliteracy

ispositivelycorrelatedwithriskyfinancialasset

holdings.Data

source:

2014ChinaSurvey

ofConsumer

Finances;2010,2012ChinaFamilyPanel

Studies.


© 2018 AFAANZ

5.4. The endogenous problem

We realise that the problem of endogeneity may apply to the aboveregression models because the coefficients cannot determine the causalitybetween financial literacy and investing behaviour. It is also plausible thatexperience in financial markets could enhance participants’ financial literacy.Specifically, several questions on advanced financial literacy test specialisedknowledge concerning risky financial products. Therefore, the potentialendogeneity of advanced financial literacy must be treated with care. Weemploy the following instrument variable and conduct a two-stage regression toremedy this problem (Newey, 1987).The 2010 China Family Panel Study conducted a verbal test to measure

familiarity with Chinese characters. We use the test score of the householdhead to proxy his/her financial literacy for the following consideration. Due tothe fact that the test score reflects the basic language skill and implicitly, thelearning ability, it is considerably easier to obtain a sound understanding ofthe field of finance and to achieve good financial literacy with a higher verbaltest score. Moreover, it is unlikely that one’s investing decision would beaffected by one’s language skill 5 years ago. We realise that verbal score is notcompletely exogenous and cannot rule out the endogenous problem perfectly.However, the testing result makes us believe that this instrument helps toalleviate endogeneity. We first perform a regression on the advanced financialliteracy factor score on the verbal test score and the control variables. Thefirst stage regression result is shown in Table 8. The expected positivecorrelation between language ability and financial literacy is indicated by thesignificant coefficient estimate, and the F statistic of the regression (69.66) isbeyond the critical values, thus indicating that the verbal test score is not aweak instrument for advanced financial literacy. Additionally, the estimatesconfirm the relation between advanced financial literacy and one’s demo-graphic background. The younger, more highly educated, males or those withhigher household income are likely to possess greater financial literacycompared with their counterparts.Then, an IV-probit model and IV-Tobit model are run on the risky asset

ownership and risky asset share, respectively. The estimate of coefficient onthe instrument of advanced financial literacy is positive and statisticallysignificant, with the signs of coefficients of other variables almost remainingunchanged. The result of the Wald test of exogeneity shows that anendogeneity problem indeed exists. IV estimations confirm that advancedfinancial literacy is a key predictor of household investing behaviour.Households with specialised financial knowledge are more likely to holdrisky financial assets, as well as a larger risky asset share in their householdportfolios.


© 2018 AFAANZ

Table 8

IV estimation to address the potential endogenous problem

Dependent

Step 1: OLSStep 2: Probit/Tobit

Advanced Financial

Literacy_Factor2

Risky Asset

Ownership

Risky Asset

Share

Advanced Financial Literacy_Instrumented 0.3025*** 0.2323**(0.0522) (0.1032)

Verbal Test Score 0.0112***(0.0024)

Basic Financial Literacy_Factor 0.2939*** �0.0488* �0.0410

(0.0195) (0.0258) (0.0295)

Strong Risky Aversion �0.2539*** 0.0168 0.0182

(0.0321) (0.0288) (0.0251)

Male 0.1475*** �0.0597*** �0.0380**(0.0301) (0.0137) (0.0191)

Age 0.0038 0.0134*** 0.0085***(0.0071) (0.0043) (0.0027)

Age Squared �0.0001* �0.0001** �0.0001**(0.0001) (0.0000) (0.0000)

Education Dummies (Base: Below Primary School)

Primary school 0.0831 �0.0225 �0.0345

(0.0595) (0.0381) (0.0396)

Junior school 0.2833*** �0.0660 �0.0858

(0.0589) (0.0410) (0.0528)

High school 0.3806*** �0.0819* �0.0884

(0.0651) (0.0476) (0.0615)

College 0.5096*** �0.0924 �0.1032

(0.0755) (0.0583) (0.0723)

University or above 0.5962*** �0.1191* �0.1271

(0.0793) (0.0624) (0.0805)

Married �0.0772* 0.0210 0.0214

(0.0447) (0.0211) (0.0188)

Ln (Household Income Last Year) 0.1017*** 0.0198 0.0175

(0.0248) (0.0195) (0.0118)

Ln (Household Net Asset) 0.0390** 0.0211* 0.0115*(0.0167) (0.0113) (0.0061)

Number of Family Members �0.0167 �0.0095 �0.0088*(0.0115) (0.0070) (0.0045)

Owning Estate �0.0524 0.0370** 0.0319*(0.0402) (0.0183) (0.0166)

