China’s Middle Class Cuts Spending: Economic Risks Explored

barometers or early signals right of where a particular phenomenon is headed so where would Chinese consumer spending or consumption spending be like for 2025 for this year there are few indicators right early indicators one would be spending over the CH or just before the Chinese New Year period and during the Chinese New Year period we look to those as indicators of consumption spending obviously but also of consumer confidence this year through the first eight days of the Spring Festival domestic travel spending hit an all-time high of 677 billion yen

or $ 93 billion us but a deeper look tells a different story per person spending only climbed 1% from 2024 and remains below pre pandemic levels Lee's daughter was born during the covid-19 pandemic since then they've become more costc conscious with their holiday budget with an annual household income of more than 300,000 Yen the Lee family fall into China's middle income group the National Bureau of Statistics defines the group as threepers households earning between 100,000 to 500,000 Yen a year I think there's no one definition for middle class and I

think a middle class should be someone who are decently educated right get some tertial education and uh also related to people's social status uh so that's why the professionals and the managers to be the middle class and also I think a middle class should be someone who have access to a stable home uh retirement saving Health Care maybe and even um uh the affordability okay to enjoy some vacation entertainment a third of the country's population some 400 to 500 million belong in this category making China the country with the world's largest middle

class the rise of China's middle class uh is one of the most remarkable uh stories in the past few decades it all began with the economic reforms uh starting in the 1970s and 1980s uh embracing Market principles and uh opening up to the world uh Unleashed incredible growth joing the WTO in 2001 was another Milestone uh turning China into the uh world's uh factories so this rapid expansion created a vast opportunities uh lifted hundreds of millions out of poverty and the fed the rise of substantial middle class with more disposable income the Chinese

middle class started spending big material things became a big Focus uh like getting a bigger apartment or buying a new machine uh so this things were symbol of progress so it's a tangible way uh to show that life was getting better fast forward to uh today the picture is very uh different the middle class today uh has far more choices and opportunities so it's not just uh about material Goods uh they're also investing in experiences uh like uh uh travel concerts uh dining art uh so we see a real diversification of lifestyles in 2022 middle class

spending was estimated at 2.3 trillion US Dollars about a quarter of China's GDP middle classes tend to be the biggest source of consumption and consumption growth in any economy in the middle class in China alone it's about more than 400 100 million people that is bigger than entire population of the United States the middle class consumption in China alone is larger than the entire size of the Japanese economy so their choice is um shape entire Industries so are they um buying domestic brands or imported goods are investing in Education Health Care or

entertainment so these decisions affect business opportunities and job creation in specific sector in specific sector uh they're not just consumers they are train seters and also a key indicator of future growth potential so that's why uh governments around the world not just China pay close attention uh to the habits of uh uh the middle class but China's middle class is changing while the size of the Chinese middle class is increasing steadily how much they spend is growing at a slow Pace before covid there was a much more of a tendency to buy expensive

Goods right branded Goods as well as Western Brands instead of Western Brands they now favor homegrown Brands partly for patriotic reasons but also partly reflecting the slowdown in the Chinese economy uh and so you know more careful spending habits uh by the urban middle classes last year the luxury goods Market saw a 20% drop drop in sales according to consultancy firm ban and Co it's the sharpest drop in 14 years and spending in this sector is expected to be muted in the first half of 2025 rather than spending the Chinese are choosing to save postco

savings deposits reached 17.8 trillion Y in 2022 that's according to data from the Central Bank while 2023 saw a slight dip to 16.7 trillion yen the decrease in excess savings didn't translate to an increase in consumer increase in consumer spending one of the reasons China's middle class Save A Lot is because of relatively weak or inadequate social protection right in terms of Pensions oldage retirement health care and even their children's education Chinese household save about a third of their disposable income which is very high China is the global

champion in savings it has been 5 years since the outbreak of the covid-19 pandemic why is the Chinese middle class still reluctant to spend Wang fun celebrated his 18th birthday in 2022 5 years before he reached adulthood his father had purchased an investment property he was expecting to reap significant returns for his son's future but it didn't quite pan out fore an estimated 60 to 70% of Chinese household wealth is invested in real estate and it's common for a middleclass family to own more than one property prices however have been sliding since

