Household Wealth And Consumption Behavior In China

Since China’s economic development has entered New Normal,consumption has become a driving force of China’s economic growth while its contribution to the growth of GDP has become increasingly prominent,reaching 58.8%in 2017.However,from the relative amount,the potential of residents’ consumption demand still needs to be further developed.The household consumption rate is still lower than the world average,and the accumulated growth rate of per capita expenditure nationwide year-on-year has decreased from 7.5%in 2013 to 5.4%in 2017.Obviously,in the process of shifting from high-speed growth to high-quality development in China,the low consumption rate of residents and the slowdown in growth have constrained the fundamental role of consumption in economic development.At the same time,with the rapid development of economy and the gradual improvement of the financial market in China,the household wealth continues to grow,both in terms of income as a flow,and of assets as a stock.Meanwhile,with more investment alternatives,the asset allocation is no longer confined to bank deposits.The proportion of financial assets(such as stocks,bonds etc.)and housing assets has gradually increased.This not only directly raises the level of residents’ wealth,but also helps to broaden the channels for property income,raise the household income level,and then affect the consumer behavior.As the household wealth growing in scale and diversifying in structure,there is still no significant increase in the household consumption in China,against the interpretation of traditional life cycle permanent income hypothesis(LC-PIH).Therefore,it is particularly important to study the impact of the nature and structure of wealth on consumer behavior.Furthermore,in China’s economic development,the growth of the total amount and its speed have been unable to meet the requirements for high-quality development,and the problem of "unbalanced and inadequate development" has become increasingly prominent.It is necessary to attach importance to the distribution of individual endowments and the difference in behaviors.In the theoretical research,the traditional LC-PIH mainly focuses on the representative consumers.Although this helps to simplify the analysis of the problem,it ignored the impact of uninsurable idiosyncratic risk and individual characteristics on consumer behavior,while it cannot accurately investigate the impact of individual wealth distribution on the overall economy.Therefore,the heterogeneous consumer’s analysis framework has been increasingly valued by researchers.The related researches mainly focuse on two aspects:ex ante heterogeneity and ex post heterogeneity.On the one hand,the difference in initial innate characteristics may cause consumers to follow different life-cycle consumption paths,namely,ex ante heterogeneity corresponding to heterogeneous characteristics.For example,consumers with fewer liquid assets are more vulnerable to liquidity constraint,which emphasizes that asset liquidity,rather than asset level,has significant impact on consumption smoothing;as an important part of household wealth,housing assets have multiple attributes including consumption,investment,mortgage,etc.,and affect consumer behavior through various channels such as wealth effect,substitution effect and collateral effect.As a result,the demand for housing assets and its impact on consumer behavior differ by the number of houses owned.On the other hand,the uninsurable idiosyncratic shock is also one of the main source of heterogeneity,manifesting as ex post heterogeneity caused by heterogeneous shocks.For instance,some studies have found that consumer behavior has a significant difference in response to the resource growth and reduction.In view of this,this dissertation concentrates on the heterogeneous consumers while identifying them by heterogeneous characteristics and shocks,and examines the variation of heterogeneous consumer behavior.The aim is to reveal the reasons for the coexistence of "high wealth level’ and "relatively insufficient consumption" in China.Specifically,in this dissertation,wealth is divided into assets as stock and income as flow.Then we distinguish between liquid and illiquid assets,which are measured by financial assets and housing assets respectively,and define positive and negative income shock as well.Based on that,we investigate heterogeneous characteristics based on the nature and structure of asset,and reflect heterogeneous shocks by the direction of income shocks,and then accordingly identify heterogeneous consumers.Theoretically,this dissertation studies the variation of heterogeneous consumer behavior based on the related theories such as liquidity constraints,precautionary savings,buffer stocks,habit formation,behavioral economics,etc.Empirically,the vector error correction model(VECM)was used to examine the long-term equilibrium relationship between household wealth and consumption from the macro perspective.Such methods as single-equation estimation,instrumental variables,quantile regression,panel data analysis,interaction term of dummy variables and explanatory variable are used to analyze the heterogeneous consumer decision-making issues from the micro-household level.It mainly includes the effect of asset liquidity on consumption smoothing,the impact of housing asset on uncertainty and wealth accumulation,the difference of wealth effects under housing asset multiple attributes,and marginal propensity to consume out of income shocks.Besides,robustness test is made to improve the persuasiveness of the results mainly by the multiple variable selection and quantile regression.Overall,this dissertation integrates factors that are macro and micro,long-term and short-term,wealth flow and stock,dynamic changes and static structure,and multiple attributes of housing assets.It not only enriches the theoretical researches related to heterogeneous consumers,but also provides reference for exploring how to improve the institutional mechanism of consumption,grasping the direction of policies for stimulating potential