China : A Middle Class Blockbuster

I forgot to mention in my post “Goldman Sachs Report and China’s New Financial Lifeforms” the phenomenal rise of China’s middle class: The 300-500 million emergent and rapidly-growing middle class is propelling new realities, including financial technology. It is a socio-economic blockbuster that will be felt throughout the world for a long time to come.

China-Middle-Class

China’s Booming Middle Class

Why Is It A Blockbuster?
Never mind the exact definition of middle class here. Let us just say these are people who have structurally attained a level of disposable income such that, on top of being able to afford housing, healthcare and education, they can either save or spend in a sustainable fashion and continue to accumulate wealth and improve their livelihood. Visibly nowadays, that is commonplace among the Chinese population and their consumption level is astounding compared to, say, a decade ago.

Officially, the government does not define middle-class-hood. Instead, it defines “poverty” and focuses on lifting people out of it vigilantly. When Xi Jingping assumed leadership in 2003, he directed that the country will work to eradicate the last 70 million people living under the poverty line by 2020. This mission now appears well on schedule, and Xi is emphasizing the need to seek out the remaining ones who are tucked away in remote corners of the country, and those special cases of people who are forgotten (he wants “not a single one left behind”). This goes hand-in-hand with the more general goal to “distribute the dividends” of development and reform to the broadest population base possible, so as to build the foundation to a “xiaokang” society (I translate it as “general well-being”, although the Chinese usually translate it as “moderately prosperous”). The result of that is now reflected in the biggest rise in the emergent middle class in the history of mankind.

Depending on who you argue with over the numbers, and where you draw the lines, the size of China’s middle class today is estimated at between 300-500 million.(For reference, the total US population is approximately 320 million. ) Every year, the increase in China’s middle class will be at least 20 million, some say as high as 50 million, for the the next decade. Never mind the nominal amount in RMB the Chinese middle class are spending (the RMB purchasing power parity to the USD is much higher in China than what economists have assumed). Just look at the throngs of humanity that pack the malls and shopping streets on weekends, and swarm the transportation depots and resort and tourist sites during long holidays. They can spend and do.

How Does It Happen?
The phenomenal rise of the Chinese middle class will no doubt be studied decades into the future. I am not one to engage in theoretical debate (I leave that to the academics). I can only tell you what I know from my exposure to official public policy. I will explain the rationale and mechanics of these factors responsible for the formation and growth of the middle class in more detail later. Here, I will only mention that it is China’s unique “Systems Approach” at work.

Some of the measures that have had a decisive contribution to the social demographic transformation during the last decade or so include these:

(1)Urban migration and the planning of integrated greater metropolitan clusters.

(2)Land use equitization reform for rural citizens.

(3)Portability of one’s “hukou”, or residential registration, entitlements from one administrative jurisdiction to another.

(4)Cooperative provision of the “5 insurances and 1 fund” by employers and the government. (This is vital. It provides the general population with basic medical security and protection against catastrophic events, by spreading risks over the largest denominator and managing them through long-term planning and adjustments of collective national resources. This gives the workforce and their families a built-in savings scheme, including a funded portion which they can use to help pay for the purchase of a home. This, I believe, is the backbone to middle-class-hood in China.)

(5)Eliminating all forms of rural land taxes and levies, and investing in public assets and infrastructural facilities to free up the rural population’s economic propensities.
(This includes low-cost essential medical insurance, education, telecommunication networks, roads and other connective infrastructures in rural areas. By integrating the provision of these services into the neighboring greater metropolitan clusters, it derives economic synergy for both rural and urban communities. Micro-businesses grew and incremental labor supply for bigger neighboring businesses is vitalized. This process bears the emblem of Xi Jingping’s practical model in his “Lifting Out Of Poverty” experience and track record that I mentioned before.)

(6)Reducing or eliminating income taxes for the lower-income brackets to raise the disposable income of the average citizen.

Economic Sustainability – The Long-term Development Strategy
The rise in the income, social security and economic propensities of the general population led to the formation of new households and an increase in average size, thanks in part to the 2-child policy. As is true throughout the world, that is the biggest driver of growth in consumption.

Bear in mind that China’s emergent middle class has a high marginal demand for first-time goods and services. Unlike the middle classes in developed economies who have already substantially consumed out, the budding middle class in China have a long way to go with their “incremental” consumption. They are also not as heavily leveraged. Their savings rate is still high, especially with the prevalence of the pooling-of-interest of multiple-generation households.

Growth in middle class population is not a specific direct goal of the Chinese leadership. Bringing poverty down to zero is. And it is the top priority. By using sustainable tools, that effort is going hand-in-hand with long-term structural growth in the overall economy. That has to do with China’s long-term (the Two One Hundred Years’ Plans)development strategy.

China’s long-term development strategy has two backbone components:

(a)Maintaining a comprehensive industrial core economy — Out of the WTO list of 500+ industrial classifications, China is the only country that possesses all of them within its territories. In addition, it is pushing cutting-edge technological upgrade in every category, aggressively streamlining, restructuring and innovating. Internet-plus is one initiative. The high-end national science and technology research programs earmarked 863 (initiated in March 1986), 973 and 163, respectively, are now bearing astonishing fruits in leading-edge technological innovations.

(b)Literacy and vocational education — The literacy rate of the 1.4 billion Chinese today are practically 100% (as constrast with only slightly over 10% in 1949 when the PRC was founded). In addition to the serious quality, as evidenced by the tough universal examinations, the Chinese education system emphasizes vocational development. After the equivalent of 9th grade, only about 30-40% stay on a university track of higher education. The remaining continue on to technical institutes or vocational schools. That way, young people are better prepared to enter the work force, wasting less time.

(a )and( b)complements each other. Given the country’s size and people quality, this balance is not only possible, but powerful and exciting. Over the long run, technology and education are the two elements that will usher in a new middle-class Chinese civilization-state that will be unprecedented in human history.

-doublewood

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