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Middle class buying power fails to grow in China

2015-03-03 14:58:06Source:AgenciesAuthor:

The nation is not importing things the way it used to. January imports plunged about 20 percent in dollar terms from a year earlier, caused in part by falling commodity prices-China is a big buyer-and the drag of a slowing economy on corporate spending.

Exports were not pretty either, having fallen 3.3 percent last month. "Domestic demand in China remains very weak, especially in the two most important types of imports: raw commodities and capital goods," wrote Louis Kuijs, chief China economist at Royal Bank of Scotland Plc.

A report suggests that a deeper problem lies ahead for multinational companies betting on China sales to drive global growth: The buying power of China's middle class is not expanding as quickly as many anticipated. That is pulling down overall per capita consumption growth, which dropped from 8.5 percent in 2009 to 7.1 percent now. The trend is likely to continue.

"We expect a clear if not disastrous slowdown in China's consumption growth in 2015," wrote Ernan Cui, an analyst at Beijing-based researcher GavekalDragonomics, in a report released earlier in February.

"The hit to consumption growth will come from the more gradual, but very real, slowdown in earnings of the middle-income households."

How can that be? China's urbanization policies were designed to bring hundreds of millions of people from farms to the cities over the next decade in an effort to unleash a surge of consumption greater than any the world has seen.

The urbanization boom was heralded by analysts, academics and even by China's top leaders. "China has much room for urban, suburban, and regional development and domestic demand has huge potential," said Premier Li Keqiang on Jan 21 at the World Economic Forum in Davos, Switzerland. "Domestic demand will keep improving and bring even greater development for the world."

That process, along with a slowdown in investment growth, is supposed to boost China's household consumption from its very low level of just 34 percent of the economy at present, well below the 50 percent to 60 percent common to most major economies.

By 2022, according to McKinsey China, the country could have a middle class of 630 million or more, accounting for 78 percent of urban households, up from 68 percent in 2012 and 4 percent in 2000.

McKinsey's definition of middle class-households earning from 60,000 yuan ($9,600) to 229,000 yuan annually-would encompass 45 percent of all households in 2022. "Central to this huge surge in middle-class consumers has been the country's urbanization, and with it, the creation of higher-paying jobs," wrote Gordon Orr, chairman of McKinsey Asia, in a March 2014 post.

Cui, the researcher at GavekalDragonomics, found that while overall wage growth has been strong in recent years, the biggest beneficiaries have not been the middle class.

Instead, the average monthly take of low-income migrant workers has risen by 70 percent over the past five years, much faster than urban wages. That has happened as growth in the supply of new migrants moving to the cities has slowed-in part because of the one-child policy-even as demand for blue-collar workers has remained high.

The rapid expansion of college enrollment in recent years has also boosted the numbers of prospective white-collar workers, putting downward pressure on that group's wages.

While higher incomes for China's migrants have indeed boosted their buying power, it has had a limited impact on overall consumption growth because their total spending is still very small.

The bottom 40 percent of China's households, which include migrant workers, account for only 17.5 percent of total consumption, according to GavekalDragonomics. "That is the obvious consequence of the bottom 40 percent having incomes that are less than half the national average," the report noted.

"The key to China's future consumption growth is thus not how fast the wages of rural migrant workers rise, but how quickly middle-income workers make gains," the report said.