Self-employed �0.0004 �0.0284 �0.0094

(0.0452) (0.0219) (0.0169)

Senior Family Member 0.0188 �0.0166 �0.0138

(0.0414) (0.0171) (0.0149)

Dependent Children 0.0525 �0.0147 �0.0125

(0.0370) (0.0162) (0.0145)

Ln (Household Medical Expense) �0.0002 �0.0003 �0.0004

(continued)


© 2018 AFAANZ

5.5. Robustness check

To examine the robustness of the estimates, we change the dependentvariable to stock. As shown in the previous section, stock is a representativeasset among all types of risky financial assets held by Chinese households, andmany households holding risky assets also hold stocks exclusively. Hence, wesubstitute the dependent variable, risky asset holding, with its main componentstock holding in the first specification. We also adjust the sample in the secondspecification. Several cities are oversampled in the sampling scheme of thesurvey, and we omit the oversampled observations and repeat the regression.Table 9 presents the results.The coefficients of advanced financial literacy remain significantly positive

for all specifications. Based on the robust results shown in Table 9, we concludethat there is a robust relationship between the financial literacy and the riskyfinancial asset holdings of Chinese households.

6. Conclusion

Our study provides empirical evidence suggesting that low levels of financialliteracy pose an obstacle to Chinese households in terms of allocating riskyfinancial assets to their portfolios. Based on descriptive statistics of the financialliteracy of Chinese households, we find a nationwide phenomenon of financial

Table 8 (continued)

Dependent

Step 1: OLSStep 2: Probit/Tobit

Advanced Financial

Literacy_Factor2

Risky Asset

Ownership

Risky Asset

Share

(0.0049) (0.0021) (0.0017)

Ln (Local GDP per Capita) 0.0334 0.0268** 0.0216***(0.0219) (0.0128) (0.0078)

Dummies on Provinces Yes Yes Yes

Obs. 3875 3875 3678

F valuep-value: Wald Test of Exogeneity 69.66 0.0067 0.0271

Robust standard errors in parentheses. *p < 0.1; **p < 0.05; ***p < 0.01. This table reports

the result of instrument variable regressions. Two-step estimator is employed to tackle with

the potential endogenous problem. Verbal test score is used as the instrument for advanced

financial literacy. In the first step, the advanced financial literacy factor score is estimated by

the verbal test score and the control variables in an OLS regression. In the second step, an IV-

probit model and IV-Tobit model are run on risky asset ownership and risky asset share,

respectively, where the explanatory variable ‘Advanced Financial Literacy’ is instrumented.

Data source: 2014 China Survey of Consumer Finances; 2010, 2012 China Family

Panel Studies


© 2018 AFAANZ

illiteracy in China where a large percentage of urban households are equippedwith little financial knowledge. The findings of our study suggest that higherlevels of financial literacy would increase risky asset holdings in the householdportfolio. The impacts may mainly derive from advanced financial literacy.When basic financial literacy and other variables are controlled, advancedfinancial literacy continues to be significantly positively correlated with theprobability of the risky financial asset ownership as well as the risky asset share.Although the portfolio theories suggest that risky assets should be included inthe portfolio, the welfare of financial-illiterate households holding risky assetsyet remains to be seen.Based on the evidence that most households have not been equipped with

adequate financial literacy that is essential to participate in the financialmarket, we believe that the need for consumer financial education in China

Table 9

Robustness check

Panel A(1) Stock Ownership (2) Subsample

Probit IV-Probit Probit IV-Probit

Advanced Financial

Literacy_Factor2

0.0766*** 0.3035*** 0.0632*** 0.2176**

(0.0078) (0.0501) (0.0084) (0.0896)

Basic Financial Literacy_Factor 0.0186*** �0.0552** 0.0214*** �0.0211

(0.0069) (0.0240) (0.0080) (0.0298)

Controlled Variables Yes Yes Yes Yes

Obs. 3875 3875 2552 2552

Panel B(1) Stock Share (2) Subsample

Tobit IV-Tobit Tobit IV-Tobit

Advanced Financial

Literacy_Factor2

0.0412*** 0.3888** 0.0407*** 0.2158**

(0.0048) (0.1614) (0.0057) (0.1051)

Basic Financial Literacy_Factor 0.0107*** �0.0803* 0.0135** �0.0296

(0.0041) (0.0474) (0.0054) (0.0292)

Controlled Variables Yes Yes Yes Yes

Obs. 3678 3678 2452 2452

Robust standard errors in parentheses. *p < 0.1; **p < 0.05; ***p < 0.01. This table

combines the results of robustness check. Panel A shows the robustness check for risky

asset ownership problem. In the first specification, the dependent variable ‘risky asset

ownership’ is substituted by its main component ‘stock ownership’. In the second

specification, we use a subsample. Panel B shows the robustness check for risky asset share

problem. The first specification substitutes the dependent variable for its main component

‘stock share’. The second specification is run on a subsample. Data source: 2014 China Survey

of Consumer Finances; 2010, 2012 China Family Panel Studies.


