“Determinants of Household Saving in China” by Eswar PRASAD
We analyze saving behavior among Chinese households using a subset of the Urban Household Surveys for the period 1990 to 2005. The household saving rate (measured as a ratio to disposable income) increased by about 10 percentage points from 1995 to 2005. Estimates of the age profile of savings show an unusual U-shaped pattern in recent years, with younger and older households having relatively high saving rates. The older working-age cohorts, who are likely to have been the most affected by market-oriented reforms, have the highest saving rates. Moreover, saving rates have increased across all demographic groups, which is puzzling given the anticipated rapid overall income growth that — in a standard life cycle/permanent income setting — should cause younger households to postpone savings. In our synthetic cohorts, consumption tends to track income closely, indicating very little consumption smoothing over the life cycle, and suggesting that alternative motives such as buffer-stock saving considerations could be more relevant. Households may also be making up for savings that were not made in the past, but are needed in China’s new economic environment. The trend increase in saving rates is consistent with expectations of a rising private burden of expenditures on housing, education and health care; this has created additional motives for savings. Moreover, there has been a large privatization of the housing stock, with purchases being financed mainly through the depletion of past savings since mortgage financing is still relatively limited. Our estimates suggest that the motive of saving for house purchases alone could account for a large proportion of the increase in saving rates over the last decade.