a better life: the wants and worries of china's consumers

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A better life?The wants and worries of China’s consumers

Sponsored by

Written in co-operation withProfessor Huo Deming,

National School of Development,Peking University

A report from theEconomist Intelligence Unit

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© Economist Intelligence Unit 2010 1

Contents

Preface 3

Executive summary 4

Introduction 8

Part 1: Life near the top 11

The wants: New homes and cars, but a greener environment 13

Homes 13

Cars 16

The worries: Environment, health and children 18

The environment 18

Health 20

Children 22

Part 2: Life near the bottom 25

The wants: A university education for the children and a cozier home 27

Education 27

A cozier home 30

The worries: Health and money 31

Health 31

Money 32

Part 3: Confidence in the future 36

A tenuous net—even for the well-off 37

Building security 38

Shifting aspirations 39

Appendix 40


2 © Economist Intelligence Unit 2010

© 2010 The Economist Intelligence Unit. All rights reserved. All information in this report is verified to the best of the author’s and the publisher’s ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Economist Intelligence Unit.



Preface

A better life? The wants and worries of China’s consumers is an Economist Intelligence Unit report, sponsored by Bayer. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. The report’s quantitative findings come from a survey of 2,651 respondents in China conducted between December 2009 and March 2010. The Economist Intelligence Unit’s editorial team designed the survey, in consultation with Professor Huo Deming, National School of Development, Peking University and Professor Willem Burgers, Bayer Chair Professor of Strategy and Marketing, China Europe International Business School. The Economist Intelligence Unit analyzed the results, conducted additional research and wrote the report.



1 According to Economist Intelligence Unit and National Bureau of Statistics data. We spoke to consumers with annual household incomes of between US$10,000 and US$100,000. Of this sample, 40% have incomes between approximately US$10,000 and US$20,000, and 26% earn between US$20,000 and US$30,000. Just under 2% earned slightly less than US$10,000, and 33% earned more than US$30,000. These incomes will go farther in some cities than others – US$10,000 goes farther in Changchun than in Shanghai. Our respondents set aside one-third of their income for discretionary spending.2 Because estimates of rural incomes in China vary widely, in designing the sample we used average adjusted income per head figures from the Na-tional Bureau of Statistics, ad-justing them upwards slightly to account for somewhat higher estimates provided by private research groups.

Executive summaryOne of the legacies of the 2008-2010 global financial crisis has been a new focus on the latent power of the Chinese consumer. As demand in the United States and Europe has waned, exports have weakened as an engine of China’s economic growth, and Beijing has turned its attention to stimulating domestic demand.

In parallel with its Rmb4trn (US$590bn) stimulus package, the Chinese government began offering vouchers in 2009 for appliances, furniture and even cars to encourage consumers to open their wallets. In mid-2010, China ended export tax rebates for certain sectors and eased the renminbi’s peg to the US dollar—all part of a strategy to reduce reliance on exports and shift the focus to domestic consumption. Faced with persistently weak sales in traditional OECD markets, foreign investors and local businesses have continued to sharpen their focus on the Chinese consumer.

What will be the end result of all of these efforts? Will Chinese consumption live up to its promise? We believe that in order for Chinese consumption to be truly unleashed, consumers need to feel confident that life is getting better. If they are worried about the future, and about basic needs such as healthcare and education, they will be less likely to spend. To gauge their confidence—and consumption priorities—the Economist Intelligence Unit has surveyed Chinese consumers, both rural and urban. The surveys, conducted between December 2009 and March 2010, spoke to two very different groups of consumers.

We should note that our conversations with respondents coincided with a remarkable recovery in the Chinese economy, largely driven by the government’s massive investment programme. China’s GDP growth had slumped to 6.2% in the first quarter of 2009 (year-on-year), but had recovered to 10.7% growth by December 2009 when our survey was launched. The economy grew even more quickly in the first quarter of 2010, hitting 11.9%. The government’s role in successfully steering the Chinese economy through the hazards of the global financial crisis has been praised by many analysts, and has no doubt helped to maintain confidence within the country.

Our survey encompassed some (but by no means all) of the diversity within China. In one group are relatively well-off urbanites. In income terms, the sample falls in the top 21% of the population in cities.1 The other criteria for participation were home ownership, a white collar job—either managers at foreign-owned enterprises, government officials, managers at state-owned enterprises, private entrepreneurs or other professionals—and at least one-third of their income available for discretionary spending. With fairly secure finances, high education levels and few material wants, this group should be feeling very confident indeed.

