Understanding China’s Rising Saving Rate: The Role of Higher Education Reform

Abstract

Substantial empirical studies show that households in China have strong precautionary saving motive; however, few studies explore the microfoundation and underlying reasons accounting for this phenomenon. Comparative analysis of household education expenditure and household consumption behavior before and after the higher education reform suggests that the reform has remarkable impacts on household consumption. Based on the life cycle hypothesis, a theoretical model is constructed with education being introduced in. Simulation results indicate that higher education reform is one of the most important reasons that account for the strong precautionary saving motive and thus the sluggish consumption demand in China. Based on household-level data collected by Chinese Academy of Social Sciences in 1995 and 2002, we test the relationship between the higher education reform and household consumption quantitatively. Cross-sectional regression demonstrates that the higher education reform in 1999 had a significant effect on household consumption. The marginal propensity to consume (MPC) of households with members attaining higher education had decreased by 12 percent from 1995 to 2002.