The Chinese Saving Puzzle and the Life-Cycle Hypothesis

• Published in: Journal of economic literature Vol. 42; no. 1; pp. 145 - 170
• Main Authors: Modigliani, Franco, Cao, Shi Larry
• Format: Journal Article
• Language: English
• Published: Nashville American Economic Association 01-03-2004
• Subjects: Average propensity to save; Coefficients; Consumer economics; Economic growth rate; Hypotheses; Inflation rates; Keynesianism; Life cycle hypothesis; Life cycles; Personal income; Population growth; Population growth rate; Rates; Savings; Savings rates; Theory; China
• ISSN: 0022-0515; 2328-8175
• DOI: 10.1257/002205104773558074

China's per capita income ranks below 100th in the world. Its saving rate, however, has been one of the highest worldwide in recent decades. In this paper, we attempt to explain the seeming paradox within the framework of the Life-Cycle Hypothesis developed by Franco Modigliani. The key LCH variables are income and population growth. Our results based on data we put together from official sources show that income growth has been the dominant factor behind the dramatic increase in China's saving rate, as predicted by the LCH. Demographic structure and inflation also had significant impact on the fluctuations of the saving rate.