Credit Suisse recently released a study showing that China now has more middle class households (109 million) than the US (92 million) and another report by UBS and PricewaterhouseCoopers found that a new billionaire is created in China, on average, about once per week.
It’s always tricky, of course, to use a relative term like middle, implying an upper and lower, in an absolute context. In this case Credit Suisse considered household wealth between $50,000 and $500,000 to be middle class, pegging the bottom threshold at approximately 310,000 Chinese yuan (CNY).
I’m not convinced, however, that we can apply Western standards of economic development to places like China and Asia in general. By definition every society has a ‘middle class’ but I don’t think it’s a universal standard of life style. As my old track coach used to say, “There’s your teammates, the league, the region, and the state.” The competition at the state level will always be faster than the competition at the team level. This is life.”
The threshold that Credit Suisse used is certainly above the average household net worth in China but a reasonably nice apartment measuring 1500 sq. ft (140 sq meters) would cost around $600,000 in the suburbs of Beijing. And while the cost of gasoline, at $3.50 per gallon, is below what many Europeans pay, middle class Americans definitely felt the pinch when gasoline reached those levels. Not to mention that a Grande Latte at Starbucks, which has been hugely successful here, will set you back $4.50.
All of which raises the question, of course, as to whether or not the Credit Suisse study is truly an apples to apples comparison. Lifestyle, of course, not net worth, is what really defines the middle class for most Westerners.
Such a lifestyle, moreover, requires an economic infrastructure that caters to the middle class. And while there is more of that infrastructure in place than there was when I arrived here, it appears to me that the economic infrastructure in China is bifurcating into an infrastructure catering to the super rich and an infrastructure catering to the working class, most of whom would not be considered to be living middle class lifestyles.
There are no middle class single family homes, for example. If a developer builds a standalone home it will be an elegant affair, even without property, costing in the millions of dollars. Otherwise they build apartments. There are no neighborhoods where a middle class household could buy a standalone home or even a duplex.
And while China is acquiring a reputation as the luxury car capital of the world, BMW sells more than twice as many cars in the 5 series than the 3 series. Mercedes sells more E class than C class. And the Audi A6 is more popular than the A4, suggesting, of course, that it is not the middle class that is driving China’s luxury car sales.
I believe a better way to measure economic development would be to look at the ratio of value added to the economy against total wealth. Did the household create economic value equivalent to the wealth they accumulated for doing so?
The Fords, the Waltons, and the Duponts all created value for the economy at large. Perhaps the wealth they so accumulated was out of proportion to the value created, but there was at least some correlation
While not a scientific assessment, I see less correlation here in China. When I see a twenty-something driving a brand new Ferrari (for which he paid an 85% import tax) I have difficulty imagining that he has personally created enough added value to justify that reward.
The richest man in China at the moment is a real estate tycoon. As are most of the richest people in China. Either that or they bought a previously state-owned enterprise at an incredibly attractive price.
In the case of real estate, the government owns and controls all of the land in China. They unilaterally decide what parcels get sold at what price and for what purpose. Real estate, therefore, is not so much a development game as it is a government game. Often the rewards reaped are far out of line with the actual value the developer created.
There are exceptions, of course. Jack Ma, the chairman of Alibaba, is the second richest man in China and certainly he created something of true economic value although he, too, had to get help from the government somewhere along the way. Somebody had to approve his business license and he undoubtedly borrowed money from a state-owned bank at some point.
There is little question that the Chinese are getting wealthier. But how are they getting wealth and is it quality wealth – is it sustainable?
China is creating a strong middle class among its entrepreneurs and innovators. The numbers, however, remain relatively small at this stage of the process. A lot of hope, but the state is still behind most economic activity in one way or another.
Corruption, of course, is public enemy number one when it comes to equating wealth accumulation with value creation. Which is why the government is working so hard to stomp it out. It will, however, not be an easy task and its legacy will influence the distribution of wealth for a long time to come even once it stops.
Credit is another area where the government must initiate reforms if a real middle class is to emerge. While the government is taking steps to fund entrepreneurs and tech startups the state-owned banks that control the credit sector have always shown a preference for lending to the large state-owned companies that have the financial backing of the China government.
Judging strictly by the number of super-luxury cars on the streets of Beijing, Shanghai, and other major cities in China, it would be easy to conclude that the Chinese people are prospering mightily. Prospering, yes. Mightily, only an elite few.
The same is happening elsewhere, of course. Now it’s hedge fund managers rather than railroad magnates that are making all the money in America, for example, and while the hedge fund managers overwhelmingly create value for the already wealthy, they do serve the middle class through retirement institutions. Even though it can be safely argued that their rewards are totally out of proportion to the value they add, there is some correlation nonetheless.
The important thing is that the US has a middle class infrastructure. Credit is cheap and readily available to nearly everyone and the government continues to push middle class infrastructure, such as homes, through the social engineering inherent in the tax code.
China has lifted more people out of poverty in a shorter period of time than any other economy in history. At some point, however, those lifted out of poverty must have hope that they can continue to move upward – into a real middle class, if you will. If not, as history has taught us, the super-rich who cannot justify their wealth through value creation will find mobs with pitchforks at their door.
It will require more than government reform. Chinese businesspeople will also have to adopt a longer-term investment perspective. The infrastructure exists for the super-rich today because there is a lot of profit in it in the short term. Catering to the middle class takes a much longer time horizon, on average. (The poor, in the end, mainly cater to the poor so their expectations are low to begin with.)
I believe that China will get there. But I, for one, will be watching the value index (created/earned) rather than household net worth. And I suggest that foreign businesses investing in China do the same.
Note: The views expressed in this post are strictly those of the writer acting in a personal capacity.
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