IMF Working Papers

Household savings in China are markedly higher than in peer economies, which have been channeled into financing excessive investment. This paper examines the structural and cyclical factors contributing to China’s elevated household savings. The analysis suggests that low government social spending in rural areas and residency (“Hukou”) restrictions in urban areas play a significant role in increasing household savings. In addition, the paper provides evidence that fluctuations in real estate prices significantly impact household savings, both through the wealth effect and the downpayment effect (i.e., need for non-homeowners to save so as to afford downpayments), though the latter channel has weakened after the recent real estate market correction. These findings suggest that further strengthening social safety nets, continuing Hukou reforms, and policies that promote a more efficient transition for the housing market can help reduce household savings and boost private consumption, thus facilitating China’s economic rebalancing.