Sunday, December 05, 2004

Benchmarks in China development: emergence of a middle class

The emergence of Chinese consumer markets - in particular, a Chinese "middle class" - is often discussed, but without quantifying exactly what is meant by middle class. Below I describe some rough calculations that suggest a population of 300M could emerge by 2020 with per capita buying power similar to that in developed countries. One could characterize this as equivalent to adding an extra EU or United States to the world economy.

2003 China GDP per capita (PPP) is $4K. Assume 5% differential between PRC and developed-world GDP growth rates (e.g. 7% vs 2%), or a doubling time of about 14 years. This is consistent with sustained performance of Japan, Taiwan or Korea during similar periods in their development. (Current growth rate differentials are larger - as much as 7% - so our estimate is not aggressive.)

To catch up with developed nations in GDP per capita (e.g., Korea, Greece or Portugal, currently at $16-18K per year) would require 30 years. (A more aggressive 6% growth differential would imply 24 years.)

Now assume income inequality similar to that of the US: 80th percentile family income is twice average income (this is conservative as actual income inequality in China is likely to be more uneven). Then, in 14 years there will be a "middle class" in China of 300M people whose household income is at developed country levels. In 20 years this middle class will easily be larger in population than either the US or EU. Note that while we refer to this as a middle class it actually comprises the richest 20-25% of the Chinese population.

Keep in mind that these figures use PPP (purchasing power parity) and not nominal exchange rates. But I expect an FX equilibration to occur over these same timescales (i.e. appreciation of the renminbi just as with the yen in previous decades), resulting in a gradual closing of the gap between PPP and nominal exchange rates. (For those not familiar with PPP, it is an exhange rate computed by comparing the local currency costs of a common basket of goods in two countries. At the PPP rate the two baskets cost the same.)

If one uses a more generous definition of "middle class" - say, GDP per capita of $10K at PPP - then there are already 200M such people in China.


Anonymous said...

I wonder that kind 'linear' projection will run true. Unlike other developed countries, China is choked by its huge population. The strain on infrastructure is taking a hefty toll despite more new infrastructure is being put in place and many old infrastructures are being ignored. For china 200 or 300 million to achieve the kind of income level on par with developed countries may perhaps take longer than that.

Steve Hsu said...

Any projection based on past trends has to be taken with caution. China could still experience social unrest, banking failure, etc. and must overcome problems like corruption, mis-allocation of investment capital, wealth inequality, etc.

But, barring major setbacks I think my estimates are not aggressive. See the Dec. 7 post for some evidence for why 7% GDP growth rates for another decade or two are not unrealistic.

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