China's Excess Sensitivity Of Consumption

In recent years, many scholars study Chinese consumer behavior using the frame of western consumption theory. The empirical studies have observed coefficients of excess sensitivity are significantly greater than zero, which means the consumption of Chinese residents show features of "excessive sensitivity": consumption and current income have a significant positive correlation, consumption depends more on current income.Chinese consumer demand power has been weak and consumption is closely related to such excess sensitivity of consumption. The observed excess sensitivity means consumers could not arrange their own consumption rationally and their consumption path basically follow Keynes's absolute income hypothesis. Since lack of long-term perspective consumers, consumption rate is well below the rate which implied by LC-PIH. As consumption accounts for a large part of economic performance, it will be a constraint for China's economic development and potential risks to reduce the domestic economy's ability if consumption demand remains weak.Based on the above theoretical and practical background, I analyze Chinese current excess sensitivity of consumption along with our country's macro-consumption status, characteristics and consumer characteristics; I measure excess sensitivity using multivariate state space methods and annually data based on the hypothesis of permanent income andλhypothesis. In the measuring process, I introduce long-term factors and short-term factors to the state space model. Then, the introduction of behavioral economics of self-control mechanisms helps to explain China's current consumption of the excessive sensitivity of the situation. To boil down, I come to the conclusion of household consumption: the excess sensitivity of consumption coefficient is found to be highly correlated with short-term factors (high-frequency control variable) while long-term factors (low-frequency control variable) is not. our country residents are better in terms of self-control mechanism than western residents, which allows our people resist the temptation of consumption easier; meanwhile, Chinese consumption environment makes it difficult to carry out an unlimited number of dynamic game ,leaves the consumers only available to cross-term consumption, the consumption rate is therefore lower than the rate implied by long-term life cycle - permanent income. Base on the conclusions, I recommend: In order to reduce the ability of self-control, our residents need to establish a scientific and rational consumption cognitive idea; focus on high-income people to reduce endogenous transaction costs; maintain the stability of economic policy, smoothness, consistency to stimulate consumption to prevent precaution savings; focus on the promotion of China's consumer credit market and its normative development; accelerate the domestic economic growth to provide residents with easy and healthy consumption environment, then individual can maintain good expectations. In this way, residents will use their information collected to perform a number of dynamic games, so that the consumption rate will be near the life cycle - permanent income level.