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 people 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 for additional consumption and savings. In 2000, China’s middle class amounted to just three percent of its population. By 2018, this number had climbed to over half of the population, constituting nearly 707 million people. China’s growing middle class presents new economic opportunities, but also poses significant political and demographic challenges. 

    Breaking Down the Middle Class

    The Rise of China’s Middle Class 

    Decades of economic development have fueled a massive increase in incomes in China. China’s Gross National Income (GNI) per capita has grown more than ten-fold since 2000, reaching $10,410 in 2019. Although this is significantly lower than the $43,861 average of OECD economies, China’s GNI per capita is on the high end among fellow BRICS countries. In 2019, China led Brazil ($9,130), South Africa ($6,040), India ($2,130), and came in just behind Russia ($11,260).

    The increase in income has led to a rising middle class in China. While there is no standard definition of “middle class,” most metrics use income bands to differentiate between economic classes. For instance, the Chinese government defines incomes ranging from $7,250 to $62,500 (RMB 60,000 to 500,000) per year as middle class. McKinsey uses a range of $11,500 to $43,000 (RMB 75,000 to 280,000) per year. To facilitate cross-country comparisons, the World Bank uses a dollar-per-day amount, adjusted based on purchasing power parity (PPP). In 2015, Pew Research Center expanded this metric to include four additional income levels, with “lower-middle” and “upper-middle” together constituting the broader middle class. 

    Breakdown of Class Income Bands
    Income Band Daily Income Annual Income
    Poor <$2 <$730
    Low $2 – $10 $730 – $3,650
    Lower-middle $10 – $20 $3,650 – $7,300
    Upper-middle $20 – $50 $7,300 – $18,250
    High >$50 >$18,250
    Source: Pew Research Center

    Based on Pew’s income band classification, China’s middle class has been among the fastest growing in the world, swelling from 39.1 million people (3.1 percent of the population) in 2000 to roughly 707 million (50.8 percent of the population) in 2018. This amounts to an increase of 667.9 million (or 47.8 percentage points). Among BRICS economies, only Russia has come close to matching China’s rate of increase. Russia’s middle class grew by 62 million people, expanding from 28.2 percent of the population to 71.5 percent. Meanwhile, Brazil’s middle class grew by 54.8 million (30.3 percent to 51.4 percent), and India’s expanded by 64.8 million (1.2 percent to 5.7 percent). 

    Most of China’s middle-class growth has occurred within the lower-middle income band. In 2018, China’s middle-class share of 50.8 percent of its population was nearly identical to that of Sweden (51 percent), but differences emerge when breaking down the middle class into its lower and upper echelons. In China, 68 percent of the middle class falls into the lower-middle income category, while in Sweden this figure is only 11 percent.  

    Middle Class Size in BRICS Economies (2000-2018)
    Economy Share of Total Population in 2000 (%) Share of Total Population in 2018 (%)
    China 3.1 50.8
    Russia 28.2 71.5
    Brazil 30.3 51.4
    South Africa 15.1 22.5
    India 1.2 5.7
    Source: World Bank (PovcalNet)

    Spending Habits of the Middle Class

    The Chinese middle class is beginning to behave similarly to its counterparts across the world in terms of consumption 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 grew continually for 26 straight years through 2017, when 24.7 million passenger vehicles were sold. Sales in China have declined in recent years, to 21.4 million passenger vehicles in 2019, but the Chinese market still accounts for roughly one-third of global sales.

    Higher incomes have also enabled consumers to be better connected. Since 2000, China’s internet penetration rate has skyrocketed, from just 1.8 percent of the population to 54.3 percent in 2017. While this is much lower than in some advanced economies like South Korea (95.1 percent) and the US (75.2 percent), it is considerably higher than India’s rate (34.4 percent). Notably, internet penetration rates are significantly higher in China’s cities. According to the China Internet Network Information Center, the internet penetration rate among urban residents stood at 76.4 percent as of June 2020, compared to 52.3 percent among rural residents.  

    Growing access to the internet has spurred rapid growth of China’s e-commerce market, which is now the largest in the world. In 2020, China’s e-commerce market was valued at nearly $2.1 trillion, making it more than three times larger than the entire European e-commerce market.  

    Breakdown of the Global E-commerce Market (2020)
    Country/Region Value
    (Billions of US$)
    Global Share (%)
    China 2,090 53.4
    North America 749 19.1
    Europe 591.2 15.1
    Asia-Pacific
    (excluding China)
    358.3 9.2
    Rest of World 125 3.2
    Source: eMarketer

    Greater economic means have also created new educational opportunities. Between 2000 and 2018, annual gross enrollment in tertiary education grew more than seven-fold, from 7.6 percent to 53.8 percent.1 Many students are flocking overseas to study. Annual outbound students climbed from about 285,000 in 2010 to over 662,000 in 2018, with most leaving to study in the US, UK, Australia, and Canada. 

    Chinese tourism, both within China and abroad, has seen significant increases. Domestically, Chinese tourists made 5.5 billion visits in 2018, spending more than $773 billion. This far eclipses the 2000 figures, which saw just 744 million domestic tourists and $38.4 billion in tourism expenditures. Annual spending by Chinese travelers abroad has likewise soared, from $14.2 billion in 2000 to over $277.2 billion in 2018. Chinese travelers are primarily visiting Asian countries, including Japan, Thailand, and South Korea, but they are also traveling farther afield. According to the US International Trade Administration, about three million Chinese visitors traveled to the US in 2018, making China the fifth-largest source of tourists to the US. 

