Ch14: How China's Middle Class Grew So Big? And What's Next?

Imagine this: A group larger than the entire U.S. population, wielding economic power that has reshaped global markets.

China, once perceived as a land of vast poverty, now boasts the world’s largest middle-class population. This seismic shift is not just a story of numbers; it's a tale of transformation, opportunity, and global impact.

Ladies & Gentlemen! Today, we delve into the extraordinary rise of China's middle class.

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The Start of it All!

In the 1980s, China's economic reforms kick-started a journey that would see millions lifted out of poverty.

• And as those reforms began attracting massive manufacturing-led investment proposals, a huge competition ensued between the local provincial Governments to attract the biggest projects.
• To stand out, and provide exemplary infrastructure to support manufacturing operations, these provincial Governments began to build better and wider roads, new power plants, and most importantly, new cities around which new industries could be set up. And, on top of that, the Central Government also embarked on an infra-building spree of its own.
• By the early 1990s, a flywheel was created, where newer cities were attracting manufacturing investments, which were attracting more and more people out of China’s hinterlands.

And with more and more people moving to cities where industries were coming up, the earnings began to shoot up.

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Result?

• In the year 1990, China's middle class was a modest 3% of its population (about 34 million people).
• And, rapid urbanization, manufacturing growth and related job growth resulted in a massive increase in Gross National Income per capita, swelling up the ranks of the middle class.
• This helped take the middle-class population to 5% or about 63 million people.

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And Then Magic Followed!

• With manufacturing picking up so strongly in the 1990s, the Government had realised that it had a major shortage of good talent.
• Thus, the Government had begun to incentivise and promote STEM education, pouring massive sums of money into building newer universities, colleges, skilling workshops and more.
• This helped create a regular and increasing supply of skilled and talented workforce moving from the hinterlands to the cities around which newer manufacturing and services jobs were exploding. And given these jobs paid way better, the per capita earnings growth accelerated.
• With continued rapid growth average GDP growth rates of over 10%, the supply of skilled talent to the newly built cities had enough new jobs to support their elevation to a middle class so big, that they would account for 25% of the national population by 2010.

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Mind It!

They were at 3% in 1990. Got to 5% in 2000. And then 25% in 2010.

And then what happened? This number further doubled to 50.8% by 2019!

Two decades. A 10x+ surge in the middle-class population.

• Imagine the kind of income growth the people would have experienced in those years.
• And the kind of consumption boom the Chinese economy would have recorded as an outcome of the same.
• Nothing like this at such scale had ever happened before. And probably, we will see nothing of this sort happen again either.

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Powering Consumption

• And this added several year’s worth of fuel to the nascent digital economy of the country.
• Internet penetration soared from 1.8% in 2000 to a robust 41.5% in 2010. And that has further grown to almost 80% today.
• That has resulted in an e-commerce market so big, that it is estimated to have logged about $3.5 trillion in annual sales, already up 75% since 2019 (pre-Covid times).
• Just for perspective, this is almost three times larger than the US, and almost 30 times larger than India’s market of $118 billion or so.
• So, the crazy growth in the size, income and consumption of the middle class is what gave birth to this whole consumption-led digital economy.

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Global Impact and Future Prospects

• Comparison with the US and India: The US middle class is growing modesty, while India's middle class is emerging rapidly, yet both are outpaced by China's scale, if not growth anymore.
• Influence on Global Brands: Major brands tailor products and marketing strategies to cater to Chinese preferences, impacting global trends. In fact, for many of them, China today is their primary market.
• International Relations: As China's economic influence grows, its middle class today plays a crucial role in shaping global trade and diplomatic relations. Especially because, like India, Chinese youth is increasingly beginning to make up the most of global diaspora population.

This should clarify, that China’s middle class isn't just a national phenomenon. It’s a global force. From influencing international travel markets to shaping global consumer trends, its impact is undeniable.

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Government's Role and Policies

China's government, recognizing the middle class's role in sustainable development, has been pivotal in this story.

The 14th Five-Year Plan (2021-2025) of the Chinese Communist Party set goals for further expanding the middle-income group with policies aimed at income redistribution, urbanization, housing, and education have been key strategies.

However, this one seems to have backfired a little.

• Given the Government built it all on top of the unending wave of new cities and infrastructure which then helped attract manufacturing investments of an unprecedented scale, nothing had created as much wealth among the Chinese people, as the ownership of real estate. Thus, the Chinese people had grown to have most of their wealth invested in real estate, than in equities, gold or other such things.
• And, the Government’s move to curb real estate speculation to make housing affordable with restrictions on how many houses one can buy or sell in a given time frame in particular regions, it began a wave of corrections in housing prices, leading to significant wealth erosion among Chinese households.
• Worse, as the real estate crackdown and the meltdown of the last three years followed, housing prices only plummeted, leading to further wealth erosion for Chinese households.

And as their wealth plummeted, their desire and confidence to invest in real estate has also gone further down.

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Outcome?

• The problem thus is, the Chinese Government did a fantastic job of building a middle class so large, in a really short span.
• But, with a massive chunk of its wealth tied up in a specific sector which is now on a secular decline, the middle class is now under pressure.

So, what next for the outlook of the Chinese middle class?

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Conclusion

China's middle-class narrative is a blend of rapid growth, government strategy, and evolving consumer behaviour, which is now stuck at a tough place.

This story is far from over, with the next chapter likely to be as dynamic as the last. And for readers all across the world, understanding this colossal demographic shift is crucial in grasping modern global economic trends.

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Subscribe and stay tuned for more updates in this fascinating saga of studying China’s rise!

See you tomorrow morning 7.30 am with another edition.

Best,

Jayant Mundhra