Growing Chinese Middle-income Group Benefits World Economy




IN international society, the middle-income group is often called the middle class. In China, academic circles and government departments often adopt the term “middle-income group.” As in other countries, there are different opinions and standards as to what constitutes the middle-income group in China. The consensus reached in Chinese academic circles is that the middle-income group should be defined by comprehensively considering factors such as income, profession, consumption, and self-identity. According to analyses by experts from the Ministry of Finance of China, the standard middle-income group in China refers to those with an annual pre-tax household income ranging from RMB 60,000 to RMB 200,000 (here we are talking about a three-member family). The U.S.-based McKinsey & Company adopts roughly the same standards as the Ministry of Finance in defining the middle-income group. It categorizes consumers in China with household incomes in the range of US $9,000 to US $34,000 (about RMB 60,000 to 229,000) as the middle-income group. McKinsey further divides the group into mass middle class with an annual household income from US $9,000 to US $16,000, and upper middle class with an annual household income in the US $16,000 to US $34,000 range.



A Critical Factor


In 2013 the Chinese government first raised the goal of expanding the size of its middle-income group and gradually attaining an olive-shaped income-distribution structure. This is of great significance for China to build a moderately prosperous society and achieve consumptiondriven economic growth. The middle-income group has a higher consuming propensity than high-income and low-income groups. The expanding middle-income group is conducive to keeping domestic demand stable and boosting economic growth. According to the theory of economics, the Marginal Propensity to Consume (MPC) of the middle-income group is considerably higher than that of high-income and low-income groups. People with high-income have enjoyed relatively high standards of living, so the proportion of additional income used in consumption is lower than that of the middle-income population. Therefore, the high-income group plays a limited role in boosting domestic demand. Although people with lower incomes have relatively high MPC, their purchasing power is curbed by their overall income level. Moreover, as they mainly spend money on daily necessities, their role in propelling the upgrading of consumption structure is also relatively insignificant. According to a report by McKinsey & Company, currently the total individual consumption of the middle-income group in China accounts for 74 percent of total urban consumption and 58 percent of the national total private consumption. The consumption expenditure of the middle-income group takes up 24 percent of the GDP of all Chinese cities and 20 percent of the national GDP. The middle-income group’s consumption has thus become an important engine to boost Chinese economic growth. McKinsey estimates that by 2022, the total private consumption of the middle-income group will hit US $2.3 trillion, twice that of 2012. In fact, the olive-shaped income distribution pattern with the middle-income group as the mainstream contributes most to achieving social stability and sustainable economic growth.


Opportunities for Foreign Enterprises


In September 2015 during Xi Jinping’s U.S. visit, he said while attending a China-U.S. CEO Roundtable that the middle-income group in China had swelled to nearly 300 million, and that the figure was expected to double in the coming ten years. McKinsey made a similar prediction: the middle-income population in China will reach 630 million by 2022, accounting for 45 percent of the country’s total. Middle-income consumers pay attention to quality, brand, and service, and are more likely to purchase products featuring new design and technology. Therefore, they are the main force buying middle- to top-grade products, modern service, and intellectual products. They have an increasing demand for foreign high quality and high-tech products, and service products in fields of finance, health care, and education, thus creating great business opportunities for foreign enterprises and becoming a driving force to boost the local economy. Sales of luxury goods, such as cars, cosmetics, watches, and high-end clothing, are rising rapidly. China has already become the world’s largest luxury consumer market. According to data from the Ministry of Commerce, Chinese tourists made 120 million overseas visits in 2015, and their consumption abroad, including transportation, accommodation, and shopping expenses, totaled RMB 1.5 trillion, among which at least RMB 700-800 billion was spent on shopping. China’s middle-income group’s surging demand for foreign products and enthusiasm for outbound tours not only augur business opportunities for foreign enterprises, but also contribute to job creation and economic growth in destination countries. Middle-income people are generally well educated, and willing to learn about and understand the outside world with an open and inclusive attitude towards foreign culture. They are also qualified talents needed by foreign-invested companies in China, and constitute the main force to attract investment from transnational businesses.


Challenges Ahead


As the second largest economy in the world, China has seen its middle-income group continue to expand. China has a big middle-income population, but its proportion in the country’s total population is much lower compared with that of developed countries. China’s official data show that its middle-income group accounts for 30 percent of the total population, while the proportion in developed countries is generally above 50 percent. Australia has the highest percentage of middle class in its population, which stands at 80.3 percent. The proportion is 68.6 percent for Norway and Japan, 69.6 percent for the U.K., 61.7 percent for France and 50 percent for Germany and the U.S. An olive-shaped income distribution structure can take shape only when the proportion of middle-income group reaches the 60 to 70 percent range, which would contribute most to the economic growth, social stability, and improvement of people’s well-being. To increase the proportion of the middle-income group to the total population is crucial for China to avoid the middle-income trap. Soaring housing prices, the relatively wide gap between rich and poor, the income distribution that still needs to be improved, and corruption are major impediments to the expansion of the middle-income group and to China’s bypassing the middle-income trap. However, we can also see that China already possesses conditions and advantages to avoid a middle-income trap. First, accelerated urbanization and fast development of industry and commerce in cities has provided material conditions for the expansion of the middle-income group. Second, the industrial structure in which the service industry plays a leading role has provided various employment opportunities for middle-income people and created conditions for some employees to enter the middle class. Third, the Chinese government advocates mass innovation and entrepreneurship, providing people with opportunities to create and accumulate wealth. Those who succeed in their businesses will enter the middle-income stratum.


To sum up, the expanding middle-income group in China is conducive to the transformation of China’s economic growth model and overall social stability. The well-educated middle-income population will shape the future of China. China boasts the world’s largest middle-income group, whose huge consumption potential provides massive opportunities for foreign enterprises. Those people themselves also serve as qualified employees for foreign companies that invest in China.