The paper investigates the relationship between changes in asset wealth and the trendmovements of household consumption in urban China. Using the vector error correctioncointegration model, we demonstrate that there is a unique long-run cointegrating relationshipbetween household consumption, disposable income, financial wealth and housing wealth inurban China. We find that housing wealth is the only factor that restores the long-runequilibrium relationship when the cointegrated system is disturbed by an external shock. Inaddition, our permanent-transitory variance decomposition analysis indicates that nearlyall variance in the movement of consumption is permanent, supporting the classical randomwalk hypothesis of consumption behavior. However, a large proportion of variance in theshort-run movements of housing wealth is found to be transitory. The paper investigates the relationship between changes in asset wealth and the trendmovements of household consumption in urban China. Using the vector error correctioncointegration model, we demonstrate that there is a unique long-run cointegrating relationshipbetween household consumption, disposable income, financial wealth and housing wealth We find that housing wealth is the only factor that restores the long-runequilibrium relationship when the cointegrated system is disturbed by an external shock. Inaddition, our permanent-transitory variance decomposition analysis shows that nearlyall variance in the movement of consumption is permanent However, a large proportion of variance in the short-run movements of housing wealth is found to be transitory.