China’s Middle Class – Growth, Policy, and Consumption

China is home to the largest middle-class cohort in the world. As the country underwent a period of rapid economic transformation, its middle class emerged as a key driver of its economic development. The rise of the middle class in China not only signifies a significant societal shift but also has profound implications for the country’s domestic consumption patterns, social structure, and global economic relations.

The growth of the middle class in China has presented a host of new opportunities for global businesses seeking to capitalize on the group’s rising purchasing power. As incomes have risen, so has demand for consumer goods, as people are more able and willing to spend on things such as cars, housing, education, healthcare, and travel. The middle class is therefore also becoming an important means for China to achieve a higher degree of economic self-sufficiency by leveraging domestic demand for goods and services.

However, as China’s middle class grows, it also faces new challenges and pressures. Income inequality, regional disparities, and rising living costs present obstacles to raising more people to the middle-income bracket, and addressing these issues is becoming a top priority for the government.

Defining China’s “middle class”

The middle class in China, or alternatively middle-income groups, has been defined in a number of different ways over the years. The most common definition currently seen in China is the scope set by the National Bureau of Statistics (NBS), which defines the “middle-income group” as a typical three-person household that earns between RMB 100,000 to RMB 500,000 (approx. US$14,844 to US$74,221 in 2022) per year.

An oft-quoted figure for the size of China’s middle class comes from the former Director of the NBS, Ning Jizhe, who, using the above definition, has stated that China’s middle-income group surpassed 400 million people in 2017, or 140 million households.

This figure continues to be used in communications and reports from China’s state media, but no up-to-date statistics have been released directly from government institutions since then.

According to the Hurun 2018 China New Middle-Class Report, there were over 33.2 million middle-class households as of August 2018. The “middle class” is defined by Hurun as “Urban residents with an annual household income of more than RMB 300,000 (approx US$42,647) in first-tier cities [Beijing, Shanghai, Guangzhou, and Shenzhen] and more than RMB 200,000 (approx. US$28,431) in new first-tier cities [such as Chengdu, Hangzhou, Chongqing, Wuhan, Xi’an, Suzhou, and Tianjin] and other cities.”

Among them, Beijing is the city with the most middle-class families, followed by Shanghai, while Guangdong was the province with the most middle-class families. These three regions had a total of 16.6 million middle-class families, accounting for 50.08 percent of the whole of the Chinese mainland.

Meanwhile, data from the NBS shows the distribution of disposable income per capita across the three middle population quintiles (from lower-middle income to upper-middle income households) ranged from RMB 19,303 (approx. US$2,744) to RMB 47,397 (approx. US$6,738) in 2022.

Spending power in China

China’s median disposable income per capita reached RMB 31,370 in 2022, a year-year-on-year increase of 4.7 percent. This figure has more than doubled from the RMB 15,632 recorded in 2013.

In urban areas, the median disposable income per capita reached RMB 45,123 in 2022, up 3.7 percent year-on-year, while in rural areas it reached RMB 17,734, up 4.9 percent year-on-year.

The two years that were the worst hit by the pandemic in China – 2020 and 2022 – both recorded a significant deceleration in the growth of disposable income per capita. However, these dips correspond with slowdowns in GDP growth in those years, and with China’s GDP projected to rebound to 5.2 percent growth according to IMF projections, it is to be expected that growth in income will follow suit.

Per capita expenditure has also almost doubled over the same period of time, growing from RMB 13,220 (approx. US$1,879) in 2013 to RMB 24,538 (approx. US$3,488) in 2022.

As with the growth of disposable income, expenditure was impacted by the COVID-19 pandemic, most notably in 2020 and 2022. The 2022 figure of RMB 24,538 was a nominal increase of 1.8 percent compared to the previous year, but after accounting for inflation, this represented a real decrease of 0.2 percent. This drop was more dramatic among urban residents, who spent an average of RMB 30,391 (approx. US$4,320) per person, a nominal increase of 0.3 percent but a real decrease of 1.7 percent after adjusting for inflation.

However, the expenditure of rural residents actually increased in real terms, with an average of RMB 16,632 (approx. US$2,364) per person representing a nominal increase of 4.5 percent and a real increase of 2.5 percent from the previous year.

Food, tobacco, and alcohol accounted for the largest portion of the spending, with an average of RMB 7,481 (approx. US$1,063) per person, accounting for 30.5 percent of the total expenditure. Medical and healthcare expenditures averaged RMB 2,120 (approx. US$301) per person, accounting for 8.6 percent of the total expenditure, while residential expenditure amounted to RMB 5,882 (approx. US$836) per person, 24 percent of the total.

