Digital financial inclusion and the livelihood vulnerability of rural households: evidence from China

Abstract

This paper examines the effect of digital financial inclusion on rural households’ livelihood vulnerability in China. It focuses on whether digital financial inclusion can reduce livelihood vulnerability and how this effect varies across service dimensions, mechanisms, regions, and household groups. Using panel data from the China Family Panel Studies (CFPS) and the Peking University Digital Financial Inclusion Index, we construct a multidimensional livelihood vulnerability index (LVI) based on the exposure-sensitivity-adaptive capacity (ESA) framework. Fixed-effects models, mediation analysis, heterogeneity tests, and an instrumental variable (IV) strategy are employed to examine the relationship between digital financial inclusion and rural households’ livelihood vulnerability. The results show that digital financial inclusion significantly reduces rural households’ livelihood vulnerability. This effect is mainly driven by deeper usage of digital financial services and a higher level of digitalization, while the marginal contribution of basic coverage expansion is relatively limited. Mechanism analysis indicates that digital financial inclusion reduces vulnerability by easing credit constraints and encouraging rural households to shift toward non-agricultural livelihood strategies. The results also reveal clear heterogeneity. The vulnerability-reducing effect is stronger in Northeast and East China, weaker in Western China, and statistically insignificant in Central China. At the household level, digital financial inclusion generates greater improvements for households with higher baseline vulnerability. These findings suggest that digital financial inclusion can strengthen rural households’ livelihood resilience, but its effects depend on the depth of digital financial use, regional conditions, and household vulnerability levels. Policy efforts should therefore move beyond expanding account coverage and place greater emphasis on improving effective digital usage, strengthening credit access, and designing regionally differentiated interventions that better match rural households’ livelihood risks.