This paper provides a new explanation for China's low consumption-to-GDP ratio by highlighting the constraints of the “household registration system” (Hukou) on China's household consumption. Our baseline results show that the consumption of migrants is 16–20% lower than that of local urban residents. We further find evidence suggesting that, caused by Hukou restrictions, migrants save more for precautionary purposes, have lower expectation of permanent income, and consume much less durable goods because of high mobility. Moreover, we have found no evidence that the consumption heterogeneity can be explained by migration effects, culture, or other forms of household heterogeneity. As both the number and income level of migrants are rising quickly, the constraining effects of Hukou on household consumption is increasing.
