September 2018

Upper Income is a Moving Target in Urban China

  • The definition of upper income households in China is changing dramatically.

  • In 2007 the definition (approx. top third of households) was Rmb 80,000 (2017 real values) and above. By 2017 it is Rmb 140,000 and above and it is projected to be Rmb 200,000 (2017 real values) and above by 2027 (In US$s that is 12,000, 20,000 and 30,000 respectively)

  • The increased affluence combined with the growing number of urban households means that the high-income segment of 2017 (Rmb 140,000) will grow from 45 million households to 119 million

  • The new affluent of the next decade will be biased to working age empty nesters (45 yrs. plus) with consumption patterns moving to experience rather than things, quality rather than quantity, and life style (wellness, sociability, health etc).

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Changes in Real (i.e. inflation adjusted) household income significantly influence consumer demand patterns.  As households move up the income ladder so their consumption patterns change, where in comparison consumption patterns within an income range tend to change very slowly.

This is particularly so In the case of China. A Real total GDP growth rate per annum of 8.18% pa for 2007 to 2017 combined with average urban household income increasing at 6.9% per annum, has caused considerable change in the consumption habits of urban households

Figure 1 shows how the inflation adjusted (it is in Real Rmb 2017 values) distribution of urban households changed between 2007 and 2017.  In 2007 an estimated 30% of urban households had an income of Rmb 80,000 and above (US$12,000) – that is high income households (in a relative sense).  Conversely 24% of households had a gross income of Rmb 40,000 (US$6,000) or less per annum.  Thus, middle income is the range of Rmb 40,000 to 80,000.

However, as shown in Figure 1, with the growth of the economy, as a result of increased productivity per worker, a small increase in the share of that productivity that was paid out in wages and a marginal increase in number of workers per household, the situation changed dramatically by 2017.  

Based on the annual Household Income and Expenditure Survey done by the National Bureau of Statistics and adjusted for discrepancies from total Private Consumption Expenditure component of GDP, average gross urban household income is reported to have increased from Rmb 72,605 (US$10,000) to Rmb 141,134 (US$20,000).  This represents an average annual growth rate of 6.9% per annum.

Therefore, it is not surprising that the top third of urban households is now those with an income over Rmb 140,000 per annum.  In contrast, only 5% of urban households were reporting a gross income below Rmb 40,000 pa which a decade ago was a third of urban households.  In fact, the start of middle income is now around Rmb 80,000 pa – what was a decade ago the boundary for upper income households (top 33%).

This means that brands that established a position aimed at the Rmb 80,000 urban household in 2007  were effectively targeting the top two thirds of urban households 10 years later.  Their target market went from 58 million households to 193 million in a decade.  (The reader is reminded that in addition to the increase in affluence there was also an increase in number of urban households because of ongoing rural to urban migration of around 20 million persons a year.  In total the number of urban households increases from 194 million to 266 million between 2007 and 2017).

So positioning a brand at the Rmb 80,000 level and above paid enormous dividends in terms of the size of the (affordable) target market.  So, were should a brand position itself now?

With an assumption that Real total GDP growth rate will slow over the next decade (as a function of slower urbanisation, slower improvements in education profile of the workforce, constraints of Fixed Capital Investment Growth) to an average rate of 4.2% per annum, it is expected that real gross urban household income will increase at a more modest 3.9% per annum.  So do not, under these assumptions, expect quite the same dynamics as the previous decade. But do expect growth and opportunity.

Figure 1: Distribution of Urban Households by Gross Income (real 2017 values)

Fig 1.jpg

 

The Rmb 80,000 segment – which was upper income in 2007, and start of middle income in 2017, will account for 84% of all urban households in 2027.  In fact, in 2027 the lower band of ‘middle income is projected to be Rmb 120,000 (US$17,600).  Conversely the upper band of ‘middle income is projected to be Rmb 200,000 (US$30,000) pa which a decade ago was the start of the top 3% of urban households.  Currently (2017) there is only 17% of urban households above that level.

This suggests that a brand that targets households with an income over Rmb 200,000 will be reaching the top third in a decade’s time.  More to the point its target market is projected to grow from 45 million urban households to 119 million – which is a growth rate of 10.2% per annum against a growth of total urban households of 2.2% pa for the same period.

The middle-income segment (ranging from Rmb 120,000 to Rmb 200,000 pa) will grow as well – from 77 million to 99 million urban households – growth but not in the same league as that of the upper income segment.

If you overlay on this the actual gross income earned by these top two segments over the last decade and for the next decade the total value of 'available' income increases dramatically.

 

Figure 2: Projected growth of urban high-income segments to 2027

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But more important than these quite compelling numbers is the nature and location of these households.  They are concentrated in a relatively small number of cities (and not necessarily the largest by urban population) and they are biased to households with two adults and no dependent children in them with the adults being over 45 years of age.  In short, what is termed working age empty nesters with a higher per capita income (because there are fewer persons in their households).

These people are a new consumer segment in terms of what they spend money on.  There is a movement from ‘things’ to ‘experience’ (they already have all the gadgets – remember they are high income).  In addition, they are moving from flash to sensible and quality rather than quantity.  They are also developing new concerns such as wellness and health, quality of life etc.  Collectively this creates a myriad of new product and service opportunities.

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