For decades, China’s financial system has underpinned rapid economic growth, yet it has also revealed a persistent structural imbalance: financial resources have been heavily skewed toward large enterprises and major infrastructure projects. Consequently, micro, small, and medium enterprises (MSMEs), low-income groups, and other vulnerable economic actors have long remained underserved. As the country continues to advance the “Five Priorities” in finance, supply-side structural reform has entered a critical new phase. In this process, insurance is increasingly vital as a risk buffer and social stabilizer. Paradoxically, it remains the most conspicuous weak link in the inclusive finance ecosystem.
Three Stages of China’s Financial System and the Rise of Inclusive Finance
01 Stage One (1985–2005): Establishment of the Modern Banking System
The pivotal breakthrough in China’s financial reform was the functional separation of the central bank from commercial banking operations. Initiated by the founding of the Industrial and Commercial Bank of China (ICBC), the banking sector embarked on a path toward specialization and corporatization. Simultaneously, the central bank began architecting a modern framework for multi-tiered monetary management. This institutional evolution spanned two decades of rigorous exploration. The successful domestic and overseas IPOs of major state-owned commercial banks between 2005 and 2006 served as a definitive milestone, signaling the fundamental completion of the banking system’s transition into market-oriented corporate entities.
02 Stage Two (1990–2010): Formation of the Capital Market System
To address the banking system’s inadequacy in providing long-term capital, the Shanghai and Shenzhen stock exchanges were established in succession, catalyzing the growth of a multi-tiered capital market. Together with the banking system, they came to form the twin pillars of finance, fueling China’s economic development. However, China’s economy is characterized by a distinctive pyramid structure, where an immense base of MSMEs and rural economic actors constitutes the bedrock of the national economy. These entities are indispensable in driving innovation, creating jobs, and vitalizing market dynamics. Yet capital markets are inherently inclined to serve large-scale enterprises with robust collateral, thereby exacerbating structural exclusion. Should the financial demands of these entities remain chronically underserved, it will not only stifle their individual potential but also create profound systemic bottlenecks for China’s economic transformation, upgrading, and sustainable development.
03 Stage Three (Since 2010): The Consolidation of Inclusive Finance and Structural Reinforcement
To rectify the systemic lack of inclusivity, China facilitated the establishment of village and township banks and microcredit companies, and launched the ChiNext and the SME Boards to channel financial resources toward grassroots levels. Since the rollout of the Plan for Advancing the Development of Inclusive Finance in 2016, a distinctive Chinese model of inclusive finance has emerged – defined by the collective participation of the entire banking sector. It is evident that the strategic focus has transitioned from constructing foundational infrastructure to optimizing financial structures and broadening service reach. The ultimate objective is now to institutionalize systemic inclusion with “inclusive” at its core.
What does the “Five Priorities” mean for inclusive finance?
01 Focus of Technology Finance
The core of technology finance lies in serving innovation-driven enterprises, especially tech-based MSMEs and high-growth start-ups. To serve the financial demands of these firms is part of the mission of inclusive finance. In this sense, technology finance is a concrete practice of inclusive finance in technological innovation.
02 Structural Contradictions in Green Finance
Green finance in China faces a salient contradiction characterized by a mismatch between “green” and “inclusive” objectives. On the one hand, instruments such as green credit and green bonds are predominantly channeled toward large enterprises and flagship projects, leaving a vast number of MSMEs remain outside the reach of green finance policies. On the other hand, lacking policy-driven incentives, rural and local neighborhoods remain stalled in their energy transition, continuing their reliance on high-carbon sources. Since MSMEs account for more than half of total carbon emissions, integration of green and inclusive finance is imperative for a comprehensive low-carbon transition.
03 Weak Links in Pension Finance
As population aging intensifies, pension finance faces growing pressure. The most critical challenge lies in ensuring old-age social security for low-income groups – the very demographic at the heart of the inclusive finance mission. Pension finance, therefore, needs to place greater emphasis on inclusiveness and be incorporated into the broader inclusive finance framework.
