The enigma of China's middle class
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While defining the middle class is a relative proposition, but what seems clear is that the number of people belonging to the middle class in China, and more generally in Asia, is rising. A 2010 report by the Brookings Institution suggests that Asia's middle class is projected to increase from 28 percent in 2009 to 66 percent in 2030 – an increase of 235 percent in just 20 years. The report says that China's middle class is poised to rise significantly not only because of the country's economic growth rate, but because more Chinese will continue to break out of the ranks of the poor. By 2030 the number of Chinese making more than $10 per day should increase to 74 percent from 11 percent today.
In 2006 the China National Research Association (CNRA) defined six criteria for what constitutes middle class status in China, based on education, salary, profession, societal influence, savings and holidays. At that time, the income benchmark for being a member of the "new middle class" was just RMB2,000 (approximately US$300) per month (or $3,600 per year). McKinsey notes that as of 2006, 77 percent of urban Chinese households lived on less than RMB25,000 ($3,676) per year – meaning, that by the CNRA's definition, 77 percent of Chinese do not belong to the new middle class.
A 2009 study by China's National Bureau of Statistics found that even with an 8.8 percent rise in disposable income that year, per capita disposable income for the average urban resident was just RMB17,175 ($2,525) and RMB5,153 ($758) for the average rural resident of the country, and that urban dwellers earn 333 percent more than farmers. This is important because as of 2006, 70.8 percent of the Chinese population engaged in some form of agricultural work according to Xinhua in 2008, and 54.3 percent of Chinese live in rural areas, meaning the majority of Chinese have very little disposable income.
So the idea that the majority of average Chinese consumers will be owning a home or a car in the near future, appears to be mistaken. This represents the paradox of the Chinese consumer market, where according to the ADB, in 2005 the percentage of "affluent" households owning a radio, television, air conditioner, refrigerator, or car was lower in China than in the Philippines – a country considered to be much poorer.
At the same time, a 2010 McKinsey study of Chinese consumers points out that in spite of the limited number of affluent consumers and individuals with significant disposable income, in general, Chinese consumers have become more sophisticated and demanding – akin to their counterparts in the developed world. However, Chinese consumers tend not to be brand loyal, but rather value driven, and tend to do more research before making a purchase than typical consumers in the developed world, so they generally take more time to make purchasing decisions.
The challenge for any producer of products in China, then, is to transform the average consumer into a loyal consumer, based on value for money. In reality, this is no different than what is required in many other countries, but as the middle class and middle class consumers find their footing in China, arriving at a definition of what constitutes value for money is bound to be ever changing, as is the definition of what constitutes the middle class. So all those starry eyed consumer brand CFOs expecting a windfall by doing business in China will need to think of another way to remain profitable for the foreseeable future.
Daniel Wagner is Managing Director of Country Risk Solutions, a political and economic risk consulting firm based in Connecticut, USA (http://www.countryrisksolutions.com/)
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn
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