Only on FXMAG! The world’s second largest economy has a huge problem with the middle class

FXMAG Spain – The middle class has played an important role in China’s economic growth, increasing consumption and providing a skilled workforce. Now he mainly focuses on consumption, investment and enjoying life.

  • The Chinese middle class is becoming the largest in the world.
  • Changes can be seen in the purchasing preferences of the middle class.
  • Investment opportunities are limited for the Chinese middle class.
  • Will China’s middle class continue to grow?

When Deng Xiaoping encouraged the Chinese to “get rich” in the 1980s, he did not think they would implement the slogan so seriously. The slogan “Dream China” added by the current president of the Middle Kingdom encouraged the community to make even more money.

China has almost eradicated poverty, and many people have more yuan in their pockets every year. Today, behind the Great Wall, the world’s most powerful middle class operates and a growing group of wealthy people. However, the lives of both groups are moving away from the Chinese dream.

h2 Higher and higher standard of living/h2 No trace of a time when more than 2/3 of Chinese were below the international poverty line. Today, poverty occurs randomly: the World Bank says 0.6% of the population and China’s National Bureau of Statistics (NBS) 0%. Majority of the society (especially the elderly, remembering the days of Maoism) support the authorities because it lifted them out of poverty and gave them prosperity. In the latest Human Development Index rankings, China ranked 79th, up from 108th three decades ago.

However, this growth has come at the cost of substantial income inequality, which has recently declined somewhat (Chart 1). Living standards in China, especially for those living in cities (who have twice the income of those living in rural areas), are growing rapidly (Figure 2). Contemporary Chinese are getting more and more (Figure 3). He has 40 times more disposable income in his portfolio than he did three decades ago. A city dweller spends 60% of his income on consumption, while a rural dweller spends more than 80%. Citigroup (NYSE:C) estimates that consumer spending will account for nearly three-quarters of China’s growth this year.

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h2 1. Income stratification in China/h2

h2 2. China: Income of Urban and Rural Residents/h2 3. Chinese gains

Over the decades, China has developed a middle class estimated at 30-50% of the population, depending on income criteria. For example, McKinsey divides the middle class into upper class ($1,333-2,615 monthly income) and mass class ($750-1,333). According to the company’s calculations, in 2022 these two groups will represent more than ¾ of the city’s population (in 2012 this ratio was 68%). Pew research puts the middle class at about half the population. However, the NBS believes that 30% of the population belongs to this group. Although there are significant differences in estimates, all agree on one thing: China has created the world’s largest middle class. Already, some companies indicate that they spend more than American (1.5 times), Indian (2.5 times) or Japanese (3.7 times).

h2 How the Chinese middle class buys/h2 The way Chinese spend their hard-earned money has changed: the proportion of food and clothing has fallen sharply, favoring significant increases in spending on housing, transport and telecommunications. Medical services, education, culture and entertainment. Although the latter had a slight decline in stocks during epidemics (Figure 4).

4. Structure of Chinese Household Costs

Food preferences have changed: consumption of animal protein has increased, which has increased agricultural production and affected the environment. Increasingly, Chinese are switching to an unhealthy, Western diet, which, combined with a sedentary lifestyle, is a recipe for civilization diseases. The shopping basket of the average resident of the Middle Kingdom is filled with high quality products and services. Its relationships with price and utility have become secondary elements in purchasing decisions. The Chinese also often resort to credit to meet their shopping needs.

The importance of national products is increasing. Until recently, consumers paid more for foreign brands, but today, domestic companies offer good quality products that are competitive, and sometimes even better than their foreign counterparts. The preference for local brands has accelerated in recent years and, contrary to what many think, has nothing to do with calling. “Consumer patriotism”, which simply counts for quality.

