I tend to agree more and more with such an idea: any policy that restricts the free flow of the economic elements, be it the restriction on human, capital, or land, will lower the allocation efficiency of the elements and cause the imbalance of the economic structure on the macro scale; and ultimately everyone in the economy will suffer the loss.

1. The Riddle of Chinese Household Savings

In the last decade, the ratio of household consumption to GDP (hereafter “household consumption rate”) in China has always been at a low level and decreasing every year. According to the statistics from the World Development Indicators (WDI) provided by World Bank, the household consumption rate in China was 47.4% in 2000, and it dropped to 36% in 2013. However, the household consumption rate in the United States was 68.5% in 2013 and 64.8% in the United Kingdom, both of which were higher than that in China by nearly 30%.

The consumption rate in the developing countries is often lower than that in the developed countries. When a country is at an early stage of economic development, return on invested capital (ROIC) is often higher. Therefore, people will tend to deposit more money in their savings accounts and the ratio of investment to GDP will be higher. Besides, the imperfect social security system and the various financing constraints are also the reasons for the relatively low consumption rate. For the lack of social security, people tend to have more precautionary savings in response to uncertainty regarding future income; moreover, for the underdevelopment of the financial system, it is very difficult or costly for people to borrow money from the formal financial sectors, which further strengthens people’s motive for savings.

However, the fact that China is a developing country cannot explain why the household consumption rate in China is so low. India and Brazil are also developing countries, but the consumption rate in China is lower than that in India by 20% and that in Brazil by around 25%. If we compare the consumption rate in China with that in Japan and South Korea at their early development, we can still find a distinct discrepancy. For instance, the lowest point of household consumption in Japan appeared in 1970, with the rate of 48.4%, which is still higher than the rate in China in 2013. Japan and South Korea have the East Asian Culture as similar as China, so the culture itself cannot explain the low household consumption in China. Furthermore, Chinese government’s expenditure on public spheres such as education, medical care, and old-age security, etc. is lower than that in other major countries, which means the households in China have to spend more on education, medical care, and old-age security (all of these belong to consumption). Concerning this, such a low household consumption rate is even beyond understanding.

In recent years, China has become one of the countries with the lowest household consumption rate and the highest household saving rate in the world. Because of this low consumption rate which keeps decreasing, China has to rely heavily on the driving force such as investment and export to maintain the high-speed economic growth. This situation interiorly caused the over-investment and overcapacity in many industries and exteriorly led to a large number of trade conflicts and exchange-rate disputes between China and other major exporting countries.

Why is the household consumption so low in China? Or why are the savings so large? Why cannot the household consumption keep pace with the annual economic growth of 9%-10% in China in the past decade? These questions are called “The Riddle of Chinese Household Savings” in academia. To answer these questions is extremely essential, because it helps us to better understand the severe imbalance of the economic structure and find ways to rebalance the economy in China.

2. Our Explanation: The Household Registration System Constrains the Household Consumption

In June, 2015, Prof. Lu Ming from Shanghai Jiao Tong University, Prof. Chen Binkai from Central University of Finance and Economics and I published a paper entitled “How Urban Segregation Distorts Chinese Migrants’ Consumption?” in World Development, which ranks No. 2 in the journals about development economics. In the paper, we tried to provide an explanation for “The Riddle of Chinese Household Savings” from a new angle.

Compared with the existing discussions, our discussion has laid more stress on the influence of the household registration system. This policy has strictly constrained Chinese people’s flow across different areas and especially restricted the permanent residence of the rural population in the urban areas. In addition, the policy has also limited the amount of public welfare that most rural population can obtain in the urban areas, such as buying the discounted monthly pass for buses and sending their children to the public schools, etc. What is more, the migrants are mostly subjected to discrimination in the urban labor markets for the lack of local household registration status: they are excluded from plenty of jobs in the urban areas; and if they want to get a permanent job, they will face obstacles in various forms.

