How well-off is China’s middle class?

How well-off is China’s middle class?
How well-off is China’s middle class?
How well-off is China’s middle class? Top

    Over the past several decades, China’s economic development has lifted hundreds of millions of Chinese out of poverty and resulted in a burgeoning middle class. Middle class households typically have enough income to satisfy their primary needs – food, clothing, and shelter – with some disposable income left over for additional consumption and savings. In 2002, China’s middle class was only four percent of its population. A decade later, this number had climbed to 31 percent, constituting over 420 million people. China’s growing middle class presents an array of new economic opportunities, but also poses significant political and demographic challenges.

    Breaking Down the Middle Class

    Defining China’s Middle Class

    China’s ongoing development has created new economic opportunities in its cities, prompting hundreds of millions of rural Chinese to migrate to urban centers. In just a few decades, China’s urban population skyrocketed from 19 percent of the total population in 1980 to 58 percent in 2017.

    As Chinese workers have flocked to cities, wages have grown substantially, averaging an 11 percent increase per year from 2001 to 2015. Rising wages have led to a steady increase in China’s Gross National Income (GNI) per capita, which now stands at $14,358. This figure falls between the per capita income of other developing countries like South Africa ($13,139) and Brazil ($15,377), but is significantly lower than the $42,355 average of OECD economies.

    China’s urban population skyrocketed from 19 percent of the total population in 1980 to 58 percent in 2017.

    A greater demand for labor in China’s coastal cities has disproportionately driven urbanization in eastern provinces, which has exacerbated regional differences. China’s coastal provinces often boast higher per capita income levels than inland provinces even after taking into account the rural-urban income gap. For example, per capita income in 2016 among urban residents in the coastal province of Jiangsu is 40,152 yuan ($6,043) compared to just 26,743 yuan ($4,025) for urban dwellers in the landlocked province of Guizhou. China’s major cities – particularly Beijing, Tianjin, and Shanghai – have some of the highest GDP per capita in the country (each at around $30,000), but are still well below those of developed-economy cities such as New York at $69,900 or Tokyo at $43,700.

    Importantly, there is no standard statistical definition of “middle class”, but some metrics use income bands to distinguish between several different income groups. For instance, the Chinese government defines incomes ranging from 60,000 to 500,000 yuan per year ($7,250 to $62,500) as middle class. McKinsey uses a range of 75,000 to 280,000 yuan ($11,500 to $43,000) per year. To facilitate cross-country comparisons, the World Bank uses a dollar-per-day amount expressed in purchasing-power-parity (PPP) dollars. In 2015, Pew Research Center expanded this metric to include four additional income levels.

     

    Class Income Bands (Per day)
    Poor <$2
    Low $2 – $10
    Lower-Middle $10 – $20
    Upper-Middle $20 – $50
    High >$50
    Source: Pew Research Center

     

    Since the early 2000s, China’s middle class has been among the fastest growing in the world, swelling from 29 million in 1999 (2 percent of population) to roughly 531 million in 2013 (39 percent of population). Compared to other large, emerging economies, this growth is particularly noteworthy. Over the same period, Brazil’s middle class grew from 32 to 107 million people (21 to 52 percent of population) and Indonesia’s middle class grew from 2 to 26 million people (1 to 10 percent of population).

    Most of China’s middle-class growth has occurred within the lower-middle income band. China’s middle-class share of 39 percent of its population is similar to that of Switzerland (42 percent), but differences emerge when breaking down the middle class into its lower and upper echelons. In China, 75 percent of the middle class falls into the lower income category, while in Switzerland this figure is only 8 percent. Nevertheless, the emergence of a strong middle class may offer an opportunity for greater political participation for a large segment of the Chinese population whose primary needs are now satisfied.

    Spending Habits of the Middle Class

    The Chinese middle class is beginning to behave similarly to its counterparts across the world by spending income on a range of goods and services. Middle class spending growth has been primarily driven by consumers in the upper-middle income band, which have a significant amount of disposable income. For instance, passenger vehicle sales in China have experienced growth for 26 straight years, with 28.9 million cars being sold in 2017. For reference, US consumers bought 17.5 million cars in 2016 and Brazilians purchased just 2.5 million automobiles.

    Higher incomes have also enabled consumers to be better connected. Since 2006, internet users and mobile phone subscriptions have skyrocketed. China’s internet penetration rate has jumped by a factor of five since 2006 when it was at just 10.5 percent. This means that in 2017, over 54 percent of the Chinese population, greater than the entire population of Europe, had access to internet. This number significantly trails the OECD internet penetration rate of 77 percent, but is also considerably higher than India’s rate of 26 percent.  Notably, internet penetration rates are significantly higher in China’s cities. For instance, both Beijing and Shanghai have internet penetration rates around 75 percent. Online shopping has likewise increased. Chinese e-commerce accounted for 42 percent of the global market in 2017  – up from just one percent in 2008. Enhanced connectivity may also provide members of the middle class with improved means to advocate for social issues through various digital platforms.

    Greater economic means have also created new educational opportunities. Annual enrollment rates in Chinese higher education grew from about 5.5 million in 2006 to almost 7.5 million in 2016 – an increase of 35 percent. Students are also flocking overseas for education. Annual outbound students climbed from about 285,000 in 2010 to over 600,000 in 2017 – with most leaving to study in South Korea, the United Kingdom, Australia, and the United States. As of 2017, China had over 865,000 students studying abroad at the tertiary level, more than the next eight countries combined. By comparison, 305,000 Indian and 119,000 German students studied abroad in the same year.

