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Young and Loaded

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Louise VuittonArmed with serious money, the Chinese middle class is fast shaping the economy and, pretty soon, the way society thinks

At 35 years old, Mr. Yu could have been your typical Chinese middle-aged family man just getting by in this dog-eat-dog world. He probably spends most of his salary on his family’s needs, and maybe has enough put away for a retirement fund. Yu, who has a medical degree, works for a scientific research institution.

But at his age, Yu’s living it up. He can spend 10,000 yuan (US$1,394) monthly and won’t even think twice about paying 5,000 yuan (US$697) for a suit. He also owns a condominium and a villa where he spends vacations with his wife and child.

Mr. Zhang, a 44-year-old university professor, can also afford to travel. He goes to different parts of China more than once a year and owns three condominiums, two of them in Guangzhou. Zhang prefers to have his meals at home, but can pay up to 100 yuan (US$13.94) when he dines out. He buys suits; but unlike Yu, he chooses those that cost only 800 yuan (US$111.53). That, however, doesn’t reflect the kind of money he makes: The professor earns 100,000 yuan (US$13,941.2) annually.

Zhang and Yu are just two among millions in China’s young and burgeoning middle class today—the hardworking nouveau rich created by the country’s successful experiment with capitalism. What was once the state’s sworn enemy has now become a mover of the economy, thanks to the immense spending power that dwarfs those of many developed nations.

According to Andrew Grant, China operations head at global management consulting firm McKinsey & Company, “China’s consumer economy is about the size of Italy’s, but in two year’s time it is going to start adding an Italy every year.”

And true enough, the tangible signs of wealth already exist.

Spend It
The likes of Zhang and Yu can afford houses, good education for their children, a car (maybe even two), and, of course, insurance policies. They can also splurge on several holiday trips and pricey luxury items.

Several studies show they are highly centralized in popular cities such as Beijing, Shanghai, Guangzhou, and Shenzhen. Some live in cities along the Yangtze River Delta and the Pearl River Delta, both of which are China’s economic powerhouse regions.

Another stark feature among the Chinese middle class is their age: many are relatively young. They achieved this level of affluence between the ages of 25 and 44, compared to their Western counterparts, who reach their peak income between 45 and 54 years old.

The middle class is often defined by its income bracket. But the income range covered by that bracket in China is not fixed mainly due to constant changes in the standard of living, thanks in part to the economy’s rapid growth.

For instance, in 2003, the Chinese Academy of Social Sciences classified families with assets valued from 150,000 yuan (US$18,137) to 300,000 yuan (US$36,275) as part of the middle class. (Back then, they accounted for 19% or 247 million of China’s 1.3 billion citizens.)

But two years later, a survey by China’s National Bureau of Statistics said households with an annual income ranging from 60,000 yuan (US$7,258) to 500,000 yuan (US$60,485) should also be included in the middle class sector.

Like Flies to Honey
The deep pockets of China’s middle class caught the attention of entrepreneurs. Armed with a slew of marketing techniques directed at the sector, many businesses made their presence felt to boost revenues.

China’s home improvement market was particularly salivating. That’s because it has the fastest growth in the world at 12% yearly. Sales for 2005 alone reached US$50 million. These numbers were fueled by an increase in homeownership in the last 20 years.

One of the companies lured by the promising Chinese market was Wal-Mart. The giant US retailer, which came to China in 1996, built a Wal-Mart Supercenter and a Sam’s Club (membership-only warehouse club) in Shenzhen. In 2006, Wal-Mart took over 100 stores of Trust-Mart, a well-known chain of retail supercenters in China. The acquisition was worth US$1 billion.

In 1998, IKEA (an international home products retailer) followed suit and opened its first store in Shanghai. Its 33,000-square-meter shop attracted 80,000 visitors on its opening day. The shop’s typical customers earn 3,300 yuan (US$460) monthly and purchase 300 yuan (US$41.82) of merchandise per visit.

Not to be outdone, Home Depot also flexed its muscle by acquiring Home Way for US$100 million in December 2006. Home Way is a home improvement retailer whose 12 stores—each with 90,000-square feet of space—are all based in northern China.

