Household Wealth,Consumption Heterogeneity And Releasing Of Potential Consumption In China

Since the reform and opening-up, China has witnessed a rapid economic growth at an annual growth rate of 9.9 percent on average, creating a "Chinese miracle" Along with the remarkable economic development in China, the drawbacks of the traditional development mode came out on and on, long-term institutional and structural contradictions increasingly severe, and the investment-oriented growth pattern no longer sustainable. Currently under the backdrop of the "new normal" Chinese economy, the only way to future economic growth in China is to strengthen structural reform of the supply front and to boost aggragate demand moderately. It has been a common concern for the academia and the decision makers to enhance the ratio of household consumption to GDP, to optimize the structural proportion of aggragate demand, to expand economic supply and demand in a balanced way and to explore a path of sustainable economic growth that is more equitable and will be shared by all.For over a decade, the ratio of household consumption to GDP in China has dipped to a low at 37.1 percent in 2012, a low level whether compared with world major development economics represented by G8 or "emerging" economics represented by the "BRICS". In other words, the private consumption in China hasn’t played the potential role it should have played in the economy growth process in recent years from a global perspective which indicates that the private consumption in China has been suppressed under Chinese specific institutional system environment backgrouond during the growth process. It is of great significance both in theory and in practice to explore whether the situation is related with the traditional economy growth path and the specific institutional environment or the heterogeneity of residents.The primary national income distribution directly affects the current flow of household wealth. As a result, on the one hand, it would directly affect the private consumption. On the other hand, the current flow of wealth would converge into the stock of wealth which would affect the private consumption again. At the same time, wealth stocks can generate property income which would affect the current flow of the wealth in return. As a result, the change of the primary income distribution is connected to that of household wealth. Both of them would affect the private consumption via a variety of channels. The current wealth stock would affect the private consumption heterogeneity directly, while the primary income distribution would have a dynamic effect on the private consumption heterogeneity. However, in current stage, the change of the primary income distribution is closely related to the specific economic growth mode. As a result, the releasing of potential private consumption must be restricted by the specific economic growth mode and the the specific economic growth target which means when we study on the releasing of potential private consumption, the constrains from the realistic economy growth targets must be considered. According to the logic above, how does the primary income distribution affect the change of the private wealth? How does household wealth affect the private consumption heterogeneity during current stage in China? How large would the primary income distribution and the household wealth affect the releasing of private consumption in China? Whether the releasing of private consumption is closely related to the specific economy growth path and target inherently? All of these questions above are what we try to solve in this thesis.In current research, no matter the Certainty Equivalence Model based on traditional life cycle model or Precautionary Theory, Liquidity Constraints Hypothesis, Buffer Stock Models and of Consumer Behavioral Models based on the break of the certainty equivalence, all abandon the traditional Keynesian consumption function which is only concerned with income flows and turn to concentrate on the impact of the life cycle household wealth. What should not be overlooked is that when the models above expand the factors affecting the private consumption from the current income flow to the life cycle wealth, they all suppose that the income flow and the wealth stock have the homogeneous effect on the private consumption and there is no cost when the income flow and the wealth stock change into each other. However, recent research indicates that, different kinds of assets have to face different kinds of cost when they change into cash, which would cause seriously consumption heterogeneity.This thesis concentrates on the consumption heterogeneity and built a theoretical framework based on current research to explore the related problems. In theory, this thesis builds an analytical framework based on modern consumption theory, especially the two-asset life cycle model, and Post Keynesian economy growth model. In empirical, this thesis uses single equation estimation, time series analysis, Difference-in-Difference with matching, quantile regression with both micro and macro data to study the related problems and try to get the most robust result. On conclusion, the paper studies the mechanism of how household wealth affect the private consumption from both the perspective of the macro primary income distribution and the micro household asset structure and the perspective of dynamic and static. Then it studies how large would the private consumption heterogeneity affect on the releasing of the potential