Japan shouldn't bet farm on China's 'middle class' Many Japanese corporations are pinning their hopes on what they see as the expanding "middle class" in China, which they think will offer a huge potential market for their products. In reality, that class is a mirage created politically by the Chinese Communist Party and is on the verge of disintegrating. The middle class in China began to show its presence around 2005 and has consisted of those in managerial posts at state-owned enterprises, financial institutions and subsidiaries of foreign companies, as well as those who operate their own information technology venture businesses. They were known for spending their money on plush condominiums, expensive automobiles, traveling abroad and playing golf. Since around 2008, real estate prices have shot up so high that the price of a condo in Beijing, Shanghai and Guangzhou now is 30 to 50 times the annual income of those in the middle class. Further aggravating the situation has been a sudden drop in the stock market. The SSE Composite Index of the Shanghai Stock Exchange, for example, fell from a peak of more than 6,000 in autumn 2007 to around 3,000 at present. What exactly is the size of the middle class in China? One answer to this question is given by the Chinese Academy of Social Sciences, a government-affiliated think tank. It says in its report that 23 percent of the total population belongs to this category. This means about 300 million out of the population of 1.3 billion, some 2.7 times the size of the middle class in Japan, estimated at 110 million. Marketing experts point out, however, that there is a big mathematical trick in the statistics announced by the academy, which defines the middle class as those who earn more than 6,000 yuan (about Â¥80,000) per month. With that monthly income, one can barely survive in big cities like Beijing or Shanghai, let alone enjoy life as a big spender. There are two reasons why the Chinese government has artificially blown up the size of the middle class. One is to drive home to Chinese people that the government's economic policies have been highly successful. The other is to give foreign corporations high expectations about China's markets. It is true that consumption in China has been on the rise, as evidenced by the 18.3 percent year-on-year increase in the first nine months of this year. This figure, however, was much lower than the 24.5 percent increase in investments by the government and state-owned corporations in fixed assets. Another important factor that must not be overlooked is the fact that nearly half of retail sales in China is accounted for by the money spent on housing. The China Real Estate Research estimates that, in 2009, sales of new and used houses were valued at 5.7 trillion to 6 trillion yuan, which represented a substantial portion of the overall retail sales, which stood at 12 trillion yuan. Given the steep rise in the prices of newly built condominiums, it would be a gross mistake to jump to the conclusion that the purchases of durable consumer goods are rising by double-digit percentages. Although home electric appliances and automobiles are growing in sales, that has been due primarily to subsidies provided by the government to encourage purchase of eco-friendly cars and to boost sales of home electric appliances in farming regions. Observers point out that during the past decade, the overall expansion of consumption in China has been brought about by wealthy people (numbering 70 million to 80 million) who have connections with the Chinese Communist Party. They have become even wealthier, while the so-called middle class has continued to struggle. This observation is substantiated by the fact that the Gini coefficient in China has shot up to 0.5. This coefficient shows how equally or unequally income is distributed within the country, with the value of zero expressing total equality and a value of 1 maximal inequality. Had the middle class grown as claimed by Beijing, the Gini coefficient could not have gone as high as 0.5. Another factor that has been working against the middle class is the sluggish performance of corporations in the private sector. Since the spring of this year, factory workers have held a series of strikes in many parts of the country to protest low wages. Management cannot afford to comply, however, because a majority of the privately owned enterprises in China are not at a technological level of high added value. So, they are forced to sell a large volume of merchandise at low-profit margins. Many companies are making only 2 to 3 percent profit on sales and have been hit especially hard by wage hikes and the recent rise in the value of the renminbi currency. The plight of the private sector is also reflected in the growing number of new college graduates who are unable to find jobs. Even though the overall economy is registering double-digit growth, only about 40 percent of those about to finish college are said to have found jobs. This is much worse than in Japan. The Chinese Communist Party has long thought that an affluent middle class is indispensable for securing social stability. But the demographic composition of the population has made this target infeasible. Whereas in the industrialized nations, social stability was attained by building a middle class covering 70 percent of the population, China has had to look after 720 million farmers. Since there are more farmers in China than farmlands can accommodate, many have had to seek jobs as migrant workers in urban areas. In the postwar Japan, the government adopted a fiscal policy designed to elevate farmers to the middle class. Farmers in China are so numerous that the government would find it impossible to do this. Even if China succeeds in establishing a middle class, its members will account for only 20 percent to 30 percent of the population. Rather than becoming the dominant group in the country, the nascent middle class in China is struggling to survive. Japanese companies would be taking a big risk in betting that the Chinese middle class will continue to expand and prosper and thus create a substantial market for consumer goods. This is an abridged translation of an article from the November issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.