consumption,and then leveraging the fundamental role of consumption in economic growth.This dissertation is divided into nine chapters:Chapter 1 is the introduction.Chapter 2 is the literature review.Chapter 3 is the description and analysis of the household wealth and consumption in China.Chapter 4 is the cointegration relationship between residents’ wealth and consumption from the macro perspective.From Chapter 5 to Chapter 8,we focus on micro-household behavior,revealing the effects of asset structure on liquidity constraints and marginal propensity to consume,the impact of housing asset demand on uncertainty and wealth accumulation,wealth effects under multiple attributes of housing assets,and the asymmetric responses of consumers to positive and negative income shocks.Chapter 9 is conclusions and policy suggestions.The main conclusions are as follows:From the macro perspective,wealth with different nature has different impact on consumption.In the long-term equilibrium,incomes have the most obvious effect,and housing assets have a positive but not significantly impact on consumption,while liquid net deposits significantly depress the growth of consumption.This not only supports the view of mental accounts in behavioral life cycle theory,namely,compared with cash assets,consumers are more inclined to consume via cash income accounts,but also reflects that differences in the nature of assets also have different effects on consumption.Liquid assets have low profitability and is not conducive to the growth of consumption in the long run.Although the housing assets have high profitability,they have obvious consumption attributes and low possibility of liquidation which results in an insignificant stimulatory effect on consumption.From the micro-household level,first of all,consumers with insufficient liquid assets will face liquidity constraints,showing that the marginal propensity to consume out of transitory income shocks is positive and significantly different between house owners and renters.This not only verifies the impact of liquid assets on consumption smoothing and liquidity constraints,but also reflects the difference in liquidity constraints caused by housing assets.Second,compared with house owners,renters face a higher level of uncertainty and have a stronger motive of wealth accumulation due to uncertainty.This active accumulation behavior crowd out the liquid assets used for current consumption and increases the degree of liquidity constraint.Thirdly,housing assets have multiple attributes such as consumption and investment,and the attributes vary according to the quantity of housing assets,leading to a distinct difference in wealth effects.Compared with renters,wealth eflfect is higher and significant positive for house owners.Among house owners,the wealth effect is insignificant for ones with one suite,and positive for ones with multiple suites.Finally,consumers response asymmetrically to positive and negative income shocks.The decrease in consumption caused by the decrease in income is greater than the increase in consumption caused by the same level of income increase.Based on the conclusions above,this dissertation explains the coexistence of "high wealth level" and "relatively insufficient consumption" in China from the perspective of household wealth structure and change.Firstly,the proportion of housing assets in total household assets is high.It helps to increase wealth levels and property income in the long run,but crowd out liquid assets,which suppresses consurmption smoothing and increases the level of liquidity constraints in the current period.Secondly,although the proportion of house owners in China is as high as 90%or above,80%of them have only one suite and view the housing assets as necessities.Therefore,housing assets possess obvious consumption attributes and have insignificant wealth effect on consumption.Thirdly,due to the rigid demand for housing assets and the developing rental market in China,house renters face a higher uncertainty and have a higher incentive to accumulate wealth,resulting in a higher percentage of precautionary savings in their liquid assets.This part of the assets is mainly used to smooth the future consumption path,so that consumers with adequate liquid assets even show similar behaviors with ones with inadequate liquid assets.If liquid assets are insufficient,higher uncertainty caused by the absence of housing assets will lead to a greater wealth accumulation and a higher proportion of precautionary savings in wealth.It results in that only little assets can be used for consumption in the current period,further intensifying the degree of liquidity constraints.Finally,for income as a wealth flow,consumers are more sensitive to the decline in wealth.The decline in consumption caused by the decline in income is difficult to compensate by the same degree of income growth.Consumption and income cannot change asynchronously,and consumption grows slower than income.The policy suggestions of this dissertation are as follows:First,the growth of income should be sustained and steady,in order to provide strong support for consumption.Secondly,related financial institutions need to promote the development of financial markets and accelerate the innovation of financial products and services.Families should be encouraged to increase the share of high-yield,expand property income,and take into account asset liquidity and profitability,while government should provide diversified assets,optimize the structure of consumer credit market and promote the credit business within a reasonable range.Thirdly,the government should adhere to the residential attributes of housing assets,implement differentiated policies based on housing demand,accelerate the cultivation and development of the housing rental market,ensure the healthy and stable development in the real estate market,and promote the residents to achieve their goals of housing.Finally,it’s helpful to deepen the Supply-side Structural Reform,strengthen the accuracy and effectiveness of reforms,and improve the adaptability of the supply structure to the demand structure.