Social trust and risky financial market participation: Evidence from China

Abstract

ABSTRACTThe Chinese government has promoted the development of risky financial markets under the market-oriented reform period. Meanwhile, social trust has changed with institutional transitions. This study investigates the influence of social trust on risky financial market participation in China based on the national longitudinal data of 2014–2018. It also estimates the effects of social trust by education, age, urban/rural hukou resident groups, and periods. The empirical results indicate that social trust positively affects the probability of holding risky financial assets and their shares. However, these effects turn insignificant when accounting for unobservable individual heterogeneity. The positive effect of social trust is more pronounced among the younger generation, highly educated groups, women, and urban hukou residents compared to their counterparts. Additionally, the positive impact of social trust is observed to be stronger in the period following the 2015 stock market crash shock than in the period before 2015.KEYWORDS: Social trustrisky financial marketrisky financial assetChina Disclosure statementNo potential conflict of interest was reported by the author.Notes1. In 2015, stock prices, which had been rising since the beginning of the year, collapsed on June 12. Within a month, A-shares on the Shanghai Stock Exchange lost one-third of their total stock market capitalisation. An unprecedented situation emerged in the Shanghai A-share market, with nearly half of the stocks suspended from trading. The government implemented financial market bailout policies, including massive funds, and the stock market returned to its starting point in October. This event is known as the 2015 stock market crash shock.2. The options for each question ranged from 0 (do not trust) to 10 (completely trust). I calculated the total value of these two questions. I also performed the estimations using the trust in a stranger or trust in a foreigner separately; the results were approximately similar to those that used the total score of these two indicators. Hence, I only presented the results using these two indicators in this study. The other results are available upon request.3. There are thirteen options for the question, ‘Which organisations are you a member of?’ They are as follows: (1) Communist Party of China; (2) Democratic party; (3) People’s Congresses (representatives) at the county/district level and above the county/district level; (4) County/district and above county/district Political Consultative Conference (Member); (5) Trade union; (6) Communist Youth League; (7) Women’s Federation; (8) Federation of Industry and Commerce; (9) Informal networking organisations (communities, networks, salons, etc.); (10) religious/belief group; (11) Association of private business owners; (12) Self-employed workers association; (13) Others. The dummy variable for Communist Party of China membership is set to 1 if a respondent selected option (1) and 0 if the respondent selected any other option from (2) to (13).4. The study used per capita household income and owning housing as income factors’ indices, in line with previous studies (Chen & Ji, Citation2017; Chetty et al., Citation2017; Ge et al., Citation2021). It was found that there may be a correlation between these two variables. I calculated the correlation coefficient of household income and owning housing and found the value to be 0.175, reflecting that the collinearity problem between these two variables may be ignored.5. For the question ‘What do you think of your financial literacy?’, the value is equal to 1 when the choice is ‘high level’ or ‘very high level,’ and equal to zero when the alternative is ‘normal,’ ‘low level,’ or ‘very low level’6. For the question ‘Are you confident about the future?’, I constructed a scale variable for optimism valued from 1 (very low) to 5 (very high). The higher the value, the higher the probability of being optimistic.7. For the question ‘Do you think money should be used instead of saved?’, I constructed a scale variable of the money value, ranging from 1 (disagree) to 5 (agree).8. For the question ‘I prefer to live in the present and not think about the future,’ I constructed a scale variable of time preference, ranging from 1 (No) to 5 (Yes). The higher the value, the higher the time preference discount.Additional informationFundingThis work was supported by the Japan Society for the Promotion of Science [20H01512].