By Dr. Duoguang Bei, President, Chinese Academy of Financial Inclusion, Renmin University of China, and Chair of China National Partner, GSG Impact
Over the past four decades, China has built a modern banking system and developed robust capital markets. Yet, as the country enters a new phase of development, it faces a critical challenge: making finance work for everyone.
Although the stereotype of finance professionals as privileged elites prevails, this perception should not obscure the existence of grassroots finance that serves those at the bottom of the pyramid. From the Grameen Bank in Bangladesh to community lenders in the United States, global experiences demonstrate that it is possible to serve the poor in a commercially viable way. China is looking beyond elite finance and embracing inclusive approaches.
Beyond the tech-and-manufacturing superpower narrative
The dominant narrative of China has been focused on its role as a technology and manufacturing superpower. However, this story overlooks the challenges of the development process—in other words, the existence of inequalities, particularly between urban and rural areas. This gap cannot be bridged by conventional finance alone, which is why impact finance becomes essential.
Financial challenges in rural China
“The measure of civilization lies in how it treats its most vulnerable.” In China, this means focusing on the needs of people from rural areas—not only farmers but also migrant workers and new urban residents. This population, which largely overlaps with low-income families, gig workers and small business owners, has been historically underserved by the financial sector.
Progress and gaps in financial access
China has made remarkable strides in providing basic financial services. Adult bank-account ownership has reached 90 percent, on a par with high-income countries and up from just 64 percent in 2011. Digital payments have become mainstream, providing convenient and affordable services that are accessible to all, regardless of their wealth or social status.
However, these successes mask significant gaps in access to credit and insurance for vulnerable populations. Our research reveals two critical characteristics of this population: high income volatility and low financial resilience, which make them vulnerable to shocks from unemployment, illness, natural disasters and accidents.
Evidence from financial diaries
In their U.S. Financial Diaries (USFD) study, Jonathan Morduch and Rachel Schneider identified an important cause of financial distress for Americans: the growing volatility and insecurity of their incomes. It is not the level of income alone that causes financial struggles for American working families, but also the uncertainty of their paychecks.
Inspired by their work, we conducted China’s first financial diaries study, tracking 197 households over a one-year period from 2021 to 2022. Participants recorded every financial transaction—earnings, spending, borrowing and savings—on a daily basis. The findings are striking: Monthly income volatility among tracked Chinese households was 1.5 times higher than that of their American counterparts. (As in the U.S. Financial Diaries study by Morduch and Schneider, monthly income volatility was measured by the coefficient of variation of month-to-month household income.) This volatility stemmed from agricultural seasonality, multiple income sources and irregular work patterns.
In Yijun County, a major corn-producing area in Shaanxi Province, the 91 households we tracked experienced income shortfalls in an average of seven out of thirteen months.
Consider Mr. Chen, a 51-year-old farmer from the area. His family of four manages 2.88 hectares of corn and 2 hectares of walnuts, relying on agricultural revenue and wage labor for income. Their annual income is concentrated in just two months: September for walnut sales and May for corn sales. The remaining 10 months feature minimal income that cannot cover expenses, creating chronic cash-flow problems. Credit products play a crucial consumption-smoothing role, yet people like Mr. Chen typically lack access to credit cards or other formal lending mechanisms.
The financial-resilience challenge
Without adequate savings, people cannot afford to be sick, escape toxic jobs or take time off to recharge. Financial insecurity causes real pain. As Matthew Desmond writes in Poverty, By America, “A higher minimum wage is an antidepressant. It is a sleep aid. A stress reliever.”
To better understand the financial well-being of Chinese gig workers, many of whom come from rural areas and work between temporary jobs, either as assemblers in electronics factories or as delivery men scooter-racing in bustling cities, we conducted a large-scale survey in 2022, through which we collected about 230,000 responses, including 132,934 from gig workers. The findings revealed a stark lack of financial resilience.
