Impact of China’s two-child policy on family savings

Fertility and savings: Impact of China’s two-child policy on family savings

China’s high household savings rate, compared to both developed economies and developing countries, has attracted widespread interest (Ahmed and Mees 2012). Significantly, these high savings rates have emerged over the decades between significant industrialization, income growth, and economic and social policy changes. Given the scale of the Chinese economy and its significant share in the global economy, the high savings rate of Chinese households has played a major role in increasing global savings, influencing global interest rates and asset prices (Bernanke et al. 2011; Caballero et al. 2008).

The explanation for China’s high household savings rate lies in demographic, economic and social factors. For example, Chaman et al. (2013) argue that increasing income uncertainty and pension reform are responsible for two-thirds of China’s urban savings rate growth. In a similar vein, Choi et al. (2017) and he and others. (2018) Find Precautionary Savings Accounts for Family Assets. Bai and Wu (2014) and Feng et al. (2011) also documented a negative relationship between social security benefits and household savings rates. Combined with higher Chinese savings rate driven income growth and volatility, researchers have highlighted the lack of access to credit or other financial buffers as a precautionary measure for higher savings rates. As an example, Coeurdacier et al. (2015) argue that growth disparities and household debt constraints may explain about one-third of the disparity in overall savings rates across emerging and developed economies. Wen (2010) and Bussière et al. (2013) further show that borrowing constraints contribute to higher household savings rates.

Other explanations for China’s high household savings rates focus more on demographic and social factors (Rosenzweig and Zhang 2014, Wei 2010, Wei and Zhang 2011). With the implementation of the one-child policy in the 1980s, the rate of Chinese savings increased sharply. Curtis et al. (2015) and Chaukhmane et al. (2019) both suggest that OCP could account for a significant portion of savings growth. Further, Imrohoroglu and Zhao (2018) suggest that a combination of the risks faced by the elderly and the deterioration of intergenerational support may halve the savings rate growth between 1980 and 2010.

One obstacle to research on the relative importance of each possible explanation for Chinese savings rates is the lack of reliable microlevel data on family characteristics and finances. Although the data accessibility of such transactions in the United States has increased dramatically in recent years, some documents have accessed Chinese family data, a gap that we fill in our recent paper (Baker et al. 2022). The use of such data allows for a more grainy understanding of the dynamics of household financial behavior and a clear identification of the drivers of costs and savings.

We primarily use eight years (2010-17) of data from a large Chinese bank located in the Inner Mongolia province. The bank has substantial coverage of the province’s population, has more than 1.5 million retail customers and 3.5 million financial accounts. We are able to monitor personal income and expenditure transactions from these financial accounts as well as link additional demographic and financial characteristics from loan application and credit availability. We can also match a large subset of these clients with administrative records covering weddings and births to provide a unique window into the types of costs and savings surrounding important events in our lives.

We first show that a lot of stylized information about family financial behavior in developed economies is reflected in China. For example, income and wealth are declining. By exploiting changes in coal prices among workers in the coal mining sector, we show that the cost response is particularly sensitive to unexpected changes in income.

Turning to the drivers of higher household savings rates, we find strong evidence that financial instability leads to a significant increase in Chinese household savings rates. Conversely, although many associate the imposition of the one-child policy with higher levels of savings, we find that relaxation of this policy tended to increase rather than decrease the savings rate, at least in the short term.

Looking at the financial strand of the explanation, we examine whether the purpose of precautionary savings explains the tendency of Chinese households to save. Families want a substantial savings buffer in the event of a negative perception of such uncertainty over their future path to income (see Jappelli and Pistaferri 2014). We investigate issues such as income volatility, growth rates, and access to consumer credit, and find that families with such uncertainties save much more in their income.

Using our high-frequency family transaction data, we further investigate the dynamics of family savings rates around life events: marriage and childbirth. Childbearing affects the income and expenditure behavior of men and women differently, men tend to increase income after childbirth, while women tend to decrease temporary income. Marriage is matched by changes in income and expenditure patterns, with the quarterly income progressing toward marriage and stabilizing later.

We then identify the effects of one-child policy relaxation on family savings decisions. Using the Triple Difference-in-Difference method, we examine the difference in financial savings after a policy change between families who have no children or one child (treated group) and who already have two children (due to pre-existing allowances for subsets) in the population. Having more than one child). Instead of reducing savings rates, policy relaxation significantly increases savings rates among post-treatment individuals. In addition, households with the highest savings are more likely to have extra children. In terms of the cost of raising additional children, these estimates would indicate that the imposition of the one-child policy may actually lead to disappointing savings, at least in the short term, because the family did not need to save for additional child-related expenses.

This search helps to expand and clarify the model proposed in Chaukhman et al. (2014), where the savings rate is influenced by the one-child policy through two channels, a transfer channel (low age support) and an expenditure channel (low child care costs). Although the transfer channel will suggest a reduction in the savings rate after relaxing the one-child policy, the spending channel will predict the opposite. Our results suggest that, at least during our sample window, the cost channel dominates the transfer channel.

In a decomposition practice, we find that the lion’s share of the fluctuations in the savings rate explain the increase in the income growth pattern. That is, while the savings rate has the ability to make strong cross-sectional predictions of other factors, the dynamics of these other factors cannot explain the change in Chinese savings rates during our sample period.

Our main conclusion is that Chinese households respond similarly to financial shocks and credit availability compared to Western households, and financial factors such as income growth and low income instability predict higher savings rates. Although such factors explain the cross-sectional differences in savings rates in our sample, the overall trends cannot be explained by the overall change in financial access or volatility. Rather, higher income growth could lead to higher savings rates, a relationship that we see is true not only in China, but in OECD countries around the world.

References

Ahmed, R. and H. Miss (2012), “Why do Chinese families save so much?”, VoxEU.org, 28 August.

Bai, CE and B Wu (2014), “Health Insurance and Cost: Evidence from China’s New Cooperative Medical Project”, Journal of Comparative Economics 42 (2): 450-69.

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

Bernanke, BS, C Bertaut, L Paunder DeMarco and S Kamin (2011), “International Capital Flows and Return of Secure Assets in the United States, 2003-2007”, International Finance Discussion Papers, Board of Governors of the Federal Reserve System, no. 1014.

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Caballero, RJ, E Farhi and PO Gourinchas (2008), “A Balance Model of ‘Global Imbalance’ and Low Interest Rates”, American Economic Review 98 (1): 358-93.

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

Choi, H, S Lugauer and NC Mark (2017), “Precautionary protection of Chinese and American 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 Conservation Puzzle”, VoxEU.org, 22 January.

Chaukhmane, T., N. Querdasier and K. Jin (2019), “One-child policy and family savings”, worksheet.

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Curtis, CC, S. Lugauer and NC Mark (2015), “Demographic Patterns and Family Savings in China”, American Economic Journal: Macroeconomics 7 (2): 58-94.

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

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

Romrohoroğlu, A and K Zhao (2018), “Chinese savings rate: long-term care risk, family insurance, and population”, Journal of Monetary Economics 96 (C): 33-52.

Zapelli, T. and L. Pistaferi (2014), “Fiscal Policy and MPC Differences”, AEJ: Macroeconomics 6 (4): 107-136.

Rosenzweig, M and J Zhang (2014), “Why are savings so high among young people in urban China?”, VoxEU.org, 14 May.

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

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

Wayne, Y. (2010), “Savings and Growth Under Borrowing Restrictions: Explaining the ‘High Savings Rate’ Puzzle”, Federal Reserve Bank of St. Louis Working Paper No. 2009-045C.

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