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

Author

Listed:
  • Chi-Chur Chao

    () (The Chinese University of Hong Kong [Hong Kong])

  • Jean-Pierre Laffargue

    () (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

  • Eden S. H. Yu

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 lifecycle 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.

Suggested Citation

  • Chi-Chur Chao & Jean-Pierre Laffargue & Eden S. H. Yu, 2011. "The Chinese saving puzzle and the life-cycle hypothesis: A revaluation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00645288, HAL.
  • Handle: RePEc:hal:cesptp:hal-00645288
    DOI: 10.1016/j.chieco.2010.09.004
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00645288
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    References listed on IDEAS

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    1. Charles Yuji Horioka, 2002. "Are the Japanese Selfish, Altruistic or Dynastic?," The Japanese Economic Review, Japanese Economic Association, vol. 53(1), pages 26-54.
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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. Samuel Cudré, 2014. "Capital’s long march west: saving and investment frictions in Chinese regions," ECON - Working Papers 161, Department of Economics - University of Zurich.
    3. Steven Lugauer & Jinlan Ni & Zhichao Yin, 2014. "Micro-Data Evidence on Family Size and Chinese Saving Rates," Working Papers 023, University of Notre Dame, Department of Economics, revised Jun 2014.
    4. Curtis, Chadwick C. & Lugauer, Steven & Mark, Nelson C., 2017. "Demographics and aggregate household saving in Japan, China, and India," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 175-191.
    5. van Treeck, Till. & Sturn, Simon., 2012. "Income inequality as a cause of the Great Recession? : A survey of current debates," ILO Working Papers 994709343402676, International Labour Organization.
    6. 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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    Keywords

    Household saving; China; Life-cycle;

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