The dark side of digital financial inclusion: Uncovering threshold-driven risk contagion in China

This study challenges the linear narrative of financial innovation by examining the conditional and spatial impact of digital financial inclusion (DFI) on systemic financial risk (SFR) in China. Leveraging a panel of 31 provinces from 2011 to 2023, we employ a multidimensional SFR index, panel threshold regression, and Spatial Durbin Models (SDM) to isolate risk transmission channels. Our analysis yields three robust findings. First, DFI significantly amplifies systemic vulnerability, acting as a risk accelerant rather than a stabilizer in the current context. Second, this relationship is structurally non-linear: risk amplification triples when household leverage exceeds 67.17 % and intensifies once the DFI ecosystem matures beyond an index threshold of 1.4005. Third, we identify a dominant “spatial leakage” effect, where 60 % of DFI-induced risk is transmitted to neighboring provinces rather than remaining local. These results expose the limitations of static, territory-bound regulation. We propose a dynamic macroprudential framework that coordinates cross-regional supervision and activates “circuit breaker” policies when household leverage breaches critical tipping points.