China’s Middle Class

by Joe

Over the last forty years, China has achieved a dominant position among the major world economies.  Several factors have contributed to this.  First, China became a supply chain hub for most of the world’s manufacturing processes.  More recently, the single most important factor in China’s continued GDP growth has been the unexpectedly rapid rise of a new digital economy.  This sector is now estimated at more than $3 trillion, or a third of national output. R&D investments in China’s tech sector have tripled in the last ten years to $440 billion per year and 9 of the world’s top 20 internet companies are Chinese.  The remainder are American firms plus one Canadian company.  A Tufts University survey ranked China the most rapidly evolving digital economy in the world. 

Over the last forty years, China’s middle class has become a major economic force.

This economic growth has produced a burgeoning middle class.  Current estimates put the size of China’s middle class at 400 million people or 140 million households. This is less than one-third of China’s total population.  Among them, the urban affluent population is concentrated in the eastern and coastal provinces that witnessed rapid growth as China invested in developing local industries and supply chain logistics capabilities that could connect easier with the rest of the world. 

In addition to expanding industries, the Chinese government has added legislation such as tax reforms that have left the Chinese with more disposable income.  Changes have included raising the tax-free threshold from RMB 3,500 (US$516.70) to RMB 5,000 (US$738.14) a month and adding new deductions, such as for parental aged care, housing mortgage costs, education costs, and healthcare costs, among others.

The growth of the Chinese middle class has been astounding.  In the last forty years, China has rapidly urbanized.  58% of its population is now urban.  In 2000,  only 4% of those urban households were middleclass.  By 2017, that statistic had grown to 30%.  This pales, however, with what’s projected to come in just the next few years.  McKinsey & Company now estimate that by 2022, 76% of China’s urban population will qualify as middle class.  McKinsey qualifies middle class as Chinese households that earn the equivalent of between $9,000 and $34,000 annually.  (These projections are all pre-pandemic.) 

There are at least four different ways the Chinese might classify themselves as middle class; these include occupation, income, consumption and self-image.  The population of the middle class under each classification system follows:

  • By occupation – 136m people
  • By income – 211m people
  • By consumption – 300m people
  • By self perception – 402m people

When membership in more than one of these groups is a requirement for middle class membership, the total number of people that would qualify drops sharply.  For instance, if belonging to each of the four groups was a requirement,  the total number of middle class would drop to about 4 million people in all of China. Membership in China’s middle class is a fragile thing.

China’s middle class spends money differently than the way American middle class families spend theirs.  For example,  The Chinese people are better savers than American families are.  China’s young middleclass families watch their budgets by buying in bulk and buying ‘on sale’.  They rarely eat out or travel abroad.  The Chinese also place a higher value on education.  Rather than spending on non-necessities like many western cultures do, Chinese families invest in education and on their children’s extracurricular activities such as music or dance lessons.  It’s thought that these activities will give Chinese children an edge when it comes time to explore opportunities to study overseas.  This emphasis on education is understandable.

The intense focus on education occurs because admissions into Chinese universities is much more scare than in the United States.  China’s college entrance examinations see more than 10 million students competing to secure a spot in one of the 150 tier-one universities.  There are at least ten eager students for every available opening in those universities.

As China’s middle class has become an important consumer market, top US retailers have found new ways to profit from the opportunities.  Walmart has conducted business in China for twenty years and is stepping up its investment.  The retail giant plans to open 14 more Sam’s Club membership stores by 2022, bringing its total Chinese store count to 45 locations.  Besides opening new locations, Walmart is also spending to upgrade its Chinese retail stores.  In 2018, Walmart spent $56 million on renovations.  Their longterm plan through 2030 is to spend over $8 billion to further develop their supply chain.  

Among the Chinese middle class is a cohort known as G2 consumers.  They are typically teenagers and people in their early 20s, raised in a period of relative abundance.  It comprised nearly 200 million consumers in 2012 and accounted for 15 percent of urban consumption. In ten years’ time, their share of urban consumer demand should more than double, to 35 percent. By then, G2 consumers will be almost three times as numerous as the baby-boomer population that has been shaping US consumption for years.

The G2 generation, Chinese teenagers, will represent over 35% of total consumer demand by 2030.

Their parents lived through years of shortage and focused primarily on building economic security. They are confident, independent minded, and determined to display that independence through their consumption. Most of them are ‘princelings’,  born and raised during a period when China’s one-child policy was strictly enforced.  According to McKinsey and Co. research, this is the most westernized Chinese generation ever. They get emotional satisfaction from buying higher priced products, are brand loyal, and prefer niche versus mass marketed brands.  They are early adopters in new categories like personal digital gadgets, and like their western counterparts, are more likely than previous generations to check their peers’ social media posts for product endorsements before buying things.  They also have strong influence on family purchases.  