In the other group, we have relatively low-income farming households2 (in contrast to their urban counterparts). The rural consumers we surveyed are farmers—rural residents who largely make their living selling agricultural products, not from working in a factory or on a construction site. To focus more fully on rural households, we looked at provinces where primary industry accounts for more than 10% of provincial GDP, thus comprising the more traditional economic backbone of the country. We selected an array of income levels as a proxy to the range of household incomes comprising the rural sector at the



national level: 16% of our sample earns less than the equivalent of US$1,500 a year, 70% earns between US$1,500 and US$3,000 annually, and 14% earns more than $US3,000.

While relatively poor compared to the urban sample, the rural consumers who participated in our survey are no less important. They have been the focus of efforts by the government to reduce the gap between urban and rural living standards, and are also the target of stimulus programmes specifically aimed at encouraging more private consumption by rural households. In income terms, they are the rural consumers with the most potential for growth.

Among our main findings:

• Optimism, even among the relatively poor farmers surveyed, is high. Across both of the survey samples, 91% of respondents said they are optimistic about the future. This confidence translates into expenditures: among the relatively well-off urban dwellers surveyed, only 17% said they were reluctant to spend money.

• Everyone wants a car—but many are also worried about pollution. At 61%, car ownership among the relatively well-off urban consumers surveyed is much higher than the overall penetration rate for cars of 28 per 1,000 people in China. Not surprisingly, many more of our respondents plan to buy a car. At the same time, however, concern over air pollution is pronounced—54% cited it as the thing they would most like to change about the area in which they live, and 53% cited it as one of their greatest concerns about the future. Traffic is another area for complaint. China’s policies to encourage sales of hybrid and electric cars could not have come at a better time, but encouraging even well-off consumers to buy them may require more than subsidies. Looking at America’s experience, sales of so-called green cars have been driven more by personal and social preferences than subsidies or other incentives.

• The passion for property will continue, and there is pent-up demand for quality housing. The relatively well-off urban survey respondents are playing a significant part in China’s booming property market—42% already own two or more properties, and 61% plan to buy a new home in the future. Many already live in newer homes—45% live in a house or flat that is less than five years old.

But new does not necessarily mean good quality. Asked what they would like to change about their living conditions, slightly more than two-thirds of respondents said they wanted to make their homes more comfortable by having such things as better temperature control. Given that 95% of respondents have air-conditioning and 81% use some sort of heat in winter, the comfort factor is likely to have more to do with efficiency ratings, either of the insulation standards of the buildings they live in, or the temperature-control systems and appliances used. Only 35% of the homes occupied by our respondents have insulation, and only 60% of respondents had heard of sustainable housing (described as “energy-efficient housing with insulation in the walls and double-glazed windows and special materials to reduce noise”).

• Healthcare is the number one concern of both the urban and rural consumers surveyed, but for different reasons. With the national healthcare reform programme still being rolled out, it is not surprising that health remains the biggest concern about the future among both urban and rural



consumers. Indeed, among rural respondents, 84% cited health as their greatest concern for the future. Rural consumers were also the most worried about the cost of healthcare: 61% cited cost as the biggest healthcare issue facing their household, and less than half that number (26%) mentioned the quality of doctors and hospitals as a concern. Of the rural residents we surveyed, 22% did not see a doctor when they fell ill. Of those who did not see a doctor, 66% said it was because it was too expensive to do so.

Of the relatively well-off urban survey respondents, 60% said they were concerned or very concerned about health in the future. But their concerns were the opposite of those in the countryside—overall, 49% cited the quality of doctors and hospitals as their biggest health-related challenge, while only one-third said they were concerned about the cost of healthcare. In a separate question, 46% of urban respondents said they worry about their health. Why do they worry about their health? Job stress was the factor most frequently cited (by 31%), while pollution was the second most common.

• To encourage rural consumption, more needs to be done to address basic concerns. The farming households surveyed showed a relatively weak inclination to consume—few were planning to upgrade the goods they already owned, or to make more expensive purchases in the near term. Even among the half of the survey sample that does not own a refrigerator, only 40% plan to buy one, and one-third of those see it as a purchase that is more than two years away. This suggests that more needs to be done to address their broader concerns about the future before programmes aimed at stimulating consumer demand can be more effective.

