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China’s Middle Class, the Middle Minority

by Tom Nunlist

September 28, 2016

China's middle class is emerging

A significant new force is beginning to take shape in Chinese society: China’s emerging middle class

Fu Cong is 33 years old, owns his own home and car in Shanghai and likes to drink shochu at a speakeasy-style Japanese bar on occasion, when he’s not at work in an international media company or spending time with his wife. In the past few years he’s gone cold on his long-time photography hobby in favor of scuba diving, and if you’re interested he can recommend the best dive spots in Thailand. It’s a comfortable life, but Fu does not consider himself to have made it.

“I’m definitely not middle class,” he says. “My income is not high enough.”

Credit Suisse, which last year estimated the size of China’s middle class at 109 million adults, would likely disagree with that. The Chinese government would as well—the official bar for middle class is an annual family income RMB 80,000 per year (around US $12,000), which adds up to more than 145 million people. But that’s only one of many ways to define the term, with others including education level, home ownership, lifestyle and career, to name but a few. Getting agreement on what, or who, counts as middle class in China and what doesn’t is fiendishly difficult, not least for Chinese people themselves.

In contrast to Fu, Fiona Gao, a middle-aged business woman, is very clear about her social position.

“I became middle class the day I bought my first apartment,” she says.

Zhi Hua, also a middle-aged businesswoman, also identifies herself as middle class, and places the moment of ascendance on graduation day from university.

Ralph, meanwhile, is a Shanghai ad salesman in his early thirties who has both an apartment and a university degree, and yet he categorically rejects the idea of being middle class, again on the basis of income.

But fuzzy as the edges may be, it is beyond doubt that a huge number of Chinese people over a span of the past two decades or so have achieved a level of prosperity and financial independence never even dreamed of by their forebears. They are, at least by the standards of popular conception, appearance and habits, middle class, a group that has never before existed in a substantial way in China’s thousands of years of history.

They take vacations and spend already $200 billion overseas annually, although currently only 4% of Chinese have passports. They go to spas and drink Starbucks, which now has over 2,000 locations in more than 100 Chinese cities. They sent more than 300,000 of their children overseas to school last year to countries like the United States, where they added $9.8 billion to the US economy in student fees and other expenses. Consumer spending in China, largely driven by this new class of people, amounted to $4 trillion in 2015. By comparison, in the US it was about $14.8 trillion dollars.

But they are also a nervous group, increasingly inclined to voice their concerns on issues from home ownership and environmental degradation to food safety. And many of them have the means to make other arrangements if necessary, moving their money and even themselves out of the country. In short, the presence of a middle class in Chinese society is suddenly very obvious and there is much debate about what impact its existence will have on China’s future.

“They are going to be at the epicenter of every social change that is going to happen,” says Luigi Tomba, senior fellow at the Australian Centre on China in the World, Australian National University. “They are educated, they are the ones that read newspapers, and travel and spend money, they are the ones that will complain about policy.”

Don’t Put Me in a Box

When trying to understand this new group of people—an unprecedented middle to Chinese society—the first task is to get a grip on the slippery terminology.

“My preference is to discard the term ‘middle class’ because it comes with certain freight,” says Arthur Kroeber, co-founder of Gavekal Dragonomics, a research firm based in Beijing.

As Kroeber explains it, someone of Fu Cong’s description aligns very closely with what we think of the Western middle class—home, car, vacation, white-collar job, the whole lot. But identification of people with a certain lifestyle can get in the way of understanding the significance of this group within China.

“Because you use the word ‘middle,’ I think everyone has embedded in their mind that if you did an income distribution curve, [they are] the people who are in the middle,” says Kroeber. “But by even the most generous estimate, this is a small minority of the total population, and it basically represents the economic elite in China, so it’s not the ‘middle’ of anything.”

Consumer Classes: Defining China's middle class by income
(Click to enlarge)

Professor David Goodman, of Xi’an Jiaotong-Liverpool University, who has long been studying the so-labeled middle class in China, adds further nuance to this understanding.

“Only [about] 15% of the working population of China earns more than RMB 80,000 a year,” Goodman says. “If we’re talking about disposable income to have a middle class lifestyle, that’s nothing.” For reference, that income figure just barely tips over the poverty line for a single person in the United States and, cost of living differences notwithstanding, it’s still not a lot of money.

In other words, this same group by one measure is in the top tier, and by another still quite poor. A bit of a skeptic, Goodman proposes that something else entirely is going on in this group.