However, certain conventions are preserved in purchasing decision-making, such as reference to the society in which one operates. Collaborativeness drives sales because the recognition of a product or service by a group causes “sheep fever” to occur. Influencers play an important role, especially in sales of cosmetics and clothing. The Chinese middle class is also driving online sales. In 2021, most purchases were made through this channel, paid (for example, Ali Pay or WeChat Pay). Even groceries were often bought far away.

h2 Middle Class Investments: Nationwide and safe/h2 The middle class also invests, although it has less room for manoeuvre. The opportunity to invest abroad was practically closed. Investments in public funds, commercial insurance and stocks dominate. A little further down the investment rankings are deposit and wealth management products. More complex or resource-intensive tools are overlooked. Most middle class investments are in the PLN 15-45 thousand range. US dollar. People also buy real estate and luxury goods.

It should be noted that the Chinese middle class is characterized by a low level of confidence, taking into account China’s environmental and geopolitical environment, and stock market liquidity is desirable. Until recently, equity investing in real estate was a surefire way to generate additional income. Finally, 87% of households own their own property and 20% own several. However, the market has become unpredictable. Just recall the protests a year ago when banks froze 300,000 accounts. Because they lost money on risky investments, mainly in the real estate market. Because of the real estate slump, there are luxury items, but the middle class here has been avoiding buying recently.

h2 A new middle class is born…/h2 As more companies point out, the Chinese middle class should not be stereotyped. For example, the Boston Consulting Group released a report focusing on generational differences in this class. Chinese Generation X and Y are more likely to purchase luxury goods than Generation Z consumers. Today, the middle class is more brand conscious and marketing has started to play an important role in attracting consumers.

Recently, the phenomenon of a new middle class has emerged, which is made up of 25 to 40-year-olds. They are urban dwellers (mainly adults) who spend a lot online (at least USD 150 per month) and use more than 30 apps per month on average. By the middle of last year, there were 163 million people in this category (a year-on-year increase of 15.6%). They are tech savvy, so platforms such as Douyin (Chinese TikTok), Kuaishou, Bilibili and most recently Xiaohongshu (Chinese version of Instagram) have become an important source of information and entertainment. This is where many brands’ marketing efforts targeting this social group are concentrated, and by 2030, Generation Z will be responsible for 1/5 of consumption in China.

h2 … it doesn’t run the economy like it used to/h2 its price for getting rich – turned out to be social pressure. Today, to be considered successful in China, you have to live in the right neighborhood, go on expensive vacations, send your kids to the best schools, drive a nice car, eat at fancy restaurants, and have money for private health care. “Intense competition” on top of that. ” in the labor market to earn all this.

Unfortunately, the truth is cruel. In 2021, about 12.5% ​​of young people were unemployed, a figure that rose sharply last year as a result of the “zero COVID” policy. Young people have high expectations (even more than their parents), but they are disillusioned with the state of the country. It is enough to look at the intersections between housing opportunities or the structure of education and the labor market. For the younger generation, owning an apartment may not be possible. The economy is growing slowly and no longer meets the aspirations for progress. Universities are producing more and more graduates, but the labor market is saturated.

Thus, until recently, the slogan Tang Ping (Lay Flat) was very popular, expressing that young people were bored with the rat race and wanted a simpler lifestyle. Currently, another, more depressing slogan, Bai Lan (Let It Rot), is practiced, which means that you voluntarily give up the pursuit of certain goals because they are so difficult to achieve. Such discouragement among young people is nothing new, the US already experienced similar waves in the 1990s. The question is whether it will pass in China.

There are legitimate concerns about whether the middle class will continue to drive the Chinese economy. People belonging to this group are more concerned about the future, job opportunities and wages. The number of people working in labor and specialized services is increasing at the expense of processing, where automation and offshoring are often used. Employment in the construction sector is declining. However, due to the hukou system, a significant number of workers work informally, particularly in labor-intensive services. There, wages are growing more slowly than GDP. This can lead to avoidance of buying expensive items and generally stopping consumption. The pandemic caused an increase in Chinese savings rates. Cumulative savings are estimated at US$2.5 trillion by 2022. It’s hard to know whether China’s reopening will free up that money.

In conclusion, a growing middle class has played an important role in China’s economic growth by increasing consumption and providing a skilled workforce. Despite concerns about the overconsumption of this social group, the Chinese customer continues to be an important object of desire for international companies.

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