Mainland China’s rising wealth

Millionaires and the middle class lead the way

24 May 2021 Qu Hongbin, Chief China Economist

Mainland China is a wealth economy and set to get wealthier. Its middle class exceeds the whole US population; 96 per cent of urban Chinese own property; more than 2 million people have over USD1.5 million to invest. The government’s net assets surpass its annual GDP. No wonder foreigners are investing there too.

The rapid accumulation of national wealth reflects mainland China’s high GDP growth – even if this has slowed a little as the economy developed and was impacted by COVID-19 – but also a saving rate of 45 per cent that is almost double the global average. We expect household wealth to grow by around 8.5 per cent annually over the next five years.

Mainland China is thus expected become the world’s largest economy in GDP terms within a decade and is likely to become the wealthiest economy even sooner. However, at that point, wealth per person will still be less than a quarter of US levels. But already, with a middle class of 340 million, this is double the US total and could reach 500 million by 2025.

Property accounts for roughly 40 per cent of household assets. The average urban household owns 1.5 residential properties and urban home-ownership is the highest in the world. For years, other options were limited but as financial markets become more sophisticated and more open, we expect a greater proportion of household wealth to be invested in shares or mutual funds at home and abroad.

The 2 million people with investible assets of over 10 million renminbi (USD1.55 million) account for 12 per cent of all household wealth and their assets total 70 trillion renminbi but could exceed 110 trillion renminbi by 2025.

Thus, the prosperity is distributed unevenly. Economic growth has lifted more than 800 million people out of poverty, but both income and wealth inequality are increasing. Just 1 per cent of households own 30 per cent of the country’s wealth. In our view, inequality won’t correct itself without government intervention.

Beijing’s response to the wealth gap involves helping the 290 million migrant workers and almost 10 million university graduates a year to join the middle class while improving social safety nets for the vulnerable.

The middle class – earning roughly USD15,000 to USD75,000 – is a big driver of economic growth. Higher earners buy quality goods, boosting domestic demand and business confidence while helping mainland China transition to a consumption-led economy.

And the government’s own assets are growing faster than its liabilities. Unlike countries that borrow to finance consumption, mainland China’s debt mainly funds capital expenditure, investing in infrastructure – tangible assets that support productivity. Public-sector assets have risen almost 20-fold since 2000, giving more room to manage debt risk, particularly from local governments.

And the country has external wealth – assets abroad funded by booming export revenues. These were once largely dominated by the government’s reserve assets, particularly in US Treasury bonds, but asset allocation has now shifted towards more private investment, including direct investment in overseas companies and portfolio investments.

Meanwhile, opening up mainland China’s domestic markets to foreign players has attracted overseas investors. Foreign holdings of bonds and equities have risen eight-fold since 2013.

Even so, both foreign investment in and by mainland China remains a relatively small proportion of GDP compared with developed countries. This means China has the capacity for its capital flows to expand. Continued two-way capital-account liberalisation and domestic demand for overseas assets will help support future growth of external capital flows.

First published 21 May 2021.

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