Sex Ratio and High Savings Rate in China: An Out-of Box Explanation

Conventional explanations determining consumption are well-known. Keynes conjectured that the marginal propensity to consume is between zero and one, that the average propensity to consume falls as income rises. Hence, current income is the single determinant of consumption. Keynes’s validated such conjectures based on household data and that too based on short time series. Interestingly, studies based on long time –series found no tendency for the average propensity to consume to fall as income rises over time. Irving Fisher finds that the consumer faces an inter-temporal budget constraint and chooses consumption for the present and the future to achieve the highest level of lifetime satisfaction. Thus as long as consumer can save and borrow, consumption depends on the consumer’s lifetime resources.
Modigliani in his life-cycle hypothesis emphasizes that income varies somewhat predictably over a person’s life and that consumer’s use saving and borrowing to smooth their consumption over their lifetimes. This suggests that consumption depends on both income and wealth. In contrast the permanent income hypothesis (PIH) is a theory of consumption that was developed by Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations. Hence, short-term changes in income have little effect on consumer spending behavior.
Measured income and measured consumption contain a permanent (anticipated and planned) element and a transitory (windfall gain/unexpected) element. Friedman concluded that the individual will consume a constant proportion of his/her permanent income; and that low income earners have a higher propensity to consume; and high income earners have a higher transitory element to their income and a lesser than average propensity to consume. Accordingly it was thought that the key determinant of consumption is an individual's real wealth, not his current real disposable income. Permanent income is determined by a consumer's assets; both physical (shares, bonds, property) and human (education and experience). These influence the consumer's ability to earn income. The consumer can then make an estimation of anticipated lifetime income. Empirically, transitory income is the difference between the measured income and the permanent income. This can be calculated simply by subtracting the measured income and the permanent income.
Hall’s random-walk hypothesis combines the permanent-income hypothesis with the assumption that consumers have rational expectations about future income. It implies that changes in consumption are unpredictable, because consumers change their consumption only when they receive information about their lifetime resources. Laibson has suggested that psychological effects are important for understanding consumer behaviour. In particular, because people have a strong desire for instant gratification, they may exhibit time-consistent behaviour and may end up saving less that they would like.
The high Chinese household savings rate is however, somewhat puzzling and hence contradicts the above theoretical explanations. Why are high household savings a general East Asian and more specifically Chinese phenomenon? Explanations such as poor social safety net, weak pension system, inadequate health coverage, are often cited as powerful ingredients. Interestingly, in recent time, for example in China, social safety has improved and the insurance coverage has expanded over the last decade or so. Quite likely, household savings rates are expected to decline, or at least not increase. Yet, household savings as a share of disposable income almost doubled from 16 per cent in 1990 to over 30 per cent in 2008 and has been rising rapidly in recent time.
Shang-Jin Wei and Xiaobo Zhang’s study reveals an interesting explanation in this aspect. For the last few decades China has experienced a significant rise in the imbalance between the number of male and female children born to its citizens. There are approximately 122 boys born for every 100 girls today, a ratio that means about one in five Chinese men will be cut out of the marriage market when this generation of children grows up. According to them a variety of factors might have contributed to the imbalance. For example, Chinese parents often prefer sons. Ultra-sound makes it easy for parents to detect the gender of a foetus and abort the child that’s not the “right” sex for them, especially as China’s stringent family-planning policy allows most couples to have only one or two children. China has too many boys now.
The Shang-Jin Wei and Xiaobo Zhang study compared savings data across regions and in households with sons versus those with daughters. More interestingly, not only did households with sons save more than households with daughters on average, but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed gender ratio. Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households. In addition, parents invest more in the education of their sons, and push them to work harder. There may also be spillover from a boy’s education to a girl’s education. In other words, parents want their sons to marry, and they figure that girls are more likely to want to marry rich boys. What about girls’ parent and their education? Arguably, the girls’ parent may have less incentive to invest on their girl child’s education assuming that they are all available in the marriage market.
Thus it appears that concerns relating to gender ratio imbalance in China may create both economic and social problems. The worry is that the result may actually be a real threat to the Chinese social system. So China should not be quite so gung –ho about her high household savings rate.