Summary:
Limited participation in stock markets is a widespread and puzzling phenomenon, but it is a particularly serious problem in China. We need to understand the factors that affect households' decisions to make risky financial investments. Previous studies indicate that house purchase price is a crucial factor in explaining the level of stockholdings. From 2000 to 2015, China's house purchase price grew rapidly, with a growth rate exceeding the rates in developed countries. In the same period, Chinese households show very high enthusiasm for housing investment. Housing investment requires substantial funds and may reduce households' exposure to risky financial assets. Following the example of Singapore's Central Provident Fund, in 1994, China implemented the housing provident fund (HPF) to improve housing affordability. The HPF scheme affects the disposable income of households in two ways. First, according to the tax law, there is no need to pay personal income tax on payments to or withdrawals from the HPF. Therefore, the HPF increases households' future disposable income and lifetime wealth. On the other hand, payment to the HPF enhances a household's current liquidity constraints and the interest rates for HPF deposits are low. Furthermore, unlike endowment insurance, the impact of the HPF is different on households with and without housing. Households without housing cannot use withdrawals from the HPF as a down payment or to repay housing loans. Although households can withdraw funds from the HPF to pay rent, the amount that can be withdrawn for this purpose is limited. Accordingly, this study addresses three main problems. First, does the HPF significantly influence households' investment in risky financial assets？ Second, what is the mechanism through which the HPF affects households' investment in risky financial assets？ Finally, we discuss the heterogeneity of the impact of the HPF on different types of households. We use data from the 2013 China Household Finance Survey (CHFS). The CHFS database includes detailed information on household assets, liabilities, financial wealth, income, and insurance. This survey of 28,151 sample households covers 29 provinces (autonomous regions and municipalities) and 262 counties (districts and cities). As the majority of people with an HPF are urban, we delete rural households. After data pre-processing, our sample contains 11,093 urban households. We use a Probit model to test the impact of the HPF on the possibility that a household will make risky financial investments. Then, we use a Tobit model to test the impact of the HPF on the proportion of risky financial investments made by households. Finally, we examine the mediating factors to determine the mechanism driving this relationship. To address endogeneity concerns, we use an instrumental variable. We also use the Heckman two-step model and panel fixed effects model as robustness tests. The empirical results show that the HPF can significantly increase the possibility and proportion of risky financial investments made by households with houses. However, the HPF has no significant impact on households that do not own the place in which they live. The analyses of the mechanism show that the HPF significantly increases households' disposable incomes and improves their risk preference levels, and thus increases the possibility and proportion of investments in risky financial assets. These findings suggest that it is necessary to strengthen the support function of the HPF for households without houses. For example, by relaxing the conditions under which households can make withdrawals from the HPF. In addition, it is very important to increase the interest rate of HPF deposit, to reduce the opportunity cost of the mandate deposit of HPF. The contributions of this study are as follows. First, this study is the first to link the HPF to risky financial investments and confirms that the HPF can significantly affect households' investment in risky financial assets. We put forward new evidence to explain individuals' limited participation in the stock market, expand the research on the HPF, and provide new topics for follow-up research. Second, the results indicate that the HPF not only improves housing affordability, but also regulates households' investment in risky financial assets. This conclusion provides insights into ways to increase households' property income and to promote the development of a multi-level capital market. Finally, the heterogeneity analysis shows that the HPF has no significant impact on investment in risky financial assets by households that do not own housing. This suggests that the government needs to pay attention to the implementation of the HPF system.
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