CHINA AND SAVINGS

WHY DO CHINESE HOUSEHOLDS SAVE SO MUCH?

Raman Ahmed, Heleen Mees

International Business Times, September 4, 2012

China's monumental savings rate is a popular topic of for policy discussion.1 It has been blamed for the global financial crisis, currency wars (Portes 2010), and the ensuing Great Recession (Mees 2012). But what explains the high savings rate?

The growing body of work on this question has put forward many answers, ranging from the one-child policy to the role of marriage and the weak welfare state (see for example Horioka and Wan 2007, Wei and Zhang 2009, Chamon and Prasad 2010, Jin et al. 2010 and Ma and Yi 2010).

In recent research (Mees and Ahmed 2012), we use a dataset that is more recent and covers a longer time span (1960-2009), including the periods with the most important economic reforms, to find the determinants of the household savings rate in China. To that extent we combine Modigliani and Cao's data with our data, and subsequently use a dummy to account for a level shift in the data for the regressions (see Figure 1). For the analysis, we make use of an error-correction model. Within this specific regression framework we include other exogenous variables next to the variables in the cointegration equation to find the effects on the savings rate. To investigate the presence of cointegration between the variables, we follow the method set out in Boswijk (1994) and use his critical values for the significance of the cointegrating factors.

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