China’s middle class is starting to look a lot like America’s – Community News
Us China

China’s middle class is starting to look a lot like America’s

  • Housing is becoming increasingly unaffordable for the Chinese middle class and household debt is rising.
  • The Chinese middle class is faced with the real possibility of not being able to do better than their parents.
  • In other words, China’s middle class is starting to look a lot like America’s.

The Chinese middle class has grown explosively over the past twenty years.

In 2000, about 3% of the country’s population was classified as middle class. According to calculations by the Center for Strategic and International Studies, which defined the middle class as those who spend between $10 and $50 a day, in 2018 more than half of China’s population – 707 million people – belonged to the middle-income class. country came.

As China’s middle class expanded, it began to resemble America’s in many ways as well. In its most recent middle class analysis, the Pew Research Center classified 52% of the U.S. population as middle class in 2016. (Methodology for defining the middle class varies, but many experts — including Pew — define the middle class globally as those living on $10.01 to $20 a day per person, which stretches across the poverty line in the US.)

And while the growth of China’s middle class is a good thing – those 707 million people have lifted themselves out of poverty, after all – some of the similarities it now shares with the US are clearly less positive.

Max Zenglein, chief economist at the Berlin-based Mercator Institute for China Studies (MERICS), told Insider China’s middle class that will soon face similar challenges to the US and European middle classes: to pay for their dreams.”

“It’s very hard to go up, but there’s a risk that they’ll go down, and that’s something new,” Zenglein said of China. “Maybe they’ll run into a ceiling.”

Priced out of the housing market and increasingly dependent on personal lending networks

House prices are rising in both China and the US.

The rise in US home prices was especially pronounced during the pandemic. In April, house prices rose by 14.6%, the largest price spike in 30 years. And house prices, which continued to hit new highs in 2021, could rise another 16% in 2022, Goldman Sachs said in October.

In this environment, Ben Winck recently wrote for Insider, middle-class homebuyers are out of luck: The US is running out of starter homes, and especially on the coasts, contractors are prioritizing expensive homes that are out of reach for middle-income earners.

In China, real estate prices have also risen over the past two or three decades. For example, from 2003 to 2013, house prices in tier 1 cities such as Shanghai, Beijing and Shenzhen saw an average annual growth rate of 13.1%. Recently, amid market concerns fueled by real estate giant Evergrande’s debt problems, that trend has reversed: in October, house prices in China began to fall for the first time in six years.

Despite the tremendous growth in Chinese house prices in recent decades, nearly 80% of households in China are homeowners (compared to 65% in the US). So while housing per se is not out of reach (the country is certainly not short of houses), the price of houses is. That’s why homebuyers, and especially younger generations of homebuyers, are increasingly turning to personal loan networks to pay the required 30% down payment on a home.

“It’s not a housing availability problem,” Logan Wright, director of China Market Research for research group Rhodium Group, told Insider. “It’s a problem of price relative to income, especially in desirable places to live.”

Aerial view of the Shenzhen River marking the boundary between residential and commercial buildings in Shenzhen, right, and agricultural land in Hong Kong, left, on Dec. 29, 2020.

Cities like Shenzhen, pictured, are home to a middle class that is increasingly resembling that of America.

VCG/Contributor/Getty Images

Rising household debt

Largely as a result of rising housing costs, household debt has increased in both the US and China.

According to the Federal Reserve, total US household debt was more than $15 trillion in the third quarter of 2021. That’s $1 trillion higher than at the end of 2019. The typical American household has about $145,000 in debt, according to the U.S. Department of Housing and Urban Development — nearly $100,000 more than in 2000. That’s also significantly higher than the average. household income in the US, which is currently $79,000.

Meanwhile, Chinese household debt is lower than in many developed countries — but has been steadily rising since the financial crisis, Bernard Aw, an economist who oversees the Asia-Pacific for Coface, previously told Insider.

According to a report by the Rhodium Group, Chinese household debt rose to 128% of income in 2020. And in late October, China’s total household debt reached 70 trillion yuan ($10.98 trillion), Wright said, citing data from the People’s Bank of China.

“Household debt has grown rapidly, so it’s leveraged. It’s a combination of high leverage, weaker economic growth and lower income growth,” Zenglein said of China’s middle class. “So there must be something.”

At risk of falling out of the middle class

It makes sense: In both China and the US, it’s getting harder and harder for the middle class to outperform their parents.

The American middle class is shrinking and struggling. From 1979 to 2017, household income growth for the middle class grew more slowly than incomes in both the top and bottom 20% of U.S. earners. And while middle-class wages stagnated, the cost of living rose in the US.

While 61% of American adults were classified as middle-class in 1971, that number shrank to 50% in 2005, according to data from the Pew Research Center. And according to a paper by the nonprofit research group Rand Corporation, 2.7 million Americans fell from the middle class from 2007 to 2017.

In China, the difficulty of staying in the middle class is a new predicament.

“For younger generations, they come from parents who emerged from the dark ages of China’s development and who significantly improved in wealth every year,” Zenglein said. “For the new generation, they can no longer assume that they are better off as a whole.”

Zenglein clarified that there is also a wealth gap within the trend: “This is probably less relevant for the lower income groups, such as migrant workers. Although inequality is increasing, it will be easier for their children to have a better life than for those who come from the middle class.”

In particular, the plight of the middle class extends beyond China and the US; on a global scale, 54 million middle-class people fell during the pandemic last year.

No specular reflection

Of course, for all their similarities, the middle classes of the two countries have their differences.

First, the American middle class is more established. For decades it was the richest middle class in the world (it lost the title to Canada in 2019).

While real estate is important for building wealth in both the US and China, the role home ownership plays in each country is not comparable. “The role of real estate for wealth and social status in China is significantly different than in the US. If you don’t have a house, you don’t get a wife,” Zenglein said of China. In China, 70-80% of household wealth is linked to real estate, which is higher than in just about any other developed country.

The agreements between the US and China are also not uniform throughout China; instead, they are especially prominent in China’s developed urban centers – cities like Shanghai, Shenzhen, and Beijing. As Zenglein put it, “the biggest winners of China’s economic success are starting to look more like the American middle class.”

That said, the resemblance between the two is strong, and stronger than before.

Wright said there are mounting risks to the economy and living standards in China if the real estate sector begins to weaken significantly: “If housing is still people’s most important asset, even if they borrow to participate in the housing market, that is about have an implication for whether people also feel or behave as middle class.”

“It’s not a one-on-one match,” Zenglein said of the middle classes in the US and China, “but it’s starting to enter an area where the similarities are increasing.”