The Rise of China's Middle Class

The Chinese middle class is growing strongly. Nevertheless, retail sales are falling year by year. The idea of a destitute middle class development may be looming.

Last year was a tough year for China – at least that’s what one might think. But despite Corona restrictions, China's gross domestic product increased according to Beijing by 4.9 percent between July and September, compared to the same period last year. This result was also achieved through comprehensive economic stimulus packages.

China's middle class keeps growing and growing. Back in 2012, McKinsey estimated that the urban upper middle class population would increase from 14 percent to 54 percent and that private consumption in this income bracket would increase by 22.4 percent from 2012 to 2022. In 2021, this 2012 forecast can be confirmed - despite Corona.

Despite this enormous growth and perhaps precisely because of it, the cost of living has also risen enormously. Rent prices in Beijing increased by almost 50 percent between 2015 and 2017. However, the average income is 1'100 euros per month, the rent almost 1'150 euros. These are figures from 2017 but until today this problematic situation persists.

According to the latest China Consumer Report by McKinsey, an increasingly strong trend is already emerging over the last few years. Many Chinese are saving more frequently and showing restraint to consume. This can be attributed to two reasons: First, there have been repeated spectacular cases of bad or even harmful products on the market in the past years. We recall the cases of milk powder, contaminated by melanin. Trust in domestic products has declined since then and selective purchasing behavior has developed accordingly. Furthermore, the older generations react more prudently to changes in economic growth. The general population is well aware that China's growth relies heavily on exports and that China is therefore dependent on both a stable global economy and the most agreeable trade partnerships possible. It is precisely on these two points that there is considerable uncertainty, influenced by COVID-19 and by other countries such as the USA or the European Union, which are increasingly taking action against China's economic and monetary policy.

Domestic consumption is clearly driven by young adults who live in comparatively smaller cities. There, income growth has increased massively in recent years compared to the cost of living.

This is strongly reflected in the comparison of Chinese holidays with foreign holidays. We already know Black Friday from the US, in China people shop on Single's Day, also known as "Double 11". Sales on this holiday are increasing steadily. One of the most popular online shops in China today is “Tmall”, belonging to the Alibaba Group. In 2019 it reported a gross volume turnover of goods valued at 10 billion renminbi within the first minute alone. Back in 2015, only 91.2 billion renminbi were turned over on the entire Single's Day. In 2019, sales of over 250 billion renminbi were achieved, equivalent to approximately 34.8 billion in Swiss francs.

The Chinese middle class will continue to thrive and probably converge with the European and US middle classes in terms of behavior. Already today, Chinese consumers attach great importance to a healthy lifestyle and high-quality goods. Despite high incomes, whether this middle class also remains solvent will depend on the development of prices and new regulations.

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