Consumer Staples Author: Skye Lan Editor: Luke Sheehan Oct 05, 2021 10:52 AM (GMT+8)

The growth of the second generation of middle-class citizens in China is not only moving the country into a new stage of economic development – it is also shaping it into a consumer market center globally.

Consumer

Antitrust, reform in education, real estate and medical care policies, Common Prosperity... all of these show that China is undergoing earth-shaking change. These changes have brought large uncertainty, making many investors afraid to invest in Chinese projects and companies. However, over the next decade, China sure will become the world's largest economy. How to better understand the opportunities and risks of the Chinese market and deal with certainty and uncertainty is a crucial problem. EqualOcean launched a series of research, China's Future Investment Watch, hoping to provide clues for global investors.


The middle-class is a class of people in the middle of a social hierarchy. The term was first introduced by James Bradshaw in 1745. He might have had many ideas about the traditional middle-class in the western world of his time – but even were Bradshaw around to analyze the contemporary world, he might not understand the profile of the new generation of middle-class people in China, which we will discuss in detail in this article.

Based on Maslow's hierarchy of needs, the middle class should be a group of people whose basic needs are all fulfilled. However, in practice what we often find is that their psychological needs are almost fulfilled but needs for self-fulfillment needs are somewhat vacant.

Its usage has often been vague, whether defined in terms of occupation, income, education, or social status. Credit Cuisse defined the middle-class as people with wealth between USD 10,000 to USD 100,000, which consisted of around 50% of the population in China in 2020. The World Bank defines those as daily spending between USD 10 to 50, which accounts for 50% in 2018. The Economist defines the middle-class as ones whose annual disposable income reached the range of USD 2,100 to 32,100, which took up 60% of the population in 2016.

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EqualOcean believes a real middle class should be comprehensively mapped with parameters like income, education, value… We think 40%, around 560 million of the population of China, are to be considered the real middle-class.

With the new generation of middle-class evolving in China – the ones contributing the most to the expansion of the middle class – the spending habits have been significantly changed.

Portrait of the second generation of middle-class citizens

The second generation of middle-class people consists of the people born between 1980 and 1995, when China started to usher an ultrafast growing era. They are mostly the only child in their family, with higher education level and their own self-crafted attitudes towards life. They are more open-minded, willing to try new things and often have demands for specific products. The new middle-class has been showing more diversity.

Less is more

For the first generation of middle-class people born into families with multiple siblings, they experienced the extreme poverty time of China and hold views that amount to 'the more, the better' when it comes to consumption. However, for the second generation of middle classes, they have less resource distribution between siblings, preferring to spend more on a single product. The stronger personalities of second representing a preference on better quality, more customized and distinctive products, even not from a famous brand.

Live clean and better

McKinsey's survey stated that 20% of the spare time of second generation of middle-class citizens is spent on self-improvement, such as working out, movies, stage plays or cooking. They have started to own themselves, cheer themselves up, making efforts to live a positive life. Also as they have more knowledge, they tend to eat healthier and spend more time on physical training, with healthy food and wellness-related businesses standing out.

High debt rate and risk tolerance

For the first generation, saving – the deposits in banks – is the main approach of accumulating wealth, on the other hand, second generation of middle-class tend to add value through active management. They are willing to invest money in different products and find risks more bearable. Also, most of them have a certain amount of debt and get used to overconsumption. Benefitting from this, many fintech and smart asset management platforms appeared to serve the middle-class population.

Enjoyment spending

Different to the first generation of middle-class citizens, who struggled with life and fulfilling their basic needs, many interests have been developed for the second generation currently growing up. They are spending more money and time on what they like, such as music concerts, staged shows, movies, travel, fancy restaurants, bars, etc.

Kids need the best  

An interesting characteristic for the Chinese middle classes, which is all same for both generations, is education consumption. In Chinese culture, kids are the future of the entire family. Parents are willing to buy overpriced apartments next to better schools and pay expensive tutoring for interest classes. According to Hurun Report, the annually education expenditure for second generation families reached over CNY 90,000 (near USD 14,000).

Behind the glamour

It looks like the middle-class population already live good lives, as they can afford many things that many people can't – but the anxiety behind this exterior is massive.

It is a generation that has few or no siblings, therefore two young couples have to afford to support four elder parents' lives after retirement. At the same time, they are worried about the elder support issue in the future themselves.

They are struggling in the most bubble-prone real estate market in China ever. Many members of the young generation could never afford an apartment in cities without support from their parents. Excessive funds went into the real estate market with less disposable income left for consumption.

Also, the education cost in China is massive. The household registration system in China determines that kids can only go to schools in the neighborhood where they live. Therefore, in order to access the best educational resources, they must buy extremely overpriced properties in the school district. What is more, the population issue in China led to fiercer competition in talent selection. Parents have been spending more and more to make their kids versatile.

Healthcare is another huge problem in China. The charges of medicine and treatments for serious illness are expensive enough to ruin the lives of younger citizens.

