Linking the Chinese saving puzzle to China’s one-child policy….

Taha Choukhmane, Nicolas Coeurdacier , Keyu Jin have this interesting piece in voxeu.

There is this Chinese saving puzzle (well most things in economics are just that puzzles)..China is a growing country and ideally should be borrowing against their future income. However, they don’t and their savings are really high. Some econs have said this is because of lack of social security and vibrant financial system where people can park their savings.

They say much of China’s higher savings can be explained by their one child policy.

The Chinese household saving rate is high and has been rising sharply. Between 1983 and 2011, the average urban household saving rate rose by about 20 percentage points – from 10.4% to a staggeringly high level of 30.5%. This stands in sharp contrast with the low household savings rate in developed countries (about 5% in OECD economies). A fast-growing economy should in principle be borrowing against future income to bring forward consumption. Why the Chinese saved so much over a period of rapid income growth and at an increasing rate has led to something of a conundrum – a ‘Chinese saving puzzle’.

Economists have put forward a handful of plausible explanations. Blanchard and Giavazzi (2005) believe that Chinese households save for precautionary reasons. Wei and Zhang (2011) argue that saving is a response to the ferocious marriage-market competition induced by gender imbalance. Changes in income profiles (Song and Yang 2010) and fast growth in the face of tight household credit constraints (Ceourdacier et al. 2013) are also among the contenders.

The saving puzzle coincided with another unique phenomenon in China – the enforcement of the one-child policy in the early 1980s aimed at curbing China’s population spiral. The consequence of fertility control policies was a drastic reduction in the average urban fertility rate from a bit above 3 children per family in 1970 to about 1.2 by 1982.

 What is the channel here?

We explore this question in our recent paper, “The One-Child Policy and Household Savings’’ (Choukhmane et al. 2013). Part of the answer can be disarmingly obvious: fewer children beget lower spending – hence a higher saving rate (the ‘expenditure effect’). Part of the answer relates to a cultural phenomenon: in a society in which the notion of intergenerational support is not only a norm but also stipulated by law, a reduction in the number of children supporting parents in old age lowers expected income (deriving from children) and raises the need for saving (the ‘transfer effect’). Indeed, as Figure 1 shows, intergenerational transfers (family support) are the main source of revenues for more than half of elderly people. Moreover, the total amount of transfers parents receive is increasing in the number of offspring they have. This includes not only financial transfers but also in-kind benefits, such as cohabitation – the likelihood of which increases significantly with the number of offspring one has.

These ‘expenditure’ and ‘transfer’ effects, which induce households to save more when fertility drops, capture the behavioural changes at the household level. Of course, at the aggregate level, the shifting demographic compositions also exert an impact on saving. This is the channel linking demographics and saving that is conventionally emphasised. The reduction in the ratio of the young to working-age population increases the share of the main savers of the economy, and yet the share of the elderly dissavers relative to the working-age population does not increase until one generation after (when the only-child generation reaches prime working age). Thus, during this demographic transition period, the rise in the ratio of the middle-aged pushes up the saving rate. We estimate that the micro-level and macro-level channels can explain about 35–45% of the total 20 percentage-point rise in China’s household saving rate. 

To understand this, authors look at families with twins vs families with single child. They say savings of first group are lower!:

To understand the relationship between fertility and saving, one cannot naively compare the saving rates of households with different numbers of children. Many factors that affect fertility, such as income and education, can also be systematically related to saving behaviour. One also cannot simply compare the household saving rate before and after the one-child policy, since many economic factors were changing during that period. A natural experiment we exploit is the birth of twins under the one-child policy – an arguably exogenous deviation in fertility.

Do households with twins save less than only-child households? And by how much? Even casual observation suggests that there are significant differences in their saving behaviour – a pattern that holds across all income groups (Table 1). More systematically, across all urban households over the period 1992–2009, regression analysis shows that an additional child (twin) reduces the saving rate by about 6-7 percentage points. The lower saving rate stems from higher expenditure – on food, and particularly on education. One additional child increases food expenditures (as a share of total household expenditure) by about 2.5 percentage points and increases education expenditures by about 7 percentage points. That is to say, an only-child household will on average spend 10.6% of their household income on education, whereas those with twins will need to spend an average of 17.3% of household income.

Hmmm.

They say with reversal in one child policy, the savings to decline as well:

The third plenum of the Chinese Communist party just announced a loosening of the one-child policy to a two-child policy, so long as either of the parents is an only child. This would apply to most couples of child-bearing age. Fertility is bound to rise, and a reversal of the saving trend may be expected. Our estimates suggest that as much as an 8% decline in the household saving rate over the next few decades wouldn’t come as a surprise.

What about India? Why are our savings so high based on this demographic channel? There has never been a restriction on children like China. People still have 2-3 children on an average which is declining overtime.

Ofcourse, Chinese context is very different from India’s. Just kind of curious..

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