A civil engineer who has obtained a masters degree will work 7 days, be on call for 12 hours a day and make about ¥10,000 rmb ($1,500) per month. During the year he/she will have 42 days for holiday, give or take, which will realistically be spent during the Chinese New Year in January. He/she has been educated with an advanced science degree and will consistently attend continuous educational training programs.
The Chinese middle class is quite opposite to the American middle class in terms of daily life because they still work to live. Around 247 million people, 18.2% of the population, qualify as middle class, meaning their households spend between $10 and $100 a day on average, according to Brookings Institution economist Homi Khara. If this current pattern continues, the number will reach 607 million by 2020 after adjusting for inflation and purchasing power.
In 1978 the middle class did not exist. The GDP per capita (adjusted for inflation) in 1978 was $600 per year. In 1820 the U.S. GDP per Capita was $1,257! Unlike the U.S. where people tend to live to work, the Chinese work to live. This is how the Chinese middle class operates.
Current Situation: Mr. Xu
I present the current situation of a 32-year-old civil engineer who is married and has a 2-year-old baby boy. With his income his wife can be a stay at home mom, which she is. Mr. Xu has been working for a major state owned railway company for 10 years. He has just signed an employment contract which guarantees him four more years of employment. If he voids this contract he will have to repay ¥38,000 to the railway company for the 3 month Business English Program I am currently teaching him and his 15 colleagues. Upon signing the contract he was fully aware that his company would control the next four years of his life. He would have to relocate as desired by his company, but his wife and child would not be relocated. I knew another Chinese engineer who lived in Vietnam for seven years and only came home once a year during Chinese New Year. In order for an ordinary Chinese to climb the social ladder they have to sacrifice something, it is often family time.
Housing: Haidian District, Beijing
Mr. Xu lives in Haidian district in North West Beijing near the fourth ring road.
In 2008 he and his wife purchased a 2 bedroom, 1 living room flat.
In 2008 the 972 square feet flat cost $1,587. Purchasing a flat is based on a 70-year lease and the government has yet to say what happens after 70 years. In China, the people own the land, aka the government. The cost per square meter in Haidian district has sky rocketed to $4,761 in 2012. Upon purchasing the home he put down $63,492. The money came for him and his wife’s savings including assistance from both their parents. I can’t stress enough how important owning a home is in Chinese culture. The total purchase price in 2008 was $142,857 at a 4.5% interest rate. In todays market the house is worth $428,571.
To Truly Understand We Must Compare
A combined savings of $63,492 is significant, especially when the GDP Per Capita was $4,428 in 2010 and the Median Household Income in Chinese cities was about $13,400, according to Moody’s Analytics, about a quarter of the U.S. figure. The GDP Per Capita in the U.S. was $27,334 in 2010 while the Median Household Income was $51,914, according the U.S. Census Bureau.
The average Median Household Income in the U.S. is about 4 times that of China. In order to understand how expensive it is for the average Chinese family to purchase a home in a Chinese city just multiple the cost of purchasing your home by 4. .
Example: U.S. Real Estate Comparison
If you and your wife were looking to purchase a 972 square foot flat, the purchase price would be $571,428. Your down payment would be $253,968 with a remaining balance of $317,460 at 4.5% over 70 years.
In 2010, 40% of income was spent on urban housing. While the average savings rate per person used to be around 50%, these savings are being transferred into real estate. Even if the Chinese saved money they would lose due to financial repression caused by extremely low interest rate set by the government. Financial repression has resulted in a reduction of bank deposit from 70% to 40% and increase of urban housing stock from 20% to 40%. Financial repression in China has been transfer of wealth from the average citizen to the elite real estate developers.
In order for the middle class to continue to develop with sustainable economic development the savings rate must decrease and the this money must go into consumption not urban housing. Unfortunately, the real estate market is draining all opportunity for consumption expenditures.
At the End of the Day
Mr. Xu, a farm boy from southern China, is accomplishing the American dream in China terms. He has a house, a baby boy, stay at home wife, and a steady job. He works 7 days a week, 10 hours per day on average and makes ¥10,000 ($1,500) per month. On average he will personally spend 40% of his paycheck on his mortgage, 40% on savings, 5% on insurance, and the remaining balance of 15% equity ($238/month) on daily life.
He dislikes the interest rate policy but to his benefit his life is significantly better than his parents. His definition of success is to feed his family, have a stable job, and be happy. Mr. Xu is the middle class. He works to live and one day hopes his child lives to work.