Working Paper: NBER ID: w23741
Authors: Russell Cooper; Guozhong Zhu
Abstract: This paper uses a lifecycle model to study household finance in China, focusing on the high savings rate, the low stock market participation rate and the low share of stocks in wealth. We control for important regime changes in China in the estimation of structural parameters, and examine their impacts on household finance patterns. Relative to the US, the distinctive financial choices of households in China are driven by institutional factors, such as labor market risks and costs of asset market participation, as well as by differences in preferences. Specifically, large stock market participation and adjustment costs along with high stock market volatility in China lead to the relatively low stock market participation rate and the low share of stocks in wealth conditional on participation, but they contribute little to the high savings rate. The high savings rate in China is driven mainly by high labor market risks and the patience of households. Given the estimated differences between China and the US in preferences, the model predicts that households in China would continue to save more than their US counterparts even if institutional differences disappear.
Keywords: Household Finance; China; Savings Rate; Stock Market Participation
JEL Codes: E21; G11; P2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high labor market risks (J48) | high savings rate in China (E21) |
| patience of households (D14) | high savings rate in China (E21) |
| institutional differences (D02) | high savings rate in China (E21) |
| large stock market participation costs (G10) | low stock market participation rate (G10) |
| high stock market volatility (G17) | low stock market participation rate (G10) |
| adjustment costs (J30) | low stock market participation rate (G10) |
| U.S. labor market conditions (J48) | decrease in wealth-to-income ratio (D31) |
| U.S. labor market conditions (J48) | increase in stock market participation rates (G10) |
| preferences change (D11) | overall savings rate (D14) |