Future growth of China’s middle class

The Boston Consulting Group (BCG), in its recent 2023 China’s Future Consumer Report, estimates that China will add an additional 80 million people to the middle and upper classes in the period from 2022 to 2030. By this time, BCG projects, China’s middle and upper classes will account for nearly 40 percent of the total population. Moreover, more than 70 percent of these new middle-class people will come from third-tier cities or below (generally smaller provincial capitals and prefecture-level cities), indicating that lower-tier markets will see increasing consumption power in the coming decade.

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China’s population continues to become wealthier, with more people joining the middle class and targeted poverty alleviation efforts bringing millions out of poverty. However, social mobility overall has slowed in the 21st Century following decades of rapid social change. According to Chinese economist Ren Zeping (citing research by Yaojun Li) between 1996 and 2014, 46.5 percent of children maintained the same social class as their parents, 41.8 percent were better off than their parents, and 11.7 percent were worse off.

Moreover, people belonging to low-income groups and high-income groups were more likely to stay in the same profession or class as their parents, further consolidating these two groups’ levels of wealth and social positions. From 2010 to 2015, according to research on the correlation between children and their parents occupational income, it was concluded that about 47 percent of sons and 58 percent of daughters of farmers would also be farmers. Meanwhile, 43.2 percent of sons and 39.4 percent of daughters of high-end salaried workers (those in professional managerial positions) would remain in the same wealth class as their parents.

Ren states that the reasons for the slowing social mobility are increasing levels of intergenerational transfer of wealth and unequal economic opportunities. In addition, rising costs of living make it harder for poorer families to raise a child, which in turn makes it harder for low-income groups to join a higher-income group. Increasing medical burden may also be a major factor contributing to low-income groups falling into the poverty trap.

Tackling the causes of the slowing of social mobility has been one of the government’s priority areas over the last few decades, and in particular in the last few years. Education, healthcare, childcare, and labor policies, among others, are being adjusted to focus on supporting and growing China’s middle class.

Policies for growing the middle class

As one of the world’s fastest-growing economies, China has recognized the crucial role of a thriving middle class in driving sustainable economic development and social stability.

For example, the 14th Five-Year Plan (2021-2025) talks about the goal of “expanding the middle-income group.” Similarly, during the 2022 Chinese Communist Party Congress, President Xi Jinping made a clear commitment to “substantially grow” China’s middle-income group as a percentage of the total population by 2035.

To achieve this, the Chinese government has formulated a series of policies that benefit the country’s middle class, both directly and indirectly.

Prioritizing income redistribution

China’s commitment to addressing income inequality and promoting wealth redistribution has been a central focus of its development plans. In particular, the 14th Five-Year Plan (hereafter referred to as “the Plan”) highlights the country’s determined effort to tackle the wealth gap and create a more equitable society.

The Plan includes specific targets for income redistribution as part of broader efforts to promote social equality and improve living standards for the middle class. Indeed, one of its main policy objectives is achieving a more balanced income distribution by implementing progressive income tax rates. Accordingly, individuals with higher incomes will be subject to higher tax rates, while those with lower incomes will face lower tax burdens. This move not only ensures a fairer distribution of the tax burden but also helps to alleviate the financial pressure on the middle class.

These efforts relate well with the idea of Common Prosperity first advanced by President Xi Jinping and then embraced by the government, focusing on promoting a more equitable distribution of wealth and bridging the income gap within the country. In a way, the initiative acknowledges the significance of a strong middle class in driving economic growth, ensuring social stability, and fostering consumption-driven development.

Urbanization and housing policies

China’s urbanization and housing policies have been instrumental in supporting the growth of the middle class.

The Chinese government also set ambitious goals for the future of China’s urbanization: the New Urbanization Implementation Plan released in 2022, for example, talked about promoting a “people-centered new urbanization strategy.” It echoed the vision expressed in the Government Work Report and the 14th Five-Year Plan released in March 2021, which aimed to raise the urbanization rate to 65 percent by 2025 – a goal, which has been achieved within the first two years from the Plan release. Emphasizing the importance of homegrown innovation, domestic consumption, and sustainability, specific objectives are centered around key areas, such as the expansion of city clusters and county towns.

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The primary focus is on expanding metropolitan regions and city clusters. This expansion is expected to generate increased demand for transportation infrastructure, create more employment opportunities, and foster innovation through increased collaboration among companies. Presently, China has 93 cities with a population exceeding one million, and plans have been made for 19 city clusters, including prominent ones such as the Yangtze River Delta (encompassing Shanghai and surrounding cities), Guangdong-Hong Kong-Macao Greater Bay Area, the Beijing-Tianjin-Hebei Region, and the Chengdu-Chongqing Economic Circle.

