China wants its middle class to spend big … but they have bills to pay

China’s middle class is something of a mythical entity, with wide-ranging estimates of its size and economic power. Optimists believe a large and growing middle class has the ability to lift China and even the world to a more prosperous level, while pessimists foresee an increasingly burdened group that could cause the economy to stagnate and even lead to political chaos. In this, the second of a four-part series, The South China Morning Post continues to examine the myth to reveal the economic and political implications of its evolution.

Beijing wants the middle class to come to the rescue of China’s economy. But rising costs, mounting household debt, worries about their future income as the economy slows and doubts over whether the government can adequately provide for the ageing population have made consumers cautious.

In many cases, they are doing the opposite of what the government wants and pulling back from spending. Whether this so-called consumption downgrade is broad-based – and a threat to Beijing’s economic plans – or not is a matter of intense debate in Chinese policymaking circles. But it is clear that many in China’s middle class are struggling to make ends meet.

The question mark hanging over China’s 400 million-strong middle class

The experience of a young finance officer in Beijing, surnamed Deng, is a typical one. Deng admits she occasionally has to borrow money from her Jiebei account – also known as Ant Cash Now, a mobile-based consumer loan service of Ant Financial – not to buy cosmetics or clothes, just to pay her rent.

A film company employee, Deng makes 5,400 yuan (US$780) a month after taxes, just above the average monthly disposable income of 5,180 yuan in China’s capital in the first half, and close to last year’s average for the high-income group of 5,411 yuan, according to government data.

But half of Deng’s earnings are taken up by rent. She runs short of cash from time to time so has to borrow more. A recent transaction record of her Alipay mobile-based payment account shows spending for only two items: food delivery and ride-hailing. Not a single luxury purchase appears on the bill, but every month there is almost nothing left in her bank account.

“I would be rich if I didn’t have to pay the rent,” said the twenty-something woman. “I buy cosmetics infrequently, almost all of my spending is just on food.

“The so-called consumption downgrade doesn’t apply to me, since I have never had a chance to upgrade my lifestyle,” she quipped.

Ant Financial operates the Alipay service and is an affiliate of Alibaba Group, which owns the South China Morning Post.

Cautious and pessimistic

China is now betting that its middle class – the largest in the world with more than 400 million consumers, according to the authorities’ estimate – will increase their discretionary spending on products and services and help stabilise the economy amid the trade war with the United States.

The National Development and Reform Commission, the government’s powerful planning agency, last month announced that it had organised a special forum to study increasing salaries for lower-middle, middle- and upper-middle income groups, whose average annual individual disposable earnings range from 13,843 yuan to 34,547 yuan.

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The Chinese Communist Party is trying to take the country through the “middle income trap” – a term used by the World Bank to refer to nations that get stuck at a middle level of economic development as they attempt to grow rich.

The perception there is a large middle class also helps China to retain its appeal to traders and investors. The government will hold the country’s first-ever “import expo” in Shanghai next month, as it seeks to use its domestic consumer power to woo the rest of the world.

At the same time, while China’s per capita income is now approaching US$10,000, the distribution of national wealth is not in favour of the people as the state takes away a growing share of income, and the spending power of China’s middle classes are restricted by rising costs for housing, education, health care and childcare – among other things.

During the week-long National Day holiday that finished on October 7, spending by mainland domestic travellers grew 9.5 per cent – the slowest growth pace since the “golden week” break was introduced 18 years ago. While still a healthy growth rate, last week’s gain would have to be at least as fast as the previous year to maintain overall growth at the same pace.

In addition, there are growing worries about the outlook for the economy and wages, and the retirement costs of a rapidly ageing population – at the end of last year the number of over-60s, the usual retirement age, stood at 240 million.

This tends to make consumers want to save more for the future and spend less now.

A survey conducted by the Bank of Communications in July also showed that Chinese households have become more cautious about the economy and their future income. Sentiment indexes on the economic outlook and household income growth based on the survey both declined by 1 point in July from the previous reading in May.

The escalating trade war between China and the United States is only adding to consumers’ anxiety.

China’s Consumer Confidence Index, compiled by data analytics firm Nielsen, decreased by 2 points in the second quarter compared to the first three months of the year, the first quarterly drop in more than three years, reflecting the start of the trade war.

Deeper into debt

Like Deng, many Chinese consumers are going deeper into debt, not by choice but by necessity. At the end of August, lenders’ outstanding consumption loans to households jumped 29.1 per cent year on year, faster than the 18.5 per cent growth in overall outstanding household debt, which includes mortgage lending, according to People’s Bank of China data.

Much of the consumption loan total does not flow into purchases of goods and services. Just like Deng, many in China’s middle class use consumer loans to help pay their rent or mortgage, even to come up with the down payment on a home.

Government data reflect a slowdown in spending growth. China’s overall retail sales growth rate rebounded slightly to 9 per cent in August, but still close to the weakest point since 2003, which was 8.5 per cent in May, National Bureau of Statistics data showed.

