A Quantitative Research On Precautionary Saving Behavior Of Chinese Urban And Rural Residents During Economic Transition Period

Since China's economic transition, particularly in the nineties of the twentieth century, Chinese urban and rural residents'savings rate has kept rising, coupled with declining consumer demand. This situation affects not only our country economic healthy development, but also has a worsening trend.Why do Chinese urban and rural residents save during the transition period? Why do they raise their saving constantly? This seems to be a commonplace problem, but in fact both theoretical development and economic practice require us to continue its study. Learn from the western precautionary savings theory, this paper approaches a quantitative research on Chinese urban and rural residents'precautionary saving behavior during the economic transition period which attempts to answer the above two questions.The western economic theory grew out of the mature market economy system and emphasized on the interpretation of the problems in regulated market, while China is experiencing a large-scale institutional transformation from planned economy to free market which is the first time in history. China's many economic problems have their own specificity. Therefore, this article follows this line of research. First, understanding the western precautionary saving theory's boundary conditions and scope of application. Second, inspecting China economic reality in economic transition period and analyzing its breakthrough or violation to the assumptions of western precautionary saving theory. Third, according to China's reality, building Chinese precautionary savings behavior theory and analytical framework. Forth, selecting the data for empirical test. Fifth, summing up the conclusions and give recommendations. Specific study content of the paper is as follows.The first chapter is the introduction. This section discusses the research purpose and significance and shows the study status of precautionary saving theory at home and abroad. It also sum up the basic method of this paper's theoretical and empirical research and set out the main content and innovations.Chapterâ…¡is an overview of western precautionary saving theory and research methods. This chapter describes the development process, basic content, major achievements, and essence of the theory of western precautionary saving theory in detail, and summarizes the four methods of quantitative study, compares their advantages and disadvantages, in order to laid the foundation for future research.Chapter III inspects the applicability of western precautionary savings theory in China. This chapter begins with a detailed study of the explicit and implicit assumptions of western precautionary savings theory, and then tests whether China's economic realities breakthrough or deviate from these assumptions. It is found that western classical theory of precautionary savings is carried out under inter-temporal optimum analytical framework. Its basic assumptions are that consumers are forward-looking; they make rational expectations for future, and only obtain utility from current and future consumption. Their future income is uncertain and they seek to maximize a lifetime utility through make proper current consumption choices. In addition to these explicit assumptions, there are two implicit assumptions which are the system certainty and price certainty assumptions. These explicit and implicit assumptions together constitute the boundary of western precautionary saving theory. Facts have proved that the reality of China in economic transition period has already broken through the boundaries of the western precautionary saving theory. First, for China's urban and rural residents, there exist a significant impact of past consumption on their utility. Second, during the transition period, China's urban and rural residents face a systematic uncertainty. Third, price certainty assumption no longer holds, etc. The three aspects means that during the transition period, precautionary savings behavior of Chinese urban and rural residents is more complex than the western theory in intrinsic characteristics and external environment. In line with China's reality, we need to build precautionary savings behavior theory of Chinese urban and rural residents.Chapter IV builds theory model and analysis framework for China's urban and rural residents'precautionary savings behavior during the economic transition period. This chapter first analyzes the great changes of China's urban and rural residents' consumption/saving behavior compared with westerners under the standard model of inter-temporal optimal consumption/savings behavior, caused by the above-mentioned breakthroughs to the three assumptions. First, China's urban and rural residents during economic transition period is not only precautionary savers, but also savers of habit formation. His utility function, not like the westerners under the standard theory of precautionary savings, can not be separated inter-temporarily. Compared with simple precautionary savings, they are do not like the volatility of consumption, so they behave more cautiously. Second, the uncertainty of the system causes Chinese urban and rural residents feel subjective uncertainty which is far more than the real uncertainty, therefore they act overly cautious. The uncertainty of the system produced a precautionary savings effect. Third, during economic transition period, Chinese urban and rural residents face rigid expenditure such as health care, education, housing