Regional variation of saving and its contributing factors in China

Abstract

There are a number of studies that have explained why China should transit to a consumption-driven growth model or achieve a more rebalanced growth model. But there are few studies to test the relationship between saving, consumption and economic development in the Chinese economy. Thus, this study conducted two panel data analysis to test the relationship between saving, consumption and economic development in China. Since the area of research by the previous studies focused on urban-rural, provincial level, and national level, regional variations of saving have not been widely researched upon. Therefore, this study would try to reveal the regional saving variations and used the regional’s context to explain the phenomenon. The method of Ordinary least square (OLS) regression has been used for the two regression models and the data is obtained from the CEIC China Premium Database. The time period for the prefecture level panel data analysis is from 2003 to 2013, while the provincial level panel data analysis is from 1989 to 2014. The regression results showed that the real saving deposit in the eastern prefecture level cities are determined by most factors in the regression model. The central prefecture level cities’ real saving deposits are influenced by fewer factors while the western prefecture level cities are affected by the fewest factors in the regression model. There are six main findings for regional variations of saving. First, the higher the cost of living and the price of fixed asset, the lower the real saving deposits. Second, as real average wage increase, real saving deposits would also increase. Third, government social expenditure does not necessarily reduce real saving deposits. Fourth, an increase in population does not automatically increase real saving deposit as real saving deposit depends on the capacity of land. Fifth, urbanization affects regions’ real saving differently as it hinges on regional characteristics and development. Besides, the study found that there exists a positive relationship between China’s saving, consumption and economic development and Keynes’ paradox of thrift is inapplicable in China’s case. Keynes’ paradox of thrift is inapplicable to China as it incorrectly defined saving as hoarding of cash, assumed investments are based on interest rates and failed to incorporate the differences between the West and China.