In recent months, I have become increasingly concerned about the next stage of development for China’s middle class. We have witnessed the tremendous transformation as hundreds of millions have moved into the middle class over the last 25 years, and in many families, now we have a younger generation born into the middle class with high expectations for further growth in their standard of living.
We have seen the projections of what this would look like, and the analysis of why it is important for China’s rebalancing to a consumption-driven, from an investment-driven economy. And while this can happen, my discussions with students at universities made me wonder if it automatically will, or whether we need a change of direction.
Students seem quite pessimistic about their future: wages upon graduation have not risen in real terms in 6 years, and many of the 7 million new graduates each year have a hard time finding a job. While graduates are only a small segment of China’s middle class, they are an important one, one that perhaps over time sets the trend for the rest of the middle class. I have concluded that this is indeed an issue, and that government and business action is required to address it.
So in the following three posts taken from a paper I prepared for the China Development Forum (an annual government-hosted forum to discuss ideas and potential policy solutions to China’s biggest economic issues) this month, I have set out to do the following:
1. Describe the importance and impact of China having a successful and prosperous-feeling middle class.
2. Lay out the trends reducing opportunities for China’s new graduates and the implications this has.
3. Propose a number of actions that business and government could take to address these pressures.
The explosive growth of China’s middle class has brought sweeping economic change and social transformation to China. In this essay, we explore how the middle class could become economic drivers of China’s continued growth, but also caution that this may not happen without significant intervention to reshape how China’s youth are prepared to meet the needs of future, not past, middle class jobs.
As recently as 2000, only 4% of urban households in China was middle class [1]; by 2012, that share had soared to 68%. Today, urbanites account for 52% of the entire Chinese population; by 2022, their share is likely to rise to 63%, with 170 million new urban residents. By then, China’s middle class could number 630 million – that is, 76% of urban Chinese households and 45% of the entire population.China is fast becoming a middle class nation. Central to this huge surge in middle class consumers has been the country’s urbanization, and with it, the creation of higher paying jobs.
The expanding urban middle class is increasingly made up of skilled white-collar workers who deliver higher productivity and earn higher wages. Their productivity is enabled both by ‘hard’ benefits in the form of infrastructure development, and ‘soft’ benefits through improvedprovision of, for instance, education and healthcare. The enormous growth in China’s urban infrastructure is well-known. Perhaps less appreciated, however, is the investment the government is putting into the soft enablers that unleash the economic potential of the middle class. Take insurance, for example: as recently as 2005, fewer than 150 million people had basic medical insurance in China; today, this figure has mushroomed to more than 95% of the population. In the case of those urban citizens that have insurance, their out-of-pocketexpenditure ratio has fallen from 59% to 35%. This is an example of the Chinese government recognizing that the quality of middle class development is as important as the number of middle class citizens.
We divided the Chinese middle class into two segments: the mass middle class – those earning annual household income of RMB60,000 to RMB106,000, equivalent to US$9,000 to US$16,000– comprising 54% of all urban households in 2012. And the upper middle class –with household income of RMB106,000 to RMB229,000,equivalent to US$16,000 to US$34,000 – accounting for 14 % of urban households in that year.
The upper middle class punches above its weight in terms of consumption, accounting for20% of China’s urban private consumption (Exhibit 1). This structure should look very different by 2022, when the upper middle class could comprise 54% of total urban households and56% of urban private consumption by 2022,compared with around 13% in the case of the mass middle class. But this will only happen if household incomes continue to grow across the middle class.
Exhibit 1
A successful shift towards the upper middle class will lead to a more mature and attractivemarket for businesses. Relative to the mass middle class, upper-middle class consumers are already more willing to pay a premium for quality products, have a higher level of trust inwell-known brands, and spend more of their income on discretionary products and services (Exhibit 2). They are also much more international in their outlook, open to – and even eager for – international brands.
Exhibit 2
China’s upper middle class consumers are becoming more mature. They decreasingly perceive shopping as a desirable family activity, spending significantly more time on leisure activities and travel than they did a decade ago. As a reflection of this trend, China’s hotel room capacity quadrupled between 2000 and 2012, and since 2010, the annual growth rate of cinema ticket receipts has exceeded 30%, with more than 1,000 new cinemas opening in 2013 alone.
