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The Chinese saving puzzle and the life-cycle hypothesis: A revaluation

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  • Chao, Chi-Chur
  • Laffargue, Jean-Pierre
  • Yu, Eden
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    Abstract

    In a stimulating paper, Modigliani and Cao (2004) concluded that most of the huge increase in the household saving rate in China since 1975, the 'Chinese saving puzzle', can be explained by the life-cycle hypothesis. Their analysis is based on the estimation of reduced form equations. However, a structural model of their hypothesis would impose constraints on these equations. For not taking them into account, their test of the life-cycle hypothesis lacks power. In this paper, we develop a structural model of household saving behavior based on the life-cycle hypothesis for the Chinese economy. We find that the life-cycle hypothesis can explain only 35% of the surge of the Chinese household saving. We then add to the model the strong motivation of young adults for buying a home and the financial support they receive from their parent for that. In this way, the model can reproduce the high and increasing level of saving since the mid-nineties. Nonetheless the increase in household saving, which took place during the eighties, may not be explained by the life-cycle hypothesis.

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    Bibliographic Info

    Article provided by Elsevier in its journal China Economic Review.

    Volume (Year): 22 (2011)
    Issue (Month): 1 (March)
    Pages: 108-120

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    Handle: RePEc:eee:chieco:v:22:y:2011:i:1:p:108-120

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    Web page: http://www.elsevier.com/locate/chieco

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    Keywords: Life-cycle Household saving China;

    References

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    1. Chamon, Marcos & Prasad, Eswar, 2007. "Why Are Saving Rates of Urban Households in China Rising?," IZA Discussion Papers 3191, Institute for the Study of Labor (IZA).
    2. Charles Yuji Horioka, 2001. "Are the Japanese Selfish, Altruistic, or Dynastic?," CIRJE F-Series CIRJE-F-134, CIRJE, Faculty of Economics, University of Tokyo.
    3. Meng, Xin, 2003. "Unemployment, consumption smoothing, and precautionary saving in urban China," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 465-485, September.
    4. LAN LU & IAN M. McDONALD, 2006. "Does China Save Too Much?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 51(03), pages 283-301.
    5. Shang-Jin Wei & Xiaobo Zhang, 2011. "The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 511 - 564.
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    Cited by:
    1. Yu, Jihai & Zhu, Guozhong, 2013. "How uncertain is household income in China," Economics Letters, Elsevier, vol. 120(1), pages 74-78.
    2. Gu, Xinhua & Tam, Pui Sun, 2013. "The saving–growth–inequality triangle in China," Economic Modelling, Elsevier, vol. 33(C), pages 850-857.

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