Digital Financial Inclusion and Income Inequality in China

This paper uses both macro and household-level data to examine the relationship between digital financial inclusion, measured by the Peking University digital financial inclusion index, and income inequality in China. We find that a higher level of digital financial inclusion is associated with significantly lower income inequality within provinces, including through having larger positive effects on lower-income households’ incomes from salaries and public and private transfers. However, we do not find a significant impact of digital financial inclusion on income inequality across provinces, as households in the relatively more developed southern region benefitted more from digital financial inclusion than those in the northern region. We also find that digital financial inclusion has larger effects on the incomes of rural, female-headed, and less educated households, which have likely contributed to the narrowing of the overall income inequality, but a smaller effect on the income of elderly households—pointing to the “digital divide” problem among the elderly in China.