Under this circumstance, the household registration system has divided the people in the urban areas into two groups: with household registration status and without household registration status. No relaxation can be seen in the household registration system, so when more and more rural population flow into the urban areas, a new “urban-rural dualistic structure” is formed within the cities. A person is born to be urban or rural; it is possible to change the household registration status, but it is extremely difficult, especially in the large cities.

Our research has combined this system of discrimination together with the macro structural imbalance in China’s economy. We have found that for the lack of urban household registration status the consumer behavior of those migrants in the cities are different from that of the residents with the urban household registration status. To be specific, we have collected data from the Dataset of China Household Income Projects (CHIPS) which is developed by Chinese Academy of Social Sciences (CASS) and compared over 4,000 households in cities with the urban household registration status and over 4,000 migrant families in cities without the urban household registration status. Through the analysis we have found that with the same amount of income, the consumption of migrants in the cities is less than that of the local households with the urban household registration status by 16%-20%.

Based on a further detailed statistical analysis, we have proved that the household registration system has weakened the consumption of the migrants in three different ways. Firstly, for the lack of urban household registration status, migrants are faced with more uncertainties about their future income, and the social security they can get is less. Therefore, even with the same amount of income, they must deposit more money in their savings accounts in response to such uncertainties. In other words, they will have more “precautionary savings”. Secondly, restricted by the household registration system, migrants can never obtain permanent residence in the cities. They know that they will go back to the rural areas someday. Once they are back in the rural areas, their income will possibly decrease. Hence, even though migrants without the urban household registration status now get the same amount of income as the urban population with the household registration status, their expectation of the future income (“permanent income”) is still lower, which also constrains their consumption at the present time. Thirdly, for the lack of the urban household registration status, the mobility of migrants in the cities is higher – once they hear there are better opportunities in another city, they will probably choose to leave the present city. With the expectation of temporary lodging other than permanent residence, migrants will reduce the consumption of durable goods that are not easily portable (e.g. home appliances). We have found that the discrepancy between migrants without the urban household registration status and residents with the urban household registration status in the consumption of home appliances is over 20%.

The rural population has poured into the urban areas and worked there since the mid-1990s. According to the data newly released by National Bureau of Statistics, the number of migrant workers in China in 2014 is 274 million. This means that from the mid-1990s to the recent years, the number of migrants in the cities who are without the urban household registration status is increasing and their income is increasing at the same time; besides, the majority of this group are adolescents and adults ranging from 16 years old to 45 years old, who have a relatively strong consumption ability. Under the strict regulation of the household registration, the negative effect of the household registration system on China’s household consumption becomes stronger and stronger, and that is the explanation we have proposed for the phenomenon that the household consumption rate in China is low and keeps decreasing.

In the following two parts, we are to discuss in detail the first two mechanisms for urban household registration to constrain the consumption.

3. The First Mechanism for Urban Household Registration to Constrain Consumption: Precautionary Savings

First, restricted by the household registration system, migrants in the urban areas always find it hard to enjoy the social security programs that are prepared for residents with the household registration status. In the sample of our research, there are totally 4,221 migrant families without the urban household registration status. Among them, the householders in only 940 families (21.3%) are having the endowment insurance; the householders in 2,623 (59.3%) migrant families are having the health insurance and the householders in 573 (13.0%) migrant families are having the unemployment insurance. On the other hand, among the 4,547 families with the urban household registration status, the householders in 3,417 families (75.2%) are having the health insurance, and this number is much higher than that of the migrant families who are without the urban household registration status (59.3%). The number of insurance coverage given by National Bureau of Statistics is even lower. According to the Investigation and Monitoring Report on the Migrant Workers in China given by National Bureau of Statistics, the proportion of the migrant workers who are having endowment insurance, employment injury insurance, health insurance, unemployment insurance and maternity insurance are only 15.7%, 28.5%, 17.6%, 9.1%, and 6.6% respectively. Under this circumstance, migrant workers can only deposit money in their savings account in response to the old-age and health problems.