“My argument is that you’ve got a discourse of middle class-ness, and that’s interesting because it then puts the attention on consumption,” Goodman says. “It’s an aspiration. You might not really be [middle class], in the sense of a sociological definition, but you might be because you want to perform that way.”

Tomba neatly crystallizes the nature of the definitional dilemma.

“The size and type of middle class, and the kind of people you include in it depend much more on the point of observation than on the actual reality of things,” he says. “I always think the middle class is anything that you want to make of it.”

But how, then, is it possible to make sense of Fu Cong and his peers, who are apparently a relatively poor elite that enjoys a consumption-based lifestyle while simultaneously claiming not to belong to a group that we’re all inventing on the fly?

The answer lies in the origin story.

“Instead of thinking about how big the middle class is, you think about where it comes from, and in particular how did it become a thing in China,” says Tomba.

Staked to the System

The roots of China’s middle class today stretch back to Shanghai in the 1920s and 1930s. But that small proto-middle class and culture was destroyed after the communist takeover in 1949, and a new ‘middle’ elite of state officials and state organization staff members was created during the 1950s and 1960s. Suffice it to say, China prior to the changes following Mao’s death in 1976 was not, contrary to popular conception, a flat society.

“China’s intermediate class, the middle class, before 1991 was comprised largely of professional and managerial types who ran the state,” says Goodman.

But this group was quite small, and the basic distinction was who did, and didn’t, work for state-owned industries and organizations—“work units.” These units provided stable income, as well as food, education, healthcare and—crucially to the story of China’s middle class—free housing. The genesis moment of the China’s contemporary middle class came in the late 1980s when the government embarked on dismantling this system, and began selling off the state organization housing to its residents.

“At first, they did not want to pay for housing because they weren’t before, so they didn’t realize what an enormous advantage it was going to be for them,” says Tomba. That leg-up became apparent in the mid-1990s when the mortgage market started. As Tomba adds, “They had an early-entry ticket.”

As the property market heated up through the 1990s and beyond, home prices rose. People with the good fortune to have been assigned state homes were able to buy second apartments and derive additional income from rent. Those with a continued connection with the state sector were also able to get better credit to add to their advantages. In other words, China’s middle class today is very much a party-state creation.

“Their wealth comes from being a part of the [Chinese Communist] system,” Tomba says.

Both Tomba and Goodman stress that not all the wealth of this group was created in precisely this way—there are also the entrepreneurs who appeared in the 1980s. But here again, there was usually a state connection: According to Goodman, more than half of all private entrepreneurs in China today used to work in the party-state system. Wang Jianlin, founder of Dalian Wanda and Asia’s richest man started his adult life as a soldier, for instance.

Indeed, it isn’t only academics that point out the Party connection to the origins of the Chinese middle class—Goldman Sachs says nearly half of the 146 million people officially in the middle class are still on the public payroll.

Many of the more cataclysmic predictions about the new middle class in Chinese society overlook this basic fact, which will to some extent at least shape the impact it has, because they have roots and a psychological investment in the system.

Money and [some] Power

Talk to any businessperson in China today, and the topic inevitably turns to the so-called middle class—how much they travel, how to design a coffee house based on their expectations, what kind of cars they buy, the dynamic between them and the party-state, how their brand preferences are changing, their impact on society, ad infinitum. It’s not just another hot topic, it’s the zeitgeist.

“Pretty much every consumption trend that you can identify today has to do with the growth of this middle class of consumers,” says Kroeber. “They are really the core of understanding the emerging Chinese economy over the next decade.”

A cursory look at a few key numbers hammers home the seismic nature of the shift in progress. Chinese consumer spending grew from $1.5 trillion in 2007, to $4 trillion last year, about 37% of total GDP. But even these eye-popping numbers mask the true extent of change—one must look at how the structure of the economy has changed as it grew, and put those numbers in a better context.

In 1952, just three years after the birth of the People’s Republic, consumption comprised a whopping 76% of economic activity—of course, this was because there was very little industry. From there, the share of consumption underwent a long, slow decline. In 1999 it was 47% of GDP, and in 2011 it was just 28%. Since then it has been growing, but it has a very long way to go to reach US level of roughly 70% of GDP.

race toward future-Middle classes
Millions of Chinese people are racing toward a richer future

The prospect of this growth has companies hungry—the Demand Institute estimates that consumer spending in China will continue to grow at 5.2% per year for the next 10 years, slower than previous decades but still robust. How much this growth in consumption can be chalked up to the rising ‘middle class,’ however, is questionable.

