The Wealth Effect of the Stock Market and Household Consumption Propensity: Evidence from Chinese Household Microsurvey Data
LI Jiashan, YI Xingjian, HE Qizhi, ZHOU Li
School of Public Affairs, Zhejiang University; Innovation Center of Yangtze River Delta, Zhejiang University; School of Finance & Investment, Guangdong University of Finance; School of Statistics and Mathematics, Zhejiang Gongshang University; School of Finance, Guangdong University of Foreign Studies
Summary:
Accelerating the creation of a new development dynamic requires improving the long-term mechanism for expanding consumption, which can better leverage the wealth effect of capital markets on household consumption. Given that housing assets dominate the portfolio of Chinese households, domestic discussions about the wealth effect have primarily focused on the housing market, while research findings regarding the wealth effect of China's stock market remain inconsistent. In recent years, the influence of the stock market on household welfare has been steadily growing. According to data from the National Bureau of Statistics and the China Securities Depository and Clearing Corporation Statistical Yearbook, Chinese households' participation rate in the stock market rose from less than 5% before 2014 to 14.99% in 2022. This paper aims to address three core research questions: Does China's stock market exhibit a wealth effect？ If such an effect exists, what are the underlying transmission mechanisms？ Do stock market fluctuations differentially affect consumption behavior across heterogeneous household groups？ This study employs data from the China Household Finance Survey (CHFS) and applies the Propensity Score Matching-Difference in Differences (PSM-DID) method to empirically examine the wealth effect in China's stock market. The results demonstrate a statistically significant wealth effect in China's stock market, with the baseline findings remaining robust after conducting various tests, including alternative dependent variables, consideration of indirect stock market participation, and external validity analysis. The transmission mechanisms primarily operate through enhancing household property income and reducing the motivation for precautionary savings. Subsequently, heterogeneous analysis from the perspective of consumption inequality reveals that the wealth effect is more pronounced among households with lower consumption levels, lower income, limited financial literacy, and lower liquid asset holdings. Finally, through scenario simulations, this study estimates that when China's stock market participation rate reaches 70% with returns either matching the average performance of major economies' stock indices or growing in tandem with GDP, the annual boost to household consumption expenditure would range approximately between 500-700 billion yuan. This study makes three principal contributions to the literature: First, it not only empirically confirms the existence of a wealth effect in China's stock market but also extends the research on how property income influences household consumption. Second, the study examines the heterogeneity of the stock market wealth effect across micro-level households, revealing the differential impact of transitory income shocks on consumption behavior. These findings provide further empirical validation and extension of the liquidity constraints theory (Zeldes, 1989) and the buffer-stock saving model (Carroll, 1997). Third, by constructing a counterfactual analysis framework, the study simulates the stimulative effect of stock market development on household consumption under various scenarios, offering evidence-based policy insights for fostering healthy and stable capital market development. This study proposes three key policy implications. First, regulators must prioritize maintaining the healthy and stable development of China's stock market, as it constitutes the fundamental prerequisite for the wealth effect. The current underdeveloped regulatory framework and financing-oriented growth model have long constrained market vitality, while persistent weak performance further discourages new capital inflows, creating a vicious cycle. To address this, regulators should strengthen the equilibrium between investment and financing functions, impose stricter penalties for financial misconduct, including fraud and insider trading, accelerate delisting mechanisms to improve the quality of listed companies, and institutionalize safeguards for sustainable development. Second, with a well-functioning stock market, households should be encouraged toward indirect participation through mutual funds, given our empirical findings that fund-based investment boosts consumption willingness more effectively than direct stock ownership. This approach accommodates China's current low financial literacy by offering professional management and lower barriers to entry, though it necessitates parallel improvements in fund supervision and investor education. Third, since our analysis identifies disposable income and precautionary savings as core consumption determinants, stimulus policies should focus on raising incomes and strengthening social security, with particular emphasis on low-income, financially underserved, and liquidity-constrained households that demonstrate higher consumption sensitivity to income shocks. Reforms in income distribution and social security should specifically target these groups to maximize consumption potential.
李家山, 易行健, 何启志, 周利. 股票市场财富效应与居民消费意愿——来自中国家庭微观调查数据的经验证据[J]. 金融研究, 2025, 538(4): 170-188.
LI Jiashan, YI Xingjian, HE Qizhi, ZHOU Li. The Wealth Effect of the Stock Market and Household Consumption Propensity: Evidence from Chinese Household Microsurvey Data. Journal of Financial Research, 2025, 538(4): 170-188.
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