and so on which prices have been rising. Their rising prices had two effects: incremental effects and stock effects. Where incremental effect is due to health care, education, housing and other expenses are rigid and can not be reduced, so their rising prices affects consumers the same as receive warning of decreasing income, which is equivalent to a income uncertainty and causes precautionary savings. In this paper, the above effect is called the incremental effect of rigid expenditure's rising price. At the same time, with prices rising of health care, education and housing, the total amount of spending is also rising, if residents expect a large one-time expenditures which can not be reduced, households will in advance put the large one-time expenditure by part in each life-time period and do precautionary saving. This effect is called the stock effect of rigid expenditure's rising price. Different with consumers under the standard model of inter-temporal optimal, Chinese residents do not only allocate resource, but also expenditures inter-temporally. Incremental effects and stock effects do not exist in west standard model of precautionary savings, but play an important role in the precautionary savings behavior of Chinese residents, and the stock effect makes the role of liquidity constraints changed. The extent of liquidity constraints will affect the amount of savings in every period under the premise that future revenues is partly determined. According to the above analysis, this article introduces habit and systematic uncertainty in common relative risk aversion utility function (CRRA), builds the utility function of Chinese urban and rural residents during economic transition period, and then consider the incremental effect and stock effect of rigidity expenditure's rising prices, establish the assets evolution equation and income uncertainty expressions, finally forms a inter-optimal precautionary savings behavior theory model of China's urban and rural residents during the economic transition period.Unfortunately, after the establishment of the theoretical mode for precautionary savings behavior of Chinese residents, we are unable to obtain a precautionary savings behavior equation of Chinese residents which can be used for empirical tests, because the existing mathematical techniques can not achieve a solution of the model. Therefore, chapter IV then builds an analytical framework on the basis of the above-mentioned theoretical model, combined with Carroll's buffer stock theory. In this analytical framework, wealth income ratio is used as a dependent variable, while income uncertainty, liquidity constraints, the system uncertainty, habit formation, rising price of education, health care, housing and other rigid spending, a total of above seven kinds of factor are used as independent variables. It implies that during the transition period, the precautionary saving behavior mechanism of Chinese urban and rural residents mainly involves two aspects. First, during the economic transition period, Chinese urban and rural residents have precautionary savings goals, It is not only due to the uncertain future income but also rooting in the habit formation, the system uncertainty, the rising prices of health care and education etc. and the liquidity constraints, which allowing the Chinese people saving goals far beyond that of the standard Western precautionary savings theoretical model. This paper argues that it is the origin of Chinese urban and rural residents high saving in transition period. Second, The precautionary savings target of Chinese residents continually increases. Chinese people' precautionary saving behavior engages in a dynamic adjustment around the goal of increasing savings with a Carroll-style alternative between caution and impatient. This article indicates that it is such a dynamic adjustment mechanism that lead to Chinese urban and rural residents'saving rate rising constantly.Chapter V and VI is the part of the empirical studies. Using the analytical framework established in the fourth chapter, they analyze respectively Chinese urban residents and rural residents'precautionary savings behavior. Chapter V include three parts. They are the static factor analysis and dynamic adjustment mechanism test of precautionary saving behavior of Chinese urban residents as well as the empirical study on precautionary saving behavior of Chinese urban residents in different income levels. Chapter VI include the static factor analysis and the dynamic adjustment mechanism test for Chinese rural residents precautionary saving behavior.The static factors empirical analysis for Chinese urban residents and rural residents precautionary saving behavior both adopt the Panel Data fixed cross-sectional effect model. Both execute a Panel Data unit root test, a overall estimates, a sub-estimates, a robustness testing as well as a precautionary saving importance estimation. Robustness tests are executed through introducing two control variables into models which are economic growth rate and the demographic dividend. The estimate method of precautionary saving importance, however, is borrowed from Carroll's idea. During the estimation, it keeps other fators constant and leaves one of factors increasing or decreasing a percentage, for example ten percent. And then it calculates change value of household desposit money of Chinese urban and rural residents in the base of the established each stage model above. Chapter V and VI estimated separately change value of household deposit money of Chinese urban and rural