Aside from expenses on home improvement, credit card usage is also up. As of April 2006, there were already 40 million credit cards issued to Chinese consumers between ages 25 and 34 (the largest market). Peony Card from the Industrial and Commercial Bank of China (ICBC) is the most popular brand, used by 13% of all credit card holders.

Inevitably, the Chinese middle class’ preferred transport will change too. The ubiquitous bicycle, long considered the king of the road in China, is slowly being replaced by automobiles. Vehicle sales grew 25% from 2005 (5.76 million units) to 2006 (7.22 million units).

In 2006, General Motors sold 650,000 cars in China, followed by Volkswagen with 500,000, and Toyota in third place with a distant yet still significant 179,000 vehicles. By 2007, there were roughly 10 million private cars plying China’s roads; that translates to about one car for every 120 people.

Apart from vehicle purchases, China’s new rich also spend their hard-earned cash on luxury items. More and more Chinese now ignore and even look down on fake goods in the local market. And why not? In recent years, China has become the world’s third largest luxury goods market (just behind Europe and

the US). Louis Vuitton Moët Hennessy (LVMH), the largest luxury goods conglomerate worldwide, said its sales in China and Hong Kong exceeded those from Japan, which accounts for 29% of all sales worldwide.

Room for Growth
The ranks of the middle class will only balloon as more people from the rural areas flock to the cities for better-paying jobs.

McKinsey & Company predicts the lower middle class—those with an annual household income of 25,001 to 40,000 yuan (US$3,485-5,576)—will reach 290 million by 2011. The consulting firm said this sector’s peak spending power will reach 4.8 trillion yuan (US$669.2 billion) by 2015. By 2025, hundreds of millions more will join the upper middle class (those making 40,001 to 100,000 yuan or about US$5,576 to US$13,941 every year). Based on these projections, the whole middle class sector will reach 520 million people with an estimated disposable income worth 13.3 trillion yuan (US$1.85 trillion). Both sub-segments are expected to overshadow the current upper class, which would comprise 40 million households by 2025.

The health care sector could prove to be a lucrative market in the future if expenses don’t rise as fast as incomes. That’s because Chinese households set aside 25% of their after-tax income for retirement and health care expenses.

In addition, middle-class parents, who are well-educated themselves, are also expected to invest heavily on the education of their children. They believe a good degree would likely land their kids a high-paying job.

Foibles of Wealth
The lavish middle class lifestyle comes with strings attached. Like other tax-paying citizens, they constantly worry about payments for the house, car, insurance, and children’s education. Maintaining the lifestyle also takes its toll on health. Oftentimes, these people become too engrossed with work and can barely make time for recreation. Due also to the widening gap between the destitute and the rich, many in the middle class worry about their own safety and are leery of the poor who they feel are out to rob and hurt them.

Socio-political Significance
Experts say the middle class is often reserved, and, sometimes, even indifferent about politics. But that doesn’t make them passive citizens, as they will defend their rights especially in matters that directly affect them.

For example, the Shanghai city government’s recent plan to extend the rail line of the Shanghai Maglev Train drew two weekends of protests. The first extension would connect Pudong’s new airport to the old Hongqiao airport located west of the city. The protesters, mostly from nearby middle class neighborhoods, claimed the noisy trains would disturb their neighborhood’s tranquility and could depreciate property values.

They also know what to demand from the government. They want efficient garbage disposal, water distribution, smoother and wider roads, and a better educational system for their children. They believe they deserve good quality service that is equal to the hard work they do to achieve their status.

Due to their sheer number, pundits also say Beijing should pay closer attention to this sector. Their opinion tends to become mainstream thinking.

Wise words to take, especially if such leanings come from hundreds of millions who, in the coming years, will be in the driver’s seat of the country’s economy.

As for now, Mr. Zhang is just seizing the moment. When he retires, he just wants to kick back and retire in his hometown. “I just want to enjoy the sunshine, plant flowers, read, write, and travel around the world,” he said.

Meanwhile, Mr. Yu seems to be just as happy with what he has. “I feel a little rich,” he said. “I’ve reached my dream in life.”

print ed: 03/08


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