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Affordability, not luxury, the focus for China’s new leadership

Economic growth
By Paul Hodges on 08-Jan-2013

China incomes.pngHalf of China’s population lived in abject poverty as recently as 1979, with incomes less than $2/day. Since then, economic policy has largely focused on reducing this number. As the chart shows, only 7% are still in this position (brown column). Instead, 70% now earn $2 – $10/day (green), and 19% have incomes up to $20/day (blue).

The major part of this move took place under Deng Xiaoping and Jiang Zemin’s leadership. But then priorities changed from 2002 under Hu Jintao. For the past decade, the leadership instead focused on creating a so-called ‘middle class’ of people with incomes above $20/day (purple). But even today, these represent only 4% of the population. Equally, an income of $20/day ($7600/year) would not be considered middle class in any western country.

Now, China’s new leadership is returning to earlier priorities. As China’s Academy of Social Sciences reportsa completely new policy approach is emerging. Its about giving farmers a bigger share from land deals, it’s about changing local governments’ reliance on revenues from land, and it’s ultimately about a fairer system of sharing China’s economic growth.”

This new policy has major implications for companies operating in the Chinese market. Of course there will still be people able to afford a luxury car and lifestyle. But this will be a niche market, and unlikely to grow too quickly. Instead, as state newspaper Xinhua notes:

“The most outstanding problem in our country’s social and economic system is still the separation of rural and urban China; and the most serious factor hindering China from building up a comprehensive well-off society is the excessively big gap between urban and rural development”.

This gap is shown in income levels between rural and urban workers. Each sector contains about half of China’s population, but latest data shows urban incomes are 3 times those of rural areas. Disposable income averages $4k/year in the towns, versus just $1450 elsewhere.

The new leadership is bound to find it difficult to implement such major changes. But the fact it is setting out its proposed direction so soon after its appointment, suggests it is serious in its aims. As the blog suggested in the Financial Times last March, affordability may well take over from luxury as the main focus for China’s economy over the next decade.