The enigma of China's middle class

By Daniel Wagner
0 CommentsPrint E-mail, December 25, 2010
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A lot of international companies have long believed that they must have a presence in China because its 1.3 billion people are all potential consumers, which implies a seemingly endless stream of future revenue. The existence of a robust middle class, upon which this vision is based, is clearly growing at an accelerated pace in China, but an increasing body of research raises question about who the country's middle class really are and the true meaning of their disposable income.

Defining the middle class with accuracy is challenging at a time when China's economy has grown to be the world's second largest, yet 10 percent of the population remains classified by the World Bank as poverty stricken. Reputable sources disagree considerably about the size and scope of the Chinese middle class, and its purchasing power implications, but there is little doubt that it will be a force to be reckoned with in the current decade.

Recent definitions of what constitutes the middle class in China range from approximately 10 percent to nearly half of the population. In 2007, Goldman Sachs said it believed 100 million Chinese consumers should be classified as middle class, and estimated that by 2015 that figure would jump to 650 million. The Asian Development Bank (ADB) suggested earlier this year that by 2020 more than 1 billion Chinese will be classified as middle class. In 2006 McKinsey estimated that the disposable income of China's urban population was $622 billion; that same year, the Chinese government declared it to be $562 million.

In a study released earlier this year, the ADB defined the middle class in China as individuals earning between $2 per day (the low end of lower middle class) and $19 per day (the high end of upper middle class) in income. The Bank notes that in 2005, 35 percent of the Chinese work force earned just $2-4 dollars per day, another 30 percent earned $4-10 per day, and less than 5 percent earned more than $10 per day. The Bank defines "affluent" consumers in China as those earning more than $20 per day (or $7,300 per year), consisting of 44.8 million in urban areas and 11.1 million in rural areas of the country – approximately 4 percent of the total population.

According to a 2009 report in The Economist, the commonly accepted definition of income for the poverty line in the developing world is two dollars per day, implying that individuals above that income are by definition part of the emerging world's middle class. By contrast, the poverty line in America is $13 per day, but it would be difficult to imagine telling someone who makes $14 per day in the USA that he or she is not in poverty. By the same token, a person making more than $20 per day in China under the ADB's definition will hardly feel wealthy.

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