The rapid rise of China’s middle class may be the defining economic trend of the next 50 years.
Though there are several factors that have fueled China’s impressive economic growth and created the expectations of global leadership, there is one central theme: a growing middle class. Millions of Chinese are abandoning their agricultural lifestyle in favor of an urban existence that brings with it disposable income and discretionary spending.
When the move into the middle class occurs to a single-family, it makes for a heartwarming story. When this trend plays out over a population of nearly 1.4 billion, it can transform not only the country but the global economy.
Below are several charts illustrating the size, importance, and expectations of China’s middle class.
The growth of a middle class is essential in part because new members of this demographic typically find themselves with disposable income — that can be spent or invested — for the first time. During the last 30 years, the average disposable income in China has increased by almost 2,000 percent.
Data Source: Trading Economics
Disposable income is expected to increase even further in the coming years, nearly tripling to approximately 73,000 yuan ($11,700) by 2050.
A further look at the composition of China’s urban population illustrates just how much progress has made in the 21st century:
Data Source: McKinsey
China’s cities, which were generally poor at the turn of the century, have transitioned to primarily middle class during the last 10 years. This transformation is expected to continue going forward, as Chinese cities come to closely mirror those of developed markets.
As China’s economy expands, the number of millionaires is certainly growing as well. But the real movement in classes is coming among those who were formerly poor and are now beginning to accumulate moderate wealth for the first time. During the next five years, millions of Chinese are expected to establish a meaningful nest egg and increase their spending power:
Data Source: Credit Suisse
These shifts may not seem too substantial over five years, but the impact is amplified because of China’s massive size. The increase from 35 percent to 51 percent in the chart above translates to more than 200 million people in China.
Historically, almost all of China’s wealth has been concentrated in a relatively small area in the eastern end of the country. China’s largest cities are located along the China Sea, and thus this section of the country has historically been home to nearly the entire middle class.
But a change is underway in this regard, as “tier two” and “tier three” cities are developing throughout the country, particularly in the West. As big cities develop throughout China, an urban existence — which often brings with it membership in the middle class — is within reach for hundreds of millions of citizens.
By 2022, it is expected that nearly two out of every five members of China’s middle class will live outside of coastal areas.
Image Source: McKinsey
Visualized another way, only a handful of Chinese provinces will comprise primarily poor, urban farmers by 2020. As a path toward moderate wealth and disposable income becomes more apparent to those throughout China, this trend will find opportunities to continue.
Image Source: Thomson Reuters
China’s Global Role
China is classified as an emerging market, alongside several other economies in Asia, Latin America, and elsewhere. But the country’s demographics are very unique compared to both its fellow developing economies and developed markets. Though China’s GDP falls well below many Western economies, most of the population falls into the top half of global wealth distribution.
China’s middle class is so important because it represents a significant portion of the global middle class.
Image Source: Credit Suisse
The dominance of China in the intermediate wealth deciles — the middle class — is evident when visualized in this manner. China accounts for relatively small portions of the world’s ultra-rich and very poor populations but is home to a massive chunk of the global middle class. The ability of this demographic to spend and invest will be a major factor in the health of the global economy.
One additional noteworthy element of the image above is the relative positioning of China to other emerging markets in India and South America. Extreme poverty (as visualized by the lowest wealth deciles) is relatively rare in China compared to many other developing economies.
Over the next several decades, China will continue its transformation from a poor, emerging, agricultural economy to a modern, advanced market. The key to unlocking the country’s economic potential — and perhaps to stimulating the global economy — lies in the ability to continue to grow the middle class.
About the Author: Michael Johnston
Michael Johnston is the Senior Analyst for All Emerging Markets, and also serves as the COO of parent company Poseidon Financial. His investment expertise has been featured in The Wall Street Journal, Barronâs, and USA Today, among other publications. He resides in Chicago.