Determinants of household savings in China and their role in quasi-money supply

This study derives household saving potential empirically from econometric models of Chinese urban and rural household consumption and uses this potential to explain household bank deposits. Model simulations are performed to analyse the effects of interest rates, income and income uncertainty on the saving potential and the bank deposits. The bank deposits variable is then used to explain quasi-money supply. High bank absorption of household savings is found to account mainly for the rapid growth in quasi-money, which in turn explains the exceptionally high M2/GDP ratio. Households' savings are largely predictable from their regular consumption.