More on Demystify China's Middle Class

Since my last post about the definition of the Chinese middle class was considered "all too simple," I dug out a comprehensive study: Emergence of the Chinese middle class and its implications. It’s a well-researched and well-documented research paper by He Li. The paper approaches the definition of the Chinese middle class from different angles such as lifestyle, income classification, occupation, and self-perception, and here is what it says:

Economists and sociologists have defined what they believe will compose the Chinese “middle class” of the future. They suggest that five categories of people will represent the middle class: scientific development entrepreneurs, Chinese managerial staff working in foreign firms in China, middle level managerial staff in state-owned financial intuitions, professional technicians in various fields, especially in intermediary firms, and some self-employed private entrepreneurs.

(If you don’t know what “scientific development entrepreneurs” means, me either, but I guess it probably means “entrepreneurs in high-tech industry”).

Two young women in front of a Starbucks in Hangzhou

For those who are interested, the paper has an in-depth analysis and discussion about the political implications of the Chinese middle class. Although it still comes to a “wishy-washy” conclusion, it provides great insights on Chinese society and gives a real sense of what is happening in China. Despite the clumsiness in language, it is one of the best research papers I have read on the subject.

There are many implications on the middle class in China, democracy being just one of them. The debates that over-emphasize the political implications are missing the point, because I believe China will come to democracy – in its own time and on its own terms. It may or may not even depend on the middle class, as the paper suggests.

The showroom of an interior designer for Chinese homes

And there are many fascinating aspects of the Chinese middle class that the world needs to understand; in addition to all the implications for business, there are environmental issues that could endanger the humanity’s common future; there are things that the world may want to learn from China, as China is learning from the world, and there are ties that bind us stronger than we realize, because at the end of the day we see that we share the same dreams!

That is my interest in taking on this project, and that is what my book on the Chinese middle class is all about.

Demystify China’s Middle Class

People often ask me about the definition of the Chinese middle class. To me, it’s simple: the middle class are people who are not poor or rich, who have disposable incomes to consume, and who can follow their own dreams and pursue their own futures.

Yet there are many debates about the Chinese middle class. Some said China has only the new rich and the very poor; others argued that the middle class is an American concept and it doesn’t apply to China.

To make things simple, here is a definition from China’s National Bureau of Statistics: the households with an annual income ranging from 60,000 yuan ($7,250) to 500,000 yuan ($62,500) should be categorized as middle class.

A research team led by Professor Zhou Xiaohong in Nanjing University further defined the occupation of the middle class to be: professionals in management and technology, civil servants, and entrepreneurs, with college or above education.

If the “middle class” is an American concept, the Chinese are adopting it. With these two definitions, I believe the picture should be clearer about what the Chinese middle class would look like. They are consistent with my research and interviews with people in China.

I have to point out that there is even confusion about the term “middle class.” In an article “Myth of China’s new middle class,” the author argued the middle class in the West was evolved from bourgeoisie during the industrialization and “became more complex, producing managerial and professional classes,” and China's "new rich categories of entrepreneurs are quite unlike the 19th-century European bourgeoisie in the extent to which they have emerged from and retain close relationships with the established political system.”

I don’t understand why the “new rich” has anything to do with the “new middle class” here. To make things more complicated, people in China actually consider “bourgeoisie” (小资) to be lower than the middle class (中产). Furthermore, to separate the government from people is also a “Western way of thinking.” Notice the occupations of the Chinese middle class include “civil servants,” – that means “the government officials.”

The Chinese middle class will not be the same as the Western middle class. How are they different? What impact will they have? These are the “myths” my book is going to unveil. Please stay tuned.

The Chinese Are Coming

When I arrived at Orrick, Herrington & Sutcliffe LLP in Menlo Park yesterday, the presentation had already started. Jane Jie Sun, the CFO of Ctrip – the Expedia equivalent in China, was giving an enthusiastic talk about the company’s success. The room was full of aspiring entrepreneurs, mostly Chinese, who are trying to catch a slice of China’s economic boom, or at minimum, to admire what others have achieved.

This is one of the events put on by HYSTA – an entrepreneurial association in Silicon Valley. Standing in the audience, I couldn’t help to be impressed. Just look at the following facts:

- China’s travel industry is growing double digits every year and there is no sign of slowing down due to the emergence of the middle class.

- Ctrip aggregated more than 80 % of a fragmented market, which was typically characterized by mom-and-pop hotels, and handles a daily volume equal to the volume one travel agent does in a year.

- The company’s revenue is growing at 50 % year to year, with a gross margin as high as 80 percent (whew, where on earth can you find a business like that?!).

Although Ctrip is a copycat of Expedia, it successfully adapted to China’s situation and provides the services that are “China unique.” For example, we already know about the call-center and free ticket delivery, but its “express service” is quite remarkable. In Beijing and Shanghai, because traffic is so bad and people cannot predict how soon they will get to the airport, Ctrip invented a service that allows people to call while riding their taxis to the airport, and issues the air ticket including boarding pass within one hour. Wall Street analysts said Ctrip is the only company in the world that is doing this.

Other things I have learned are: since 2006, GDP growth in the second-tier cities in China has surpassed that of first-tier cities. Recently, China relaxed visa restrictions for people to travel to the U.S. as tourists. It is predicted that by 2020, China will be the largest outbound travel country in the world. A minor point, it will certainly help the huge trade deficit between the United States and China.

A friend of mine told me that her sister, who works in IBM Beijing, travels every year, and each year to a new country. For the young Chinese middle class, travel to see the world is an essential component of their lives. Some consider it an important achievement in their lifetime. We will see the Chinese are coming.