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2012-038

2012-038

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Research Division
Federal Reserve Bank of St. Louis
Working Paper Series
Housing Prices and the High Chinese Saving Rate Puzzle
Xin WangandYi Wen
Working Paper 2012-038Ahttp://research.stlouisfed.org/wp/2012/2012-038.pdf September 2012FEDERAL RESERVE BANK OF ST. LOUISResearch DivisionP.O. Box 442St. Louis, MO 63166
______________________________________________________________________________________The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors.Federal Reserve Bank of St. Louis Working Papers are preliminary materials circulated to stimulatediscussion and critical comment. References in publications to Federal Reserve Bank of St. Louis WorkingPapers (other than an acknowledgment that the writer has had access to unpublished material) should becleared with the author or authors.
 
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Housing Prices and the High Chinese Saving Rate Puzzle
*
 
Xin Wang
Tsinghua University
Yi Wen
Federal Reserve Bank of St. Louis& Tsinghua University
Abstract:
China’s over 25% aggregate household saving rate is one of the highest inthe world. One popular view attributes the high saving rate to fast-rising housing prices inChina. However, cross-sectional data do not show a significant relationship betweenhousing prices and household saving rates. This article uses a simple consumption-savingmodel to explain why rising housing prices per se cannot explain China’s high householdsaving rate. Although borrowing constraints and demographic changes can translatehousing prices to the aggregate saving rate, quantitative simulations of our model usingChinese time-series data on household income, housing prices, and demographics indicatethat rising mortgage costs can increase the aggregate saving rate by at most 2 to 4percentage points in the best down-payment structure.
 
Keywords:
Chinese Economy, Housing, Saving Rate, Borrowing Constraints,Housing Reform.
JEL Codes:
D14, D91, E21, I31, R21
* A shorter version of this paper appeared in the Federal Reserve Bank of St. Louis
 Review
, March/April 2011,93(2) 67-88. We thank Jiandong Ju, Yue Liu, Qing Liu, Xue Qiao, Xinzheng Shi, Michael Zheng Song, XiaoxiaWang, Ziru Wei, Binzhen Wu, Weilong Zhang, Xiaohan Zhong, and two anonymous referees for helpful comments,Zhenjie Qian for sharing data and Judy Ahlers for editorial assistance.
 
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Introduction
According to Friedman’s (1957) permanent income hypothesis, rational consumersshould save less when their income is growing faster because the need to save isreduced when people expect to be richer in the future than they are today. However,the reality in China is the opposite: As one of the fastest-growing economies, China’saggregate household saving rate is among the highest in the world.Housing investment is commonly included in the measured household savingrate. Thus, if shelter is more or less a necessary consumption good (e.g., due to thelack of a well-developed rental market), then rising housing prices could potentiallyexplain the high aggregate household saving rate in China. However, even excludinghousing investment, China’s aggregate saving rate is still one of the highest in theworld.To understand whether rising housing prices can contribute to such a highaggregate household saving rate, we define the “aggregate household saving rate” inthis paper as the ratio of net changes in aggregate household financial wealth (e.g.,bank deposits, government bonds, and stocks) to aggregate household disposableincome.
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(i) If housing investment is included in the saving rate, then using rising housingprices to explain the level of rising housing expenditures (housing investment) is moreor less tautological and thus uninteresting.We adopt this definition also for several other reasons:(ii) Because shelters are durable goods, the purchase of a home immediatelyreduces the need of future expenditures on rental payments, thus increasing futuresavings. Therefore, including housing investment in the household saving rate impliesdouble counting of a person’s average lifetime saving rate because the market value of a house is related to the present value of discounted future rental expenditures. Sincehousing investment is financed by financial wealth (such as bank deposits) or bank loans, the reduction in financial wealth or the increase in bank loans to finance
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Bank deposits account for the bulk of household financial wealth in China.

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