Second, there are more uncertainties in the income from work for the migrants without urban household registration status. We have examined the differences in the labor contracts between the migrants and residents with urban household registration status and found that in the sample 48.1% of residents with urban household registration status are having a long-term contract or a permanent labor contract with their employers while only 40.3% of migrants in the cities are having the same kind of contracts. Besides, 25.1% of migrants are temporary workers without the labor contracts while the percentage of the residents with urban household registration status under the same situation is only 4.6%; 21.9% of the migrants are self-employed while only 4.7% of the residents with the urban household registration status are of the same type. These statistics are similar to the statistics provided by National Bureau of Statistics. According to the monitoring report given by National Bureau of Statistics, in the recent years, about 40% of migrants have signed labor contracts with their employers and around 15% of these labor contracts are not the fixed term contracts, meaning that employers can lay them off at any time.

Another aspect showing the uncertainty in the migrants’ income is that migrants are more likely to change their jobs frequently. In the sample, 38.8% of migrants without urban household registration status have ever changed their jobs while only 5.2% of residents with urban household registration status have got the similar experience. What is worse, the cost for migrants to change their jobs is higher. A recent investigation carried out in Beijing, Wuxi and Zhuhai indicates that the discrimination embedded in the household registration system has decreased the number of jobs that migrants can possibly find. In fact, the jobs that migrants are doing are mostly the ones that local residents are not willing to do; despite this, the discrimination brought by the system itself still increases their costs of getting these jobs and their costs of losing these jobs. All the data and facts have shown that there are more uncertainties about the future income for migrants without urban household registration status than residents with the urban household registration status, and this forces the migrants to deposit more money so as to pay all the expenses in the time when they are looking for a new job.

Third, migrants are also faced with the problem of salary arrears. Concerning this problem, we want to cite the evidence mentioned in a paper published in 2010:

“Less than a half (48%) of migrant workers can get their salary on time, and 52% of migrant workers who have been interviewed are always faced with or sometimes come across the problem of salary arrears. 68% of migrant workers cannot have a day off after the week-long work. As they work in the holidays, 54% of migrant workers have never received the overtime pay required by law, and 76% of them have never received the overtime pay in the public holidays.”

The risk of salary arrears further motivates the migrant workers to have precautionary savings. To sum up, compared with the residents with the urban household registration status, the social welfare given to the migrants in the cities is a lot less; moreover, they are faced with more uncertainties in their jobs. Therefore, even with the same amount of income as the local residents, migrants without the urban registration status are more likely to have precautionary savings.

4. The Second Mechanism for Urban Household Registration to Constrain Consumption: Expectation of the Permanent Income

The second mechanism is related to the expectation of the future income (permanent income). Such expectation influences their present consumer behaviors. Migrants in the cities without the urban household registration status will not live permanently in the cities where they work. Once they go back to the rural areas, their income will decrease. According to a paper published last year, with the increase of age, the likelihood for rural residents to migrate to the cities will firstly increase and later decrease. The turning point in this “Inverted U” shape is 33 years old, that is, after they reach 33 years old, migrants in the cities without the urban household registration status will be more likely to go back and live in their hometown. In the past decade, in China the income per capita for the urban residents is three times the income per capita for the rural residents, so these migrants will predict that after they go back to their hometown their income will decrease dramatically.

It is difficult to calculate the permanent income in a very accurate way; hence in our paper we have used a relatively indirect way to prove this mechanism. This mechanism is derived from a city’s restriction on the permanent residence of migrants without the urban household registration status; therefore, we assumed that the more restrictions there are, the greater influence of the household registration system on migrants’ expectation of permanent income; and the greater such an influence is, the greater the effect on their present consumption will be. Based on this idea, according to the strictness of household registration we have classified the sample into five groups: Shanghai, Chongqing, capital cities of the coastal provinces, capital cities of the non-coastal provinces, and non-capital cities of the non-coastal provinces. In China, it is more difficult for rural residents to get the urban household registration status in the large-sized and medium-sized cities. According to some official documents, the change of residency status from “rural” to “urban” or from other cities to the major cities such as Beijing, Shanghai, Tianjin, etc. must be under “strict control” while the change of residency status from the countryside to the suburban areas, from small towns to the small cities, and from small cities to the big cities should be under “reasonable control”.

