Academic journal article Journal of Money, Credit & Banking

The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data

Academic journal article Journal of Money, Credit & Banking

The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data

Article excerpt

CHINA HAS ATTRACTED increasing attention because it is the world's most populous nation and because it has maintained phenomenal rates of economic growth in recent years. For example, the Asian Development Bank now projects that China will attain a growth rate in excess of 9% in 2006 for the fifth consecutive year, thereby serving as the engine of growth in the Asian-Pacific region (Nihon Keizai Shimbun, evening edition of April 6, 2006, page 1).

Moreover, another reason for being interested in China is that China introduced a so-called "one-child policy" in 1979 as a way of controlling population growth. This is an interesting natural experiment that makes fertility largely exogenous and enables us to assess the impact of the age structure of the population on the household saving rate without worrying about endogeneity issues. Moreover, because the one-child policy was applied more leniently to ethnic minorities, the policy also led to substantial variations among provinces in the age structures of their populations, and this will enable us to more sharply estimate the impact of the age structure of the population on the household saving rate.

Yet another noteworthy aspect of China's economy is its high saving rate. China has had by far the highest overall saving rate in the world since at least 2000, and the saving rate has increased even further since 2000--to nearly 50% of GDP. Gross capital formation (investment) is also high in China, but because saving exceeds investment, China has been running a net saving surplus, which translates into a current account surplus, and that surplus has been growing sharply--from 1.9% of GDP in 2000 to 3.6% in 2004 and a remarkable 7.2% in 2005--even though China is investing at a staggering rate of 43-46% of GDP and even though China is still relatively poor. This has made China one of the world's largest capital exporters and has exacerbated trade frictions with the United States and other countries. Moreover, China's net saving surplus shows no signs of abating (The Economist, September 24-30, 2005, "A Survey of the World Economy," page 13). (1) Thus, it is important to understand the determinants of, and future trends in, China's saving rate, and the obvious candidates are the rapid rates of economic growth alluded to earlier and the age structure of the population, which has shown tremendous variation over time as well as over space.

In this paper, we conduct a dynamic panel analysis of the determinants of the household saving rate in China using a life cycle model and panel data on Chinese provinces for the 1995-2004 period from China's household survey.

At least two previous studies have conducted similar analyses. Kraay (2000) uses panel data on Chinese provinces from China's household survey to analyze the determinants of the saving rates of rural and urban households during the 1978-83 and 1984-89 periods and finds that, in the case of rural households, future income growth has a negative and significant impact on their saving rates, that the share of food in total consumption has a negative and significant impact on their saving rates, presumably because households closer to the subsistence level have less ability to save, and that neither the dependency ratio (proxied by the ratio of population to employment) nor future income uncertainty has a significant impact on their saving rates. However, Kraay finds that virtually none of the explanatory variables has a significant impact on the saving rates of urban households. Modigliani and Cao (2004) conduct a regression analysis of the determinants of the household saving rate using time-series data for the 1953-2000 period and find that the long-term growth rate, the reciprocal of the dependency ratio (proxied by the ratio of the employed population to the number of minors), the deviation of growth from the long-term growth rate, and inflation all have positive and significant impacts on the household saving rate. …

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