04 Enabling Role of Digital Finance
Digital finance has fundamentally enhanced the efficiency and reach of financial services through technological innovation. From agile neobanks to the digitized operations of traditional incumbents, digital tools have pushed the boundaries of inclusive finance. By lowering barriers to entry and operational costs, digital finance provides important technological support for addressing bottlenecks in inclusive finance.
Achievements and Weak Links of Inclusive Finance in China
01 Achievements
1. An Inclusive Credit Supply System with Broad Participation Across the Banking Sector
Unlike countries such as Bangladesh, where inclusive finance mainly relies on specialized microfinance institutions (MFIs), China has developed a distinctive model based on strategic mobilization. At its core, this model leverages national strategic mandates and regulatory performance evaluations to compel the entire banking ecosystem – from state-owned giants to local legal-person banks – to embrace inclusive finance responsibilities. Driven by the 14th Five-Year Plan and sustained regulatory incentives, by the end of June 2025, the outstanding balance of inclusive MSE loans had surged to RMB 36 trillion, up 136 percent from 2020, the end of the 13th Five-Year Plan period. Notably, the balance for large commercial banks expanded to 3.36 times its previous level, while interest rates on new loans dropped by 2 percentage points. This “mandatory institutional evolution” enabled China to build the world’s largest inclusive credit supply network in a relatively short period, systematically addressing the chronic financing constraints that have long hindered the survival and growth of MSEs.
2. A Leapfrog development in Infrastructure Powered by Digital Finance
China has achieved globally preeminent success in digital finance. Mobile payment platforms, most notably Alipay and WeChat Pay, have not only achieved near-universal penetration but have also bridged the digital divide by extending services to remote regions and elderly populations, establishing the world’s most expansive digital payment network. This foundation has catalyzed a thriving ecosystem of digital lending, insurance, and wealth management, creating a high-efficiency, full-chain service architecture. This innovation model, led by mobile payments and fortified by cross-sector synergy, has not only significantly improved the accessibility and convenience of financial services, but has also cemented China’s leadership in the global digital finance landscape.
3. Elevated Public Financial Literacy and Capability
In addition to expanding access, China’s inclusive finance initiatives have significantly bolstered public financial literacy and capability, catalyzing a strategic shift from “passive aid” to “proactive empowerment.” Through continued efforts such as the “Credit Village” initiative and financial education programs, people have gained a better understanding of modern financial instruments and how to use them. This progress is evident not only in the widespread basic financial services, but also in stronger awareness of risk management and more sophisticated financial planning skills. This marks a pivotal transition in China’s inclusive finance journey: moving beyond mere coverage expansion toward a high-quality development phase centered on service excellence and holistic financial well-being.
02 Three Weak Links
1. Inadequate Coverage of MFIs
China’s current inclusive finance system relies disproportionately on the top-down extension of services from large commercial banks, resulting in a systemic absence of community-rooted MFIs. Unlike the mature community banking and cooperative finance ecosystems in Europe and the U.S., China faces a severe deficit in MFIs that can well balance commercial viability with social mandates. This structural gap hinders targeted service delivery at the grassroots level; the inherent tension between the standardized offerings of large banks and the heterogeneous needs of local clients prevents financial services from truly taking root in the last mile.
2. Insufficient Supply of Inclusive Insurance
While China’s agricultural insurance market ranks among the world’s largest, the risk protection framework for the general public – particularly vulnerable demographics – remains underdeveloped. Key areas such as critical illness, accident, and old-age insurance suffer from conspicuous coverage gaps and a chronic shortage of effective supply. This weak link leaves many households exposed to major risks, revealing significant vulnerabilities in the national financial safety net. Recent surveys indicating high levels of public anxiety over medical expenses also point to a wide gap between existing insurance provision and people’s actual needs.