It isn’t just imported American brands that are doing well in China.  China’s newly minted middle class is rapidly gobbling up the products offered by native Chinese brands such as Huili (athletic shoes that compete with Nike and Adidas) and Perfect Diary (a cosmetics brand that goes head-to-head with Revlon and similar brands). These start-ups target China’s millennials and market their products using flashy campaigns that include popular Chinese singers and partner with widely recognized Western icons such as the British Museum of London.  In addition to achieving a high level of sales ($14 million in 2018), Perfect Diary is also opening a large number of stores in China.  The company opened 40 locations in 2018 and plans to open 600 by 2022 (pre-pandemic forecast).  Other American brands that are capitalizing on China’s booming middle class include Starbucks, Apple, Kentucky Fried Chicken and Netflix.  

Technology companies are the most important factor in China’s modern economy.

Things may be changing for China’s middle class, however.  The country’s strong economic growth is slowing as changes in political philosophy have led to tightened restrictions on the flow of funds out of China and a reduction on news from the west.  The trade war with the United States has also weakened the dollar:yuan exchange rate, making imported US products more expensive.  One Chinese university professor in Guangzhou recently described her outlook on the short-run economic situation by saying, “It’s just like watching our car enter a tunnel, but suddenly finding there is no way to turn on the headlights.”   Interpretation:  The future is unknown, and it’s not a comfortable feeling.  

There is a growing public perception that purchasing power is shrinking.  As the value of the rmb starts to lose value, wealthier Chinese are focused on “preserving the value” of their assets.  One tactic people are using is transfer of their money to foreign banks.  Even with these hedges, the general belief is that the rapid economic growth of 10% or more in recent years will continue to slow down.  Annual growth in GDP of 3% or 4% is projected for at least the next five years.  

The face of China is always changing.  This fascinating country offers both cultural and economic opportunities.  For over twenty years, Word4Asia has been on top of these changes and this has allowed us to play an important role in our clients projects.  Are your plans calling you east to China?  We’d be happy to meet with you to discuss ways we can help you chart a more successful path.  Contact Dr. Gene Wood at Word4Asia with any inquiries (gene@word4asia.com).  We look forward to hearing from you! 


Sources:

https://www.tandfonline.com/doi/abs/10.3200/AAFS.33.2.67-83?journalCode=vasa20

https://www.hooplaglobal.com/news/chinese-middle-class-is-growing

https://www.inkstonenews.com/business/chinas-rich-are-trying-move-their-wealth-abroad-yuan-weaks-and-price-rises/article/3026498

https://asia.nikkei.com/Opinion/China-wants-to-be-a-middle-income-country-without-a-middle-class

https://www.latimes.com/71189283-132.html

https://www.ifri.org/sites/default/files/atoms/files/ifri_av69_thedistinctivefeaturesofchinasmiddleclasses_ekman.pdf

A Consultant’s Perspective on the Corona Virus

by Joe

I may have the title “Doctor” prefixed to my name, but I am not a medical doctor and have no more experience with germs, viruses and biological ailments than the average “Joe”. 

With that out of the way, allow me to comment on some aspects of this most recent outbreak in China. I have been a China watcher for over 22 years. In that span of time, I have logged over 120 visits to China and Hong Kong. I’m borrowing from an insurance company slogan to summarize why I feel I can comment on this event; “We know a few things because we’ve seen a few things.”  

I did travel in China during the height of SARS. I was not worried then for personal safety and I am not worried now. When looking at the latest reported statistics, I suggest you do a little personal research to draw comparisons. For instance:

Q. How many people are estimated to die each year in China due to air pollution? 

Q. How many people will die in the USA from influenza this winter season? How many will be hospitalized? 

Q. How many deaths are caused by traffic accidents in China?  USA?

All of us should work to gain a balanced perspective about this latest challenge because FEAR is IRRATIONAL.

You get the idea. Do you own homework and draw your own conclusions.  For me, as soon as planes begin to fly again, I will be back over to visit our friends in China. 

When the virus was first reported, I was on a ship in South America. One of the hospitality staff members was from Wuhan. So naturally we discussed the topic. My first, early prediction was that the government would work to downplay the topic in order to prevent panic. In the event that downplay was not working, their next step would be to jump to stop the spread by reverting to draconian measures at a level the world may not experienced before.

In the end, this is pretty much the path they have chosen.

A number of people question whether the numbers being reported are factual and accurate. Any veteran China watcher will pretty much yawn at such an accusation.  In China, there is one news source for every event and used at all times. For the people of China and friends of China such as ourselves, we accept this.  Are the reported numbers accurate?  Who can argue?  The fact is the Party wishes to eradicate this virus as much or more than any other entity.  I, for one believe they’ll be effective if for no other reason than saving face. Be patient and life will go back to normal. 

There are a few strands of good news we can be thankful for. One, the USA has offered to send assistance. The tariffs are coming down. When the USA issued a “do not travel to China” recommendation, the Chinese officials were quick to comment that this was “unkind.”  I guess that means China wants their Western friends to come back soon!  Also, I know many people around the world are missing their opportunities to travel to China. I see both as healthy.