    Although Chinese consumer activity is catching up to – and surpassing – that of other countries, Chinese households saved a much greater share of their income (36.1 percent) than households in other major economies such as Germany (10.2 percent), the US (7 percent) and the UK (1.7 percent) in 2016. However, the Covid-19 pandemic is shifting saving patterns. Savings rates rose to 19 percent and 33 percent in the eurozone and the US, respectively. The impact has been mixed in China. Some unemployed individuals have dipped into their savings for survival, while others have reduced spending to cope with the uncertainty. 

    Debt patterns are similarly changing. Historically, Chinese households have had low levels of debt as a percentage of GDP as a result of their relatively high savings rates. Yet, from 2014 to 2019, China’s households added $4.6 trillion in borrowing, causing household debt to surge to 56 percent of GDP. 

    Much of this recent growth in household debt is linked to property markets. Chinese households keep a greater proportion of their wealth in real estate, averaging 74 percent in 2012 compared to 52 percent in the United States. Moreover, China has an above average home ownership rate of about 87 percent compared to just 68 percent in the US.

    Rising housing prices are putting increased financial pressure on China’s middle class. At the end of 2018, debt related to housing accounted for two-thirds of all household debt in China. In first-tier cities like Shanghai and Beijing, home prices ranged from 15 to 20 times the average household income in 2018. In comparison, the housing price-to-income ratio was 9.2 in San Francisco and 5.4 in New York City in 2017. The cost of renting is also on the rise. Average monthly rent in Beijing grew by over ten percent in the first seven months of 2018 alone. 

    Consequences of a Growing Middle Class 

    The expansion of China’s middle class has presented a host of new environmental, demographic, and social challenges. As the middle class continues to grow, the Chinese government faces ever-evolving demands to address these challenges.  

    The increased consumption levels of the middle class have contributed to environmental stresses. Rising vehicle purchases, higher gasoline consumption, and urban sprawl are resulting in higher CO2 emissions and elevated levels of air pollution. This has prompted action from the Chinese government, including a drive to increase renewable energy production and a pledge to make China carbon-neutral by 2060.  

    Dietary preferences have also shifted. A rise in animal protein consumption among the middle class has increased agricultural production and placed a considerable strain on the environment. This shift in middle-class diets, coupled with the sedentary lifestyle often associated with higher income occupations, has led to an increase in health care costs. Chronic and non-communicable diseases like heart disease and diabetes are on the rise in China, and they are often expensive to treat. From 2000 to 2018, annual health care expenditure grew from $55.5 billion (4.6 percent of GDP) to $893.5 billion (6.6 percent of GDP).  

    Health care concerns are further compounded by the fact that China’s population is aging. China’s population pyramid is in the process of inverting. Its dependency ratio (the number of people below age 15 and above age 65 divided by the total working population) is expected to increase from 37.7 percent in 2015 to 66.6 percent in 2050. Without working-age adults to support older generations, the rising costs of caring for older retired family members are expected to increasingly burden Chinese households.

    Inequality also poses a challenge for China, as the benefits of economic growth have not been shared equally throughout Chinese society. China’s Gini index – a measure of a country’s income inequality scored from 0 (perfect equality) to 100 (maximal inequality) – increased from 32.2 in 1990 to 43.7 in 2010. China’s Gini index has declined somewhat in recent years, to 38.5 in 2016, but it remains in the middle among major developing economies. China’s 2016 Gini Index was far lower than that of South Africa (63 in 2014) and Brazil (53.3 in 2016), but slightly higher than of Russia (36.8 in 2016) and India (35.7 in 2011).

    The Chinese government has faced growing demands from the middle class to address these interconnected issues. To alleviate the burden of rising health care costs, Beijing has extended healthcare coverage to urban non-workers and reduced out-of-pocket (OOP) spending on health care. In 2000, OOP spending covered 59 percent of total health care costs. This figure fell to 28.6 percent by 2018 as a result of growing contributions from the government as well as public and private insurance. The government has put in place plans to further reduce OOP spending to 25 percent by 2030. 

    To support China’s aging population, the government increased average pensions by more than 10 percent annually from 2005 to 2015. Pension raises have stalled somewhat, rising just by five percent in 2019, but Beijing has also looked to expand coverage by introducing a more general pension that covers workers not participating in the formal economy.  

    Poverty

    In addition to expanding the middle class, decades of economic development have also lifted hundreds of millions of Chinese citizens out of poverty. Learn more.

    Leaders in Beijing have also sought to spur wage increases and broaden the social safety net. China’s provinces and municipalities have regularly raised minimum wages in recent years. They have also put in place measures to expand unemployment insurance to migrant workers where, previously, these benefits would not follow their move to a new city.

    Most importantly, China’s leaders are focused on sustaining the economic growth that has powered the country’s middle-class growth. The government cut taxes by RMB 2 trillion (about $288 billion) in 2019, largely in an effort to offset the economic impacts of trade tensions with the US. The move boosted China’s GDP by roughly 0.8 percent that year, but China continues to face serious downward pressure on economic growth. Overcoming threats to economic development will be key to the continued expansion of China’s middle class and meeting their ever-growing demands. ChinaPower

    1. The gross enrollment ratio for tertiary school is calculated by dividing the number of students enrolled in tertiary education, regardless of age, by the population of the age group which officially corresponds to tertiary education.