Precautionary Saving, Household Wealth And Consumption Behavior Of Urban Residents In Different Income Groups

The level of savings of Chinese residents has shown a rapid and obvious upward trend since the 1990s, and remains at a high level since then. The economy has experienced a transition from a phase of rapid growth into an intermediate-high growth, which is known as the new normal at this stage as the slowdown in economic growth since 2007.Under this new situation of economic development, economic growth driven by consumption is a healthy and sustainable development model. The government took various measures such as cut interest rates, to stimulate consumption since 1996, but the effect was not ideal. In this case, it has raised great concern in academic circles that understanding factors and influence channels of the high level of savings as well as low consumption of Chinese household.China is still in the period of economic system transition at present, in which various systems needs to be improved. In order to respond to all kinds of uncertainties in future life, residents have to exhibit prudence motivation to reduce consumption and increase their level of savings. As income is the decisive factor of consumption, the income level of residents influences the extent of reaction of the future uncertainty. After the reform and opening, the income gap of Chinese residents has widened rapidly, which has also led to significant differences between consumption behavior of the residents. In addition, as important supplements of household income, household assets and human capital can bring benefits for family, with different degrees of impact on consumption level of residents. Therefore, given the heterogeneity of income groups, testing the precautionary saving behavior and wealth effect of different income groups respectively is helpful to find out the relatively high level of savings of Chinese residents.Based on the modern consumption theory, combined with particularity of Chinese urban households’ economic behavior in the period of system transition, this paper makes qualitative and quantitative analysis of the effects of precautionary saving and household wealth on consumption behavior of urban households of different income groups from different perspectives. This dissertation consists of 7 chapters. Chapter 1 is introduction. Chapter 2 and 3 is the theoretical basis of the full text. Chapter 2 organizes the main research results of the influence of the precautionary saving theory and household wealth on the consumption of the residents while Chapter 3 discusses the applicability of precautionary saving theory in China’s national conditions. Chapter 4 to 6 is the empirical part of the whole paper, and also the focus of analysis. Based on precautionary saving theory, combined with the heterogeneity of consumer behavior of residents from different income groups, Chapter 4 tests the influences of uncertainty, liquidity constraint and consumption habit on consumption behavior of urban residents of different income groups. Chapter 5 distinguishes household assets and human capital according to the different types and nature, and tests the impact of different types of household wealth on consumption behavior of urban households respectively taken human capital and household assets as parts of household wealth. Chapter 6 integrates precautionary saving motive, household wealth and life cycle stage of household into one analytical framework, respectively examines the effect of various factors on consumption behavior of urban household of different income groups. Chapter 7 is the conclusions and policy implications.The mainly conclusions and innovations are as follows.First, based on Dynan’s precautionary saving model with the introduction of liquidity constraint and consumer habit, using survey data of national urban residents of different income groups, this paper divides urban residents of different income segments into liquidity constraints group and uncertain liquidity constraints group for the first time in accordance with the heterogeneity of liquidity constraints suffer. It provides dynamic panel data among different income groups to make an empirical analysis on precautionary saving behavior of urban households divided by income groups in a random coefficient model. The results show that the precautionary saving motive strength presents a downward trend after the first rise as income levels increase while low-income groups suffer a lot from liquidity constraints. The influence of real interest rate and habit formation on each income group is not obvious.In terms of income groups, low-income groups reduce their levels of consumption mainly due to strong liquidity constraints and uncertainties, so they show great precautionary saving motive strength. Consumption behavior of high-income groups is mainly affected by uncertainties, and their precautionary saving motive strength decreases significantly as income levels increase.Second, human capital attached to the family members is taken as a part of household wealth, and introduced into the analysis of urban household consumption behavior. The education level of the head of household is chosen as the proxy variable of education capital and household medical expense as the proxy variable of healthy capital in the quantization of human capital.Contrast analysis is applied in the empirical tests of the relationship between multiple sets of different household wealth and consumption behavior of urban household. It is found that living housing shows no obvious effect on household consumption while other housing has a significant role in promoting consumption with obvious wealth effect. Financial assets have a significant role in promoting consumption. Although the share of productive fixed assets in urban households is relatively low, its wealth effect is apparent. Moreover, human capital has a significant positive impact on household consumption levels with households of higher education levels tend to consume more. Effect of health capital on consumption is more stable compared to that of education capital. In addition, families with unmarried children significantly improve the level of household consumption, which is mainly from household income rather than wealth effect of housing assets.Third, this paper integrates uncertainty, household wealth and life cycle stage of household into a unified analytical framework, and makes a comprehensive test on the effect of those factors on saving rate of urban household of different income groups using robust OLS estimation with microdata of urban household divided into different income groups. The results indicate that consumption and saving behavior of urban household in different income groups have some differences, especially for low-income families.To be more specific, the impact of income and expenditure uncertainty suffered by low-income households on their saving rate goes in the opposite direction of that of other three income groups. Income and family size have a greater positive effect on saving rate of low-income households, while expenditure on education and health care leads to a dramatic decrease to saving rate of those families. Saving rate of low-income families presents a very different pattern from others by showing a fluctuating downward trend with the age of household head. In the case of medium-and-low-income households, influence on their saving rate affected by both income and consumption uncertainty is roughly equal. Income and expenditure for education and health care has a strong negative effect on the saving rate, with effect of education spending stronger. Their saving rate shows a roughly U-shape structure as aging of household head. As for medium-and-high-income families, the saving rate is affected by the positive impact of income uncertainty, which is greater than the negative impact of expenditure uncertainty. Household asset and family size have a significant effect on the consumption of medium-and-high-income families. Unlike low-income households, their saving rate continues to rise after falling with the age of the househould head. Negative effect of spending uncertainty has greater weight than positive effect of income uncertainty on the saving rate of high-income families. Income and assets play a significant role in promoting household savings rate. Its pattern of saving rate of household in life cycle is similar to that of medium-and-high-income households but smoother.Based on the above analysis, the policy implications of this dissertation mainly include the following five aspects. First of all, stabilize income expectation of residents and environment for employment. The expected impact of uncertainty generated during the system transition period on consumption behavior of households is great, resulting in a significantly reduce of consumption level of households. Second, income level needs to be increased gradually and income gap needs to be reasonably narrowed with the improvement of income distribution mechanism. To improving resident’s income, especially for the low-income groups, is conductive to release the consumption potential of urban residents and improve their quality of life. To perfect the security mechanism of low-income groups and narrow the gap between the rich and the poor plays an important role in promoting consumption and reducing the level of household savings. Third, the government public spending on education, pensions and health care increase, improvement of the education system and the pension system together with the establishment of a broad coverage of medical insurance system is expected to help reduce the expectation of household spending in education and health care, especially for the low-income households. Fourth, to stabilize housing prices can motivate residents to form a stable expectation of housing prices. Soaring housing prices or big price fluctuations will have an impact on the expectation of buying a house, forcing them to cut their expenses and show more cautious consumer behavior. Therefore, adjustment supply of housing according to the real estate market supply and demand structure and stable housing prices can be helpful to improve the level of consumption of residents. Fifth, sound the pension system while reduce pension costs and spending expectation to the elderly. To accelerate the reform of the pension insurance system and the establishment of a comprehensive and powerful guarantee pension insurance system as well as improve the expectated retirement income level of resident could reduce the level of household savings in old age, and to a certain extent, stimulate consumption.