    Chinese are also traveling more frequently, as evidenced by an increase  of over 275 percent in annual domestic trips between 2007 and 2016. Annual spending by Chinese travelers outside of the mainland grew by over 2500 percent – soaring from $10 billion in 2000 to over $260 billion in 2016 – with Hong Kong, Macau and Taiwan the top destinations. Chinese are also traveling further afield to locations like Thailand, South Korea, and the Philippines. Over roughly the same period, tourism spending abroad by US citizens grew by 175 percent to $160 billion, and spending by E.U. citizens grew by 172 percent to $388 billion.

     

    Although consumer financing instruments such as credit cards, mortgages, and automotive loans, which are more commonplace in upper-income countries, are on the rise in China, the savings habits of Chinese consumers have yet to reflect those of their foreign counterparts. Chinese households save a greater share of their income than households in other major economies. As of 2015, the average Chinese household saved about 40 percent of its income, the highest of any major economy and in stark contrast with savings rates of 5.2 percent and 1.8 percent for the US and Japan, respectively. These saving habits are somewhat of a necessity due to lower levels of social insurance and were historically promoted by the Chinese government as it set up state-owned banks and postal savings. Today, households cite family, investment, and retirement as top reasons for saving money.

    Asset allocation in China is also different than in other countries. Chinese households keep a greater proportion of their wealth in their home, averaging 74 percent compared to 51 percent in the Euro area. Moreover, China has an above average home ownership rate of 87 percent compared to 67 percent in the US. Its household debt to GDP ratio is similarly lower at just 49 percent in 2017 compared to 80 percent for the US

    FDI

    In 2016, China’s total debt amounted to 257.1 percent of its gross domestic product (GDP). Learn more about China's growing debt.

    Rising housing prices are putting increased financial pressure on China’s middle class. One 2012 survey found that couples living in major cities like Beijing or Guangzhou spent nearly 42 percent of their combined monthly incomes on mortgage payments. In other densely populated areas like Shanghai and Shenzhen, home prices ranged from 28 to 40 times the average household income in 2017. In comparison, the housing price-to-income ratio in San Francisco sat at 8.5 in 2017, and 5.5 in New York City. The cost of renting across China is also on the rise. Average monthly rent in Beijing grew by over ten percent in the first seven months of 2018.

    Between January and  October 2018, the Shanghai Composite Index fell by over 30 percent, which has placed additional financial stress on the middle class. Unlike most other major stock markets, the Chinese stock exchange is largely dominated by individual investors rather than institutional funds. Following China’s tightened regulations on shadow banking and peer-to-peer lending in 2018, stocks are one of the few investment options left for China’s middle class. As a result, hundreds of millions of China’s middle-class investors are vulnerable to market disruptions.

    Social Challenges of the Middle Class

    China’s middle class is forecasted by McKinsey & Company to reach 550 million by 2022 and comprise 75 percent of urban households. This continued expansion of the middle class presents a host of new environmental, demographic, and social challenges.

    The increased consumption levels of the middle class have contributed to environmental stresses. Rising vehicle purchases, higher gasoline consumption, and urban sprawl is resulting in higher CO2 emissions and elevated levels of air pollution. Dietary preferences have also shifted. A rise in animal protein consumption among the middle class has caused an increase in the intensity of agricultural production and placed a considerable strain on the environment.

    McKinsey & Company forecasts China’s middle class to reach 550 million by 2022 and comprise 75 percent of urban households.

    This shift in middle-class diets and the sedentary lifestyle often associated with higher income occupations has led to an increase in healthcare costs. Chronic and non-communicable diseases are on the rise in China. These same diseases characterize the populations of developed countries and are often expensive to treat. From 2005 to 2015, healthcare expenditure per capita in China increased by over 550 percent.

    Healthcare concerns are further compounded by the fact that China’s population is aging. China’s age pyramid is in the process of inverting, with its dependency ratio expected to increase from 36.6 percent in 2015 to 69.7 percent in 2050. Without vibrant working-age adults to support older generations, the rising social security and healthcare costs of older, retired family members is expected to increasingly burden Chinese households.

    Inequality also poses a challenge for China. China’s Gini coefficient, a measure of a country’s income inequality ranked from 0 (perfect equality) to 1 (maximal inequality), has increased from 0.28 in the 1980s to about .467 in 2017, higher than that of the US’ 0.39 or Japan’s 0.33. While the rise in inequality partially speaks to China’s previous economic impoverishment, it also reflects the imbalanced growth in the Chinese economy.

    The government has taken some actions to strengthen China’s social safety net to better handle a range of social issues. For example, Beijing increased average pensions by 275 percent from 2006 to 2015 and also introduced a more general pension that covers workers not participating in the formal economy. Additionally, it has extended healthcare coverage to urban non-workers, raised the minimum wage in fourteen provinces and major cities, and passed measures to expand unemployment insurance to migrant workers where previously, their benefits would not follow their move to a new city.

    Overall government expenditures on social spending rose to 9 percent of GDP in 2012 from 6 percent in 2007. While significant, this is noticeably lower than the OECD average of 22 percent. Social welfare reform is also part of the government’s attempt to spur middle class spending and reduce high savings rates. Other measures designed to encourage middle-class spending include raising the interest rate on deposits and lowering taxesChinaPower