China’s Growing Middle Class Fuels a Consumption Boom

When Wang Yuchun’s 12-year-old daughter, Baobao, was younger, he and his wife used to take her to Beijing shopping malls on weekends. Together they would spend entire days shopping and eating. Now that Baobao is too busy preparing for her junior high school exams, Wang goes online and shops onAlibaba Group Holding’s Taobao.com and other e-commerce web sites.

“Online shopping is not as fun as going to the malls,” says Wang, a 38-year-old executive who runs a trading company in Beijing. “But that’s all we have the time for these days.” Wang also travels abroad with his family every year, taking short holidays in Taiwan or Hong Kong. “As a family, holidays are important for bonding emotionally,” he says. “We go on packaged tours and spend up to 30,000 yuan [$4,600] for every trip.”

The Wangs are members of China’s rising middle class, consumers who are becoming increasingly important for driving not only China’s economy but also growth around the world. At the recent Group of 20 summit in Shanghai, the G-20 Finance ministers urged China to focus its policies on keeping its consumption — and their growth — going. If recent data are any indication, China’s consumers seem to be doing their part to keep the nation’s economy humming at a time when the nation’s export engine is slowing down.

“Chinese households continue to express willingness to spend both domestically as well as globally,” says Shang-Jin Wei, chief economist at Manila-based Asian Development Bank. “You saw a record in outbound tourists last year, with many going overseas. Nations across Asia, even the small ones like Palau and the Maldives, are benefiting.”

China’s economic growth has slowed, from a peak of more than 10 percent in 2001 to 6.9 percent last year. Although data from the National Bureau of Statistics of China indicate that households still save a lot — about 30 percent of their disposable income — their willingness to spend has grown steadily, with consumption rising from slightly over 30 percent of gross domestic product a decade ago to more than 50 percent last year — the first time it exceeded business investment’s share of the economy.

The Nielsen Co., which surveys consumer attitudes to compile its Chinese Consumer Confidence Index, says consumers’ willingness to spend stood at 48 (on a scale of zero to 100) in 2015, up from 38 in 2012, whereas their willingness to save or invest fell from 70 to 64 over the same period.

“Personal income is still rising in China,” says Yan Xuan, Nielsen’s president for greater China. “Not double-digit, of 10 percent to 12 percent, annual growth that we saw a few years ago, but it’s still at a healthy level of 8 percent to 9 percent. We still are optimistic about private consumption in China.” Most of the increased spending is coming from people who live in China’s so-called tier-1 cities, the largely eastern metropolises such as Beijing, Shanghai, Shenzhen and Guangzhou, where most of the nation’s wealth is concentrated, as well as from the country’s rural population.

China’s retail sector has grown at a rate of about 10 percent in each of the past two years, driven by e-commerce, which now makes up 10 percent of the nation’s $387 billion retail market. Alibaba and its rivals are pushing an increasingly wide range of consumer products, once available only in the cities, to China’s hinterlands, where nearly half of the nation’s 1.37 billion people still live. As smartphone ownership rises and wireless technology becomes widely available, even in villages, and as logistics companies expand into rural areas, consumption as a percentage of GDP will continue to rise, says Nielsen’s Yan.

Investors who follow China closely continue to be optimistic about the nation’s transition from export-led to consumption-driven growth. “In 2016 services and consumption will be bigger than manufacturing and construction,” says Andy Rothman, investment strategist at San Francisco–based Matthews International Capital Management, which has more than $26 billion in assets under management.

“The rebalancing that many pessimists say they don’t know is happening can happen,” Rothman says. “It already is happening. This is the best situation in China.” Retail sales were up 11 percent in the first quarter from a year earlier, Rothman notes, adding that household income has risen by roughly 130 percent in real terms in the past decade, versus just 8 percent in the U.S.

On a per capita basis, individuals in China still lag far behind their U.S. counterparts. The average Chinese consumer earns about $8,000 a year, just a fraction of the $55,000 earned by the U.S. counterpart. But more than half of the population now lives in urban areas, and with more people due to move to the cities in the coming two decades, private consumption will continue to rise in the years ahead, says Yan.

China’s rising consumer confidence stands out in a report issued last month of a survey of emerging markets by the Credit Suisse Research Institute. The Swiss bank partnered with Nielsen to conduct nearly 16,000 face-to-face interviews across nine emerging economies: Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey.

“我们的分析表明,奥维r the last two years, approaching 100 million new households across our survey countries have found their way into the middle class,” Stefano Natella, head of global markets research at Credit Suisse, said in announcing the results.

Consumers in China trailed behind only their peers in India in terms of confidence in making a major purchase, according to the survey. The relative optimism of consumers in those two countries andSaudi Arabiacontrasted with pessimistic sentiment in Russia, South Africa and Brazil, said Giles Keating, deputy global chief investment officer at Credit Suisse. The survey defines the middle class in China as households earning between $1,000 and $2,000 a month. It did not give an estimate of how many households had this level of income but said the group was far larger in number than its middle-class peers in the U.S.

Nielsen’s Yan estimates that 250 million people will move to China’s cities in the next 20 years, sustaining the growth of consumption. “The key driver is urbanization,” he explains. China is reforming its residential registration, or, as it is known in Chinese, thehukousystem, to allow peasants to move to urban areas — except for the tier-1 cities — to enjoy social welfare and health care benefits widely available only in urban areas. By doing so, the government is encouraging people to save less for retirement, which frees up disposable income for consumption, Yan says.

Another factor driving consumption, Yan says, is the growing penetration of wireless technology. About 80 percent of China’s 800 million consumers now own smartphones, which gives them access to e-commerce, he notes. Many small-town producers are beginning to use e-commerce to sell not only locally but also into major urban areas. “This increases productivity in rural areas and thereby also increases rural consumption,” Yan says. “These factors will help drive consumption growth for at least the coming 20 years.”

Global investors and China’s G-20 partners certainly hope Yan is right.