Forty percent of gig workers reported that their expenses had exceeded their incomes in the past three months. Over a quarter had no emergency savings to cover even one month of expenses, and 70 percent could not sustain themselves for three months from their savings. Perhaps most concerning, nearly 23 percent had no insurance coverage at all. These findings underscore the potential for financial services, particularly credit and insurance, to improve the well-being of vulnerable populations.
The case for impact finance
Driven by the need to maximize shareholder returns and comply with regulatory requirements, traditional financial institutions often overlook these “unbankable” populations. This is not a moral failing but a structural reality. When a farmer like Mr. Chen needs a loan, traditional risk models see only irregular income and a lack of collateral. When a gig worker needs emergency credit, algorithms often reject his or her application due to an unstable employment history.
This exclusion creates a vicious cycle. Without access to appropriate financial services, vulnerable populations cannot build resilience against shocks, invest in productive assets or smooth consumption during lean periods. Their continued distress then reinforces banks’ perceptions of them as “unbankable”, perpetuating exclusion.
Impact finance, which bridges the gap between philanthropy and profit maximization, offers a way out of this cycle. It recognizes that serving vulnerable populations can be financially sustainable and socially beneficial.
Impact finance, which bridges the gap between philanthropy and profit maximization, offers a way out of this cycle. It recognizes that serving vulnerable populations can be financially sustainable and socially beneficial. To make finance work for all, China must develop financial models that prioritize social impact alongside financial returns.
When designed appropriately, financial products can unlock human potential. For rural farmers, weather-indexed crop insurance can mean the difference between investing in better seeds or being trapped in subsistence farming. For gig workers, accessible credit can provide a crucial buffer against income volatility. For micro-entrepreneurs, working-capital loans can transform a survival business into a job-creating enterprise. The key is to recognize the unique needs of different populations and develop targeted solutions, rather than one-size-fits-all approaches.
Policy innovations in rural finance
Translating these ideals into practice requires supportive policy frameworks and institutional arrangements. China has approximately 2,000 banking institutions that operate primarily in rural areas. While most have since been converted into commercial banks, they originated as credit cooperatives with a social mission. These institutions maintain branches in remote villages where purely commercial entities would not venture, and their commitment to community service is embedded in their institutional DNA.
However, China currently lacks the legal and regulatory frameworks to support these dual-mission institutions. When rural cooperatives are transformed into commercial banks, they become subject to regulations such as Basel III (of the Basel Committee on Banking Supervision [BCBS]), which may conflict with their social missions. This forces them to choose between regulatory compliance and community service—a false choice that undermines both financial stability and rural development.
In the US, community development financial institutions (CDFIs) provide a model for supporting mission-driven financial institutions. Some CDFIs, such as loan funds, are nonprofit organizations, which allows them to operate outside of a purely commercial framework.
China’s rural banking institutions represent a unique opportunity to develop a distinctly Chinese approach to impact finance. They already have deep community roots, local knowledge and social missions embedded in their origins. What they need is a regulatory framework that recognizes and supports their dual missions.
Conclusion
Big Tech’s foray into finance, particularly in China’s payment and credit markets, introduced competition that compelled traditional banks to reduce prices, enhance services and expand coverage. Will similar disruptions in the insurance and wealth-management sectors occur, reducing protection gaps for the most vulnerable while providing them with tools to build assets? The answer remains uncertain, as China’s insurance sector operates under different competitive dynamics than the banking industry.
Nevertheless, a broader transformation is already underway. The future of finance will not be a homogeneous landscape dominated by institutions driven purely by profit maximization. Instead, it will be a diverse ecosystem that accommodates financial institutions striving for both financial sustainability and social impact. The time to build this ecosystem is now.
Dr. Duoguang Bei is President of the Chinese Academy of Financial Inclusion (CAFI) at the Renmin University of China and Chair of China National Partner of the GSG Impact. A 30-year veteran in the financial sector, Dr. Bei previously worked at the Ministry of Finance, China Securities Regulatory Commission (CSRC), China International Capital Corporation (CICC) and J.P. Morgan.