Powered by higher incomes, upper middle class shoppers buy a wider range of products and at higher price points than their compatriotsin the mass middle segment. Nearly 60% of upper middle class consumers have bought digital cameras, compared with just 40% of mass middle class consumers. In the case of laptops, 51% of upper middle class consumers bought this item, compared with only 32% of the mass middle class. A similar pattern is evident in purchases of laundry softeners, where 56% of the upper middle class bought this product compared with 36% of the mass middle class (Exhibit 2).
Stark disparities exist between the two segments with regard to what products they consider attractive.Basic functional benefits appeal to mass middle class consumers, two-thirds of whom mention ‘durability’as one of their top five buying factors for a washing machine, compared with less than half of upper middle class consumers citing this factor. In the case of smartphones, 62% of mass middle class consumers cited durability in their top five considerations,compared with only 36% of upper middle class consumers.
Emotional and social benefits are increasingly important to upper middle class consumers,who are more than 50% more likely than mass consumers to cite considerations such as‘showing my taste’ and ‘makes me feel that my family is living a better life’, when purchasing products such as shampoo or mobile phones.
China’s expanding upper middle class is much more outward-looking than the broad swath ofChinese citizens—a dramatic break from the past that has broad implications for their consumption behavior. This group is much more willing to buy foreign brands. Foreign-branded food and beverages are favored by 34% of upper-middle class urbanites compared with 24% of all city dwellers. The upper middle class is also much more likely to travel abroad—in 2012, 10%of the urban middle class travelled overseas,compared with 3% of all urban Chinese.
This international outlook reflects a number of factors. Upper middle class citizens are bettereducated and more likely to speak a foreign language – 34% of the upper middle class holds a bachelor’s degree or above, and 26% can speak and understand English. They have, as a result, been the beneficiaries of the newly created, higher paying jobs in financial services, professional services, and the travel industry.
Widespread adoption of the internet is another important ingredient in this internationalism; the upper middle class are more likely to buy online and spend a higher proportion of their income online. The Chinese market will continue to retain its own unique characteristics, but if the upper middle class becomes the new mainstream, we should expect it to bear an increasing resemblance to mature international markets.
Businesses looking to serve these consumers will need a granular understanding of where the greatest growth in middle class numbers will. While China’s middle class expansion is largely happening in cities and will continue there, it will become much more evenly spread geographically.
In 2002, 40% of China’s urban middle class livedin the tier 1 megacities of Beijing, Shanghai,Guangzhou and Shenzhen. However, this share is expected to decline to 16% in 2022, while the share will rise in tier 2 and tier 3 cities. Tier 3 cities hosted only 15% of China’s middle class households in 2002; by 2022, that share should reach 31% (Exhibit 3). This shift in the weight of the middle class households from megacities to medium-sized cities means that there is also a movement from the huge urban centers of the coast to urban areas inland. In 2002, only 13% of the urban middle class lived in inland provinces, but that number is expected to rise to 39% in 2022.
Exhibit 3
Examples of two small cities illustrate this shift. Jiaohe in Jilin province is a northern inland tier 4 city, which is growing quickly due to its position as a transportation center. It has abundant natural resources such as Chinese forest herbs and edible fungi, and is China’s mostimportant production base for grape and rice wine. In 2000, fewer than 900 households out of 70,000 were middle class; by 2022, the city is expected to grow to 160,000 households, and about 90,000, or nearly 60%, are predicted to be middle class.
Another city, Wuwei in Gansu province, is an inland tier 4 city with the advantages of being within the Jinchang-Wuwei regional development zone. It possesses rich sources of minerals, with its nearby ilmenite (the most important ore in the manufacture of titanium) reserves ranking among the largest in the nation. Wuwei is also conveniently located at the junction of major railways and several highways. In 2000, less than 900 of 87,000 households were middle class. By 2022, the city is expected to grow to 650,000 households, of whicharound 390,000, or 60%, will be middle class.
