The Effect Of Credit Constraints On Household Allocation Of Financial Assets

On the background of rapid growth of household disposable income and increasing diversification of financial investment, the study of household finance has become an emerging hot area of financial research. For families, the allocation of financial assets has become the core issue of household financial investment. Household holdings of financial assets and household participation rate of financial market are both the criteria of a country s degree of finance. The research results of household allocation on financial assets can provide practical suggestions for government to make financial policy. Also, the research results can offer financial institution pertinent suggestions of financial innovation, as well as optimizing the structure of household financial assets. At present, compared with developed countries, the structure of Chinese families financial assets presents high savings rate and low participation rate of stock market. So, what factors exactly influence China household allocation of financial assets? This paper believes that credit constraints could be an important factor.Firstly, based on the permanent income hypothesis and the life-cycle theory, precautionary savings as well as modern portfolio theory, this paper presents empirical hypothesis. Secondly, this paper uses the data from China household finance survey to analyze the structure of household financial assets and household credit situationoalso uses Probit and Tobit models for empirical test. Finally, in order to eliminate the influence of endogenous, this paper uses !if is the local surname(Negative)" as the instrumental variable to do the robustness test.The main conclusions are as follow. Firstly, in the selection of financial assets, most of families in China tend to hold cash and savings. The risk degree of China household financial assets is still low, and savings are the main allocation of financial assets, while stock market participation rate is low, about 9%. In the aspect of credit constraints, 20% families face credit constraints. Those families who face credit constraints hold less income, estate, savings, stock assets and risky assets than those families without credit constraints. Secondly, credit constraints have the significant negative impact on participation rate and allocation ratio of savings, stock, risky financial assets. Credit constraints can reduce the participation rate and allocation ratio of household savings, which means credit constraints do not cause the phenomenon of high savings ratio in China. Credit constraints negatively influence participation rate and allocation ratio of stock and risky financial assets, which means credit constraints can prevent families from risk investment. Thirdly, credit constraints have the significant impact on household participation in formal and informal financial markets. Those families who face credit constraints are more likely to seek private borrowing for meeting their demand of funds. Meanwhile, credit constraints can reduce the possibility of lending out money and lower the proportion of private lending. Fourthly, based on the difference of income and the difference of urban and rural, the whole data sample is divided into higher-income families, lower-income families, urban families and rural families. The empirical results show that on the selection and allocation of financial assets, lower- income families will be more likely to be subject to credit constraints. Besides, there is no significant difference between urban and rural families on investment in stock assets and risky assets.