From Scale Expansion to Efficiency Enhancement: Fiscal Support and Inclusive Finance in China

【Authors】

XIONG Deping, HUANG Jirong, XI Zhuhao & SUN Yilei

【WorkUnit】

Yunnan University of Finance and Economics, 650221.

【Abstract】

China’s inclusive finance sector has moved beyond the initial stage of extensive coverage expansion to a new stage emphasizing quality, resilience, and robust growth. Traditional evaluations have prioritized metrics of access, availability, and usage, which are useful to reflect the incremental expansion of inclusive finance, but are insufficient for assessing whether inclusive finance genuinely enhances the development capacity of vulnerable groups or advances equitable income distribution under the goal of common prosperity. Since the Third Plenary Session of the 18th Central Committee of the Communist Party of China called for developing inclusive finance, China has gradually formed a market-led, government-guided development framework for inclusive finance. In this process, the central and local governments guide the flow of financial resources to key areas such as micro and small enterprises, farmers, and low-income groups through special funds, interest subsidies, risk compensation, and credit infrastructure. However, the role, mechanism, and actual effect of large-scale fiscal investment in the development of inclusive finance remain insufficiently understood.
This paper addresses these gaps by distinguishing two dimensions of inclusive finance development. The first is scale, which is the direct goal, defined as the expansion of financial service coverage and accessibility; the second is efficiency, which is the fundamental goal, measured by the capacity of financial resources to be translated into residents’ income raise and a narrowing urban-rural income gap. We further differentiate between direct and indirect fiscal support, and construct a multi-sectoral theoretical model featuring heterogeneous agents. Based on the provincial panel data from 2016 to 2023, we use the urban-rural income gap as a proxy indicator of efficiency to systematically identify the effect of fiscal support. 
The main findings are as follows. (1) Direct fiscal support promotes both scale expansion and efficiency improvement of inclusive finance, but its effect on scale is significantly stronger, indicating that fiscal resources are still biased toward scale expansion. (2) Indirect fiscal support enhances both dimensions by improving the broader economic and social basic environment. (3) Supply-side incremental incentives for agriculture-related loans and demand-side interest subsidies for entrepreneurial guaranteed loans can significantly improve efficiency, forming two transmission paths of supply incentives and demand incentives. (4) The effect of fiscal support is heterogeneous: Efficiency gains are larger in regions with a higher degree of marketization, stronger economic development, and less rugged topography.
This study makes three marginal contributions. First, by integrating scale and efficiency into a unified analytical framework, it overcomes the limitations of existing literature on single-dimensional outcomes. Second, it theoretically explains the differentiated mechanism through which direct fiscal support and indirect fiscal support operate, reflecting the institutional characteristics of China’s “efficient market + well-functioning government” approach. Third, it constructs a novel provincial-level dataset on fiscal support for inclusive finance and comparatively evaluates the effects of different financial instruments, offering empirical evidence for optimizing the allocation of financial resources.

JEL: G21, R51, E62

【KeyWords】

Inclusive Finance Development in China, Fiscal Support, Scale Expansion, Efficiency Enhancement, Urban-Rural Income Gap