The rise of the middle class
The growth of incomes in China has created an enormous new class of consumers and their spending patterns are expected to shift from necessities to discretionary goods in the near future, revealed a report from investment banking firm Golden Sachs.
The report also noted that what the world has witnessed so far of Chinese consumers’ spending powers is merely a preview of what is to come. Although China’s working population is larger than that of the US and Europe combined, the core consumer group comprises just 150 million people — or 11 percent of the population — from the urban middle class who have annual incomes of or above $10,000. Furthermore, less than 2 percent of workers in China actually earn enough to have to pay income tax.
Despite having a relatively narrow middle class, China is already ranked as the second biggest market besides the United States for many global consumer companies, an indication of the magnitude of this core group’s spending prowess.
Joshua Lu, the unit leader of the consumer research team at Goldman Sachs, believes that this burgeoning consumer population will provide huge opportunities for businesses in sectors such as entertainment, food services and healthcare.
“In the coming decade, a couple hundred million people will enter the middle class as their incomes double and this migration will continue to be a powerful driver in China’s consumption growth story,” said Lu.
“Businesses will need to understand China’s growing middle class and align pricing, offerings and other practices to the group’s specific needs.”
The report indicated that Chinese consumers currently spend about half of what they earn on necessities such as clothes and food while only about 10 percent of the income is used to “have more fun”. The latter category is expected to have the largest growth potential in the next few years as more people will demand for a better quality of life.
The falling costs of electronics, combined with the desire to engage in leisure activities such as watching movies and online gaming, are also fueling significant growth opportunities in the technology and media sectors.
Spending on recreational activities — including travel, dining out, sports and gaming — has been found to be much lower in China than other countries. In 2013, such activities only accounted for 9.2 percent of personal spending in China, in contrast to the 17.3 percent in the US.
“Low costs have made online games the biggest component of media spending. But movies are showing rapid growth as affordability improves,” said Lu.