Fertility and savings: The effect of China’s two-child policy on household savings

Scott Baker, Efraim Benmelech, Zhishu Yang, Qi Zhang 11 May 2022

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China’s high household savings rate, relative to both advanced economies and developing countries, has attracted great interest (Ahmed and Mees 2012). Notably, this high savings rate has emerged amid decades of substantial industrialisation, income growth, and economic and social policy change. Given the scale of the Chinese economy and its significant share of the global economy, Chinese households’ high savings rate has played a major role in the global savings glut, affecting global interest rates and asset prices (Bernanke et al. 2011, Caballero et al. 2008).

Explanations for China’s high household savings rate span demographic, financial, and social causes. For example, Chamon et al. (2013) argue that rising income uncertainty and pension reforms account for two-thirds of the increase in China’s urban savings rate. In a similar vein, Choi et al. (2017) and He et al. (2018) find that precautionary savings account for households’ wealth accumulation. Bai and Wu (2014) and Feng et al. (2011) also document a negative relation between social security benefits and household savings rates. In conjunction with income growth and volatility driving the high Chinese saving rate, researchers have highlighted a lack of access to credit or other financial buffers as a precautionary motive for high savings rates. As one example, Coeurdacier et al. (2015) argue that growth differentials and household credit constraints can explain about a third of the divergence in aggregate savings rates across emerging and developed economies. Wen (2010) and Bussière et al. (2013) also find that borrowing constraints contribute to high household savings rates.

Other explanations for China’s high household savings rate focus more on demographic and social factors (Rosenzweig and Zhang 2014, Wei 2010, Wei and Zhang 2011). The sharp increase in the Chinese savings rate coincided with the implementation of the One-Child Policy in the 1980s. Curtis et al. (2015) and Choukhmane et al. (2019) both suggest that the OCP can account for a substantial fraction of the rise in savings. Further, İmrohoroğlu and Zhao (2018) suggest that the combination of the risks faced by the elderly and the deterioration of intergenerational support may account for half of the increase in the savings rate between 1980 and 2010.

One obstacle to research on the relative importance of each potential explanation of Chinese savings rate is the dearth of reliable microlevel data on household characteristics and finances. Although the accessibility of such transaction data in the US has increased dramatically in recent years, few papers have accessed data from Chinese households, a void which we fill in our recent paper (Baker et al. 2022). The use of such data allows for a more granular understanding of the dynamics of household financial behaviour and a cleaner identification of the drivers of spending and savings.

We use eight years (2010–17) of data from a large Chinese bank located primarily in the province of Inner Mongolia. This bank has substantial coverage of the province’s population, spanning over 1.5 million retail customers and 3.5 million financial accounts. We are able to observe individual income and spending transactions from these financial accounts as well as to link additional demographic and financial characteristics from loan applications and credit availability. We can also match a large subset of these customers to administrative records covering marriage and births to give us a unique window into consumption and saving patterns around the timing of important life events.

We first demonstrate that many stylised facts about household financial behaviour in developed economies are mirrored in China. For instance, the marginal propensity to consume is decreasing in income and wealth. Leveraging changes in coal prices among workers in the coal mining sector, we show that consumption responses are particularly sensitive to unanticipated changes in income.

Turning to the drivers of high household savings rates, we find strong evidence that financial volatility drives substantial increases in Chinese household savings rates. In contrast, while many link the imposition of the one-child policy to higher levels of saving, we find that the loosening of this policy tended to increase savings rates rather than reducing them, at least in the short run.

Aiming at the financial strand of explanations, we examine whether precautionary saving motives explain Chinese households’ propensity to save. Such uncertainty over the future path of income may result in households desiring substantial savings buffers in case of negative realisations (see Jappelli and Pistaferri 2014). We investigate factors such as income volatility, income growth rates, and access to consumer credit, and find that households facing such uncertainty tend to save much more of their income.

Using our high-frequency household transaction data, we further investigate the dynamics of household savings rates surrounding life events: marriage and the birth of children. Childbirth differentially affects the income and spending behaviour of men and women, with men tending to have increases in income after a child’s birth, while women experience temporary income declines. Marriage coincides with changes in income and spending patterns, with income increasing in the quarters leading up to marriage and stabilising afterward.

We then identify impacts of the loosening of the one-child policy on household savings decisions. Using a triple difference-in-differences approach, we examine the difference in financial savings after the policy change between households who have no children or one child (treated group) and those who already have two children (due to pre-existing allowances for subsets of the population to have more than one child). Rather than decreasing rates of savings, the relaxation of the policy tended to increase savings rates significantly among the treated in the post-policy period. Moreover, households that increased savings the most had the highest propensities to have additional children. Given the costs of raising additional children, these estimates would imply that the imposition of the one-child policy may have in fact depressed savings, at least in the short term, because households did not need to save for additional child-related expenditures.

