China’s YOUNG middle class consumption
The explosive growth of China’s emerging middle class has brought sweeping economic change and social transformation — and it’s not over yet. By 2022, our research suggests, more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 renminbi ($9,000 to $34,000) a year.
How has the consumption not been upgraded and the young people have been downgraded? Through our own observations, we found that consumption upgrading is still a major trend. Degradation of consumption requires a special background. The article will illustrate the trend of young people’s consumption upgrade.
01. From the demographic dividend to the middle income bonus
The nominal GDP growth rate of the Chinese economy over the past 30 years exceeds that of any other country in the world, and it is achieved with the base of the world’s largest population country. It is one of the biggest miracles of the global economy in the past 100 years, and it also brings a huge middle-class dividend.
According to the McKinsey report, the middle class in China is a group of people with an annual income of 11,500 to 43,000 U.S. dollars (corresponding to 75,000 to 280,000 yuan in annual salary). This population has grown from 5 million in 2000 to 225 million today, and is expected to increase to 275 million by 2020. This population figure will exceed the total population of Europe. This also gives great significance to the study of the Chinese middle class.
Moreover, China’s miracle is that almost all wealth has accumulated over the past 30 years. Since 1978, 700 million Chinese have already been separated from the poverty line. In the past 30 years, almost everyone has lived better than their parents. It can be said that reforms, opening up, and globalization have led to China’s economic leaps in the past three decades and have created a large number of middle classes.
Although China’s population is aging, the middle class is still relatively young. Under the age of 35, most have received college education, 80% own property, have only one child, and live in large cities.
Photo explanation: Ratio of middle class to urban population, 2015–2020
02. Social characteristics after the rise of the middle class: freedom and independence
As the education received is getting better and better, especially for the acceptance of Western ideas, and the superposition of other social reasons: high education, self-identity, and urban migration. China’s middle class increasingly seeks freedom and independence. The social feature behind it is that the age of marriage is getting late and even the divorce rate has increased dramatically. In the past, people liked to use leftover males to describe these single middle-class people. The fact is that with the improvement of education, it is normal for the entire population to delay marriage. Moreover, the high number of houses has become the biggest stumbling block for young people to marry. More and more people devote their time and money to themselves, not because they were forced to marry in the past for family and succession.
There are also many separations between husband and wife due to career and work, and the driving force divorces. In fact, the actual divorce rate in China is even higher. All of this points to more free and independent personality and lifestyle.
03. Better quality of life and environment
China’s Engel coefficient fell sharply since 1985. In the words of my buddies, the “proportion of hungry people” is rapidly falling. First of all, we got rid of the poverty line, then gradually entered a relatively comfortable life, and gradually entered the middle class life. This has led to a significant improvement in quality of life and quality over the past 30 years. When I was young, I had the habit of saving, and I felt that I was not eating enough. Now after 1990 or 2000 borns is grown up with little gold spoon, life quality has improved dramatically. In the following figure, we also see that from education, pork consumption, etc. have rapidly increased. This also created a “generation gap,” creating a stronger sense of consumption among young people.
These people have no sense of insecurity since childhood, and they are similar to the American generation. They do not like to save money, do not pay for cost-effective, but pay for services, personalized, and even small-scale products. This will also have a profound impact on the future of the consumer goods market. First of all, brand concentration will certainly increase. Second, the small-scale product is also a direction. In the end, more and more demand for service-type goods, it is more and more important to force the grid.
Photo explanation: The four charts correspond to average life expectancy, mobile phone ownership, higher education ratio, and pork consumption. Explain that the quality of life of the Chinese people has been improved
04. Misunderstandings in Consumption: Per Capita Income in China is Still Low
So why do people think that there is a downgrade in consumption? Why is pinduoduo, a compound low-consumption internet application, having such a great deal of flow?
Before answering this question, we need to understand what the nature of the Internet is. The biggest feature of the Internet is the coverage of long-tailed users. The number of users must be the most central indicator of most Internet applications. Pinduoduo can rise, but in fact also represents the overall Chinese consumer trends.
The most important reason behind this is that the Chinese as a whole have not imagined that they are rich.
In our previous analysis of pinduoduo, the Chinese income group was divided into five major groups: high-income per capita disposable income of 64,493 yuan, middle-to-upper-middle income of 34,547 yuan, and middle income of 22,495 yuan. The income can be controlled at 13,843 yuan and the low income can be controlled at 5,958 yuan. In other words, the highest-income group has a salary of more than 5,000 a month. In 2017, the per capita disposable income of the country’s residents was only 25,974 yuan.
Let’s take a look at the per capita wage in China’s big cities. In 2017, the bottleneck wage in Shanghai was 7,132 yuan a month, and the average annual income was 85,684 yuan. In other words, 8,000 yuan a month in Shanghai has already surpassed half of Shanghai’s income. Beijing and Shenzhen are even lower. The average annual income of Beijing’s urban population is 57,230 yuan, and the average annual income of Shenzhen’s urban population is 52,938 yuan. Therefore, not all people in Beijing are income from Internet companies, and Shenzhen can’t compete with Tencent. A month’s 5,000 income also exceeded the average population in Beijing and Shenzhen.
05. Consumption downgrade requires a large macro background
Many people like to compare the present China with Japan. Due to the ageing of the population and the solidification of society, Japan has a distinctly low-desire social characteristic. Although there is no family planning, young people do not want to have children at all, and they do not even want to marry and fall in love. In Japan, we can see a large number of older people working. Their children stay at home as otaku otaku. According to a survey report, 36% and 39% of Japanese young men and women between the ages of 18 and 34 are “children.” A large number of men under the age of 40 do not have a girlfriend.