3. Underdeveloped Direct and Equity Financing
Despite long-standing policy mandates to increase the proportion of direct financing, China’s financial system is still dominated by indirect bank lending. In fostering tech innovation and start-ups, the supply of equity capital, including venture capital, private equity, and angel investment, is profoundly inadequate to meet the diversified needs of firms across different growth cycles. This structural imbalance not only stifles corporate innovative vitality but also imposes deep-seated constraints on China’s economic transformation and upgrading. Bridging this gap has become a pivotal objective in financial supply-side structural reform that requires an urgent breakthrough.
Examining the Core Value of Insurance Protection through the Lens of Financial Health
Financial health serves as a critical framework for measuring the financial resilience and development potential of households and individual economic actors; it stands at the heart of high-quality inclusive finance. Empirical evidence from a financial health perspective indicates that insurance provides irreplaceable value in consolidating poverty alleviation gains and mitigating household financial risks.
This insight is derived from “Financial Diaries,” an international comparative tracking study. Supported by the World Bank and conducted between 2021 and 2023 in Shanghai municipality, Pingjiang county (Hunan province), and Ningshan county (Shaanxi province) in China, the project meticulously recorded the continuous annual cash flows, debt obligations, and consumption of 200 households. This granular data provides a robust empirical foundation for inclusive insurance by offering a deep dive into residents’ financial health. The findings reveal that the core challenges facing low-income households lie not only in low income but, more critically, in the pronounced volatility and unpredictability of earnings. This “erratic and fluctuating” financial profile hinders households from making long-term spending plans, significantly eroding their financial resilience and long-term growth potential, as their modest savings remain woefully inadequate to withstand major risk shocks.
Most crucially, the study illuminates the distinct role of insurance as compared to credit. When a household member suffers a critical illness or accident, the absence of insurance coverage leaves them doubly burdened: they must manage exorbitant medical expenses while servicing debts, often precipitating an immediate lapse into “illness-induced poverty.” Empirical evidence demonstrates that a well-designed inclusive insurance system – comprising medical, critical illness, and accident coverage – functions as a vital safety net for low-income groups. As a financial backstop, it provides a level of protection that credit instruments alone cannot deliver.
Accordingly, from a financial health perspective, the social value of inclusive insurance may, in certain respects, even surpass that of inclusive credit. Policy formulation should pivot beyond a credit-centric approach toward a new paradigm of “synergetic credit-insurance development.” By positioning insurance protection as a foundational institutional safeguard to prevent households from descending into poverty, China can establish a critical strategic pillar for the next phase of its inclusive finance development.
Pain Points and Future Paths of Inclusive Insurance
01 Pain Points
1. Demand-Side Constraints
Inclusive insurance faces dual demand-side constraints. First, the legacy of historically aggressive marketing has left a pronounced “trust deficit,” compounded by a pervasive lack of risk awareness. Second, as the target demographic primarily comprises low-to middle-income segments, their restricted purchasing power and acute price sensitivity directly suppress effective demand. Furthermore, a general deficiency in financial literacy impairs the public’s ability to recognize the long-term value proposition of inclusive insurance products.
2. Supply-Side Challenges
First, serving vulnerable segments entails significantly higher operating costs than traditional lines of business, driven by expenses related to distribution, risk management, and field operations. Second, the scarcity of granular historical underwriting data and comprehensive credit profiles impedes insurers from constructing precise actuarial models, resulting in a deficit in risk-based pricing capabilities. In addition, low average premiums make it difficult to achieve scale economies, while elevated adverse selection drives persistently high loss ratios. Taking “Huiminbao” (government-guided commercial medical insurance) as an example, pronounced product homogeneity and mounting claims pressure reflect the formidable challenges to the commercial viability of the inclusive insurance model.
3. Policy Dependency and Sustainability Risks
Inclusive insurance programs have historically relied heavily on government fiscal subsidies. Policy-driven lines, such as agricultural insurance and critical illness coverage, operate on a model underpinned by sustained local fiscal outlays. However, as local fiscal pressures intensify, this funding model – heavily dependent on public finance – is coming under increasing strain. In some regions, delays in subsidy disbursement and mandated reductions in coverage have already emerged, directly undermining the continuity and reliability of inclusive insurance provision.