the 20121 property downturn wiping out investment savings and disposable income real estate prices fell after the government tightened financing rules for individuals and developers Prime areas in the bigger cities saw price declines of 15% or more so imagine your wealth 60% of your wealth is falling in value you know that causes what we call a negative wealth effect which means that as your wealth levels fall you also less likely to spend right it reduces your marginal propensity to consume China's recent economic slowdown started with a covid-19

pandemic recovery from its three-year containment policy has been slow pre pandemic China's GDP was expanding at 6.1% in 2019 last year it lost a 5% growth for the second year in a row for 2025 the government is also expecting to stick to this target China among the major economies is unusual in that it hasn't really had a postco rebound all the other major economies in the world uh had very strong postco rebounds contributing to the return of inflation right uh prices across the world Rose partly because there was so much pent up demand that that was

Unleashed that was released when uh uh when covid restrictions were ended in China that hasn't really happened last year the household income growth rate was about 4.6% year over a year that's not too bad compared with the global average but it's much slower uh than the preco level uh if I remember correctly in n in 2019 the income growth was close to 8% 7.9 uh precisely so you can the income uh growth is slowed from 8% to 4.6 that's a lot that's almost a 80% uh slow down in terms growth terms growth rate a look at tax receipts Bears this out in China

individuals with an annual income of 100,000 Yen or more are required to pay required to pay taxes personal income tax revenue fell by 16% in the first 2 months of last year this could mean that either more have fallen out of this income bracket or some in the bracket are earning less than they used than they used to weaker economic growth uh definitely has an uh impact on the job market and especially in the disposable income growth of uh growth of uh residents so with decelerating economic growth um income growth also decelerate the South China Morning

Post analyzed annual reports from 23 of the top Chinese companies across the real estate internet automotive and financial Industries last year it found that 14 of them laid off employees in 2023 the technology in real estate sectors were the worst hit even the government sector seen as an iron Rice Bowl in China saw a 5% drop in headcount in in headcount in 2023 meanwhile the gig economy is saturated with some 200 million workers apart from internal factors geopolitical shifts have also trickled down to the ordinary Chinese right now the uncertainty is

also rising in terms of uh different uh restriction in trade investment which has obviously affected some of the provinces or companies that are more externally facing and in terms of sectors definitely manufacturing is the one that are being the most and almost uh enter like a deflation trend for surfaces is relatively doing slightly better Wang's father owns a towel Factory with over 100 employees his business has been buffeted by the economic headwinds last September Beijing announced a stimulus package worth 1 trillion yen to boost flagging economic

growth measures were aimed at Key sectors such as real estate and financial services the housing market support package included lowering mortgage rates by 0.5% while minimum down payment for all homes was reduced to 15% we do see quite a quick Rebound in the home transaction um in the tier one cities there's some stabilization in home prices but it will take a much longer time for it to actually convert into the better uh investment uh which may not uh happen uh this year because developers are still a busy uh uh basically selling their or finishing

their inventory they need to deliver their home before they can actually invest um invest um further the impact of that is mainly to boost investment rather than consumption uh and to the extent that mortgage interest rates have fallen to try to support uh property uh Investments property uh purchases so it doesn't really directly or so immediately affects consumption affects consumption spending another Focus was monetary easing the Central Bank reduced the main policy interest rate by 0.2% points lowering boring lowering boring costs so again that is

directed at uh you know improving the finances of government particularly local government particularly local governments it's not really directed at helping uh consumers or or to supporting their their spending if China wanted to boost consumption spending a more direct way of doing it would be to provide uh things like what Hong Kong did during covid which is consumption vouchers China hasn't really resorted to those sort of uh measures rightly or wrongly the impact of that is that consump consumer sentiment in China is still relatively muted and

consumption growth is still quite is still quite weak to get people spending a tradein initiative was introduced in July last year this lets consumers buy new household goods with subsidies if they trade in their old ones 150 billion yen was allocated for this scheme this scheme there a part the subsite the trading in for home appliances cars and Furnitures because these are the uh uh the item hit hardest by the housing down term while you're not buying a home you not buy furniture and refrigerator so when you're trading your old refrigerator for a new

government subsidized 20% of the uh Tech uh Tech price within the first 5 months more than 8 million consumers made purchases 11.8 million appliances were sold churning 55.8 million yen in sales this January the scheme was expanded increasing the categories of appliances eligible for eligible for subsidies over the first 8 days of this year's Spring Festival total sales exceeded 31 billion yen however such trading uh subsidies are only helped the products uh or the SE that SE that covered at the same time it may crowd out consumption spending in on other

