Enhancing urban water efficiency through digital financial inclusion: Evidence from China

Abstract

Traditional finance exhibits several limitations in its capacity to drive the advancement of the green economy. In contrast, emerging Digital Inclusive Finance (DIF) uses digitization as a tool to address these shortcomings inherent in traditional financial systems. This research employs panel data encompassing 275 cities in China over the period from 2011 to 2021 to examine the relationship between DIF and Urban Water Efficiency (UWE). The findings of this study demonstrate a compelling positive association between DIF and the enhancement of UWE, intensified by significant spatial spillover effects. These results remain robust across a range of tests. It's worth noting that DIF primarily boosts pure technical efficiency, rather than scale efficiency, which are two important aspects of UWE. Delving deeper into the mechanisms that clarify how DIF reinforces green innovation and enhances the green total factor productivity, thereby contributing to UWE. Further exploration indicates that DIF has a more significant impact on UWE in cities with populations exceeding 5 million, no water resource tax, and strict environmental regulation. The combined efforts of financial and environmental regulation by the Chinese government play a key role in strengthening the positive relationship between DIF and UWE. Consequently, this research provides stronger evidence that financial development enhances environmental efficiency and offers new insights for urban water resource management.