residents when each factor decreased or increased by ten percent, twenty percent and thirty percent seperately as well as when they change ten percent, twenty percent and thirty percent together.The dynamic adjustment mechanism's empirical tests of precautionary savings behavior of Chinese urban and rural residents both are based on a theoretical model which is deduced in chapter V. It includes two parts. The first part is short-term dynamic adjustment around the wealth goal of the prior period with carroll-style. The second part is long term dynamic adjustment which residents continually increase their wealth goal. Through empirical analysis, if the effect of the first part is significant, resident's short-term dynamic adjustment behavior do exist. And if the second part's variable coefficients estimated results are significant, then Chinese people's wealth target change exactly. If each variable eatimate value is positive, we can judge the wealth target is increasing, residents's long-term dynamic adjustment behavior do exist. The adjustment speed can be calculated through the coefficient of the lag dependent variable. According to this theoretical model of dynamic adjustment, Chapter V and VI establish a dynamic linear Panel Data model to do the empirical test for dynaic adjustment mmechanism of precautionary saving behavior of Chinese urban and rural residents.The empirical research on precautionary saving behavior of Chinese urban residents in different income levels are carried on a total capacity of 2983 panel data samples. This chapter research the precautionary saving behavior of China's urban residents in low, medium and high income levels on the economic transition period respectively. Since the data constraints, this section studies the impact of income uncertainty caused by unemployment, as well as the rising education price and the rising health care price, on precautionary saving behavior of different income level urban residents. While the uncertainty system and liquidity constraints as well as the rising regional housing price are not yet be considered due to their corresponding proxy variable can not be obtain. In addition, two control variables, which are bandwagon effect and income gap, are added into the model.Chapter V and VI construct thirty-four models altogether. They obtain a wealth of estimation results and fully verify the theoretical point of view claimed in the fourth chapter. First, precautionary saving is the main reason of high saving of Chinese urban and rural residents in the transition period. Income uncertainty, liquidity constraints, institutional uncertainty, habit formation, education, health care and housing prices are all important reasons which result in precautionary savings of Chinese urban residents during the transition period. However, the reasons of precautionary savings of Chinese rural residents in transition period are mainly due to income uncertainty, habit formation as well as education and health care prices rising. The system uncertainty and housing prices have positive effects on precautionary saving of Chinese rural residents, but they are not significant statistically. Due to data limits, the impact of liquidity constraints to saving of Chinese rural residents during the transition period has not been analysed effectively. It can only be improved in the future. Second, during the transition period, the impact of income uncertainty and other factors to precautionary saving of Chinese urban and rural residents have structural changes. On the one hand the significance of these factors changes with time, on the other hand the size and sequence of coefficient estimation are changed. Third, the estimation results of precautionary saving importance indicate that precautionary savings of Chinese urban and rural residents are important, but in recent years, its growth is slowing. However, the research show that Chinese rural residents precautionary saving is accelerate. Forth, urban and rural residents in China do exist the short-term dynamic adjustment behavior resulting from the mutual substitution between Carroll-style non-patience and cautious around the prior saving goal. There also conduct a long-term dynamic adjustment significant. Adjustment speed of Chinese urban residents was 0.59 while China's rural residents is 0.55. Both adjustment speed are fast. This dynamic adjustment mechanism makes household saving rate of Chinese urban and rural continue rising in the economic transition period. Fifth, precautionary saving behavior of Chinese urban residents is different in low, middle and high income grade. From the year of 1995 to 2001, it is the price of Education and health care that produced significant positive impact to the three income-grade precautionary savings. After the year of 2002, however, it is the education price and health care price and spending habits that make a significant impact to the middle-income grade and low-income grade.Chapterâ…¦sums up this article, and then it makes a brief analysis of what are essential causes behind several factors resulting in the precautionary saving. It specially points out that the rising education price and health care price of Chinese urban and rural residents, as well as the continually rising housing price of Chinese urban residents are owing to the imbalance between supply and demand of these products. It also points out that the low price elasticity, expenditure rigidity, and supply constraints are the root causes of the imbalance between these supply and demand. The article concludes with recommendations.