products So when you buy uh a new refrigerator this month because of some price discount you probably postpone your purchase of your mobile phone so I think at the end of the day what needed is still more broad-based uh measures you need more you need more investment create more jobs estimate more salary wage and overall income growth so can more broad-based uh recovery of income and consumption despite government support for one the middleclass status feels precarious what will happen to China's economy if its middle class is less willing to spend and

what impact will this have on the rest of the world this traditional Chinese music school opened more than 10 years ago in the heart of guango City for last year UA population Research Institute reported that China is the second most costly country to raise a child after South Korea sending their children to enrichment classes is a marker for the middleclass lifestyle for since the economic slowdown there have been reports that clubs and centers offering Afterschool activities were shutting down while their Course prices haven't changed since the

pandemic the school has made some adjustments to keep F students most people have an impression that uh China consumption is pretty poor uh the truth is that yes uh China consumption grows Rance much slower than the preco level but however there's still much faster consumption growth than uh most other countries can wish for over the past five years the house consump in Europe didn't grow at all nothing uh the house consumption in the United States increased by about 18% in five years China's house consumption increased by 30% in 5 years still faster

than others be that as it may huge investments in the manufacturing sector have led to a buildup in capacity over the years as domestic demand slows the world's second largest economy is now facing its longest deflation streak since the 1960s and China still is investing a lot it is still investing more than 40% of its GDP which is very high by global standards most countries invest only about a quarter at most a third of their output and what that does is is there's a lot of Supply but when consumers are holding back what that does is it contributes to

deflation falling prices and when there are falling prices that also causes consumers to hold back on their spending I think the prices are continuing to fall I shouldn't be so eager to spend now and so deflation becomes a becomes a self-fulfilling uh self-fulfilling uh self-reinforcing uh Dynamic China is actually still a developing economy uh with uh growth rate of around 5% having a 1% inflation just simply um do not make too much sense it basically shows that the mang is still quite weak at China's annual parliamentary Gathering or two sessions

earlier this month Beijing stipulated an inflation Target of 2% this is down from last year's 3% also the lowest since the early 2000s the government plans to achieve this by injecting more stimulus to boost to boost and here is where the changing spending habits of China's middle class has ripples outside its borders Chinese suppliers are looking to other markets to absorb their products ball Bay shopping mall is a retail and wholesale Market in Bangkok Thailand with seven stories of shops or at least it used to foreign spee in 2020 24 China's exports

hit record highs exports from China to Thailand surged surged 14% conversely exports from Thailand to China declined China declined 5% Thailand shuttered 2,000 factories in 2023 leading to a loss of thousands of jobs in the manufacturing sector last July Thailand imposed a 7% value added tax on Imports less than 1,500 butt in value this was aimed primarily at Chinese Goods push push back other countries in the region are also taking a toughest stance on cheap Chinese Imports last July Indonesia proposed tariffs of between 100 to 200% on a range of

Chinese products these include Footwear clothing textiles and textiles and Ceramics Vietnam has also banned Chinese online retailers shiin and TAMU for missing a government deadline to register their companies this comes after accusations of pricing out local producers and selling counterfit items if you uh saying that southeast Asia countries are importing too much from China that becomes a problem they have say it's a problem for home um if they're buying a lot from China that means consumers want it not only consumers want it in fact the business want

it because chines export these days are not just cheap consumer products over half of chines export these days are machineries equipments and it product they are capital goods not consumer goods these are the product business need to business need to need to put on the factory floor uh put into the offices uh so it's not just consumer goods in the short run um maybe it's um good for the world but structurally speaking in the long run domestic firms especially smes will find it quite difficult to compete with all this um uh production uh coming from China

with this uh more well build e-commerce uh platforms that will have an impact on jobs so I think in the long run uh it basically means that uh the world may not be as open as before China's deflation is expected to persist for the rest of the year but even if Chinese consumers don't spend as much as they used to what about the size of China's middle class can they continue to grow there is one thing that 22-year-old Shu Hanan prays for to pass the bar exam after failing it previously on his first attempt shu's Hometown is in Shenyang Northeast of Beijing

