The rise of the middle class

China Daily (Canada) - - SHANGHAI - By YU RAN in Shang­hai

yu­ran@chi­nadaily.com.cn

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.

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