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Why Are Saving Rates of Urban Households in China Rising?

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  • Chamon, Marcos

    () (International Monetary Fund)

  • Prasad, Eswar

    () (Cornell University)

Abstract

From 1995 to 2005, the average urban household saving rate in China rose by 8 percentage points, to about one quarter of disposable income. We use household-level data to explain why households are postponing consumption despite rapid income growth. Tracing cohorts over time indicates a virtual absence of consumption smoothing over the life cycle. The age profile of savings has an unusual U-shaped pattern, with saving rates being the highest among the youngest and oldest households. We find that financial underdevelopment, as reflected in constraints on borrowing and low returns on financial assets, partially accounts for this pattern. Moreover, overall saving rates have increased across all demographic groups. We argue that this can be explained by the rising private burden of expenditures on housing, education, and health care.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3191.

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Length: 50 pages
Date of creation: Nov 2007
Date of revision:
Publication status: published in: American Economic Journal: Macroeconomics, 2010, 2 (1), 93-130
Handle: RePEc:iza:izadps:dp3191

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Related research

Keywords: borrowing constraints; financial development; precautionary savings; demographics; age and cohort profiles of savings; household savings;

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References

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  1. Christina Paxson, 1995. "Saving and Growth: Evidence from Micro Data," NBER Working Papers 5301, National Bureau of Economic Research, Inc.
  2. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
  3. Franco Modigliani & Shi Larry Cao, 2004. "The Chinese Saving Puzzle and the Life-Cycle Hypothesis," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 145-170, March.
  4. Angus S. Deaton & Christina Paxson, 1994. "Saving, Growth, and Aging in Taiwan," NBER Chapters, in: Studies in the Economics of Aging, pages 331-362 National Bureau of Economic Research, Inc.
  5. Carroll, Christopher D & Rhee, Byung-Kun & Rhee, Changyong, 1994. "Are There Cultural Effects on Saving? Some Cross-Sectional Evidence," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 685-99, August.
  6. Christopher D. Carroll & David N. Weil, 1993. "Saving and growth: a reinterpretation," Working Paper Series / Economic Activity Section 140, Board of Governors of the Federal Reserve System (U.S.).
  7. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  8. Charles Yuji Horioka & Junmin Wan, 2006. "The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data," NBER Working Papers 12723, National Bureau of Economic Research, Inc.
  9. repec:att:wimass:9722 is not listed on IDEAS
  10. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
  11. Jappelli, Tullio & Pagano, Marco, 1992. "Saving, Growth and Liquidity Constraints," CEPR Discussion Papers 662, C.E.P.R. Discussion Papers.
  12. Angus Deaton & Christina Paxson, 2000. "Growth and Saving Among Individuals and Households," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 212-225, May.
  13. Eswar Prasad & Michael P. Keane, 2002. "Changes in the Structure of Earnings During the Polish Transition," IMF Working Papers 02/135, International Monetary Fund.
  14. Nicola Fuchs-Schündeln, 2008. "The Response of Household Saving to the Large Shock of German Reunification," Working Papers, Center for Retirement Research at Boston College wp2008-21, Center for Retirement Research, revised Dec 2008.
  15. Wooheon Rhee, 2004. "Habit Formation And Precautionary Saving: Evidence From The Korean Household Panel Studies," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 29(2), pages 1-19, December.
  16. Nicola Fuchs-Schundeln, 2008. "The Response of Household Saving to the Large Shock of German Reunification," American Economic Review, American Economic Association, vol. 98(5), pages 1798-1828, December.
  17. McKenzie, David J., 2006. "Precautionary saving and consumption growth in Taiwan," China Economic Review, Elsevier, vol. 17(1), pages 84-101.
  18. Meng, Xin, 2003. "Unemployment, consumption smoothing, and precautionary saving in urban China," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 465-485, September.
  19. Aart Kraay, 2000. "Household Saving in China," World Bank Economic Review, World Bank Group, vol. 14(3), pages 545-570, September.
  20. Chou, Shin-Yi & Liu, Jin-Tan & Hammitt, James K., 2003. "National Health Insurance and precautionary saving: evidence from Taiwan," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1873-1894, September.
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  1. Guest Post: The puzzle of Chinaâ??s rising household saving rate
    by Yves Smith in Naked capitalism on 2011-01-18 07:55:54
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