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Jun 24, 2011 | 02:23 GMT

7 mins read

The Importance of China's Rising Middle Class

PHILIPPE LOPEZ/AFP/Getty Images
Summary
In a recent report, China's leading think tank estimated that the country's middle class could constitute nearly 8 percent of the country's population by the end of 2011. A middle class is important for the preservation of social cohesion and remains a source of domestic consumption to fuel economic growth. Though Beijing has traditionally been more concerned with the support of the elites who form the basis of the Party's power, it must be wary of the financial burdens that could diminish its middle class and threaten economic growth and social stability.
The Chinese Academy of Social Science (CASS), the country's top think tank, recently released the 2011 Blue Book of China's Commercial Sector. In the annual report, CASS estimated that the country's middle class could number 104 million (nearly 8 percent of the country's population) by the end of the year. Interestingly, this number was significantly lower than another report released by CASS just a year ago, which predicted that the middle class would account for nearly one-fourth of the country's population by the end of 2010. This discrepancy can largely be attributed to the nebulous definition of middle class; the criteria includes socio-economic status, ownership of property and purchasing power as well as many other things with different weights assigned to different indicators. Nonetheless, whether the middle class is growing is not the primary issue for Beijing. Theoretically, the middle class is an important pillar sustaining the development of society — it identifies with mainstream values and serves to maintain social stability; its comparatively higher economic status means it can bolster domestic consumption and help to sustain dynamic economic growth; and it naturally embraces progressive ideas and thus could facilitate gradual economic and political reform. However, the Chinese government is much more concerned with retaining the support of the elites who form the foundation of the Party's power. Beijing must, however, be wary of the mounting financial burdens that could eventually cause its middle class to shrink — an outcome that would threaten economic growth and risk widespread social frustration.

Benefits for Elites

Though the influence of the middle class is expanding, the elites are still the dominant group in Chinese society. Elites enjoy benefits dating back to the time of Deng Xiaoping, who believed that a few must get rich before the country as a whole can become wealthy. According to an estimate by Boston Consulting Group, 70 percent of China's wealth is controlled by only 0.2 percent of its population. Furthermore, the elites have formed various political and business connections to secure and pass on their wealth to their children and grandchildren and other networks of their choosing. Ironically, while they enjoy the highest socio-economic status and hold most of the wealth, China's elites are much less apt to invest in their home country than elites in other countries — particularly in recent years. They often seek alternative destinations for their wealth. The latest Personal Fortune of Chinese Report for 2011 shows that investment immigration, whereby a person is allowed to reside or gain citizenship in a foreign country in exchange for a substantial investment in real estate or open enterprises, has become the preference among individuals who have more than 10 million yuan ($1.55 million) in personal investment assets. Of the roughly 500,000 individuals who constitute this group, 27 percent have become immigrant investors in countries including the United States, Canada and Singapore. Large sums of assets also are transferred out of China by other means, including a great deal by corrupt political officials. This trend of capital flight reveals a less-than-optimistic attitude among China's elites about the country's financial future and its ability to safeguard their assets. Equally worrisome is that the trend will cause elite-driven domestic investment and consumption to diminish. The tremendous wealth gap that the elites have fostered through their investment decisions will further constrain the ability of the country's poor and middle class to grow.

Disproportionate Burdens on the Middle Class

The socio-economic burden of the poor and middle classes in China stands in stark contrast to that of the country's elite. Based on the ambiguous criteria that define it, the middle class normally has stable jobs that require relatively higher levels of education and bring greater social status. They enjoy salaries in the upper-middle range, which in China may range from 5,000 to 30,000 yuan per month, depending on the region. Under different circumstances, this income would translate into decent living standards in most Chinese urban areas. However, China's middle class must deal with extremely high housing prices, rising living and educational costs and a weak social welfare system. These obstacles mean that China's middle class feels the least safe financially and probably is one of the least happy of all the country's social groups. In fact, as the wealth gap between the middle class and elites grows, the distance between the middle class and poor shrinks. Unlike the rural class, which views ownership of a plot of land as its most valuable asset, the priority of most of the Chinese middle class, particularly in urban areas, is home ownership. This desire is partly driven by culture and partly by investment rationale. In particular, home ownership has become an important precondition of family building among young people since the late 1990s when the government and state-owned companies canceled a program of allocating homes to employees. Housing prices have soared since the early 2000s. Prices have especially risen since Beijing began subsidizing the real estate sector in 2008 to sustain economic growth. In many urban areas, housing prices have more than tripled, creating large asset bubbles and the single largest burden on the country's middle class. This situation means that not only are huge down payments required but these decades-long mortgages can often consume 30-60 percent of a middle class individual's income — a development known as "housing slavery." Skyrocketing housing prices also serve as a barrier preventing many from joining the middle class. Other financial burdens on the middle class include supporting parents and grandparents — a problem compounded by the one-child policy, which demands many young families to provide for four or more elders. The lack of a sufficient pension and medical network as well as the high cost of education and other services merely compounds the pressure. Moreover, the middle class has borne greater social responsibility in the country's wealth distribution. According to an estimate from the Ministry of Finance, nearly two-thirds of China's income tax revenue comes from the mid-to-low income groups (those with a monthly income below 10,000 yuan) with the rising middle class accounting for the greatest part. Since 2008, Beijing has been discussing raising the income tax threshold to 3,000 yuan from the current 2,000 yuan, an idea that reflects the government's reluctance to upset the various interest groups and political-economic elites even at the expense of threatening the growth of the middle class. The proposal to raise the threshold aims to offset the rising living costs and to reduce the number of people who pay taxes. The plan has drawn widespread criticism, particularly from the low-to-middle-income group, because it would only offset inflation and would not change this group's status as the largest contributor to the country's income tax revenue. Beijing may be coming to realize the importance of supporting its rising middle class, especially as the country gradually transforms its economy from being export-driven to being dependent on domestic consumption. Additionally, with its inherent concern for the social stability, the middle class could help to support the regime if it is properly assimilated into the Party system. The Chinese government would like to broaden the criteria used to define the middle class so that it could point to its development as some sort of economic achievement. Nevertheless, in practice, nothing is significantly changing to help develop this population. Beijing continues to place great significance in the support of the elites to secure the Party's power. Regardless, the government must carefully set up supports and cultivate the middle class to avoid its shrinking — a path that would only weaken the economy and give rise to social frustrations.

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