Alex's China & the World Economy Part A: Housing Sector I. Explaining the high saving rates in China - 2. The role of rising housing, education, and health expenditures Flashcards
(6 cards)
Which source is this whole section based on?
**Chamon, M.D. and Prasad, E.S. (2010). Why are saving rates of urban households in
China rising? American Economic Journal: Macroeconomics, 2 (1), 93-130
Introduce the role of rising housing, education, and health expenditures on explaining high savings rates in China
Chinese households save a lot, and their saving rates have increased in recent years even though
income was growing rapidly, and interest rates on bank deposits were low.
This paper is the first to try and explain this phenomenon using household-level data over a long
time period.
It proposes rising housing, health and education expenses as possible explanations.
1990: only 17% of Chinese households owned their homes
2005: 86%
% of health and education in total consumption expenditure:
1995: 2%
2005: 14%
Describe the dataset used in the study for this section
Urban Household Surveys conducted by the National Bureau of Statistics.
Period: 1990-2005; 10 provinces.
Saving rate= (disposable income – consumption)/disposable income
Top 2 deciles of income distribution accounts for over half of total savings
State the stylized facts of findings from this paper
Substantial increase of both average disposable income and consumption over the period.
Consumption tracks income -> no evidence of consumption smoothing.
Hump shaped pattern of income in early period, followed by a profile with two peaks (young and
middle-aged).
Contrary to what is observed in most other countries, it is younger and older households who
have the highest saving rates in China. In other words, an interesting characteristic of Chinese
households’ saving behaviour is the U-shaped pattern of saving. This contradicts the predictions
of the life cycle model/permanent income hypothesis (see graph above), which posit that it is the
middle-aged people who save most, whilst the young and old respectively borrow and dissave.
Young households save substantially. Then saving rates decline reaching a trough when
household heads are in their 40s. After that, savings rise and remain high even among much older
households.
Describe & explain the potential explanations for the findings for this paper?
SHIFT IN SOCIAL EXPENDITURE
Substantial increase in health and education expenditure.
Education expenditures peak at 45 low saving rate for that group.
Health expenditures rise with age high saving rate for older groups.
SHIFT IN SOCIAL EXPENDITURE
1997 pension reform
Prior to the reform, replacement ratio of pensions was 75%-80% relative to the average wage.
After the reform: replacement rate: 60%.
This can explain higher savings of older generations.
HOUSING
1990: only 17% of Chinese households owned their homes
2005: 86%
In the past, housing was provided to employees by state-owned enterprises.
Housing reform in last decade: houses sold to workers, typically at below market rates.
Housing purchases may have explained the rise in saving rates in the last decade and a half.
Saving is not likely to slow down even now that most households own a house, as people want
to upgrade their living conditions.
EFFECTS OF STATE ENTERPRISE RESTRUCTURING
Transition to market economy erosion in the share of employment accounted for by SOEs and
in the share of the private sector.
As SOE employment is typically more stable, this increases uncertainty increase in
precautionary saving.
What are the conclusions from this paper?
One possible way to reduce the saving rate of Chinese households: financial market development
Possibility to borrow against future income
Better opportunities for portfolio diversification
Better rates of return on saving
This, together with improvements in the social safety net and an increase in the public provision of
education could reduce saving rates and help rebalancing the country’s growth towards
consumption
