From Poor to Well-off: Why Aren’t the Chinese Consuming?

By: Project 2049 Institute |

It is generally agreed that increasing prosperity among the Chinese populace, along with the expansion of the Chinese middle class will unleash a wave of consumption. More American large manufacturing enterprises have invested in China. They believe that the boost of this middle stratum will not only bring about significant social transformation in the next twenty years, but drive the burgeoning economy as a fertile market for western retailers, banking, insurance and luxury goods. However, will China’s expanding middle class generate significant spending growth in the coming years as the country continues to grow economically?

Chinese middle class households account for roughly 100 million people, with each earning an annual average income of 150,000 yuan (US$18,137) and holding household assets of 620,000 yuan (US$74,969) to date. However, statistics show that more than 40 percent of household income goes into savings, and their purchasing power for items beyond very basic food, clothing and housing is miniscule. Why hasn’t China’s economic boom generated more enthusiastic consumption, which is usually seen as a principle driver behind economic growth?

One reason for limited consumption is that since China’s economic reform, many formerly free services from state-owned enterprises such as housing and medical care have to be bought by households now. In 2008, urban residents spent an average 30% of total household income on housing, health care and education, which accounted for less than 20% of household income in 1995–this implies that there might not be much left for other consumption after spending on necessities. On the other hand, the relatively underdeveloped credit market on the Mainland also restricts growth of consumption.

Second, China’s phenomenal saving rates have been largely a result of its imperfect social security system. The migrant workers are not entitled to change their formal household registration to enjoy social security networks in urban cities, and yet they make up a significant percentage of the urban working population, especially in China’s special economic zones. The sense of financial insecurity in retirement, pension, health care and unemployment insurance combined with the difficulty of procuring personal bank loans largely accounts for China’s increasing saving rates.

The last reason is that the Chinese are still slowly learning to consume as it takes time to develop a culture of consumption in a country where accumulation of wealth is a highly valued virtue. A recent article in the Los Angeles Times recounted IKEA’s experience in Shanghai where nouveau riche customers make day trips to their furniture themed playlands to browse and make themselves at home by napping and dining in model bedrooms and dining rooms. While it may sound a little absurd, American enterprises have found that it takes some socialization processes for Chinese to learn to spend their money on items beyond their basic necessities, such as acquiring interior decoration ideas and learning home/apartment furnishing lessons from Western furniture chains, like IKEA.

Chinese middle class is not big consumer yet. In sum, to reverse China’s consumption-saving puzzle is not simply a basic economic problem of supply and demand, but a social equilibrium of institutional reconstruction and cultural infrastructure.