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July 25, 2007

China’s middle class reaches 80 million

Analyst Insight by An Hodgson.

In line with the country's impressive economic growth, the middle class in China is expanding strongly. They comprise the most important target consumer group for consumer goods companies who want to secure long-term success in the country.

Issue

China's middle class has grown from 65.5 million in January 2005 to 80 million in January 2007. It is forecast to expand to 700 million by 2020, driven by continued strong economic growth. The substantial and rising number of middle class with its growing incomes will transform the Chinese consumer market.

Importance

China's impressive economic expansion in recent years has brought with it an emerging middle class:

  • Real GDP grew by 10.7% in 2006 over a year earlier. This is a ten-year high and a fourth consecutive year of double-digit economic growth;
  • Annual disposable income stood at RMB21,739 per household in 2006, representing a robust 50% increase over 2001 in real terms;
  • In line with rising income, the country's middle class had risen to 80 million by January 2007, up from 65.5 million in January 2005. The middle class in China is defined as comprising households with an annual income between RMB60,000 and RMB500,000;
  • The Chinese middle class is concentrated mainly in urban areas where greater jobs and business opportunities exist. It comprises of entrepreneurs and managers in high-tech companies, foreign firms and financial institutions as well as some self-employed private entrepreneurs;
  • The expanding middle class in China is indicative of the country's economic success and is extremely important to both local and international companies due to their significant purchasing power.
Household disposable income by bracket: 2001 and 2006

Source: Euromonitor International from IMF and national statistics.

Implications

The growing middle class in China will open up opportunities for companies in a range of sectors:

  • As personal wealth increases, local and international banks can expect to expand on a wider range of financial products and wealth management services. Data from the central bank shows that the Chinese private banking market grew at an annual rate of 12% in 2006;
  • Companies in the automotive, housing, tourism, education and entertainment industries can expect strong business growth in the coming years. An increasing number of international luxury brands are also setting up shops in China to capitalise on the rising wealth and consumer spending. In 2006, total consumer expenditure was above RMB7,800 billion, a 10.6% real increase from a year earlier;
  • In 2006, the proportion of private consumption in China's total GDP was 38.0%, well below the world's average of 59.2%. The expansion of the middle class will help to boost the role of private consumption in the Chinese economy, turning it into a key driver of economic growth. This will reduce the reliance on exports for China's economic expansion.
Total private consumption and proportion of private consumption in GDP: 2001-2006

Source: Euromonitor International from IMF.

As the emerging middle class concentrates in urban areas, the gaps between urban and rural and between rich and poor are widening:

  • In 1990, the richest 10% of households possessed 19.0% of the national wealth. By 2006, their share had risen to over 40.0%;
  • Between 1990 and 2005, China's Gini coefficient rose from 0.257 to 0.447 (even worse than India's 0.325). A zero Gini coefficient represents perfect income equality and a score of 1.0 indicates absolute income inequality;
  • In 2006, per capita household income in rural areas grew by just 7.4% in real terms in 2006 while in urban areas the rate of growth was 10.4%;
  • The widening wealth gap can undermine the business opportunities presented by the emerging middle class in that it can cause social and political discontent, potentially threatening the business environment and economic growth in China.

Future scenarios

The Chinese economy is expected to expand at an annual rate of 10.0% in 2007 and 9.8% in 2008. Meanwhile, inflation is expected to be relatively low, at an annual rate of 1.8% in 2007 and 2.2% in 2008. This means that the purchasing power of the Chinese consumer as a consequence of rising incomes and economic expansion will hardly be eroded by inflation.

The middle class is expected to rise to 700 million by 2020 (compared with less than 100 million in 2007). This large number will transform the Chinese consumer market. In order to succeed in this market, it is essential that firms begin to target and promote their brands among this middle stratum of the market.

Although the government is also exerting efforts to reduce the incidence of poverty and narrow the wealth gap, the middle class will continue to congregate in towns and cities in the medium term. Thus, market potential will likely be found in urban areas.


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