“China is a big market just because of the number of people we have,” says Jessie Qian, Head of Consumer Markets, KPMG China, in Shanghai. “But does it really matter how much middle class we have? I really don’t believe so. It’s really how you look at your targeted consumer.”

Regardless of how you look at this new group as consumers, their impact will surely go beyond just economic growth. As commentators are wont to proclaim, demands for control over one’s life go hand-in-hand with affluence. While China’s middle class has benefited heavily from the current system, it also has to deal with its legacy in the form of apocalyptic smog, food safety scandals, a degraded environment and lack of rule of law. And there are the beginnings of signs of pressure being put on the government to make changes.

As China grew rapidly, consumer spending as a proportion of GDP steadily shrank.

Last year’s smash hit documentary, Under the Dome, attacked pollution issues with a personal, emotional appeal of the narrator’s concern for her newborn daughter. The video was viewed over 100 million times before it was pulled from the web—Dali Yang, director of the University of Chicago Centre in Beijing, called it “a middle-class manifesto.” And censored or not, the government has responded with serious cleanup efforts.

“You have seen significant pushes by these emerging affluent consumers for cleaner air and cleaner food,” says Kroeber. “The government has had to respond to this by getting much more serious.”

But whether or not concerns around these types of issues constitute some kind of middle class consciousness is considered dubious by many observers.

“I don’t think there is any middle class consciousness,” says Tomba. “[The issues] sit next to one another, but they never have some sort of umbrella organization.”

Risk in a Generation

Somewhat ironically, the biggest issues facing the new middle class involve the very thing that propelled them to their status in the first place: property.

Even casual observers will note the first and fundamental contradiction of wealth via property in China—the fact that home ‘ownership’ is very much in quotation marks. At the end of the day, the state remains the owner of all property, and ‘bought’ land is actually only leased land. Most commonly, the lease term for urban land is 70 years, which pushes the issue of what to do when the lease expires a fair way into the future. There are exceptions, however, and this year has provided a taste of what may come to pass.

In April in Wenzhou, a southeastern city, some residents were caught off guard when the local government informed them that the 20-lease on the land under their building was due to expire and some apartment sellers were told to pay a fee of up to one-third the value of the holdings to roll over the leases. This naturally did not go over well with residents, and while the final outcome is to be determined, the case highlighted the legal limbo in which all ‘homeowners’ in China live.

But the more pressing issue may lay with the property market and how it has developed since those first homes were sold off in the late 1980s. While the first generation received a windfall, the second generation is taking it on the chin.

“If you are a young couple, you have a double disadvantage,” says Tomba. Not only did they miss out on the state-backed fire sale, but also the housing market since has rocketed toward the outer limits of reasonable valuation. With the caveat that the Chinese housing market varies greatly by location, prices in Beijing and Shanghai are now more than 30 times average income, and five of the world’s ten most expensive cities in these terms are in China.

“We have a crisis in the second generation of the middle class, which may look much more like the US or the UK because they have the same troubles,” Tomba says. “They can’t buy a house, they can’t afford a good lifestyle, and their salaries are not growing as much as they would like.”

On the other side, the older generation has much, or even most, of its wealth sunk into housing, partly because of a lack of savings and investment vehicles in China. That makes the threat of a valuation crash much more salient. What this means on the whole is that the first and second generation of China’s new middle class is, in a sense, on opposite sides of the status quo.

This and other problems have seemingly provoked a flight response. A 2016 survey by the Financial Times found that 45% of Chinese middle-earners wanted to trade at least 10% of their savings for foreign currency, and that another 29% had already done so. This problem has escalated so much that the government has repeatedly cracked down on cross-border cash flows, even restricting foreign ATM withdrawals.

In the last five years, Chinese have spent more than $110 billion buying real estate in the US alone (including corporate purchases), and 90% of US investor visas go to Chinese citizens. One estimate says that companies and individuals have moved $1 trillion out of China in the past 18 months—clearly not the behavior of a secure group of people.

On the other hand, only a small number of people can really afford to leave—it may even be more an elite strategy than a middle-class one. So that only leaves one viable alternative: Make the best of it here.

Certain Change

When trying to come to grips with what exactly China’s new middle is, or who does or doesn’t belong to it, solid answers are virtually impossible to come by. In turn, attempting to predict what long-term effect the new middle class will have on China’s society and economy is correspondingly more difficult. In the end, however, pursuing concrete resolutions may not be as valuable as simple patient observation.

“I think what matters is that certain people are growing their wealth and they are more aware, and creating new mentalities,” says Tomba. “[It is these] accumulated mentalities that will have an impact.”

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