Abstract: Over the past two years, China’s household sector has undergone a shift in asset allocation behavior from seeking capital appreciation to capital preservation. Regarding this phenomenon, the prevailing explanation suggests that it is a risk-averse behavior adopted by the household sector due to weak economic expectations and significant pressure on asset price reassessment, indicating a decline in risk preference. However, during the period of significant economic downturn and dramatic asset price reassessment in 2014-2015, a similar situation did not occur. Additionally, the influence of household debt pressure on household behavior can be largely ruled out. In fact, over the past two years, the debt repayment pressure faced by Chinese households has been easing, and the crowding-out effect of debt on cash flow has been diminishing.
The brief believes that the underlying logic behind the significant change in household asset allocation behavior is the increasing uncertainty among households regarding future wage earnings. To hedge against this uncertainty, households need to hold more low-risk safe assets. Upon reevaluation, the so-called "low-risk, low-return" safe assets in effect offer relatively high real yields after adjusting for price levels.
When the entire household sector engages in similar behavior, a fallacy of composition occurs. This proactive "self-rescue" may not necessarily assist the household sector in rebalancing its balance sheet. Instead, it could potentially lead the household sector into a kind of "safety trap." At this point, only robust external intervention can aid the household sector in breaking free from the quagmire and rebalancing its balance sheet as soon as possible.
