| This paper analyzes the determinants of FAFH expenditure for Chinese urban households paying particular attention to the impact that reforms in the social insurance system will have on this market. Existing literature in this field mainly focuses on the effects of income and household composition on FAFH expenditure. However, nobody has ever estimated whether reforms in the social insurance system, which are aimed at increasing China’s domestic consumption, will affect FAFH expenditure at all. This kind of analysis enables to shed some light on the ways in which sources of financial risk, such as sudden high medical expenditures or lack of entitlements to income in the old age, can have repercussions on FAFH expenditure. At the same time, it gives some important insights about how improvements in the social insurance system will affect the future of this market. This paper utilizes a2002dataset which comes from a survey series called Chinese Households Income Project (CHIP). The advantage of choosing this dataset is that it contains detailed information about households participation to the social insurance schemes and consent to carry out a comprehensive empirical analysis.The findings firstly confirm that the FAFH market in China will grow at a greater rate than the overall economy in the near future, as it has been found by the most recent literature in this field. Specifically, the calculations lead to the conclusion that FAFH is a luxury good for78%of the observations and a normal good for99%of the observations. In addition, income elasticity shows increasing trends for lower income groups of households, the highest peak is estimated to be close to the middle of the sample and it then shows decreasing trends for the higher income groups. The empirical analysis also reveals interesting age and student effects on FAFH expenditure. Consistently with previous studies, young households are estimated to expend more on FAFH than others. More interestingly, empirical evidence shows that students account for a large part of this effect. This finding is very important for understanding the identity of FAFH consumers in China and apparently it was ignored by previous studies. The fact that students often live in school campuses and eat at the school canteens might be the reason for their high influence on households FAFH expenditure.The most important findings however are related to the effects that the social insurance policies of the Chinese government will have on FAFH expenditure in the years to come. First, the household total contribution to the individual pension accounts has the effect of increasing FAFH consumption. The result is robust to the controls for city effects despite the high number of city dummies. The proposed reason for this fact is that households who contribute higher amounts of money to their individual pension accounts are less worried about their future income and can afford to expend more on FAFH. Accordingly, if the Chinese government achieves its goal of considerably extending the coverage of the urban pension system, FAFH consumption in China will increase as a result.Second, there is some evidence of a positive effect of the housing fund balance on FAFH consumption. Households participating in the housing fund need to save less for the future purchase of a house, thus enabling increased FAFH consumption in the present. This result is not robust to the city controls, but when household contribution to the housing fund is used as a control instead of the housing fund balance the alternative variable it is also found to have a positive effect. It follows that the increased provision of affordable housing from the Chinese government could also have a positive effect on FAFH consumption in China.Lastly, the increase in out-of-pocket medical expenditure over income explains a large reduction in FAFH consumption, especially for poor households. The suggested reason is that the timing of medical expenditure is often unknown with certainty and the expenditure it is not amortizable, this leads households in bad health condition to maintain high savings level and consume less. The influence of medical expenditure on savings level is documented by several studies. Similarly to the pension effect, this result is robust to the controls for city effects. In addition, the dummy variable controlling for household heads having no medical expenditure coverage from an insurance scheme leads to the same conclusion. Accordingly, if the Chinese government succeeds in extending state payments of medical bills through medical insurance schemes, thus reducing the burden of medical expenditure on households, FAFH expenditure will increase as a result.Further confirmation about the effects of the participation to social insurance schemes and of the government subsidies is given by the negative effect of the number of migrants in the household on FAFH expenditure. The reason is that migrants are excluded from most of the insurance schemes and when they are included they are subject to much more onerous conditions. FAFH expenditure will increase also with the improvement of social insurance services for the Chinese migrant population.No empirical evidence is found in favor of a negative effect of educational expenditure on household FAFH consumption, nor it appeared any sign that under a specific house value Chinese households limit their expenditure level. |
