Understanding Household Savings in China: the Role of the Housing Market and Borrowing Constraints

Abstract

This paper examines the role of rising housing prices and borrowing constraints as determinants of China's high household saving rate, especially among young households. Using a life-cycle model of saving behavior in the presence of borrowing constraints, we show that the relationship between housing prices and saving exists only under certain conditions and for certain groups of households. Specifically, when the return on financial instruments is low (which is the case in China), the saving rate of young households may increase with housing prices. This relationship, moreover, is non-linear and depends on the level of wealth. Employing an empirical strategy motivated by the theoretical model, we analyze a dataset of over six thousand Chinese urban households spanning the years 1995, 2002 and 2007. We find evidence that higher housing prices do in fact increase the saving rates of young households. We also find evidence for the predicted non-linearity.