Empirical analysis of the effect of financial restraint policy on Chinese residents’ consumption

Purpose - The purpose of this paper is to test whether the policies of China’s financial restraint have an inhibitory effect on the consumption of residents. Design/methodology/approach - This study used the principal component analysis for constructing a financial restraint index and also used empirical methodology. Findings - The authors found that financial restraint policies create rent opportunities for banking sector and production sector, which further creates the rent opportunities for the household sector. Such transfer of rent and redistribution will have an inhibitory effect on residents’ consumption. The financial restraint policies directly and indirectly inhibit the growth of residents’ income; and in theory, the purpose of financial restraint policy is to promote economic growth, thus promoting residents’ consumption. Thus, the financial restraint policies impacting the residents’ consumption are non-linear and test the threshold effect of financial restraints on the residents’ consumption of China. Research limitations/implications - This paper’s theoretical contribution includes: increasing the connotation of financial restraint in the policies of stock market and foreign exchange controls, and further developing the financial restraint theory; and exploring the inhibitory effect on the consumption of residents from the perspective of financial restraints to enrich the connotation of the consumption theory. Originality/value - The findings in this study can help the financial authorities to gradually relax the financial restraint policies to encourage residents’ consumption.