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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.

Suggested Citation

  • Chamon, Marcos & Prasad, Eswar, 2007. "Why Are Saving Rates of Urban Households in China Rising?," IZA Discussion Papers 3191, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp3191
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    More about this item

    Keywords

    borrowing constraints; financial development; precautionary savings; demographics; age and cohort profiles of savings; household savings;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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