Is China's economy catching up with and possibly even surpassing that of the United States? Much of the discussion on this issue has focused on catching up in terms of the size of the economy, especially whether China's GDP has caught up with that of the United States. But the scale of the economy doesn't tell the whole story. Instead, consider the question from a different perspective: Are Chinese families and individuals catching up with the American middle class? The answer is a firm yes. The speed and scale of personal income catch-up is astonishing. The proportion of the Chinese population whose income is comparable to that of the American middle class has skyrocketed. Although this group is still a minority of the Chinese population, the sheer size of this group now exceeds the entire population of the United States. Rising household incomes in China are transforming the global middle class and are having global implications. China The emergence of a global middle class also has significant domestic implications and is at the heart of China's current development strategy, which emphasizes shared prosperity and expanding domestic demand to sustain future economic growth.
How big is China's global middle class? Recent studies provide estimates based on a simple definition of the "global middle class": per capita household income is neither rich nor poor in high-income countries. Income does not encompass all aspects of the middle class, but it is direct and closely related to the standard of living. We use high-income countries as benchmarks because family income in high-income countries is associated with prosperity, and we are interested in whether Chinese households are catching up with those in the United States and Europe. If a household's per capita income is between 60% and 200% of the EU median income in 2018, we classify it as middle class. For earlier years, we adjust these figures for inflation so that our income cut-off line and real purchasing power remain constant over time. We refer to the population enjoying these income levels as the "global" middle class. According to this definition, a family consisting of two adults and two children has a total household income of approximately $30,000 to $100,000 (based on the 2018 purchasing power parity exchange rate,
equivalent to 120,000 to 400,000 RMB), it is classified as the global middle class. For comparison, in the United States in 2018, the median income of such households was $74,000. We apply these dividing lines to China's data to obtain an estimate of the size of China's global middle class. We use surveys conducted by the China Household Income Project (CHIP) in 2002, 2007, 2013 and 2018 to achieve this goal. The CHIP survey covers a large sample across the country and provides information that has been consistent over many years, making it possible to analyze long-term trends.
Table 30.1. Global Middle Class in China, 2002-2018
As shown in Table 30.1, our estimates show a huge increase. In 2002, less than 1% of China's population belonged to the global middle class; By 2018, just 16 years later, nearly 25% of people belonged to the global middle class. During these years, China's global middle class grew at an average annual rate of 27 percent. In contrast, middle-class populations in the United States and Europe grew slowly or negatively during this period, including the Great Depression of 2007-2009, but before the pandemic. As a result, China's middle class is catching up very quickly, indeed faster than GDP. In 2018, China's middle-class population was 344 million, surpassing the total population of the United States (330 million) and equivalent to two-thirds of the population of the European Union (510 million, including the United Kingdom). As a result, China has become a major player in the global middle class.
Who belongs to China's global middle class? The vast majority of China's global middle class is urbanite. More than 90% of people live in cities, and this growth has led to an astonishing transformation of China's cities. In 2007, less than 5% of urban dwellers belonged to this group; By 2018, the proportion of China's urban population had reached nearly 40%. Assuming continued growth, the incomes of most Chinese urban residents will soon be on par with middle-class households in the United States and Europe. This is not the case in rural China, where less than 5% of the population reached these income levels in 2018. For rural families, the main route to the middle class is through migration to the cities. Rural-to-urban migrants, like those born in cities, have rapidly increased incomes, enabling many to enter the global middle class. China's global middle class has several notable features. First of all, they are relatively wealthy compared to the rest of China's population. The lower bound of our global middle class exceeds China's median income, placing those who reach this level in the upper half of China's income distribution.
Second, this group has considerable spending power. Middle-class households in China have many of the same consumer durables as middle-class households in the United States, including refrigerators, washing machines, and electronic devices such as cell phones and computers. They spend on entertainment, travel, and other leisure activities. They are well-educated and invested in their children's education. The majority of middle-class adults are high school graduates, and many have a college degree or higher. Third, they earn mainly from wages and salaries (or pensions from previous jobs), and their work is mainly in quasi-state institutions such as civil servants, state-owned enterprises, and the education sector. In China's global middle class, there are relatively few entrepreneurs or private entrepreneurs. This is not to diminish the importance of small and medium-sized enterprises in China, but the sector is more closely related to the rural population and low-income classes than China's global middle class. Fourth, although their incomes are comparable to those of the U.S. middle class, the wealth of the global middle class – the value of the homes, investments, and other assets they own – remains relatively low.
Almost no one has ever inherited wealth. This reflects China's past policy of strictly prohibiting private ownership. However, with the relaxation of these policies and the development of the financial and real estate markets, the wealth of China's global middle class will become increasingly important.
Why should we care about China's global middle class? Studies from other countries have found that the middle class can have significant economic and impact. From an economic perspective, middle-class households have incomes high enough to give them more discretionary spending on high-quality goods and services. Therefore, the expansion of the middle class can induce innovation and growth in demand. Middle-class households also earn enough to invest in physical and human capital, so they can provide key inputs to productivity. Several studies have highlighted the contribution of middle-class business people and entrepreneurs, whose innovation and risk-taking spirit inspire economic growth. In terms of impact, an expanding middle class can reduce social divisions and promote social consensus and stability. Some further argue that the middle class is a force for change. They are educated, autonomous, conscious. Historical studies of European countries generally confirm this view.
Do these features apply to China? China's middle class does consume more and better quality goods and services. China understands this well, advocating for a "moderately prosperous society" and "common prosperity" and seeking to rebalance the economy from investment-driven, export-led growth to domestic demand-driven growth. That is, the middle class has less influence on consumption than expected because they save a significant portion of their income – about one-third. Its savings rate is higher than that of China's larger low-income bracket, and also higher than that of the middle class in high-income countries such as the United States. Middle-class savings are due to obstacles in the domestic financial system. Chinese households cannot borrow easily, so they must save to cover major household expenses such as housing and education. They have little to no way to insure themselves against risks such as illness and unemployment, so they have to save in case they happen. Due to incomplete pension coverage, lack of secure long-term investment tools, and changing relationships between parents and children, they must save for retirement.
In principle, their savings can boost economic growth, but they have few good investment options, and the domestic financial system does not channel their savings to the most productive sectors and companies. As for China's middle class as a source of innovation and entrepreneurship, its contribution is limited, as there are relatively few innovators and entrepreneurs among them. This situation is unlikely to change as long as policies are maintained in favour of state-owned enterprises and disadvantages of the private sector. More broadly, the potential economic contribution of the middle class will not be realized without further reforms to China's financial, legal, and social welfare institutions. What is the political influence of China's global middle class? The middle class is large enough to have an impact, and its benefits are reflected in a range of policies and programs, such as subsidies for sector employment and spending on urban pension and welfare programs. Studies of China's middle class usually conclude that they support the status quo. They have benefited from China's rapid economic growth,
and rely on the current system for employment and other benefits. In terms of participation in certain areas, in some late-developing countries, elites bring middle-class members on board by inviting them into groups. This is already happening in China. Why should the rest of the world care about China's global middle class? Until recently, consumers in North America and Europe were the main source of demand worldwide. Their consumption shapes the world economy and creates opportunities for export-led growth in low-income countries. The rapid expansion of China's global middle class has shaped a tectonic shift in this equation. While the impact on global consumption, investment, and production has not yet been fully realized, nor is it guaranteed to continue to expand rapidly, China's global middle class has the potential to reshape the global economy in the future. This will create challenges and opportunities for the rest of the world. Stay tuned for the next installment.