The China Daily takes a look at China's middle stratum, noting that "middle class" is considered politically incorrect in China and middle stratum is more acceptable.

A report from the Chinese Academy of Social Sciences says the middle class was 19% of China's 1.3 billion population. With projected income and economic growth, this should reach 40% of the total by 2020, according to the report. The definition is a family with assets between Yuan 150,000 - 300,000 (about US$18,000 to US$36,000).

Regardless of the exact number China is rapidly gaining a class of people who are increasing in affluence and disposable income. If they can overcome their natural inclination to save (Chinese private savings are as much as 25% of income, compared to low single figures in many Western countries) China's consumers will become a factor in global consumption. But they will not become the solution to all companies' growth questions in the years to come. Look at those numbers again. We're talking about families with total assets of about US$25,000 on average. Sure the cost of goods is lower in China and on a purchasing parity basis this amount gets you more bang for your buck. But it does not mean that suddenly Chinese consumers will imitate Western ones in both the quantum and pattern of consumption. The rapid growth in Chinese wealth is great but there is still a massive gap to catch up to Western consumption and wealth levels. China's GDP is just over US$1,000 per person; Hong Kong's is over US$27,000 per persno.

This leads to the next problem: the growing inequality in wealth distribution in China. I've talked previously of the growing differences between the rich urban coast and poor rural interior in China. In Communist China the Gini coefficient has now risen to 0.39 against the international average of 0.40*. China's farmers earn on average US$317 per year, which has risen 4% in 2003 despite boom times for rural China. So in fact the urban rich have average incomes far higher than the per capita GDP suggests. As my pervious post put it, there are two Chinas: a wealthy coastal urban China that is rapidly becoming like the West and a poor rural army of peasants struggling to divine any benefits from China's new wealth.

This presents the Chinese leadership with two challenges. Firstly they need to ensure that this second, poor China gathers at least some of the benefits of this new golden age of Chinese economic expansion. The Communists based themselves and their legitimacy on representing the peasantry and advancing their interests. At the same time the leadership need to deal with a growing group that have something worth protecting in terms of assets and lifestyle. While the emergence of China's middle class is at an early stage, it is going to pose a growing challenge to China's governance.

* _{0 means perfect equality; 1 means all wealth is in the hands of only one person}