Why China’s middle class is nervous

HONG KONG — Almost as quickly as China’s burgeoning middle class has catapulted into existence, there have been fears that its days of heady growth could be ending.

With the economy slowing, and the manufacturing boom that propelled it looking shaky, many experts inside and outside the country argue that it will have to go through a period of painful rebalancing before middle-class growth can be resumed.

In a barnstorming editorial for Caijing magazine titled “The Ten Grave Problems,” Deng Yuwen argues that the problems created by the last decade of growth may outweigh its achievements. Among the problems he lists is the “failure to nurture and grow a middle class.”

He argues:

In the last decade, benefiting from the economic boom, the sheer number of middle-class people increased. However, the growth rate lags far behind general economic growth rates, as a result of the lack of any mechanism to nurture the middle class. As regards income distribution, reform has stagnated, resulting in an ever-increasing gap between rich and poor.

The road leading towards the middle class is becoming even bumpier for low-income households. High housing prices have eroded people’s spending power, putting middle-class living standards beyond their reach. Bearish stock markets have sucked in people’s savings yet denied them the chance of getting returns on investment. These are just some areas where the government should have done better.

A recent paper by Kam Wing Chan, professor of geography at the University of Washington, also casts doubt on how successfully China has developed its new middle class. In it, as reported by FT Alphaville, he argues that though half of China now lives in cities on paper, much of that population is not properly “urbanized,” or middle-class, as they are migrant workers who are legally excluded from social support.

FT Alphaville explains:

Because your hukou status theoretically determines whether you are eligible for various benefits and rights, it also determines whether or not you can really join the “middle classes.”

The urban-dwellers with agricultural hukou, or “rural migrant workers,” as they’re often described, continue to live a second-class life.

Hu Shuli, the widely-respected editor of Caixin magazine, wrote in a recent op-ed that the use of new stimulus money suggests that local governments still are not facing the challenge of shifting China toward a more innovative economy that would enlarge the opportunities for China's middle class:

No doubt some officials think the new model of development looks good on paper but takes too long to work in practice. They agree that technology should drive economic growth, but lament that technological advances take too long; they agree that there should be more competition and less economic distortions, yet complain that profit margins in competitive industries are too low and expansion is limited.

Addicted to their fix of quick, spectacular growth, these officials cling to the old development model. They talk up support for a new growth path, but in practice follow the old formula of "three highs and one low" — high investment, heavy energy use, high levels of pollution and low returns. The result will only take China further away from its goal of a people-centred, co-ordinated, holistic and sustainable model of development.