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Is household registration system responsible for the limited participation of stock market in China?

Yulin Liu (School of Public Affairs, Chongqing University, Chongqing, China)
Min Zhang (School of Economics and Business Administration, Chongqing University, Chongqing, China)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 14 July 2020

Issue publication date: 1 July 2021




This paper aims to examine the effect of China’s unique household registration system (hukou) on stock market participation.


In an effort to estimate the effect of hukou on households' financial behavior, we draw on data from China Family Panel Studies (CFPS) and use probit model and tobit model to test the effect of hukou on households stock market participation.


The results are with strong interpretative power over the limited participation of stock market in China-investors living in urban areas with urban hukou are more likely to participate in stock markets and allocate a larger fraction of financial assets to stocks and remarkably robust to a battery of robustness checks. The dual structure of social security caused by the household registration system could explain this result. Furthermore, marriage plays such a role of integrating social resources attached to hukou that only the marriage of individuals with urban hukou could significantly promote households' participation in the stock market. For married families, a household in which both husband and wife have urban hukou has a greater possibility to invest in stocks relative to those with rural hukou.


This paper contributes to the literature in two ways. First, much literature focuses on the stock market limited participation puzzle and gives explanations from the perspectives of individual heterogeneity and financial markets. This paper examines the effect of hukou. Such an idea is instructive to some developing countries where residents are treated differently because of the institutional reason. Second, the effects we find are economically meaningful. Our estimates indicate that medical insurance attached to hukou can explain almost 58% of the impact of hukou, which suggests that the key to reforming China's current household registration system is to make welfare separate from hukou. Moreover, homogamy based on hukou widens the gap of households' risky assets, which provides a new view to understand the income gap in the cities of China and the heterogeneous effect of marriage on stock market participation.



This work was supported by the surface of National Natural Science Foundation of China [grant No. 71773011]; the National “Four Batches” Talents of China [No. 47]; and the Research Fund Project of School of Public Affairs, Chongqing University [grant No. 2019GGXY001].


Liu, Y. and Zhang, M. (2021), "Is household registration system responsible for the limited participation of stock market in China?", Review of Behavioral Finance, Vol. 13 No. 3, pp. 332-350.



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