Let’s open the bridge as soon as possible and get back to normal. 

I did travel during SARS. Frankly, it was one of my most pleasant trips ever. Everyone wore masks to protect me. Hotels and planes were almost empty. Polite people followed me into the elevator wiping down the buttons. 

I remember traveling by van along some rural roads during that trip. Suddenly, there was a cluster of people, all wearing white uniforms and face masks. I remember how they looked like they were preparing to board a space craft. They had us roll down the window and handed us thermometers, apparently for an oral temperatures check. As the lead delegate, I did what I was told. Everyone with me followed suit. Minutes later, the official who had handed them out to us returned and with alarm began to shout “No!  No!…under your arm!”   I wondered why they had a salty taste!

I never did have a problem with SARS, although I did have to complete a thorough mouth cleansing.  My advice for when you eventually return to China is to be sure and get clear instructions when you are stopped, like we were, at any check points.

My team and I are all eager to return to China. In the meantime, we are praying for the good health of everyone there, as well as throughout the We are on this globe together and together we can make it a safer place.

2020: Are You Prepared for the Year Ahead?

by Joe

Welcome to another year and a new decade!  If you’re like me, you probably have spent the first day or two of the new work year looking ahead, anticipating what’s to come.  I always find it a great time for reflection on the goals I have for myself, and for my business.  What new skills can I personally acquire this year?  In what ways will I stretch to help my clients achieve the challenges they’ve planned for themselves?

As related to strategic planning, I’ve seen at least two common approaches among our clients.  One approach tends to be more ‘passive’; react as best one can to new challenges that surface.  The other approach is proactive and includes evaluating both the organization and the environment and then setting a course that will hopefully deliver continued success.

This second approach is more difficult, but usually more rewarding.  

With a plan in place, our clients are in a position to evaluate each opportunity as it comes their way.  Which of them are red herrings?  Which of them provide a waited for opportunity that will finally allow an organization to develop in a way they’ve been wanting to?   Since every organization operates with limited resources – time, money, reputations – we all must choose carefully.

The importance of planning is laid out for us in the Gospels, “For which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish it—lest, after he has laid the foundation, and is not able to finish, all who see it begin to mock him, saying ‘This man began to build and was not able to finish’?”  Luke 14:28-30

Yes.  Having a deliberate, intentional planning process yields great benefits.  

At Word4Asia, having a formal planning process has enabled us to identify our core strengths as well as to address areas that needed strengthening.  Over time, this has enabled us to adapt to changes in the markets we serve.

Having clear goals has deepened the personal commitment our staff, partners and program participants have towards our shared work.  On this point, I’ve also found that including our stakeholders in the planning process has been critical to the success of our planning and has improved team member engagement.

Our decision making about approaching new opportunities and challenges is really assisted.  Our plans are a ‘map’ we navigate by.  If certain opportunities are not on-route, we either ‘pass’ or having very strong reasons why we should detour into ‘shiny object syndrome’.  

Approaching our business this way has also freed us from a lot of the ‘management by in-box’ method that I know we’d fall prey to if we didn’t recommit frequently to ‘management by calendar’ instead.

I hope you do take the time to clarify the road ahead before the year gets too hectic.  Make the most of these first few weeks of 2020 to think about that ‘white canvas’ and how you might fill it to have an extraordinary year.  Of course, if your vision includes work in China, Word4Asia would like to talk to you.  Our highly developed network across mainland China, and our over twenty years in that fascinating, ever-changing environment may provide you just the expertise and resources your project needs to flourish.  You can reach me any time at gene@word4asia.com

Happy New Year!

The Greatest Story Ever Told

by Joe

The Christmas story is pretty basic. God loved the world so He sent His Son into this world to bring peace and joy. Mixture of opinions on this event. Some see it as mythology. Others a time-space history. I happen to be of the latter opinion.  Let me share some takeaways from this story which perhaps most all of us can be encouraged by. 

  1. The season reminds us that the Creator is very interested in the events of this earth. 

2. God’s love is for the entire world. It is not national or sectarian. 

3. The message is to be one which contributes to “peace on earth.”

4. The event was intended to contribute to our “joy.” 

 As a consulting firm which serves as a bridge between the two largest economies we deal constantly with divergent philosophies, world-views and yes some religious opinions. This time of year should lead us to look for points of agreement and understanding.  While I do not believe in all the assumptions frequently associated with the Dragon Boat Festival in China, I can nonetheless appreciate the spirit of fun and celebration it brings as well as the core historic event being remembered.   Likewise, many of our Chinese friends do not believe in the birth of the Christ-child who we believe was sent by God to be our Savior. All the same, we hope they also can join in our desire to see “peace on earth and good will to all upon whom His favor rest.”  

Merry Christmas, 

From your friends at Word4Asia Consulting International.

 

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