Urban consumer spending grew 4.7 per cent in the first half compared to a year earlier, a rebound from the 3.4 per cent in the first quarter that was the lowest growth rate since the data series began in 2014, the bureau’s data showed. Spending growth has decelerated every quarter from the first three months of last year to the first quarter this year, continuing a broad trend over recent years. It stood at 7.3 per cent in the first quarter of 2014.

The uncertainties facing the middle class are leading some to become disillusioned with their economic status. In Beijing, a computer programmer surnamed Wei makes 15,000 yuan a month after taxes, a salary level that puts him solidly in the middle of the Chinese middle class.

But the 29-year-old, who bought a flat for his family two years ago, does not see himself as part of that group. “I am carrying a mortgage and a person who doesn’t have financial independence should not be treated as middle class,” Wei said.

Mortgage payments cost him 8,000 yuan every month, and another 2,000 yuan from his earnings goes to his and his wife’s parents to pay for their living expenses.

The young man, who works at a board and card game company, pinches every penny of his remaining 5,000 yuan for daily costs. Despite needing it for work, he has not updated his laptop in five years and says he will not buy new clothes until the old ones are worn out.

His wife makes 20,000 yuan per month, but the couple has chosen to save that money rather than spend more. “We plan to have a baby, so we have to make sure we have enough savings,” Wei said.

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His concerns are echoed by a full-time mother in the southeastern city of Xiamen surnamed Fang. Her experience shows how the rapidly mounting cost of raising children has changed the spending habits of Chinese middle-class families, limiting their options for discretionary purchases.

Before giving birth to her son three and a half years ago, Fang said she would binge on beauty products during frequent shopping trips. But now she cannot remember the last time she bought a new lipstick.

She sends her son to a bilingual kindergarten and has reserved a spot for him in an English-language school. The tuition for the English school is 13,267 yuan a year – nearly three times the average monthly disposable income of an urban resident in Xiamen during the first half of this year.

“I have already used up most of my money on the tuition fees for the kindergarten and the English school, as well as on textbooks – another problem is that the price of textbooks is still rising,” she said. “Every month I am able to save only a little.”

Many members of a WeChat group for housewives that Fang joined have the same complaints: that with prices continuing to climb, it has become harder to save money, not to mention spending more.

“It was already hard to save any money before we had our child, but now we use up all our earnings every month,” a young mother in the group said.

“My husband wants to buy a new car, but I have to keep stopping him from doing it,” she added.

Other Chinese families are making the same choice. Vehicle sales in the world’s second largest economy dropped for a third straight month in August, with a year-on-year decline of 7.4 per cent, accelerating from the 5.5 per cent drop in July, according to China Passenger Car Association data.

Even though Chinese have a reputation for being prolific savers, the growth rate of deposits at the country’s financial institutions slumped to a record low of 8.3 per cent in August, according to central bank figures.

In addition, income from investments has been cut back sharply. The average personal income earned from financial assets, property and other assets was 532 yuan in the second quarter, falling from 643 yuan in the first quarter – a 17.2 per cent quarterly decline. High-return investment channels through the country’s shadow banking system have been curbed by the government’s campaign to rein in excess debt, taking away extra earnings that could be used for increased purchases. And the stock market, one of the few investment channels still open to the Chinese middle class, has dropped by 17.7 per cent from the start of the year to the first week of October, further depressing incomes.

Many young mothers in Fang’s WeChat group said they spend tens of thousands of yuan every year buying health and education insurance to hedge against future uncertainties.

No relief in sight

Deng, Wei and Fang are all cautious about the outlook for their incomes.

Deng said she did not expect any large increase in her after-tax income, since the entire Chinese film industry was going through a tough time in the wake of the tax evasion scandal of actress Fan Bingbing. The State Administration of Taxation has tightened its collection methods for the television and film business, slowing down new productions.

Wei was also not optimistic that he would see a dramatic rise in his earnings, because regulators have been cracking down on gambling-related video games. Chinese tech giant Tencent Holdings shut down its popular Texas Hold ’Em video poker game last month in response to Beijing exerting more control over the market.

Fang, meanwhile, thinks her education costs will continue to rise as financial support from her husband’s family dries up. Her parents-in-law operate a mining blasting company in Guizhou province and used to offer them support, but in the past two years business has slumped and at times the firm has been unable to pay its workers.

Why China cannot rely on consumers to spend their way out of the trade war

The country’s median individual disposable income grew 8.4 per cent year-on-year in the first six months, continuing a consistent slowing pattern seen in recent years. Median disposable income grew 7 per cent in the first half of 2017, 8.7 per cent in the first six months of 2016, 10.5 per cent in the first half of 2015, and 13.7 per cent in the first two quarters of 2014, according to the NBS data.

In Shenzhen, a foreign trading company employee said her industry was feeling the pain of tariffs imposed by the US, and she could not see her finances improving. “I am afraid of a wave of unemployment or a terrible [round of] inflation if an economic crisis were to happen,” said the woman, surnamed Liu. “I am very pessimistic about my future income.”