The economy has entered a stage of low-speed development, and society has undergone tremendous differentiation. The elderly who enjoyed the bubble economy in the previous generation basically had no worries about food and clothing, and had a good pension for the company to pay for the second half of their lives. However, young people of the new generation have found fewer and fewer opportunities. Even if they try hard, they will not have a chance to succeed.
There are a large number of odd jobs in Japan and the wages are settled by the hour. The staff of many convenience stores are these people. They have no desire to fight, nor do they desire to fall in love. Otaku can only look at comics at home and play games. There used to be a classic comic book, Gambling Apocalypse, which was actually telling the story of this social background. Japan even has a large number of “disappearing people”. Many people can stay at home for a few years without touching the community. Every day, their life is to get up, brush your teeth, and then play games.
The general background of the reduction in overall consumption is that the macro economy no longer grows. Japan is experiencing deflation for almost 20 years today. The economy does not increase and young people do not see hope. What everybody sees is that there are fewer and fewer employment opportunities. You must not be unemployed. Unemployment means no work, and no job means no life. A large number of Japanese young people are “daily wagers.” One day’s work, one day’s food, the so-called hand stop.
China is not such a sight at all. Young people have strong vitality. The rapid growth of the economy in the past made everyone see the hope of changing their destiny. Although the economic growth in the general direction in the future must be downward, it will take a long time to achieve economic non-growth. What is worried about in China is not unemployment, but too many choices and too casual employment. So comparing China’s young people to Japan today is completely incorrect.
06. Consumption upgrade everywhere
If we observe the phenomenon around us, we find that consumption upgrades are everywhere. In the past few years, the market share of brand merchants has risen rapidly. Regardless of whether it is food, clothing, housing, people are increasingly spending more on branded products. Today’s young people still eat snacks, but not the roadside noodle or cake, but a family-owned chain. The meal is not sitting on the side of the road, but is sitting in a clean, well-decorated store.
In Shanghai, more and more old convenience stores are beginning to disappear and replaced by new convenience stores with better services and products. For example, the family, 7–11, Rosen and so on. Going to the box horse near the house on weekends, the freshly made seafood inside is always in line. Many old aunts also gave up the farms at their doorsteps, came to serve and experience better Hema, and the total price of crabs and prawn was not cheap.
Some people say watching movies is a downgrade of consumption, but it is not. Today, the proportion of people watching movies in China’s three-and-four-tier cities has increased dramatically. After solving the problem of food and clothing, more and more people begin to consume spiritually. This is also consistent with Maslow’s consumption pyramid model. These people used to go to the small auditorium to look at the film and now go to the formal big cinema. In the past, many people were still thinking about buying pirated films. Today, everyone is willing to pay for better services, experience and quality.
07. Changes in consumer trends brought about by changes in economic structure
With the overall improvement of income structure, it will inevitably bring about changes in consumer trends. People emerging from the poverty line will increase the purchase of optional consumer goods, while incomes entering the middle and high levels will increase spending on brands and services.
From the data point of view, there have been some changes. For example, the proportion of the Chinese population in food, beverage, and tobacco consumption has dropped from 37% in 2005 to 30% in 2015. On the other hand, the proportion of house-related consumption has increased dramatically from 10% in 2005 to 22% in 2015. Behind it also reflected the large wave of urbanization. More and more Chinese people have their own homes, and the per capita housing area has been continuously increased, and the investment at home has also increased accordingly.
The figure below shows the fastest annual growth rate of what types of goods are seen in 2010–2015. The first is the communication equipment, which is basically a mobile phone. With the arrival of the mobile Internet wave, smart phones have maintained an average annual growth rate of around 35%. Ranked second in the home improvement industry, the average annual growth rate of 30%, followed by the furniture industry. At the same time, we saw that since the Internet media replaced traditional media, the slowest growth in the five years was the sales of traditional books and magazines.
For the future, we compare the consumption structure of China and South Korea. After all, the spending habits of Asians will be more similar. We found that in 2015 South Korea’s tobacco consumption in food accounted for only 15%, China is 30%, and there is room for further decline in the future. At the same time, the proportion of our consumption in the house-related industry chain is 22%, which is already higher than that of South Korea, and it also indicates that China has reached a high proportion in terms of the proportion of consumption. On the contrary, South Korea’s investment in education is 14%, which is more than 11% of China’s. Another high percentage of South Korea’s consumption is medical care. Of course, we see that the highest percentage is “others.” There are 22% of Korea’s share and China only 3%. It shows that the service industry in the future will have the greatest room for improvement.
Another structural opportunity comes from financial services. As wealth grows, the demand for financial services will also increase dramatically. When people have no money, they can only hold cash. With money, it will start depositing banks, and if you have money, you will buy some stocks and funds. The wealthiest people certainly need wealth management services. According to 2012 data, China’s per capita holdings of financial assets are 120,000 yuan, of which 76% is in the form of deposits. As we can see in the chart below, the higher the holding of financial assets, the higher the different types of assets held.
08. Conclusion: Consumers have not demoted either data or perception
We elaborated on the detailed and complete data and found that consumption degradation did not appear. Indeed, more and more expensive rents will occupy some of the people’s spending power, but the increase in housing prices has also stimulated the desire of consumption by another group of people.
The upgrade of consumption is related to the reduction of more and the greater background of economic growth. China will become the country with the largest number of middle class in the world. Consumption escalation is everywhere and behind it is the big dividend released by rapid economic growth over the past 30 years. In the future, if overall consumption is reduced, it must be a rapid decline in economic growth, or even a non-increasing phenomenon. So simply seeing a few phenomena, even comparing today’s China and Japan, is not objective.
