The Growth of the Chinese Middle Class

There are a number of predictions for the future growth of the Chinese middle class from Goldman Sacks, the Boston Consulting Group, and McKinsey Global Institute. The numbers are more or less the same.

In my forthcoming book The Chinese Dream, I mainly cite predictions from the McKinsey report From ‘Made in China’ to ‘Sold in China’: The Rise of the Chinese Urban Consumer. (For the definition of the Chinese middle class, please see my previous post).

Based on a proprietary database with data covering the past 20 years, McKinsey uses an econometric forecasting model in combination with interviews in China to predict that the Chinese middle class will reach 612 million by 2025, accounting for 40 percent of China’s population then.

The key assumption is an annual GDP growth rate of 6.5 percent. The experts I talked to believe this prediction is on the conservative side. They think China will maintain at least this level of growth or higher for the next 20 years. Even as China’s overall economic growth moderates, according to the report, incomes in urban areas will rise faster than GDP because of higher labor productivity and rising education levels.

The growth of the Chinese middle class will also be driven by the country’s continued urbanization. Another McKinsey report, Preparing for China’s Urban Billion, predicts that China’s urban population will expand from 604 million in 2008 to 926 million in 2025, and hit the one billion mark (out of a total population of 1.5 billion) by 2030. By 2025, China’s urban economy will generate over 90 percent of its GDP, over 200 of China’s cities will have more than one million residents, and approximately 70 percent of its urban population will be middle class.

According to these reports, the rising consumption of the Chinese middle class will not depend on significant change in saving behavior or particular government policy. In the near term, consumption growth will be driven by rising per-capita income. In the longer term, this will be further accelerated by a moderating savings rate.

As its economy re-balances toward domestic consumption, China will reduce its reliance on exports. China’s urban consumer market will begin to emerge as a driver of growth in its own right. Thus, a virtuous cycle of growth will be established.