Nudging towards a better financial future: applying behavioural insights in the development of financial systems in rural China

Although China has almost eliminated urban poverty, the total number of Chinese citizens in poverty remains at 82 million, most of which are rural residents. The development of rural finance is essential to preventing the country from undergoing further polarization because of the significant potential of such development to facilitate resource interflows between rural and urban markets and to support sustainable development in the agricultural sector. However, rural finance is the weakest point in China's financial systems. Rural households are more constrained than their urban counterparts in terms of financial product availability, consumer protection, and asset accumulation. The development of the rural financial system faces resistance from both the demand and the supply sides.

The proposed project addresses this challenge by investigating the applications of a proven behavioural approach, namely, Libertarian Paternalism, in the development of rural financial systems in China. This approach promotes choice architectures to nudge people into optimal decisions without interfering with the freedom of choice. It has been rigorously tested and warmly received in the UK public policy domain. This approach also fits the political and cultural background in China, in which the central government needs to maintain a firm control over financial systems as the general public increasingly demands more freedom.

Existing behavioural studies have been heavily reliant on laboratory experiments. Although the use of field studies has been increasing, empirical evidence from the developing world is limited. Meanwhile, the applications of behavioural insights in rural economic development in China remains an uncharted territory. Rural finance studies on the household level are limited; evidence on the role of psychological and social factors in rural households' financial decisions is scarce. The proposed project will bridge this gap in the literature.

The overarching research question of this project is whether and how behavioural insights can be used to help rural residents in China make sound financial decisions, which will ultimately contribute to the sustainable economic development in China. The research will be conducted through field experiments in rural China. By relying on field evidences, the project team will develop policy tools and checklists for policy makers to help rural households make sound financial decisions. Two types of tools will be developed for policy makers, namely, "push" tools that aim to achieve short-term policy compliance among rural households so that they can break out of the persistent poverty cycle and "pull" tools that can reduce fraud, error, and debt among rural households to prevent them from falling back into poverty. Finally, the project team will also use the research activities and findings as vehicles to engage and educate rural residents, local governments, regulators, and financial institutions. Standard and good practice will be proposed to interested parties for the designs of good behavioural interventions; ethical guidelines will be provided to encourage good practice. This important step ensures that the findings of this project will benefit academia and practice, with long-lasting, positive impacts.

The findings will benefit researchers in behavioural finance and economics, rural economics, development economics, political sciences, and psychology. The findings of and the engagement in this project will help policy makers to develop cost-effective behavioural change policies. Rural households will benefit by being nudged into sound financial decisions and healthy financial habits. The project will provide insights on how to leverage behavioural insights to overcome persistent poverty in the developing world. Therefore, the research will be of interest to communities in China and internationally.

The proposed research has a potential to affect the improvement of the welfare of rural households in terms of financial decisions and behaviour. The project will affect the behaviour of rural residents indirectly through behavioural interventions initiated by public policy makers and financial regulators, with financial service and product providers playing an active role in this process. Therefore, the project has the potential to engage all stakeholders in the activities organized during the project period. Our dissemination strategies and plans will also ensure that the impact of the research will go beyond the geographic boundary and time limit of this project. Our findings will continue to influence works on improving the welfare of the developing world after the completion of the project.

We will influence the public administration of central government institutions in China. We have initiated collaborations with many central government departments in China in preparation for this application. The Ministry of Land and Resources of China and the Ministry of Housing and Urban-Rural Development of China are our project partners. These government institutions will be confident to develop their own behavioural change policies in China by consulting our concrete local field evidence and clear guidelines developed based on the success in the UK, potentially making China's public policy more "from the people and for the people."

The research will have an impact on the practice of financial regulatory authorities in China. The China Micro-credit Companies Association and the China Credit Assets Registry & Exchange Co. Ltd. will join us in this project as local partners. Leveraging these established links, we will share our research findings with regulatory authorities and self-regulatory bodies by giving a series of tailored talks. We will make key recommendations for change with regard to the adjustment of current policies and regulations aimed at improving the financial systems in rural China.

We will influence public administration by the local government in rural China. The local government will be engaged throughout the entire research cycle.Thus, the understanding of the local government of the needs of rural residents will be improved and the awareness of behavioural change policies among the local governments in rural China will be increased.

Our research will also influence the product/service design and delivery by financial companies in China. Two large insurance companies will participate in our field experiments. The companies are also interested in participating in the seminars and workshops organized in China. They will gain insights into the behavioural and social characteristics of target customers through their involvement in this project and will improve their product offering and management accordingly, resulting in rural insurance services and products that are more tailored to the needs of rural residents.

Our findings will contribute to the work of charities and NGOs in Asia and beyond. We have obtained the support of the newly established Singapore Office of Behavioural Insights Team (BIT), a social purpose company jointly owned by the UK Government, Nesta (the innovation charity), and their employees. We can leverage their practical knowledge from the UK and Asia through this partnership. Meanwhile, our project will provide BIT with much needed field evidence from rural China. Our findings are likely to reach other charities and NGOs in Asia and beyond through the BIT network and continue to influence public policy making after the completion of the project.

We will set up an online platform to ensure knowledge exchange and enable co-construction of knowledge to extend the effect of our study.The online platform will be gradually developed into a knowledge exchange base, where tools and findings from other behavioural studies can be shared.