Middle class driving China’s consumption growth


hina’s per capita GDP reached US$1,090 in 2003, breaking the US$1,000 barrier for the first time and marking a new chapter in China’s economic development. The development signals a structural transformation taking place in the country which will shift from being an investment-driven economy into a consumption-driven one.

Apart from mass consumption of daily necessities and high-end products by rich Chinese citizens, the swelling consumption power of the middle class and the emerging pattern that they are creating will play a key role in shaping China’s consumer market.

It is difficult to precisely define China’s middle class, because income gaps and living standards differ considerably around the country. According to BNP Paribas Peregrine’s research, families with an annual income of around 75,000 yuan and assets worth over 300,000 yuan can be classified as middle-class, which currently represents 13.5 percent of the population. Researchers at the Chinese Academy of Social Sciences estimate that 48.5 percent of urban residents hold 150,000 yuan to 300,000 yuan per household, and 19 percent of the Chinese population earn what is regarded as a middle-class income. If China maintains its growth momentum, the middle-income class will account for 40 percent of the total population by 2020, and their contribution to China’s GDP growth will rise from 58 percent in 2002 to 71 percent, which is close to the level in developed countries.

The Central Government has been encouraging consumption as part of its economic policy for many years. In line with this, China has just amended its constitution to protect holders of private property. New personal income tax regulations are also being formulated to further promote consumption. Such policyinitiatives, coupled with growing use of credit and the improving social security system will further strengthen the middle class’ consumption power.

The spending habits of China’s middle class are inline with those of developed countries. These range from organic food, brand name clothing, overseas travel, insurance and education to new electronic products, cars and houses. The middle class’ consumption fad has contributed to the prosperity of these industries, which in turn drive China’s economic growth. The growing ranks of the middle-class and rising incomes will also boost sales of cars, housing and other luxuries.

Demand for investment and financial services are also expected to rise. In ten years’ time, the middle class will have developed their preferences and tastes, which will include investment and financial services.Hong Kong can further leverage its strengths as Asia’s financial centre and become the “Switzerland in Asia.” Of course, this will require free exchange of the renminbi and further liberalization of the renminbi business in Hong Kong.

As the Chinese government is promoting consumption and the middle classseem to be listening, vast business opportunities in the Mainland are appearing. Given Hong Kong’s rich experience in the property, distribution and other services sectors, local businesses have the opportunity to make the most out of China’s consumption trends. Furthermore, CEPA provides opportunities for Hong Kong firms to develop these industries in the Mainland.

Further opening of service sectors such as tourism, education and insurance will represent enormous potential for Hong Kong companies, and the liberalization of these sectors will be a major item in the next-phase of CEPA negotiations.

HKGCC recently sent a questionnaire to members to collect their views about CEPA. It is very likely that your opinions will be reflected in the next-phase of CEPA and will help Hong Kong businesses seize the opportunities created by consumption trends of China’s middle-class. If you have not received the questionnaire, please contact Ms Chan at 2823 1207.