Alex's China & the World Economy Part A: Housing Sector I. Explaining the high saving rates in China - 3. The role of uncertainty

Question 1

Which source is this whole section based on?

Answer 1

He, H., Huang, F. Liu, Z., and Zhu, D. (2014). Breaking the “iron rice bowl”
and precautionary savings: Evidence from Chinese state-owned enterprises
reform. Working Paper. Federal Reserve Bank of San Francisco Working
Paper

Question 2

Introduce this topic and paper

Answer 2

Introduction
Rapid growth in China + rising household saving rate  contradicts the permanent income
(consumption smoothing) hypothesis.
Economic reform leads to a rising uncertainty, which in turn leads to higher precautionary saving.
Difficult to measure uncertainty.
Introduction
This paper uses a natural experiment: severe layoffs in the State Owned Enterprise (SOE) sector
between 1995-2002.
In addition to losing their jobs, laid-off workers also lost associated benefits (e.g. housing,
pension, education, health care): breaking of the iron rice bowl.
Finding: precautionary saving accounted for about 30% of the total savings of SOE workers
between 1995 and 2002.

Question 3

Describe the background for the paper in this section

Answer 3

1995-96: around 50% of SOEs reported losses.
In 1997, many of the smaller and loss-making SOEs were either privatized or let go bankrupt.
Massive layoff of SOE workers between 1997 and 2002.
Increased uncertainty also for those SOE workers who did not lose their jobs.

Question 4

Describe the data and empirical strategy for the paper in this section

Answer 4

Chinese Household Income Project (CHIP).
Urban and rural households.
1995 and 2002.
Before the reform, both workers in SOEs and in GOVernment sectors had life-long employment
+ iron rice bowl.
Following the reform, only SOE workers lost the iron rice bowl.
Look at changes in saving behavior associated with the SOE reform comparing SOE and GOV
workers.
Datasets restricted to households whose head is aged 25-55 and works in either the SOE or the
GOV sector.
1995: 2977 SOE workers + 1413 GOV workers
2002: 1702 SOE workers + 1325 GOV workers

Question 5

Describe the summary statistics for this paper

Answer 5

Before the reform, GOV workers: slightly higher financial wealth (FW) and permanent income
(PI). They were also more likely to own houses.
After the reform, the FW/PI gap between the two groups widened.
Sharp rise in home ownership for both groups.
SOE workers more “pessimistic”.

Question 6

Describe the baseline specification for this paper

Answer 6

You dont need to know the equation

Question 7

State the empirical results from this paper

Answer 7

Question 8

State the additional findings from the paper in this topic

Answer 8

Question 9

Describe & explain the concept of Disentangling Permanent Income (PI) effects from precautionary saving

Answer 9

The reform may have led to expectations of declines in income.
If the rise in saving is related to this, then it reflects a desire for consumption smoothing rather
than precautionary savings.
How can the two effects be disentangled?
Estimate separate regressions for workers that expected a decline in income and workers that did
not.
Table 5 shows that for people who expected a decline in income, the
Beta1 coefficient is much higher
than in Table 4. This suggests that for SOE workers, saving is driven both by precautionary and
PI considerations.
The same does not happen for households who did not expect a drop in income.

Question 10

Describe & explain the robustness test in this paper

Answer 10

The results in table 6 show that between 1995 and 2002, the
Beta1 coefficient increased from 0.0001
to 0.088 (no asterix) for CSOEs and from 0.160 to 1.082 (asterix) for LSOEs
This suggests that workers in LSOEs had stronger precautionary saving motives than those in
CSOEs due to higher unemployment risks.

Question 11

Quickly state the other robustness tests that were used for this paper and what affect did they have on results?

Answer 11

Question 12

State the conclusion from this paper

Answer 12

Significant evidence of precautionary saving stemming from the increase in unemployment risk
for SOE workers compared to GOV workers following the reform.
This precautionary saving: 30% of the actual increase in wealth accumulation by urban SOE
households between 1995 and 2002.