Geographic remoteness matters less and less in shaping consumer needs and purchases. When China inaugurated its high-speed rail lines seven years ago, many observers declared them an infrastructure boondoggle that would never be used at capacity. How wrong they were: daily ridership soared from 250,000 in 2007 to 1.3 million last year. Demand was simply underestimated. Now that trains run as often as every 15 minutes on the Shanghai–Nanjing line, business and retail clusters are emerging, and middle class consumers are making weekly day-trips to work and shop, rather than monthly overnight visits. There are already more than 9,000 kilometers of operational lines—and that figure is set to double within the next few years.
Another factor making geographic location less relevant is the fact that internet retail is “born national”. All products available in Shanghai can also be delivered in Wuwei. Physical retailers have a tough time competing and may now choose to never establish anything beyond a few flagship locations in third tier cities. In some segments like B2C apparel, where online sales almost doubled in 2013 over 2012, internet retail is rapidly becoming the mainstream channel.
In tier-3 cities, online contributed to 14% of luxury goods sales in 2012, compared to almost nothing in 2010. Chinese consumers already spend 55% of their media time online, compared to 38% for their U.S. counterparts. This is driving new behaviors which will shape the Chinese middle class of the 2020s, such as shopping through social media platforms like WeChat, or visiting malls primarily as a leisure and entertainment activity, instead of for purely shopping.
Notes:
1. We have defined ‘middle class’ as those with annual household disposable income of between RMB60,000 and RMB229,000, a range that – in purchasing power parity terms – is between the average income of Brazil and Italy. These consumers would spend less than 50% on necessities and demonstrate distinctive consumption behavior compared with other classes of consumers.
You can read more of my views on China on my blog, Gordon’s View. And please follow me on Twitter @gordonorr
Photo: stockbroker / 123RF Stock Photo
I dig really deep into this in my new book, HOW THE POOR CAN SAVE CAPITALISM (June, 2014 release), but let me say it here quick, clean and crisp. On job creation, we're looking for love in mostly all the wrong places.
We talk about big business creating jobs, but this is not the 1970's,
when 70% of all employment came from big business.
We talk
about innovation, but to quote my friend Jim Clifton, chairman and CEO of
Gallup, "an innovation without a customer standing next to it is
not a business."
We tell
our kids to go to school K-12 and graduate (check), and then go to college and
graduate (check). And then we tell all of our kids to go off and get a good job
working for either big business or the government.
Now,
putting aside the six-figure-plus student loan balances that are slowly
strangling a generation of achievers, 1,000 or so companies that employ 10,000
people or more in America cannot save America alone.
As admirable and inspiring as IBM, HP, UPS, the Coca-Cola Company,
Wells Fargo, Google, Microsoft, Rubbermaid, Apple, SunTrust Banks and 970 other
household name companies might be, this is simply not where we are going to find
enough good jobs to employ a nation.
Government is
great, but the government in the U.S. economy accounts for only between 8%-13%
of all jobs. The rest come from the private sector. And in the Middle East and
Africa, the ratios are all backwards, meaning worse. In some countries
90% of all jobs are government, which is not sustainable I might add. And most
of the rest of the jobs come from big businesses that are tied to the
government. But none of these folks can solve the jobs crisis in those countries
either. Everyone seems to be looking for love in all the wrong places.
We seem to be talking about everything but the
facts that matter most. So where do jobs (in a growing economy) really
comes from? Let me take a run at it.
There are more than
7 billion people in the world.
There are 300 million people in America.
America is the largest economy in the world, with approximately $17 trillion in GDP.
There are approximately 26 million business entities in America, but most of these companies and corporations are shell entities or tax structures.
Of the 26 million plus business entities, approximately 6 million employ one person or more.
Of the 6 million that employ one or more, less than 1,000 businesses employ 10,000 people or more. And most of these companies don't define economic growth as 'hiring more people.' This is not a knock on big business, it's increasingly a reality.
Approximately 18,000 businesses employ between 1,000 and 10,000 people.
70% of all jobs come from companies with 500 employees or less.
50% of all jobs in America come from companies with
100 employees or less. That's right -- HALF of all jobs in America.
There
you have it.
Small businesses, entrepreneurs, start-ups and
what is called "shoot ups" account for the majority of jobs in America, and most
job growth comes from small businesses in years 3-7.