© 2018 AFAANZ

is urgent. In the past decades, a growing number of countries have beenengaged in promoting nationwide financial education to complementfinancial consumer protection and provide effective solutions to financialilliteracy. In recent years, as many as 34 economies with different incomelevels are implementing national strategies for financial education, whileadditional 25 economies including mainland China are actively designing thenational strategy (OECD, 2015). It would be an enormous challenge to carryout financial education programmes across the whole population. Therefore,it would be much more efficient to start with the most vulnerable groups,which suggested by our findings, are females, seniors, the poor and the lesseducated. We recommend that financial knowledge be incorporated into thenational compulsory education system to improve financial literacy amongthe young generation. Multiple channels exist that can be used todisseminate financial knowledge. The financial regulatory authorities andfinancial institutions should take efforts to provide financial education forindividual investors.In this study, the sample is limited to urban households. Chinese rural areas

differ substantially from urban areas. In addition, a large gap exists in urbanand rural households’ access to financial products. It may thus be interestingand important to study the financial literacy and the risky asset holdingbehaviour of Chinese rural households in future research.

References

Agarwal, S., J. C. Driscoll, X. Gabaix, and D. Laibson, 2009, The age of reason:Financial decisions over the life-cycle with implications for regulation. (SSRN)Available at: http://ssrn.com/abstract=973790.

Atella, V., M. Brunetti, and N. Maestas, 2012, Household portfolio choices, healthstatus and health care systems: a cross-country analysis based on SHARE, Journal ofBanking and Finance 36, 1320–1335.

Atkinson, A., and F. Messy, 2012, Measuring Financial Literacy: Results of the OECD/International Network on Financial Education (INFE) Pilot Study (OECD Publishing,Paris).

Balloch, A., A. Nicolae, and D. Philip, 2015, Stock market literacy, trust, andparticipation, Review of Finance 19, 1925–1963.

Barber, B. M., and T. Odean, 2001, Boys will be boys: gender, overconfidence, andcommon stock investment, The Quarterly Journal of Economics 116, 261–292.

Bernheim, B. D., and D. M. Garrett, 2003, The effects of financial education in theworkplace: evidence from a survey of households, Journal of Public Economics 87,1487–1519.

Bertocchi, G., M. Brunetti, and C. Torricelli, 2011, Marriage and other risky assets: aportfolio approach, Journal of Banking & Finance 35, 2902–2915.

Bosshardt, W., and W. B. Walstad, 2014, National standards for financial literacy:rationale and content, The Journal of Economic Education 45, 63–70.

Bricker, J., L. J. Dettling, A. Henriques, J. W. Hsu, L. Jacobs, K. B. Moore, S. Pack, J.Sabelhaus, J. Thompson and R. A. Windle, 2017, Changes in U.S. family financesfrom 2013 to 2016: evidence from the survey of consumer finances. Available at:https://www.federalreserve.gov/publications/files/scf17.pdf.


© 2018 AFAANZ

http://ssrn.com/abstract=973790

https://www.federalreserve.gov/publications/files/scf17.pdf

Bucher-Koenen, T., and A. Lusardi, 2011, Financial literacy and retirement planning inGermany, Journal of Pension Economics & Finance 10, 565–584.

Bumcrot, C., J. Lin, and A. Lusardi, 2013, The geography of financial literacy,Numeracy 6, 1–16.

Campbell, J. Y., 2006, Household finance, The Journal of Finance 61, 1553–1604.Cardak, B. A., and R. Wilkins, 2009, The determinants of household risky assetholdings: Australian evidence on background risk and other factors, Journal ofBanking and Finance 33, 850–860.

Carlin, B. I., and D. T. Robinson, 2012, What does financial literacy training teach us?,The Journal of Economic Education 43, 235–247.

Christelis, D., T. Jappelli, and M. Padula, 2010, Cognitive abilities and portfolio choice,European Economic Review 54, 18–38.

Cole, S., T. Sampson, and B. Zia, 2011, Prices or knowledge? What drivesdemand for financial services in emerging markets?, The Journal of Finance 66,1933–1967.

Collins, J. M., 2010, The impacts of mandatory financial education: evidencefrom a randomized field study, Journal of Economic Behavior and Organization95, 146–158.