private consumption given the specifi economy growth path and target. There are eight chapters in this thesis. Chapter 1 is the introduction. Chapter 2 is the literature review. Chapter 3 analyses the situation of the change of the household wealth and private consumption. Chapter 4 analyses the relationship between the consumption heterogeneity and the effectiveness of fiscal policies, which takes the Chinese Government’s Consumer Electronics Subsidy Program as example. Chapter 5 analyses the relationship between the change of household wealth and the releasing of private consumption from the macro perspective. Chapter 6 analyses the relationship between the household wealth and the propensity to consume from the micro perspective. Chapter 7 analyses the relationship between the consumption heterogeneity and the building of new impetus to economy growth. Chapter 8 is the conclusion and policy suggestions.The main conclusions and innovationas are as follows.First, based on Bhaduri-Marglin model, this thesis establishes an economic model concerning surplus labor supply and credit constraints in Chinese economy to analyze the relationship between the change of functional income, economy growth and transformation in China. Credit constraints have a significant effect on the relationship between functional income distribution and economy growth. When an economy grows with credit constraints, such as China, it could change from a wage-led growth regime in classical Bhaduri-Marglin models to a profit-led growth regime in our model, and vice versa. Empirical estimation shows that if labor share improves by 1%, private consumption will improve by 0.59% and it won’t have negative effect on Chinese economy growth. As a result, if the government controlled the opportunity and strength of economic reform policies concerning functional income distribution, private consumption and investment effectively, the Chinese economy could transfer to a consumption-led growth path smoothly.Second, in this thesis, we divide household assets into two types:high liquid assets and low liquid assets and construct a double-assets consumption decision model incorporated with a simple consumption-saving decision model and Baumol-Tobin current demand model considering the transaction cost of different assets. Then it studies the effect of household asset structure on the household propensity to consume in China empirically based on CFPS data. We find that the rise of the proportion of high liquid asset is helpful to improve the household APC (Average Propensity to Consume). If the proportion of high liquid asset rises by 1 percentage, the household APC would increase by 0.11 percentages. When the proportion of high liquid asset increases, its effect on the household APC also increases. In conclusion, it’s helpful to expand private consumption demand on micro perspective by increasing the liquidity of total household assets and reducing the financial service rates. The improving of the share of high liquid asset could increase the household consumption obviously. The fast developing capital market would improve the share of high liquid asset, which is helpful to build the micro foundation of consumption growing mechanism.Third, based on classical RCK model and the latest progress of consumption heterogeneity, this thesis analyses the generation mechanism of consumption heterogeneity and its effect on economy growth path under the background of the fast growing of household wealth and the financial environment during the current stage. We find that as the result of the lag of industrial upgrading and the financial monopoly power, the two-asset financial supply structure leads to the decrease of both the household consumption expenditure and consumption rate. From the empirical based on the micro data, we find that 33.57% households in China are non-Ricardo Equivalent consumers which are different from the homogeneous consumers in traditional consumption theory. By policy simulation analysis, we find the existing of non-Ricardo Equivalent consumers have an obvious effect on the effectiveness of the government transfer policy. With the income increasing, the effect of non-Ricardo consumers would be weakened by the law of decreasing marginal propensity to consume.The policy implications for this thesis are as follows. Compared to the economic development history of main economies, as a result of the deterioration of the primary income distribution and the two-asset structure, the private consumption in China has obvious heterogeneity and doesn’t play an important role in the economy growth. Under traditional economy growth path, the deterioration of investment environment and investment effectiveness further depresses the potential consumption. We suggest that the government should try to build a long-term mechanism and co-ordinate the economic reform policies in different areas to motivate the increase of private consumption. The government should also try to improve the competition in the financial market by promoting the development of capital market to improve the diversification of assets that households could choose and decrease the share of house asset. The financial monopoly power should be restrained to reduce the overall tariff level of financial services and improve the fluidity of household wealth. At last, the government should reduce its control on economic activities, especially in the credit market, to make market mechanism play a decisive role in economic activities and improve the invstment effectiveness.