Academic journal article Federal Reserve Bank of St. Louis Review

Can Rising Housing Prices Explain China's High Household Saving Rate?

Academic journal article Federal Reserve Bank of St. Louis Review

Can Rising Housing Prices Explain China's High Household Saving Rate?

Article excerpt

China's average household saving rate is one of the highest in the world. One popular view attributes the high saving rate to fast-rising housing prices and other living costs in China. This article uses simple economic logic to show that rising housing prices and living costs per se cannot explain China's persistently high household saving rate. Although borrowing constraints and demographic changes can help translate housing prices to the aggregate saving rate, quantitative simulations using Chinese data on household income, housing prices, and demographics indicate that rising mortgage costs contribute at most 5 percentage points to the Chinese aggregate household saving rate, given the down payment structure of China's mortgage markets. (JEL D14, D91, E21, I31, R21)

Federal Reserve Bank of St. Louis Review, March/April 2011, 93(2), pp. 67-87.


According to Friedman's (1957) permanent income hypothesis, rational consumers should save less when their income is growing fast because the need to save is reduced when people expect to be richer in the future than they are today. However, the reality in China is the opposite: China, as one of the fastest-growing economies, has an average household saving rate among the highest in the world.

"Aggregate household saving rate" is defined in this paper as the ratio of net changes in aggregate household financial wealth (e.g., bank deposits, government bonds, and stocks) to aggregate household disposable income. (1) Figure 1 shows that the average Chinese household saving rate was around 2 percent in 1978 (the first year of economic reform) and rose rapidly thereafter. The saving rate stabilized at around 20 to 25 percent after the early 1990s and peaked in 1994 and 2003 with values of 27 percent and 26 percent, respectively.

Such a persistently high aggregate household saving rate is extraordinary compared with developed nations such as the United States, which has had an average household saving rate of 2 percent since the early 1990s. However, the high Chinese saving rate is not unique. Figure 2 shows the household saving rates for Japan and Korea in the postwar period. Both economies had a high household saving rate--above 20 percent--during their rapid economic growth periods (Japan in the mid-1970s and Korea from 1987 to 1994). (2)


Why the Japanese saved so much during the rapid stage of economic development is still an open question (see, e.g., Hayashi, 1986). Hence, it is not surprising that the high Chinese saving rate appears puzzling, especially given China's rapid income growth.

The high saving rate of Chinese households not only poses a challenge to economic theory, but also has become a source of recent political controversy and trade disputes with the United States and its other major trading partners. For example, the former Chairman of the Federal Reserve, Alan Greenspan, alleged that the high Chinese saving rate was likely the culprit of the recent American subprime mortgage crisis because it caused low interest rates in the world financial markets, which pushed Americans toward excessive consumption and housing finance (Greenspan, 2009). Current Chairman Ben Bernanke (2005) also argued that the "global saving glut" is partly responsible for the increase in the U.S. current account deficit.

What are the causes of the high Chinese saving rate? A growing segment of the macro literature has focused on understanding this phenomenon. Many factors have been proposed as possible causes, including rapid income growth, aging population, lack of social safety nets and unemployment insurance, precautionary saving motives, cultural tradition of thrift, high costs of education and health care, and rising housing prices, among others. (3) In particular, Wei and Zhang (2009) propose that the unbalanced sex ratio in China leads to competitive saving behavior in the marriage markets, which may significantly raise the aggregate household saving rate because men with adequate wealth accumulation (e. …

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