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Digital finance has the transformative power to realise financial inclusion. However, evidence on the relationship between digital finance and poverty reduction remains limited. This study examines the mitigating effects of digital financial inclusion (DFI) on vulnerability to poverty in rural China, explores potential mechanisms at the micro-level, and investigates the external conditions for DFI to validate these effects.

Rural household data from the China Labour Force Dynamics Survey and the regional DFI index compiled by Peking University are used. The probit and mediation effect models are employed to assess the impacts of the DFI on vulnerability to poverty and explore its mechanisms, with an appropriate instrumental variable to mitigate potential endogeneity.

DFI can mitigate vulnerability to poverty in Chinese rural households. Specifically, both sub-indices – coverage breadth and depth of use – have a significant effect. Further analyses based on the mediation model show that improving agricultural productivity, stimulating entrepreneurial activities and promoting non-agricultural employment are the core mechanisms for alleviating poverty vulnerability. Heterogeneity analysis shows that DFI is pro-poor and benefits those who lack economic opportunities. Moreover, adequate endowment in rural households, such as production and human capital, is an external condition for digital finance to mitigate vulnerability to poverty.

This study is among the first to examine the vulnerability-mitigation effects from the perspective of digital finance development, relying on data from a large-scale, nationwide household survey and the regional DFI index. It also checks for the mechanisms and heterogeneity of the effects, which prove the effects can help balance efficiency and equity.