Household savings in China

The domestic saving rate in China is the highest in the world and it surpasses the investment share in GDP, which is also very high by international standards. This excessive saving results in a large current account surplus. Understanding why the Chinese save so much is a central issue in the debate on global imbalances. The goal of our paper is to analyse empirically Chinese household saving behaviour taking into account the disparities within the country, at the provincial level and between rural and urban households. We first show that, notwithstanding the rising contribution of government and firms to national savings the real peculiarity lies with Chinese families. We move from Modigliani and Cao's (2004) attempt to explain rising personal saving in China within the life cycle hypothesis and show how a more careful analysis indicates that life-cycle determinants do not suffice, especially in the most recent period. Once we consider regional differences and distinguish urban and rural households using provincial-level data, it becomes clear that additional explanations are needed and that precautionary motives and liquidity constraints are playing an important role. Our results suggest that in order to reduce the propensity to save of Chinese households it is necessary to improve social services provision and to facilitate the access to credit.