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OUTSIDE EXPERT – Friedland

September 8, 2006

jerold_friedland.jpgChina’s Growing Middle Class 

By Jerold Friedland, Professor of Law and Director of the Asian Legal Studies Program at DePaul University in Chicago.
 
Reuter’s interviews with top executives at Tsingtao Brewery and Gome Electrical Appliances suggest that Chinese firms expect China’s growing middle class to provide an expanding market for their upscale products.   Currently, the middle class is estimated to include between 11 and 19 percent of China’s 1.3 billion population.  At current rates of economic growth, China’s middle class could encompass 25 percent of the population by 2010,  and 40 percent by 2020. 
    
Political correctness compels many Chinese to avoid the term “middle class”, substituting “middle stratum” or “middle-income group.” Generally, these terms refer to people whose incomes allow them to afford items such as a house, car, child education and family vacation.  This lifestyle usually requires annual household income of about 75,000 RMB ($9,000), and asset ownership of over 500,000 RMB ($60,000).  The group includes most managers, professionals, skilled technicians and service workers.
    
A substantial increase in consumption by China’s middle class will not occur, however, until its saving and spending patterns change.  Despite the rapid growth of China’s economy, its domestic consumption rate is far below the world average.  Consumption is low because savings rates in China are very high, reflecting the population’s deep-seated concerns about retirement and health care costs. These concerns will abate only gradually as China’s social safety net improves.  If the savings rate decreases, China’s domestic consumption rate can increase to 65 percent by 2010 and 71 percent by 2020, close to the 78 percent rate in most developed countries.
    
The growth of China’s middle class also may lead to significant social and political change.  The current extreme income disparity between rich and poor in China has created severe social friction, particularly in rural areas.  This tension may ease as a larger portion of China’s population enters the middle class.  This has been the case in most advanced economies, where the middle class is an important stabilizing force that adheres to a moderate ideology.
    
It is doubtful, however, that China’s middle class will demand major political reforms.   Although it is possible that a rising Chinese middle class will demand democratization and liberalization, the current group appears to seek little more than economic security. Indeed, many in China’s educated middle class are elitists who disdain the rural peasantry.  Rapid democratization, they fear, would allow corrupt officials and demagogues to manipulate a huge peasant population that is not ready to participate in elections.  Although China’s middle class may become the western-style consumers that business leaders hope for, it will not press for political change as long as its economic status is not threatened.  
– Prof. Friedland specializes in the areas of international business and taxation and is a well-known expert on joint ventures, partnerships and limit liability companies. Professor Friedland has lived and worked in China, serving as a Fulbright Senior Scholar in Beijing and lecturing at universities and bar associations throughout the country.

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