The results of the analysis have supported our assumption. The household registration system in Shanghai is under the strictest control. We have finally got the estimation that the consumption discrepancy between migrants without the urban household registration status and residents with the urban household registration status is 46.3% in Shanghai; 26.2% in Chongqing; 20.6% in capital cities of the coastal provinces; 6.05% in capital cities of the non-coastal provinces; and 11.3% in non-capital cities of the non-coastal provinces. These results have proved our prediction: the stricter the control of the household registration system in a city is, the greater the effect of the household registration system on consumption discrepancy will be.

What is worth noticing is that this result has excluded other assumptions. For instance, some people may simply attribute the low consumption of migrants in the cities to the fact that they are from the rural area – if so, even when they get the urban household registration status in the cities where they work, they will not have too much consumption. If the low consumption is affected by migration, then we should have observed a similar amount of consumption discrepancy between migrants without the urban household registration status and residents with the urban household registration status in different cities. However, if the household registration system is the main factor for the consumption discrepancy, then the consumption discrepancy should become more obvious in the areas where the household registration system is under stricter control; and that is exactly what we have seen in the analysis.

5. Discussion on the Policies

Our research has found that without the urban household registration status, migrants in the cities will have more precautionary savings and have lower expectation of permanent income; besides, because of the high mobility, they will reduce the consumption of durable goods. We have also found that the effect of household registration system is more distinct on migrants who have less income; and the consumption difference between migrants without the urban household registration status and residents with the urban household registration status cannot be explained by their differences in family structure, level of education, expenses on children’s education, or the ownership of property, etc.

In the past decade, as the group of migrants in the cities is getting bigger and bigger, the negative effect of the household registration system on the development of residents’ gross consumption in China becomes stronger and stronger. Therefore, we think that the restriction of household registration system is one of the major reasons for the decrease of the household consumption rate in China. Since the explosion of financial crisis in 2008, the Chinese government has been trying to formulate different policies to boost the household consumption and rebalance the Chinese economy. The results of our research have shown that the household registration system is the main obstacle to the rebalance of the Chinese economy; if there are fewer restrictions concerning the household registration, the 300 million migrants without the urban registration status in the cities will increase their consumption, which will help stimulate the domestic demand.

To be more specific, based on the findings in Part 3 and Part 4 concerning the mechanisms, we want to propose here two steps for the reform of the household registration system. Firstly, the Chinese government should try to guarantee the equality between migrants without the urban household registration status and residents with the urban household registration status in the aspect of public service, especially the social security and other insurance programs. Besides, the Chinese government should take measures to prohibit every kind of discrimination against the migrants without the urban household registration status in the labor markets. Secondly, the Chinese government should lower the threshold for the urban household registration status step by step; in this way, for the migrants in the cities, the expectation that they will live in the cities for a longer term and they can get higher permanent income will become higher. Therefore, the policy makers can adjust the present registration system to make it more possible for the migrants, who have steady jobs, reside at a fixed place and pay the social insurance premiums regularly, to get the urban household registration status. In the large cities where the household registration system is under strict control, residence permits can be given to the select migrants so that they can live legally in the respective city for 5 to 10 years. Policies similar to this can lower the mobility of migrants and motivate them to purchase more durable goods.

The feasible and effective reform of the household registration system is an important means for the increase of consumption, the balance of the economy, and the sustainable growth; to reform such a system which discriminates against the migrants can also help realize the goal of “Equal Opportunities for All” and boost the harmony and stability in the Chinese society.

Note: The author is a professor and PhD supervisor in the School of Economics and Management at Tongji University. This article first appeared in Teahouse for Economists (Vol.4, 26-31) in 2015.