The Influence Of Financial Literacy On The Debt Behavior Of Urban Households

The world today is undergoing profound changes unseen in a century.Under the increasingly complex international environment and fluctuating external demand,a series of new situations,new features and new problems have emerged in domestic economic development.There is an urgent need to reposition and select policies and strategies for China’s economic development in the new era.The key to solving the current problems facing China’s economy is to accelerate the establishment of a "dual circulation" development pattern in which domestic economic cycle plays a leading role while international economic cycle remains its extension and supplement.Also,it is especially important to expand domestic demand.Moderate debt can not only smoothen consumption in different periods and improve the intertemporal utility for the household,but also stimulate domestic demand.However,the rapid increase of debt may increase the pressure on household repayments and cause household financial vulnerability.Currently,China’s household debt-to-income ratio reaches 107.2%,and the scale of debt is approaching the limit of what households can afford.With the rapid development of the consumer finance market,household debt decisions have become more and more complex,which places higher demands on consumers’ financial literacy.Therefore,it is important to analyze the factors that influence the debt decision of Chinese households from the perspective of financial literacy.It may show the distribution of residents’ financial literacy in China and provide targeted financial inclusion education for different groups.Moreover,it can provide suggestions to help households optimize their debt decisions and reduce financial vulnerability by exploring the impact of financial literacy on household debt behavior and debt risk.This paper first summarize the literature and constructs a theoretical framework to analyze the impact of financial literacy on household debt.Secondly,this paper analyzes the current situation of household debt and the distribution characteristics of residents’ financial literacy using data from the China Household Financial Survey(CHFS)and statistical yearbooks.It also uses the CHFS 2019 urban sample data to construct indicators related to household debt,and empirically tests the effects of financial literacy on the debt behavior of Chinese households using models such as the probit model.In addition,this paper further investigates the impact of financial literacy on the debt burden and debt risk of Chinese households.Taking the possible issues of endogeneity into account,this paper also uses the instrumental variable method to confirm the causal relationship between financial literacy and household debt.Finally,this paper demonstrates the robustness of the results from various perspectives.The conclusions of this paper are as follows:(1)Chinese urban residents have some understanding of basic financial concepts,but do not generally master financial knowledge;The overall correctness rate of residents’ answers to financial questions is low,and there is still a large room for improvement in financial literacy.(2)Financial literacy is an important factor in household debt holdings and debt size.Improving residents’ financial literacy may help households to participate in the credit market and expand the scale of household debt.Also,the contribution of financial literacy to household debt size is more pronounced in the middle and high debt groups and relatively less in the low debt groups.(3)Financial literacy is an important factor in the choice of household debt channels.With the improvement in residents’ financial literacy,households are more likely to borrow from banks and other formal financial institutions,while reducing the probability of households using informal financial channels.(4)Financial literacy has a significant positive effect on household housing debt and other consumer debt.(5)Financial literacy has an important impact on household debt burden and debt risk.It can significantly reduce household debt burden and debt risk,thereby preventing household financial vulnerability.