Promoting urbanization in county towns is another significant priority for the government, as they start to become key drivers of domestic demand.

Moreover, several key policies and initiatives have been implemented to improve access to affordable housing and create a favorable environment for middle-class individuals and families. In this regard, specific programs include:

• Affordable housing: The Chinese government has implemented several affordable housing projects over the past few years, including Public Rental Housing programs. The government currently supports affordable housing through subsidies for commercial housing purchases and the provision of low-rent public housing for middle- and low-income families. Simultaneously, it relies on the private commercial housing market to cater to the housing needs of higher-income groups. Estimates suggest that China’s goal of constructing 6.5 million public rental housing units from 2021 to 2025, accommodating 20 million people in 40 major cities, will contribute to stabilizing property investment and prices.
• Hukou system reforms: Reforms to the hukou system have been introduced to facilitate the movement of residents within China and, at the same time, these amendments also aim to expand housing opportunities and access to urban services for the middle class.
• Mortgage support policies: China has implemented concrete measures to support middle-class homebuyers, such as providing favorable interest rates, reducing down payment requirements, and offering mortgage loan subsidies. These policies help middle-class individuals and families secure financing for their housing purchases. Earlier in January 2023, the government introduced a new policy to promote urban housing sales, facilitating the middle class in their acquisition.

Making education more affordable

China places a strong emphasis on education and skills development as a way to empower the middle class and facilitate upward mobility. The government has implemented various policies and initiatives aimed at providing quality education, enhancing vocational training programs, and promoting lifelong learning opportunities.

In particular, China has placed much effort into making education more affordable – which greatly benefits the middle class. In July 2021, the Ministry of Education (MOE) released a much-debated policy document containing “double reduction” regulations, with the goal of reducing the burden on primary and middle school students in relation to two specific areas: homework and after-school supplementary classes. This move came with a ban on for-profit tutoring, in order to lift the burden faced by Chinese families, specifically those belonging to the middle class, which were the primary consumers of private classes.

Another recent example is strengthening vocational training through the revised Vocational Education Law, effective from May 1, 2022, which eliminated the distinction between secondary schools and secondary vocational schools, encouraging traditional schools to offer vocational education courses. The law emphasizes the equal importance of vocational education and general education, ensuring that graduates from vocational programs have equal education and career opportunities. It reflects the government’s commitment to strengthening vocational education and equipping individuals with the necessary skills for the evolving job market.

Consumption boost and consumer protection

The Chinese government is relying heavily on domestic demand to boost economic growth, especially after the country’s post-pandemic reopening and recovery.

As such, China is implementing policies and reforms to stimulate consumer spending and tap into the country’s purchasing potential, which is seen as a crucial driver of economic recovery, modernization, and prosperity. President Xi Jinping himself has recently emphasized the importance of expanding domestic consumption supported by stable income growth, while releasing an Action Plan in December 2022 dedicated to boosting internal demand. These efforts align with China’s larger strategy of building a dual-circulation development pattern, where a robust and thriving consumer market plays an integral role in the country’s domestic economic circulation and interacts with global markets.

The growth of consumer spending reflects people’s aspirations for an improved quality of life and aligns with China’s pursuit of common prosperity and the construction of a modern socialist country. To support consumption, both central and local authorities have introduced policies and initiatives, with a focus on boosting consumer demand, upgrading products and services, and providing a favorable consumption environment.

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Following the easing of COVID-related restrictions, consumer spending in China has experienced a robust recovery. Retail sales in the first quarter witnessed a significant rebound, with a year-on-year increase of 5.8 percent. This positive growth effectively reversed the decline of 2.7 percent observed in the fourth quarter of 2022, as reported by the NBS.

In addition to this, recognizing the role of consumers in the country’s economy, the Chinese government has implemented a range of policies to protect consumer rights and promote consumer confidence, with a particular focus on safeguarding the interests of the middle class.

One key aspect of consumer protection in China is the establishment of product quality and safety regulations. These regulations cover various aspects such as product labeling, packaging, and testing. By enforcing stringent standards, the government aims to prevent the sale of substandard or unsafe products, ensuring that consumers have access to high-quality goods.

