Abstract

China’s rising household leverage has intensified concern about household-level financial risk, yet the role of digital financial inclusion (DFI) remains ambiguous. This study examines the association between DFI and household financial fragility through two channels: an information channel and a credit-constraint channel. We develop a three-period household decision framework and test its implications using China Family Panel Studies (CFPS) data from 2014 to 2022, matched with a county-level DFI index. The results show a U-shaped association between DFI and household financial fragility. Mechanism tests are consistent with a leverage channel: broader credit availability is associated with higher household leverage and higher distress risk. Evidence for the risk-taking channel is more conditional and becomes more visible at higher levels of DFI development. Instrumental-variable estimates, lagged specifications, alternative fragility measures, and double machine learning produce the same nonlinear sign pattern, although the exact turning point is specification-sensitive and the exclusion restriction remains an identifying assumption. The findings support risk-based monitoring of digital credit and consumer-protection policies targeted at households with weak liquidity buffers and high debt-service burdens.

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