Research Of Chinese Household Savings Behavior

In a country’s economy, as the antithesis of consumption, savings plays a role of regulating aggregate demand. As the source of national wealth accumulation, it determines the capital stock, thereby affecting investment, economic growth and employment to a certain extent. However, compared with the rest of the world, Chinese savings rate has been kept at a high level. During 2002-2012, the household saving rate kept in a high level of 48%. High savings rate, while providing adequate capital for economic development, can lead to a series of problems i.e. the banking system risk, insufficient domestic demand and excessive dependence on exports and overcapacity. The government has focused on expanding domestic demand and adjusting consumption structure in recent years, and has carried out a series of policies to stimulate and adjust consumption, which has not received a satisfying result. Focus on the high savings rate fact, neoclassical economists put forward four theoretical explainations, including Keynes’s absolute income hypothesis, Duesenberry’s relative income hypothesis, Friedman’s permanent income hypothesis and Modigliani’s life cycle hypothesis, while this dissertation offers the fifth explaination based on behavioral economics. China is in a political, economic and cultural transition period, household savings influenced not only by external facters, such as income per capita, demographic structure, inflation etc., but by the behavioral factors of people. By proving and researching of mental accounting theory and prospect theory, this dissertation concludes that loss aversion and attitudes toward different incomes are also the important explainations for the phenomena of high saving rate and the consumption disparity between urban and rural areas in China.This dissertation is composed by six parts. The first chapter is the introduction of research background, research core topics, research significance and the summaries of research innovations.The second chapter is the literature review. First, the dissertation reviews the existing saving theories and the feasibility in China, and then classifies the literatures by external factors and behavioral factors of household savings, pointing out the inadequacy of existing researches. Respectively, the external factors include economic growth, population structure, social insurance and inflation, etc.; the behavioral factors include the prospect theory and mental accounting theory.The third chapter gives basic analysis of household savings issues in order to examine the influence of traditional external factors. On the basis of re-estimating household savings rate during 1953-2012, a large sample co-integration is made with dependency ratio, per capita income and income increasing rate. The results show that there is a long-term stable co-integration relationship between household savings rate and long-term growth rate, change of elderly dependency ratio, social security expenditure, change of children dependency ratio and inflation. Furthermore, we establish an error correction model to analyze the short-term fluctuations of household savings, and it shows a significant positive impact from the fluctuations of long-term growth rate on household savings rate which proves the life cycle savings model has strong applicability. Taking into account some giant revolutions in politics, economics and culture, especially in the process of planned economy turning into market economy, the data is likely to have structural changes. If so, some independent variables may have periodic variations in their impacts to household saving rate. So we divide the entire sample into two sections and make regression separately by introducing a dummy variable from which we find that the elderly dependency ratio and social security have structural changes in 1987.Chapter four brings the mental accounting theory from behavior finance into the analysis of Chinese household savings. Both of the macroscopic and microscopic data examinations are undertaken within the analysis to study the mental features of urban and rural residents, and then the difference between urban and rural areas in the perspective of income sources. The incomes are classified by income resource to wage income, operating income, property income and transfer income. The analysis of mental account is undertaken through macroscopic validation for the samples in 31 cities and villages from 2002 to 2012. In addition, the MPS among different income resource is validated by GMM. The results show that the impacts of transfer income on household savings are not significant within both urban and rural samples. The MPS for the other three types of income are:property income> wage income> operating income. Besides, the rural residents have higher MPS. Based on the previous analysis, the household income is divided into three sub-accounts which are work-related income, unconventional investment income and operating income. The consuming accounts are divided into four sub-accounts which are the living necessities, family investment and personal development, emotional support and entertainment cost. The savings accounts are divided into safety savings and risk savings accounts. The microscopic validation is undertaken using the national baseline database from China Health and Retirement Longitudinal Survey (CHARLS) in 2011. The result also supports the theory of mental account and shows that the urban residents have the highest MPC on living necessities account, while the rural residents have higher MPC on family investment and personal development. Furthermore, the analysis include element like gender, age, education level, marital status, whether or not covered by medical insurance, the number of children, the degree of subjective health, living standards and income levels. Logit models were established for indicating the mental characters of urban and rural residents. The study finds that each of the above variables has different degrees of impact on savings and consumption. The difference in MPS between urban and rural residents and the changing trends of various sources of income, to some extent, offer reasonable explanations of the consumption gap between urban and rural residents.In the fifth chapter, we introduce prospect theory into savings and consumption analysis, and undertake macroscopic and microscopic examination. Besides, we explain high savings and consumption gap between urban and rural areas in the perspective of income fluctuation. Based on the life cycle-permanent income hypothesis, introducing positive and negative variations of income, we establish the testable econometric model of loss aversion. Using interprovincial panel data of Chinese urban and rural residents, from Q1 of 2005 to Q4 of 2012 and Q1 of 2003 to Q4 of 2010 respectively, and the CHARLS data of 2011 and 2013are used to make the macroscopic and microscopic examination of the prospect theory. Then, results do not support for the life cycle-permanent income hypothesis as current income changes have a significant impact on consumption. The result implies consumption has a much more reflection when individuals face a decrease in current income, supporting the prospect theory. We creatively introduce different income sources which belong to mental account into the prospect theory model, analyzing the difference in the extent of consumptive loss aversion when there are positive and negative variations of different income sources. It turns out that urban residents show apparent loss aversion in wage income while rural residents show much loss aversion in transfer income. The loss aversion to negative income change and the difference in the degrees of loss aversion, to some extent, can explain not only the rapid increase household saving rate but also the phenomena of consumption disparity.The sixth chapter indicates the research conclusions and the insufficiencies of this paper; in the meantime, we try to make some proposals to policy. Not only affected by the external factors, the high household saving phenomena is also influenced by residents’ behavioral factors such as loss aversion and mental account which have impacts on both household savings and consumptions. On the basis of stabilized household income, it is necessary to pay attention to the differences in behavior characteristics between urban and rural residents and make policies with pertinence in order to promote consumption and narrow the gap between urban and rural consumption effectively.The innovations of this dissertation can be described as:(1) The prospect theory and mental accounting theory are introduced into the analysis of household saving issues and the examination of psychological influences to household saving behaviors. It is concluded that the differences of loss aversion and marginal propensity between urban and rural areas can explain high saving phenomena and consumption disparity in the perspectives of income fluctuation and income sources.(2) By using the interprovincial panel data and the newest national baseline survey data from China health and retirement survey (CHARLS), make theoretical test of prospect theory and mental accounting theory thoroughly, theories have credible applicability in China at both macroscopic and microscopic level.(3) By establishing Logit models, this dissertation analyzes the differences between the mental characteristics of the urban and rural residents’ consumer behavior. As a conclusion, the influence of sex, age, education level, marital status, whether to have health insurance, number of children, subjective well-being, subjective life level and income level are different.(4) By bringing mental account into prospect theory, this dissertation does research on the difference of loss aversion among various income sources. As a result, urban dwellers express obvious loss aversion to wage income, while rural dwellers detest the loss of transferability income.