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I. Introduction
The sweeping global economic crisis of 2008 affected both the developed and developing countries. Although the crisis began with the subprime catastrophe in the USA, it quickly spread worldwide, including to China. The first legislative action of Barack Obama's administration in Washington in January 2009 was to pass a $787 billion economic stimulus package to save the struggling US economy. At the same time, the Chinese government issued an urgent ten-point measure to fight off the worsening economic situation, but only time will tell whether it will work. The measure mainly focused on stimulating domestic consumption ([22] Qin, 2008). An understanding of how Chinese residents save and consume can serve as a starting point for effective government measures regarding domestic consumption.
The current paper has three objectives. First, we explore whether Western theories of consumption are applicable to the Chinese situation. Second, we test our hypothesis on the intermittent and cyclical nature of Chinese urban consumption. Finally, based on our theoretical analysis, we propose recommendations for Chinese policy makers to serve as a basis for further measures to sustain economic growth and for policy makers in other emerging economies that are facing a similar current economic slowdown.
II. Literature review
Western economists have proposed many theories about consumption, such as [18] Keynes's (1936) absolute income hypothesis (AIH), [8] Duesenberry's (1948) relative income hypothesis (RIH), [11] Friedman's (1956) permanent income hypothesis (PIH), [12] Hall's (1978) life cycle-PIH (LC-PIH), the excess sensibility hypothesis ([10] Flavin, 1985), the λ hypothesis ([3] Campbell and Mankiw, 1991), the buffer inventory deposit hypothesis ([6] Deaton, 1991), the precautious saving hypothesis ([1], [2] Caballero, 1990, 1991), the liquid constraints hypothesis ([28] Zeldes, 1989; [14] Jappelli and Pagano, 1994), and so forth. These theories are primarily based on micro-rational behavior and on the premise that the system is definite; hence systemic change and population and income differences are ignored. Although these theories have played an inspirational role in analysis of consumption behavior in the developing countries, a close examination of the conclusions reveals their limitations. In particular, it is difficult to explain the problems of the developing countries, such as China, based on these theories.
Before the economic reform, China was characterized as an economy of shortage, thus there were resource...