02 Future Paths
To drive inclusive insurance from a policy concept to large-scale, sustainable implementation, it is essential to build a robust ecosystem defined by multi-stakeholder collaboration and functional complementarity.
1. Strengthening Government Guidance and Policy Synergy
The government should clarify the strategic role of inclusive insurance within the broader social security system through top-level design, while concurrently refining regulatory frameworks and industry standards. Specifically, policy instruments – including fiscal subsidies, tax incentives, and risk compensation mechanisms – are essential to lowering operating costs. In addition, greater access to public data would enable insurers to improve risk-based pricing and catalyze product innovation, thereby creating a more enabling institutional environment for the development of inclusive insurance.
2. Incentivizing Innovation in Products and Business Models
Insurers should be encouraged to harness advanced analytics, such as big data and artificial intelligence, to streamline operations and reduce costs. Priority should be given to the development of inclusive insurance products that feature transparent terms, affordable premiums, and streamlined underwriting. Furthermore, the industry should explore modular and customized product formats to address the diverse needs of various customer segments, while establishing dynamic pricing mechanisms to ensure long-term commercial sustainability.
3. Leveraging the Outreach Capabilities of Insurance Intermediaries and Channels
A multi-tiered service network should be developed by forging strategic partnerships with entities on the ground, such as rural cooperatives, community organizations, and postal networks, to effectively integrate offline service resources. Concurrently, digital channels should be expanded to enhance service efficiency through mobile internet platforms, providing a pragmatic solution to the “last-mile” delivery challenges in inclusive insurance.
4. Guiding the Participation of Social Organizations and Philanthropic Capital
Drawing on international models of “blended finance,” innovative mechanisms should be developed to facilitate the participation of private capital. By encouraging third-party actors such as philanthropic foundations and charitable organizations to contribute to premium subsidies, co-insurance pools, and risk-sharing arrangements, a multi-stakeholder risk-sharing framework can be established, involving government, market, and civil society. This approach will bridge the gaps in purely commercial models and enhance the long-term viability of inclusive insurance.
5. Enhancing Public Financial Literacy and Risk Awareness
Financial literacy education should be advanced systematically, leveraging multiple channels, such as community outreach programs and digital platforms, to strengthen public understanding of the utility and functionality of insurance. Particular emphasis should be placed on bolstering risk awareness and the ability to evaluate insurance products among vulnerable groups. By stimulating demand-side market potential, this approach will help establish a solid foundation for the long-term, sustainable development of inclusive insurance.
Through the synergistic advancement of the five dimensions outlined above, we can foster a virtuous development model defined by government guidance, market-driven operations, social participation, technological empowerment, and tangible public benefits. This integrated approach will ultimately facilitate the creation of an inclusive insurance ecosystem that achieves broad coverage, efficient service delivery, and long-term commercial viability.
Insurance serves as an indispensable tool for risk mitigation and a “social stabilizer”; yet it remains the weakest link in the current inclusive finance system. Looking ahead, we must adopt “financial health” as our guiding objective, elevating the development of inclusive insurance to a more prominent strategic priority. This requires not only innovation in products, channels, and technology in the insurance industry, but also the cultivation of an ecosystem based on “joint contribution, collaborative governance, and shared benefits” among the government, market entities, social organizations, and consumers. By facilitating a transition from “credit-centric inclusion to insurance-centric inclusion,” we can fortify the financial safety net for China’s economic and social development, and advance toward a higher-quality financial development that is more inclusive and resilient.
(Note: This article is based on a speech delivered by Bei Duoguang, President of the Chinese Academy of Financial Inclusion (CAFI), at a conference hosted by China Pacific Insurance Group (CPIC) on November 13, 2025.)