where his family runs a clothing clothing store they once belonged to the middle class but have since fallen on hard times Shu graduated in 2024 with a degree in law by passing the bar he's hoping to earn a substantial income to reverse his family's family's fortunes the average salary for a lawyer in China ranges from 300,000 to 600,000 president cining wants to grow China's middle income group to half the size of its population by its population by 2035 this means raising the incomes of some 200 million people for China education is often seen as a

ticket to climb the social ladder Li Guang comes from a third tier City in Hanan a province south of Beijing he's come to the capital to see how his son has settled into has settled into University back home Li is a maintenance worker at a factory with a monthly salary of 5,000 yen he's considered lower income in China on a job it's not common for young people from Le's Hometown to move to bigger cities to China's youth unemployment hit an all-time high of 21% in June 20123 before the government stopped publishing regular data graduates made up a large

portion of this figure the rate fell to 18% last August after the criteria was tweaked to exclude current students a degree is no longer a guarantee of a middle class lifestyle for decades the Chinese dream uh was very clear uh study hard uh work hard and then you get ahead so that promise was a very powerful motivator and now uh that promise is starting to feel less certain when we talk about the middle class it's not just income it's also education levels right so if U younger people or college graduates can't find it difficult to find a job uh one

effect is that it slows down the growth of the middle class another effect which we are already seeing it causes uh workers uh to be demotivated or demoralized at a very early stage in their working live so in China the word tanging which means to lie flat essentially to do the bare minimum so that that phenomenon has been gaining traction I would say uh for the last three to four years and that's very worrying these sentiments are a hurdle to president C's common Prosperity push common Prosperity is rooted in communism and was revived by SE in 2021 the

intent is to reduce inequality and ensure affluence and prosperity for all the goal uh is to create an olive shaped Society with a large middle class and few people at the very top or at the bottom of of the income scale the idea is that this type of social structure is good for both economic growth and social stability unfortunately uh this common Prosperity agenda got off uh uh to a bumpy start uh the pandemic uh the tensions with the United States and China's o own recent policy decisions have created many have created many challenges the common

Prosperity Drive in the past few years uh achiev one thing that has helped lift the lowest run the people in the after poverty uh out of a the deposit trap um uh the two other are still uh less than desired the first is how to prevent lowincome people falling back in poverty after a few years second is somehow at overl uh people in the middle class so we need to uh lift uh uh the whole boat help the people from the whole income Spectrum uh up I think China needs a new social compact it should absorb some of the risk associated with uh old age retirement

absorb more of the risk associated with illness uh and health presidency said a couple of years ago that we should avoid the welfare trap right where people become lazy or become reliant on on government handouts I think it is entirely possible to have a consumption Le economy consumption Le economy without uh it being welfarism right without it being sustained or maintain by by handouts to to the population at the two sessions China announced its aim to create 12 million new Urban jobs this year yet the country faces mounting external threats president

Donald Trump imposed additional 10% tariffs on all Chinese Imports into the United States this February and doubled the amount early this this month China retaliated with 10 to 15% levies on products such as American coal and gas as well as Agricultural and food products a trade War could weaken Chinese middleclass Chinese middleclass confidence so the Biggest Losers of Trump's tariffs would be American consumers there is no doubt about that it deprives them of the inflation reducing benefits of Chinese Goods going into the United States in the medium

term it might also hurt China and Chinese Chinese workers in 2017 workers in 2017 2018 uh 20% of China's export went to the United States right now I about 15% of China export go to United States so that it means for each percentage point of uh in uh the T rate hike uh impact on China uh export is about 25% less than in 2017 2018 even back then we saw China's export held up so we know that maybe storm are ahead but so far uh people are uh not in a panic mode in 2008 in the aftermath of the global financial crisis China's middle class driven domestic

consumption was a key to the country's recovery this in turn helped pull other countries out of recession these days though China's middle class is projected to continue growing they are a changed group no longer as loose with their perrings as trade Wars and deglobalization Loom how the Chinese middle class spends could be important for the world's second largest economy and and Beyond I think this 2025 may still be less than desired but still should be a better year uh than we saw in the past few years stock market stabilize and housing market may also

stabilize so that may help stabilize or even lift especially middle class consumption lot of consumers they may be reducing the spending on automobile or or basically other uh luxury products but on the surfaces side um people are more willing to spend on some lifestyle type of um activities or health care and Etc so um it is more like a shift of the um cons consumption pattern that may not be able to fully revert this deceleration uh Trend but still they're still spending I mean this 1.4 billion population there