Furthermore, 'Savings' is rooted in Chinese life, even for the second generation of the middle-class. The serious consequence is that, under the great pressure from housing, healthcare, and education issues ('three mountains'), the middle-class refuse to spend more. The percentages of consumption to the scale of middle-class will be 1.12 in 2022, which is 56% of spending power to 54% of scale, decreased from 1.57 in 2012. The figures marking a weakening consumption power for the middle class, a dangerous sign for an economy.

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However, the middle class, especially the second generation, has been serving as the main economic contributor in China. It boosts the domestic demands and therefore push the progress of consumption upgrade. The trend of collapse must not continue.

Middle-income pattern drives domestic demand

As we discussed in the previous articles, boosting domestic demand will be the solution to lifting the people's income levels to step across the hurdle of GDP per capita of USD 12,000, and therefore help China to transform from an investment-driven to a consumption-driven economy. In driving domestic demand, the obstacles impeding the spending of the middle class should be removed, which are the 'three mountains' we mentioned earlier.

We anticipated that the stimulus policies issued by the state targeting wage levels and labor markets will ease this unfavorable collapse situation. Besides, financial market reform, with fewer restrictions on the private sector, is expected to improve total productivity and provide more occupation. Some specific policies targeting the healthcare and medicine industry are lowering the treatment costs, while regulations on the real estate sector will reduce the price bubbles and ease the housing burden and the crackdown on the off-campus education also followed the decision of the Chinese government to remove the 'three mountains' for the middle-income population, in order to boost domestic demand.

The new form of urbanization in China, which we called metropolitanization in previous articles, is expected to stimulate the population of the second generation of middle-class in developing areas, which has 10% lower consumption power on average compared to the second generation of middle-class living in cities.  

Japan and Korea went through this. In 1960, Japan issued a national income boost project, with moves including improvement of the social security system, tax benefits, and helping agricultural workers to reach similar income levels to other occupations. As a result, a stable middle-income population group formed, laying a foundation for Japan's economic growth. In a similar story, many policies and laws launched in the 70s and 80s on salary, agriculture, and social security eased the transition for the population from lower-income to middle income.

The revitalization of the middle class is indeed the turning point of domestic demand.

Consumption upgrade – economy booster

Even though the middle class has been willing to split less the total income for consumption than before, they still contributed most to total consumption scale, 58% in 2021 based on our projection.

A consumption upgrade should come along with the domestic demand increase, to fuel the economic growth together. The second generation of the middle-class population – for whom consumption is a process reflecting social status and self-worth – like we said, have the ability to spend more on unessential stuff, paying a premium for better services and products.

The consumption structure is showing that people are spending more on healthcare, travel, entertainment, and self-improvements, meaning that people have started to pursue higher standards of living.

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Also, with the higher education level more open mindset, the consumption upgrade of the second generation of middle-income citizens that lives in less developed or even rural areas will be the main force of urbanization in China, which the state is seeking a more balanced consumption and resource structure nationwide.

In the future: a consumer goods empire?

As we discussed before, China is not likely to fall into the middle-income trap on the way to GDP per capita of USD 20,000 from USD 10,000, as the state is very aware of the importance of the middle-income population, especially the second generation, with many associated policies actively launched. Along the path, the middle-class will be revitalized and get stronger.

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The population that formed the very bottom line of the second generation, represented by young professionals and recent graduates, who are highly educated and about to or have just entered society, have often drifted into a vulnerable financial situation – they make up nearly 20% of the total population.

According to <Social Stratification in Modern China> (Chinese:  《当代中国社会分层》) by Li Qiang from Tsinghua University, those members of the population – defined as the ones with annual income between CNY 40,000 to CNY 10,000, are most likely to transition into the second generation of middle-income citizens. Also, the lower-tier cities have more population on the edge relatively, which will be more easily stimulated with urbanization progress in China.

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The second generation is, apparently, the main power of China’s consumption trends, and China is no doubt the main force in global consumption. This population grew up with the development of the ‘Made in China' mentality, when the national self-confidence was built, with many new domestic brands evolving, as we discussed in the previous article. From 'Made in China' to 'Craft in China,' we shall see the great opportunities in domestic brands going global; from the first to the second generation, we shall see massive market possibilities in the Chinese consumer sector become diverse.

Wrapping up…

The second generation of middle-income consumers in China is a unique group that has started to have more options, to create its own values around striving and achieving but also retains Chinese traditional beliefs, which is often the root cause of anxiety. They aspire to freedom and equality but worry about whether they can provide enough help to the next generation. They value individual liberation, but also can't stop competing and comparing. They rebel against secular ideas, but also struggle to achieve monetary affluence.

These contradictions form a complicated and special group – the second generation of middle-income consumers, which is playing more important role not only in China, but also the world.


EqualOcean operates offices in Beijing, New York, and Shanghai. We welcome investors interested in the Chinese market to contact us via (contact@EqualOcean.com) or visit our offices. We believe the exchange of views will make you have a clearer prediction of the future.