Fornero, E., and C. Monticone, 2011, Financial literacy and pension plan participationin Italy, Journal of Pension Economics & Finance 10, 547–564.

Fratantoni, M. C., 1998, Homeownership and investment in risky assets, Journal ofUrban Economics 44, 27–42.

Halko, M., M. Kaustia, and E. Alanko, 2012, The gender effect in risky asset holdings,Journal of Economic Behavior and Organization 83, 66–81.

Heaton, J., and D. Lucas, 2000, Portfolio choice and asset prices: the importance ofentrepreneurial risk, The Journal of Finance 55, 1163–1198.

Hung, A., A. M. Parker, and J. Yoong, 2009, Defining and measuring financial literacy.RAND Working Paper Series WR-708. Available at SSRN: http://ssrn.com/abstract=1498674.

Jappelli, T., and M. Padula, 2013, Investment in financial literacy and saving decisions,Journal of Banking and Finance 37, 2779–2792.

Jappelli, T., and M. Padula, 2015, Investment in financial literacy, social security, andportfolio choice, Journal of Pension Economics & Finance 14, 369–411.

Klapper, L., and G. A. Panos, 2011, Financial literacy and retirement planning: theRussian case, Journal of Pension Economics & Finance 10, 599–618.

Love, D. A., 2010, The effects of marital status and children on savings and portfoliochoice, Review of Financial Studies 23, 385–432.

L€uhrmann, M., M. Serra-Garcia, and J. Winter, 2015, Teaching teenagers in finance:does it work?, Journal of Banking and Finance 54, 160–174.

Lusardi, A., and O. S. Mitchell, 2007, Baby boomer retirement security: the roles ofplanning, financial literacy, and housing wealth, Journal of Monetary Economics 54,205–224.

Lusardi, A., and O. S. Mitchell, 2011, Financial literacy around the world: an overview,Journal of Pension Economics & Finance 10, 497–508.

Lusardi, A., and O. S. Mitchell, 2014, The economic importance of financial literacy:theory and evidence, Journal of Economic Literature 52, 5–44.

Markowitz, H., 1952, Portfolio selection, The Journal of Finance 7, 77–91.Newey, W. K., 1987, Efficient estimation of limited dependent variable models withendogenous explanatory variables, Journal of Econometrics 36, 231–250.

OECD, 2015, National Strategies for Financial Education: OECD/INFE PolicyHandbook. Available at: http://www.oecd.org/daf/fin/financial-education/National-Strategies-Financial-Education-Policy-Handbook.pdf.


© 2018 AFAANZ



http://www.oecd.org/daf/fin/financial-education/National-Strategies-Financial-Education-Policy-Handbook.pdf

http://www.oecd.org/daf/fin/financial-education/National-Strategies-Financial-Education-Policy-Handbook.pdf

Poterba, J. M., and A. Samwick, 2001, Household portfolio allocation over the lifecycle, in: S. Ogura, T. Tachibanaki, D. A. Wise, eds., Aging Issues in the United Statesand Japan (University of Chicago Press, Chicago), 65–104.

Rosen, H. S., and S. Wu, 2004, Portfolio choice and health status, Journal of FinancialEconomics 72, 457–484.

Sekita, S., 2011, Financial literacy and retirement planning in Japan, Journal of PensionEconomics & Finance 10, 637–656.

Van Rooij, M., A. Lusardi, and R. Alessie, 2011, Financial literacy and stock marketparticipation, Journal of Financial Economics 101, 449–472.

Walstad, W. B., K. Rebeck, and R. B. Butters, 2013, The test of economic literacy:development and results, The Journal of Economic Education 44, 298–309.

World Federation of Exchange, 2015, Major stock exchanges. Available at: https://en.wikipedia.org/wiki/List_of_stock_exchanges#Major_stock_exchanges.

Xiao, J. J., and B. O’Neill, 2016, Consumer financial education and financial capability,International Journal of Consumer Studies 40, 712–721.

Yin, Z., Y. Wu, and L. Gan, 2015, Financial availability, financial market participationand household portfolio choice, Economic Research Journal 3, 87–99 (In Chinese).

Appendix I

Questionnaire for the financial literacy

Questions

In OECD/

DHS


Division Imagine that five brothers are given a gift of ￥10000. If the

brothers must share the money equally, how much does each

brother receive?

OECD

Time deposit

interest rate

What do you think the interest rate is of the 1 year time deposit? No

i) <1% ii) 1–5% iii) 5–10% iv) >10%Calculation of

simple interest

and principal

Suppose you deposit ￥10000 into a savings account with a

guaranteed annual interest rate of 3%. You neither deposit

additional payments into this account nor withdraw money.

