Real Chinese middle class and the McKinsey paper

Real Chinese middle class and the McKinsey paper
China Solved, Apr 16, 2009

If you haven’t read the McKinsey paper on China’s Wealthy – take a look. It’s a beautiful publication – and really reinforces the notion of China as the new super-consumer. The paper is full of tasteful shots of young, attractive Chinese people buying wine together and enjoying one another’s company in shopping malls.

But what caught my eye was on page 9 - the size of wealthy population. Less than 1% of urban Chinese households are wealthy – compared to 10% in US, Germany and Japan. But the Chinese are growing their wealthy component fast – around 16% per year. So we can expect China’s wealthy to rise to maybe 2% the population in 5 years. McKinsey says 4 million households by 2015. It’s not a huge number – but China is a developing economy and maybe McK set the bar too high.

How do they define ‘wealthy’ in China? In a footnote on page 8, McKinsey identifies as wealthy the 1.6 million Chinese earning 250,000 rmb per year or more. Unless I get my basic arithmetic wrong (and it’s been known to happen) we’re talking about people earning upwards of 20,800 rmb per month – or just shy of US$40 K a year.

The hopes of the commercial universe are riding on them – this small band of brave uber-consumers.

The Real Chinese Middle Class vs. the Imagined Chinese Middle Class
It may not have been their intent, but the McKinsey report demonstrates just how thin the upscale Chinese market is. If your business model used to be tailored to a ‘middle class expat’ market that is rapidly disappearing, then you’re already finding that the ‘middle class Chinese’ market is both unwilling and unable to fill the void. McKinsey’s “wealthy Chinese” aren’t packing that much of a punch in terms of numbers or spending potential.

Many westerners leaf through McKinsey type reports and conclude that China can support a lot more high-end spending than it really can. China per capita GDP for 2008 was in the neighborhood of US$3,000. They’re doing great – when I first came here it was barely $1800. Kudos to you China. Kudos.

But we’ve got to be careful which myths we allow ourselves to believe. The notion that an army of Chinese super-spenders with piles of disposable income saving are mobilizing to rescue the global economy – and our favorite little Shanghai bistro – is just wishful thinking. If your China business model still includes lots of foot traffic from “middle class Chinese earning 50 or 60,000 rmb / month “, then you’ve got to go back to the drawing board. Those days are over – and they are not likely to come back any time soon.