Importance of precautionary savings for urban Chinese households

Abstract

This study utilizes data from the China Household Finance Survey for the years 2013 to 2019 to estimate income uncertainty among urban households and examine the impact of income uncertainty on wealth accumulation using an instrumental variable approach. Research findings indicate that precautionary savings contribute to urban households’ wealth accumulation to a certain extent, but the overall proportion is relatively low, at approximately 15% to 25%. This figure is notably lower than the estimates found in other literature. Further regression analysis on sub-sample reveals disparities in the proportion of precautionary savings contributing to total wealth accumulation across different types of households. Specifically, for households with low to middle-income levels, those in second- and third-tier cities, as well as those located in the eastern, western, and northeastern regions, precautionary savings play a comparatively more substantial role in wealth accumulation. However, even among these groups, precautionary savings do not exceed 40% of total wealth accumulation. Therefore, while precautionary savings partially explain the high savings rates among urban households in China, they do not completely account for this phenomenon.