What would the account balance be at the end of the first

year, after the interest payment?

OECD/

DHS

i) exactly ￥10300 ii) greater than ￥10300 iii) less than ￥10300

Compound

interest

and what would the account balance be at the end of the second

year?

OECD/

DHS

i) exactly ￥10600 ii) greater than ￥10600 iii) less than ￥10600

Inflation Imagine that the annual interest rate of your savings account is

3% and that annual inflation is 5%. After 1 year, how much

would you be able to buy with the money in this account?

OECD/

DHS

i) more than today ii) the same; iii) less than today

Time-value of

money

Suppose you can receive ￥100000 today, and your brother will

receive ￥100000 3 years later. Who is richer because of the

income?

OECD/

DHS

(continued)


© 2018 AFAANZ

https://en.wikipedia.org/wiki/List_of_stock_exchanges#Major_stock_exchanges

https://en.wikipedia.org/wiki/List_of_stock_exchanges#Major_stock_exchanges

Table (continued)

Questions

In OECD/

DHS

i) you ii) your brother iii) both are equally rich

Risk and return An investment with a high return is likely to be high risk. OECD

i) true ii) false


Bank function Which of the following banks is responsible for monetary

policymaking and implementation?

No

i) Bank of China ii) Industrial and Commercial Bank of

China iii) People’s Bank of China iv) China Construction

Bank

Risky assets Normally, which asset displays the highest fluctuations over

time?

DHS

i) Savings accounts ii) Bonds iii) Stocks iv) Mutual Funds

Diversification It is usually possible to provide a safer return by investing in a

single stock instead of a stock mutual fund.

OECD/

DHS

i) True ii) False

Knowledge of

stocks

What happens if you buy the stock of company X? DHS

i) You have loaned money to company X; ii) You become a

shareholder of company X; iii) In the long term, you are a

shareholder of company X, but in short term, you are a

lender; iv) None of the above

Knowledge of

mutual funds

Which statement concerning mutual funds is correct? DHS

i) A fund with a low price is supposed to provide a high return;

ii) Mutual funds can usually invest in several assets, for example,

invest in both stocks and bonds; iii) Mutual funds usually pay

a guaranteed rate of return that depends on their past

performance; iv) None of the above

Knowledge of

commercial

bank

financial

products

Which statement concerning financial products sold in

commercial banks is correct?

No

i) Financial products may provide a negative return similar to

other risky assets; ii) Financial products are as safe as savings

accounts are and will not lose the principal at minimum;

iii) The expected and actual return of a financial product are

equivalent; iv) None of the above

Knowledge of

stock market

Which of the following statements specifies the main function

of the stock market?

DHS

i) The stock market helps predict stock earnings; ii) The stock

market increases the price of stocks; iii) The stock market

brings people who want to buy stocks together with people

who want to sell stocks; iv) None of the above


© 2018 AFAANZ

The last column indicates the sources of the questions. Questions with ‘No’ in the last column

are created by the researchers of the Chinese survey.

Appendix II

Factor loadings of the Financial Literacy Index

Factor loading

Financial Literacy_Factor

Interest Rate_Correct 0.1250

Calculation of Interest & Principal_Correct 0.1803

Compound Interest_Correct 0.1734

Inflation_Correct 0.1657

Time-Value of Money_Correct 0.1337

Risk and Return_Correct 0.0959

Bank Function_Correct 0.0943

Risky Assets_Correct 0.1373

Diversification_Correct 0.1063

Knowledge of Stock_Correct 0.0789

Knowledge of Mutual Fund_Correct 0.0942

Knowledge of Commercial Bank Financial Products_Correct 0.1349

Knowledge of Stock Market_Correct 0.1216

Basic Financial Literacy_Factor

Interest Rate_Correct 0.1574

Calculation of Interest & Principal_Correct 0.3366

Compound Interest_Correct 0.2972

Inflation_Correct 0.1977

Time-Value of Money_Correct 0.1719

Risk and Return_Correct 0.1194

Advanced Financial Literacy_Factor








Advanced Financial Literacy_Factor2








Bank Function_Unknown �0.0951

(continued)


© 2018 AFAANZ

Table (continued)

Factor loading

Risky Assets_Unknown �0.1553

Diversification_Unknown �0.1000

Knowledge of Stock_Unknown �0.1399

Knowledge of Mutual Fund_Unknown �0.1256

Knowledge of Commercial Bank Financial Products_Unknown �0.1401

Knowledge of Stock Market_Unknown �0.1961

© 2018 AFAANZ


financial literacy and risky asset holdings: evidence from

Documents