Over the next two decades China is expected to transition from an investment-led to more of a consumption-led economy. MGI research finds that as this rebalancing occurs, a massive middle class will emerge.
As China transitions to a more consumption-led economy, Chinese incomes will grow and a massive middle class is expected to emerge.
The urban consumer markets, in particular, will develop rapidly, moving from 43 percent of the population today, to 69 percent by 2015, and 76 percent by 2025. Most important, this urban phenomenon will spread beyond China’s large wealthy coastal cities, to smaller cities further inland.
As the incomes of the new middle class rise dramatically, China will become the third-largest consumer market in the world by 2025. A key characteristic of China’s new middle class will be that these households will begin to spend a larger proportion of their income on discretionary items, thus significantly changing the patterns of spending in the economy.
It is important to note that the spectacular rise of China’s urban middle class, and its consequent impact on consumption, does not depend on major changes in Chinese savings behavior or on particular government policies (although certain policies could accelerate or slow the process). Even the impact of varying future growth rates tends to alter only the timing of these developments, not whether they happen at all.