Moreover, to ensure compliance with consumer protection regulations, in 2018 the government established the State Administration for Market Regulation (SAMR), an authority responsible for market regulation and enforcement. Through regular inspections and penalties for non-compliance, the SAMR works to improve product quality and safety. It also plays a crucial role in addressing deceptive practices, counterfeit products, and substandard goods, thereby protecting the interests of consumers.

Consequences for business

Changes to China’s labor market

The increase in living standards and income levels will have a significant impact on China’s labor market, as people’s job preferences change and the cost of labor rises.

According to data from the NBS, the per capita income from wages was RMB 20,590 (approx. US$2,993) in 2022, an increase of 4.9 percent from the previous year, which accounted for 55.8 percent of disposable income. The average monthly wage of a migrant worker was RMB 4,614 (approx. US$671), up 4.1 percent from 2021.

Increasing living standards will mean more people going into higher-skilled and higher-paid jobs. Primary and secondary industries are expected to feel the brunt of this shift, as younger generations eschew traditional manufacturing in favor of more comfortable service sector jobs.

In fact, a survey conducted by the All-China Federation of Trade Unions (ACFTU) survey found that there is a structural gap in traditional manufacturing fields, and there is a demand for upskilling employees. This is driven in part by the fact that younger generations are less willing to work in factories.

This trend is being driven not only by rising income levels but also by China’s major demographic shift, which is seeing falling birth rates and an aging population.

Changing consumption patterns

In some ways, the consumption patterns of the Chinese middle class have started to align with those of middle classes worldwide in terms of purchasing goods and services. The growth in spending by the middle class has been mainly led by consumers in the upper-middle income segment, who possess a considerable amount of disposable income.

As an example, sales of passenger vehicles in China showed consistent growth over 30 consecutive years until 2021, reaching 26.1 million units sold. In 2020, over 20 million units were sold in China, more than in the United States, Germany, and Japan combined.

The consumption patterns of China’s middle class have significantly influenced the country’s booming outbound tourism market. Prior to the pandemic, Chinese tourists were enthusiastic travelers, with Mainland China having the largest outbound travel market worldwide in terms of the number of trips and total spending. In 2019 alone, Chinese tourists embarked on 155 million outbound trips, spending a staggering US$255 billion on travel. Leisure travel was the primary driver, accounting for 65 percent of outbound travelers, followed by business travel at 29 percent, and visiting friends and relatives at 6 percent.

Despite the challenges posed by the pandemic, recent analyses indicate that Chinese tourists retain a strong desire to explore international destinations. Australia/New Zealand, Southeast Asia, and Japan emerged as the top three desired overseas travel destinations, while interest in travel to Europe has slightly declined. The wealthier segment of the middle class still shows a significant interest in EU destinations.

China’s domestic travel industry is also undergoing significant changes, with the emergence of new trends which are favored by the great majority of the Chinese middle class, including camping and other kinds of outdoor activities – have been partly boosted by a strong post-pandemic desire to spend time outdoors, and partly by increased attention to self-care and personal mind/body health.

Notable consumption patterns can also be observed in everyday life. One significant shift can be found in dietary preferences, with the Chinese middle class consuming more animal protein. Revenue in the meat segment is expected to reach US$87.75 billion in 2023, and China’s meat market is projected to grow annually by 19.99 percent between 2023 and 2027. At the same time, there is also increased awareness about the origins of food, driving up the demand for high-quality meat. In addition, the market for plant-based products is also rapidly expanding, due to health and environmental-related considerations.

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Indeed, China’s middle class has shown an increased consideration toward health concerns. Moreover, as China’s population undergoes a significant demographic shift, with a growing proportion of elderly individuals, the issue of healthcare expenses has become even more pressing. As such, the changing population pyramid, marked by an increase in the number of older individuals compared to the working-age population, has prompted the middle class in China to pay greater attention to healthcare and elderly care. Recognizing the escalating costs associated with elderly care, the Chinese middle class is increasingly conscious of the need to allocate resources toward healthcare services and provisions for the aging population.

All in all, China’s expanding middle class is experiencing shifting spending habits and evolving consumer patterns that may differ from those of Western countries, such as the United States. With President Xi Jinping’s common prosperity goal at the core of the country’s main development objective, efforts to reduce the wealth gap and enlarge the middle class are underway.

Middle-class families prioritize education for their children, while economic challenges deriving from the pandemic have limited their ability to invest in the coming years. Additionally, property ownership has been a significant avenue for wealth accumulation in China. As the middle class adjusts to economic uncertainties, there is a growing emphasis on domestic opportunities along with a new evaluation (or re-dimensioning) of their aspirations in light of changing global dynamics.

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