The Consumption‐Stimulating Effect of Public Rental Housing in China

• Published date: 01 January 2022
• Author: Xiaokuai Shao,Yujin Cao,Yangchuan Teng,Jidong Chen,Liutang Gong
• Date: 01 January 2022
• DOI: http://doi.org/10.1111/cwe.12403

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 106–135, Vol. 30, No. 1, 2022

106

*Xiaokuai Shao, Assistant Professor, International Business School, Beijing Foreign Studies University, China.

Email: shaoxiaokuai@bfsu.edu.cn; Yujin Cao, Associate Research Fellow, Institute of Economic Research,

China Academy of Macroeconomics, China. Email: caoyujin777@126.com; Yangchuan Teng, PhD Candidate,

Business School, Beijing Normal University, China. Email: tengyangchuan@foxmail.com; Jidong Chen

(corresponding author), Associate Professor, School of Public Policy and Management, Tsinghua University,

China. Email: chenjidong@tsinghua.edu.cn; Liutang Gong, Professor, School of International Economics and

Management, Beijing Technology and Business University, and Guanghua School of Management, Peking

University, China. Email: ltgong@gsm.pku.edu.cn. This project is supported by the National Natural Science

Foundation of China (No. 72074133), the National Social Science Foundation of China (No. 18ZDA080), the

Fundamental Research Funds for the Central Universities (No. 2020QD014) at the Beijing Foreign Studies

University, and the Tsinghua University Initiative Scientifi c Research Program.

The Consumption-Stimulating Effect of

Public Rental Housing in China

Xiaokuai Shao, Yujin Cao, Yangchuan Teng, Jidong Chen, Liutang Gong*

Abstract

China’s public rental policy creates opportunities for poor households to rent apartments

at low rental prices. In addition to such an impact, we argue that public rental housing

increases the purchasing power of the poor and therefore enhances the income elasticity

of consumption, i.e., the percentage of consumption increment due to a 1 percent increase

in income. Based on a nationwide dataset from China, the Chinese Household Income

Project 2018, we fi nd that public rental housing signifi cantly increases the marginal impact

of household disposable income on consumption. Specifically, our analysis suggests that

public rental apartments could increase the income elasticity of consumption demand by

18 percent among all rental households and by 24 percent among rental households

with below-average income. We also find that the effect of public rental housing on

income elasticity of consumption is stronger for service consumption than for nonservice

consumption. These results suggest that a well designed public rental policy could not only

promote consumption in favor of the service industry but also alleviate the undesirable

consequences of the unbalanced consumption structure caused by income inequality.

Keywords: consumption, elasticity of consumption, income, inequality, public rental housing

JEL codes: D3, H2, R2

I. Introduction

After decades of economic reform and opening up, China’s economic development not

only interacts with the international market but also relies strongly on demand in the

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

The Consumption-Stimulating Effect of Public Rental Housing in China 107

domestic market. Such a pattern is now refl ected in China’s “dual circulation” strategy.

In the new era of development, the Chinese economy is facing multiple challenges,

including the stimulation of domestic consumption, reform of the income distribution

system, and the need to maintain a healthy housing market. In this paper, we argue that

a well designed public rental policy, as a supplement to the private housing market in

China, could simultaneously solve these problems – at least partially.

The housing situation has changed signifi cantly in the past few decades in China.

Residential housing was typically provided by employers in the public sector prior

to the 1990s, and then became commoditized in the mid-1990s. The past 15 years

have brought mass rural-to-urban migration (Meng and Zhang, 2001; Song et al.,

2012) and a limited increase in the housing stock. As a result, the housing price in

the first-tier cities in China demonstrated an average of 13.1 percent annual growth

(Fang et al., 2016; Glaeser et al., 2017). Due to high saving rates (Wei and Zhang,

2011) and subjective preferences (Hu, 2013), the owner-occupied rate in China is

reported to be 90 percent, which is higher than that of the US (Glaeser et al., 2017). In

addition, the sale-to-rent price ratio remains relatively high in China (Wu et al., 2012;

Sun et al., 2017).

Although residential housing is typically categorized as a private good, private

provision of housing involves limited affordability and constrained purchasing

power, thus making it necessary to implement public subsidized housing. In the 2017

annual Central Economic Work Conference, the Chinese State Council advocated for

mechanisms that aimed to increase efficiencies in the rental market.1 From then on,

public housing has become one of the most prominent focus issues for policymakers

in China. Furthermore, government-subsidized housing (or “social housing”) through

public ownership is also pervasive in developed countries. For example, a large number

of houses are supplied by the UK government, and the rents are set below the market

price to achieve the goal of “a separate house for every family that wishes to have one”

(Whitehead, 2008, pp. 135–52).

In this paper, we argue that public rental policy not only serves its original policy

intention, i.e., to satisfy the basic living needs of the poor, but also improves their

purchasing power and therefore stimulates consumption. We fi rst develop a decision-

theoretic model in which a representative household makes choices regarding renting,

non-housing consumption, and saving. An opportunity to have public rental housing is

refl ected in the model with a lower rental price. The comparative statics of the model

shows that a public rental apartment saves household purchasing power, and therefore

1For more details see http://www.gov.cn/xinwen/2017-12/20/content_5248899.htm.