How well-off is China’s middle class?

by Chinapower/csis.org

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 desired 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.

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 56 percent in 2015.

As Chinese workers have flocked to cities, wages have grown substantially, averaging an 11 percent increase 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 $13,300. This figure falls between the per capita income of other developing countries like South Africa ($12,100) and Brazil ($14,100), but is significantly lower than the $37,900 average of OECD economies.

A greater demand for labor in China’s coastal cities has disproportionately driven urbanization in eastern provinces, which has exacerbated significant 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 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 among the highest levels of Gross Domestic Product (GDP) per capita in the country (each at around $30,000), but are still well below those in developed-economy cities such as New York at $69,900 or Tokyo at $43,700.

Importantly, there is no standard statistical definition of a middle-class level of income, but some metrics use 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.

Since the early 2000s, China’s middle class has been among the fastest growing in the world, swelling from 29 million in 1999 to roughly 421 million in 2013. Compared to other large, emerging market countries this growth is particularly noteworthy, as Mexico’s middle class only grew from 19 to 34 percent (19 to 42 million) and Indonesia’s only grew from 1 to 10 percent (2 to 24 million) over the same time period.

Most of China’s middle-class growth has occurred within the lower-middle income band. China’s middle-class share of 31 percent of its population is similar to that of the Netherlands (32 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 the Netherlands this figure is only 7 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 23.9 million cars being sold in 2016. For reference, U.S. consumers bought 17.5 million cars in 2016 and Brazilians purchased just 2.5 million automobiles. Read more…

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