This finding helps to extend and clarify the model proposed in Choukhmane et al. (2014), where savings rates are affected by the one-child policy through two channels, a transfer channel (less old-age support) and an expenditure channel (fewer childcare expenses). While the transfer channel would suggest a decrease in savings rate upon a loosening of the one-child policy, the expenditures channel would predict the opposite. Our results suggest that, at least during our sample window, the expenditure channel dominates the transfer channel.

In a decomposition exercise, we find that income growth tends to explain the lion’s share of within-sample savings rate fluctuations. That is, while other factors have strong cross-sectional predictive power in savings rates, the dynamics of these other factors cannot explain changes in Chinese savings rate during our sample period.

Our main conclusions are that households in China tend to respond similarly to financial shocks and credit availability as compared to Western households, and that financial factors such as income growth and lower income volatility are primary predictors of high savings rates. While such factors explain cross-sectional heterogeneity in savings rates in our sample, aggregate trends cannot be explained by aggregate shifts in financial access or volatility. Rather, high levels of income growth likely drove up savings rates, a relationship that we show holds true not only in China but in OECD countries across the world.

References

Ahmed, R and H Mees (2012), “Why Do Chinese Households Save So Much?”, VoxEU.org, 28 August.

Bai, C-E and B Wu (2014), “Health Insurance and Consumption: Evidence from China’s New Cooperative Medical Scheme”, Journal of Comparative Economics 42(2): 450–69.

Baker, S, E Benmelech, Z Yang and Q Zhang (2022), “Fertility and Savings: The Effect of China’s Two-Child Policy on Household Savings”, NBER Working Paper no. 29856.

Bernanke, B S, C Bertaut, L Pounder DeMarco and S Kamin (2011), “International Capital Flows and the Returns to Safe Assets in the United States, 2003–2007”, International Finance Discussion Papers, Board of Governors of the Federal Reserve System, no. 1014.

Bussière, M, Y Kalantzis, R Lafarguette and T Sicular (2013), “Understanding Household Savings in China: The Role of the Housing Market and Borrowing Constraints”, Working Paper no. 44611, MPRA.

Caballero, R J, E Farhi and P-O Gourinchas (2008), “An Equilibrium Model of ‘Global Imbalances’ and Low Interest Rates”, American Economic Review 98(1): 358–93. 

Chamon, M, K Liu and E Prasad (2013), “Income Uncertainty and Household Savings in China”, Journal of Development Economics 105(C): 164–77.

Choi, H, S Lugauer and N C Mark (2017), “Precautionary Saving of Chinese and U.S. Households”, Journal of Money, Credit and Banking 49(4): 635–61.

Choukhmane, T, N Coeurdacier and K Jin (2014), “China’s One-Child Policy and Saving Puzzle”, VoxEU.org, 22 January.

Choukhmane, T, N Coeurdacier and K Jin (2019), “The one-child policy and household savings”, Working Paper.

Coeurdacier, N, S Guibaud and K Jin (2015), “Credit Constraints and Growth in a Global Economy”, American Economic Review 105(9): 2838–81.

Curtis, C C, S Lugauer and N C Mark (2015), “Demographic Patterns and Household Saving in China”, American Economic Journal: Macroeconomics 7(2): 58–94.

Feng, J, L He and H Sato (2011), “Public Pension and Household Saving: Evidence from Urban China”, Journal of Comparative Economics 39(4): 470–85.

He, H, F Huang, Z Liu and D Zhu (2018), “Breaking the ‘Iron Rice Bowl’: Evidence of Precautionary Savings from the Chinese State-Owned Enterprises Reform”, Journal of Monetary Economics 94(C): 94–113.

İmrohoroğlu, A and K Zhao (2018), “The Chinese Saving Rate: Long-Term Care Risks, Family Insurance, and Demographics”, Journal of Monetary Economics 96(C): 33–52.

Jappelli, T and L Pistaferri (2014), “Fiscal Policy and MPC Heterogeneity”, AEJ: Macroeconomics 6(4): 107-136.

Rosenzweig, M and J Zhang (2014), “Why are Savings So High Among the Young in Urban China?”, VoxEU.org, 14 May.

Wei, S-J (2010), “The Mystery of Chinese Savings”, VoxEU.org, 6 February.

Wei, S-J and X Zhang (2011), “The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China”, Journal of Political Economy 119(3): 511–64.

Wen, Y (2010), “Saving and Growth under Borrowing Constraints: Explaining the ‘High Saving Rate’ puzzle”, Federal Reserve Bank of St. Louis Working Paper No. 2009-045C.

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Topics:  Macroeconomic policy

Tags:  China, one-child policy, precautionary savings, savings rate, fertility

Associate Professor of Finance, Kellogg School of Management, Northwestern University

Harold L. Stuart Professor of Finance and Director, Guthrie Center for Real Estate Research, Kellogg School of Management

Professor of Finance, School of Economics and Management, Tsinghua University

Associate Professor of Finance, Antai School of Economics and Management, Shanghai Jiaotong University

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