I
remember getting into a public debate with a big time Fortune 500 CEO. He was
arguing how only big business was the driver of all relevant economic growth. I
simply reminded him that every big business -- including his -- was once a small
one. He stopped arguing.
America started with the agrarian
farmer during the Agricultural Age, and then came the Industrial Age, the
Technology Age, and where we are today -- the Information Age. And my bet on the
future -- is you and me. I believe the 21st century is going to see the dawning
of the Human Age. Back to where we all began -- human capital as wealth
creation.
And that is why after 22 incredible years, I
rebranded and relaunched Operation HOPE as a start-up: America's first nonprofit
software company, specializing in the software of human potential. Reverse
engineering poverty (into human potential).
So when
your kids ask you what they should be doing with their lives, don't just limit
them to going and getting a job that already exists -- or alternatively doesn't
exist.
Challenge them to create a new job no one has ever
seen or thought of before. Or maybe just a practical product or service that
everybody needs, right in your neighborhood. Right around the block from your
home or office.
No one knew we needed the Internet until we
got it -- and now most of us cannot live without it. You're reading this article
because of the Internet. But in 1992, most of this eWorld we take for granted
was a mere dream. And 90% of it was created by dreamers, entrepreneurs and small
business owners.
Average people like you and me created
modern America. We can do it again. One new job at a time.
Let's go.
John Hope Bryant is the Founder, Chairman and CEO of Operation HOPE and Bryant Group Companies, Inc. Magazine/CEO READ bestselling business author of LOVE LEADERSHIP: The New Way to Lead in a Fear-Based World (Jossey-Bass), and is the only 2010-2012 bestselling business author in America who is also African-American. His newest book, due out May, 2014, is HOW THE POOR CAN SAVE CAPITALISM, and will be published by Berrett Koehler Publishing. Bryant is a Member of the U.S. President's Advisory Council on Financial Capability for Young Americans.
About 260,000 people who had a college or professional degree made at or below the federal minimum wage of $7.25 per hour last year, according to the Bureau of Labor Statistics.
Things may be looking up a little, though -- it's the smallest number since 2008. The worst year was 2010, when the number skyrocketed to 327,000.
Despite the recent improvement, the number of workers with college degrees is still more than double what it was in 2005, prior to the Great Recession.
Related: 2014 minimum wage, state by state
While an improving economy might play a role in graduates snagging better-paying jobs, other less-encouraging factors might also be at play.
A total of 21 states, including New Jersey, New York and Connecticut recently, have higher minimum wage floors than the federal level of $7.25 per hour
Experts point to shifts in the post-recession labor market as the reason for so many college graduates in low-paying jobs.
"The only jobs that we're growing are low-wage jobs, and at the same time, wages across occupations, especially in low-wage jobs, are declining," said Tsedeye Gebreselassie, a staff attorney at the worker advocacy group National Employment Law Project.
Related: Surprising minimum wage jobs
Some 58% of the jobs created during the recent economic recovery have been low-wage positions like retail and food prep workers, according to a 2012 NELP report. These low-wage jobs had a median hourly wage of $13.83 or less.
At the same time, median household income has also dropped by more than $4,000 since 2000, according to the Census Bureau.
This has fed the growing number of college educated workers protesting for higher pay.
Debbra Alexis, a 27-year-old Victoria's Secret employee with a bachelor's degree in health sciences, gathered more than 800 signatures in support of her campaign for higher pay at her New York City store. The store, part of L Brands (LB), ended up giving across-the-board raises of about $1 to $2 per hour to all workers in the Herald Square store.
Related: Millennials turn up heat against low wages
A group of Kaplan tutors in New York City also formed a union to bargain for better wages.
And fast food worker Bobby Bingham, who got a bachelor's degree from University of Missouri in Kansas City, works four part-time low-wage jobs just to barely scrape by.
The consensus among these workers is that they thought pursuing pricey degrees would buy them access into the middle class. But that has been far from the reality in the wake of the recession.
"My family told me, 'just get your degree and it will be fine,'" Bingham told CNNMoney. "A degree looks very nice, but I don't have a job to show for it."
http://money.cnn.com/2014/03/31/news/economy/minimum-wage-college-graduates/index.html
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