China’s Middle Class: The Rise that Transformed the Country

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The rise of the Chinese middle class has transformed the country in the last several decades — reducing poverty and sparking new consumer behaviors. It has also led organizations from food companies to automakers to invest in the growing — and future — consumption by Chinese consumers.

For example, Volkswagen plans to open 10 new automotive plants in the near future, seven of which will be located in China. Research by McKinsey suggests several important trajectories as the middle class continues to grow and evolve over the next decade.

Specifically:

  • Upper middle class growth. The mass middle will shrink, while the upper middle class grows in share of households and consumption.
  • Generational shifts. The future middle class will increasingly be made up of—and influenced by—today’s younger consumers.
  • Geographic shifts. Middle class growth will penetrate China’s Tier 3 and Tier 4 cities in the north and west of the country.

3 KEY FINDINGS

  • The size and composition of the Chinese middle class is changing, according to recent forecasts from McKinsey & Co.
  • The upper middle class will drive much of the consumption in China in the next decade, and more middle class Chinese will live in smaller, interior cities.
  • By 2022, nearly 40% of middle class Chinese will live in Tier 3 and Tier 4 cities.

DEFINING THE MIDDLE CLASS

Within the context of McKinsey’s forecasts, China’s four income classes are defined by their level of disposable income per household.

  • Affluent: Greater than 229,000 renminbi ($34,000)
  • Upper middle: 106,000 to 229,000 renminbi ($16,000 to $34,000)
  • Mass middle: 60,000 to 106,000 renminbi ($9,000 to $16,000)
  • Poor: Less than 60,000 renminbi ($9,000)

3 BUSINESS IMPLICATIONS

  • The shrinking of the mass middle and poor segments, both as a share of all households and as a share of consumption, implies that bottom-of-the-pyramid (BOP) opportunities in China could very well decline in coming years. Organizations should reassess BOP prospects for their industry/ important categories, and adjust strategies as necessary to reflect the rising importance of upper income groups.
  • The expected growth in the upper middle segment suggests that the “average” Chinese consumer of 2020 will be more sophisticated and demanding than today. Taken together, upper middle and affluent consumers will make up 63% of Chinese households, and will drive demand for high quality, better levels of customer service, and luxury goods. Already, McKinsey notes clear differences between the upper middle and mass middle in spending—e.g., upper middle consumers are much more likely to purchase specialized household items like fabric softener.
  •  The rise of a Chinese upper middle class — and the generational shifts toward more wired and materially focused G2 members in the upper middle and mass middle classes—will make quality, customer service, and personalization more important attributes. Luxury will democratize to some degree, as it did in Western economies from the 1980s until recently. Price will remain important to many, but these other attributes will grow more and more essential in reaching younger consumers.