An Unhappy Middle in the Middle Kingdom; In between China’s billionaires and peasants is a surprisingly thin and unhappy middle class, which poses a big social and economic challenge

March 7, 2013, 10:15 a.m. ET

An Unhappy Middle in the Middle Kingdom

By WEI GU

China has the world’s largest number of billionaires and 700 million peasants. In between is a surprisingly thin and unhappy middle class, which poses a big social and economic challenge.

Among the 3,000 delegates of the 2013 National People’s Congress, the percentage of blue-collar workers and peasants has risen to 13% from 8% in 2012. The number of migrant workers has jumped to 30 from just three last year. Wealthy Chinese continue to be well represented. China’s richest man, Zong Qinhou, is attending the annual powwow for the 11th time.

The squeezed middle class deserves more love. As many as 51% of Chinese working professionals suffered from some level of depression, the Ministry of Health said in 2011. They blame pressure from a rapidly changing society, increased competition, long work hours and high property prices.

“The biggest risk in the world is China’s middle class not being happy,” said Shaun Rein, the managing director of China Market Research, a consulting firm. “They are the most pessimistic group in the world.”

“The truly rich can afford to live anywhere, and the poor get double-digit wage increases every year,” Mr. Rein, author of the book “End of Cheap China,” said. “China’s middle class has hopes to own a car and home and be rich one day. But as their salary growth slows, they realize they will never be able to get there.”

The Chinese government has made it a priority to help migrant workers. In 2012, 25 provinces raised minimum wages by an average of 20%, official data show. But wage increases for managers at multinationals, private and state-owned companies have slowed or stalled.

At present, the great majority of the Chinese are working class, living in households with annual disposable income of between $6,000 and $16,000, just about enough to cover basic needs, according to consulting firm McKinsey & Co. The middle class, with annual disposable income of between $16,000 and $34,000, make up only 6% of the urban population. A tiny group of upper-middle-class to rich consumers, whose disposable income exceeds $34,000, comprises only 2% of the urban population.

The Organization for Economic Cooperation and Development defines the global middle class as those households with daily spending between $10 and $100 per person in purchasing power parity terms. The OECD reckons the U.S. has the biggest middle class in the world, with some 230 million people, or 73% of the population. It puts China’s middle class at up to 10% of the population, but expects the number to rise to 40% by 2020.

China has 408 billionaires, more than the 317 who live in the U.S., according to Hurun Global Rich list 2013.

Although basic goods in China are still relatively cheap, it is costly to lead a middle-class life in China. A Starbucks SBUX +2.01% grande latte costs $4.81 in Beijing, compared with $3.55 in San Francisco and $3.87 in Hong Kong. A locally madeVolkswagen VOW3.XE +0.89% Passat sedan retails for up to $50,000 in China, versus up to $33,000 in the U.S. Goods that are made in China, including clothing and electronics, are often more expensive there than they are abroad, partly due to inefficient distribution.

The middle class in China also suffers from high housing costs. Average rent jumped 9% in Beijing in January, according to the Statistics Bureau. “If only because of rent, it is hard to save a lot of money in top-tier cities for the middle class,” said Jeff Walters, a partner at Boston Consulting.

In some ways, middle-class status in China doesn’t confer the same privileges as in the West. In China, basic things such as uncontaminated baby formula, clean air, top-quality schools and private hospitals are luxuries, out of reach of many members of the middle class. Usually, the middle class is the stabilizing force in a society. But China’s nascent middle class, which is increasingly demanding better health and more freedom, marched on the streets of the prosperous Ningbo city in 2012 to protest a chemical project.

The authorities have said they want to develop an olive-shaped society, with a fat base in the middle. The 18th Party Congress in late 2012 came up with a new plan to double average income by 2020 by changing the economic growth model and income distribution system. But they may be missing something.

“The government hasn’t addressed the core of the issue,” said Wang Xiaolu of the China Reform Foundation and one of China’s leading academics on income distribution. “Without reforms of the fiscal system, land policies, social welfare and the administrative system, mere income growth can’t resolve China’s middle class problem.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: