Prospects For Internal Rebalancing in China: What Drives High Household Saving?

Transitioning the Chinese economy to a more balanced and sustainable economic model in which domestic private consumption plays a greater role in driving economic growth is currently a high priority for Chinese policy makers. To this end, gradually reducing China’s elevated household saving rate is critical. In this context, this paper undertakes an empirical analysis of the determinants of high household saving in China, with a view to assessing the prospects for rebalancing efforts and identifying complementary policy objectives that may catalyse the necessary shift. The analysis employs a dynamic panel data model, estimated using fixed-effects panel estimation as well as the Generalised Method of Moments (GMM) methodology. Provincial-level household survey data is decomposed for urban, rural and all households to facilitate deeper analysis. The results suggest that strong income growth, demographic variables, habit formation and precautionary saving motives are important factors behind China’s high saving rate. Accordingly, policies aimed at promoting a stable macroeconomic environment, addressing China’s aging population, and financial deregulation are likely to assist efforts to boost domestic consumption. Moreover, given projections for slowing GDP growth and an increasing dependency ratio, combined with on-going financial liberalisation, prospects for gradually reducing the household saving rate and increasing domestic consumption growth appear to be strong.