The biggest hope for these respondents is to see their children go to university—42% cited this as their greatest desire for the next ten years. The hopes being placed on the next generation can be seen in the fact that while only 21% of the rural respondents said they would like to move away from farming, and only 14% said their greatest wish for the next decade was to move to a city, a mere 5% expect their children to be farmers. Unlike the well-off urbanites in our survey, these farming households have even more at stake in seeing their children succeed—71% of respondents expect to live with their children when they grow old, and 72% plan to rely on them financially.

• Use of the internet, believed to be a great economic leveler, is very low among the farming households surveyed, suggesting the risk of a widening digital divide. Only 10% of our rural respondents had an internet connection, and only 16% said they ever used the internet. This is somewhat lower than the rate reported in other surveys. According to data from China Internet Network Information Center (CNNIC)3, there were 107m rural internet users at the end of 2009—accounting for 28% of China’s total—but the rate of growth in rural users had slowed and the overall rural penetration rate was still around 15%, compared to 45% penetration in urban areas.4 Only 16% of our rural respondents owned a personal computer. The largest growth area in internet penetration in China is through mobile connections, which accounted for 61% of total internet users. But while 92% of our survey respondents own a mobile phone, only 9% said they used their mobile phones to get online. Affordability is undoubtedly one reason for poor take-up, but other studies suggest that lack of familiarity of how to use the internet and its utility are at least equally to blame.

3 CNNIC’s data is based on a survey of 72,000 consumers aged six and over.

4 “25th Statistical Survey Re-port on Internet Development in China,” China Internet Network Information Center, Jan 2010.



• Even the well-off remain big savers, and hesitant borrowers. In theory, wealthier consumers should be more confident and more willing to spend. Given the income bands we have targeted in our survey, respondents in Tier 3 and 4 cities should be very well off indeed based on the assumption that their incomes will go much farther given the lower cost of living in their cities. But we found that their confidence does not seem to show a proportional gain: savings rates were actually higher in the lower tier cities. In Tier 1 cities, 67% of respondents said they saved 25% or more of their household income, and 33% said they saved 35% or more. In Tier 2, 3 and 4 cities, the figures were even higher: seventy percent of respondents in Tier 2 and Tier 3 and 69% in Tier 4 saved 25% or more their household income.

The same story held true in terms of borrowing to finance property purchases. In Tier 1 cities, 75% of respondents said that they had relied on their own earnings or on family and friends to finance the purchase of the home where they lived. But in Tier 4 cities, that figure rose to 83%. This thinking appears to be deeply ingrained. Though 61% of urban respondents planned to buy a new home, they do not plan to borrow much to finance it. Respondents in Tier 1 cities seemed to be more willing than others to take on debt—47% said they would borrow between 30% and 50% of the price of their new home. In the other tiers, an average of 37% of respondents said they would borrow between 30% and 50% (though this could also reflect access to borrowing in the lower-tier cities).



Introduction

It’s hard to miss the outward signs of China’s extraordinary growth. Its prodigious appetite for commodities, its rapid construction of skyscrapers, bullet trains and modern highways, and its

investments in Africa and Southeast Asia all testify to the country’s progress and future prospects. It is safe to say the changes taking place on the inside, in the aspirations and appetites of ordinary Chinese consumers, are just as dramatic. These shifts towards greater confidence may be less visible, but they are just as important.

As China grows, and incomes rise, so the desire for a better life deepens. Middle class families want nicer homes, farmers dream of sending their children to university and everyone suddenly has to have a car. And the world takes note.

Indeed, one of the legacies of the global financial crisis has been a new focus on the latent power of the Chinese consumer. As demand in the United States and Europe has waned, exports have weakened as an engine of China’s economic growth, and Beijing has turned its attention to stimulating domestic demand. In November 2008, China announced a Rmb4trn (US$590bn) stimulus plan that included spending on infrastructure, healthcare, education and social welfare. The government also subsequently introduced subsidies for rural consumers to buy appliances and cars. Raising consumption is an issue that concerns more than just officials in Beijing. Chinese consumers’ conservative habits contribute to global economic imbalances, as illustrated by China’s huge trade surplus, causing friction with other nations. Local and foreign companies, faced with weak markets elsewhere, are also pinning increasing hopes on China.

China is already the world’s largest market for many consumer goods, including mobile phones and TVs, as well as the biggest car market. Despite these statistics, most economists agree that Chinese consumers have not yet lived up to their promise. China’s consumption is expected to account for only 5.6% of global private consumption in 2010, compared to the US’s 29% and Western Europe’s 26% (Figure 1).5 Private consumption accounts for only around 35% of GDP, compared to 55-70% in most other major economies (Figure 2). When will this change? In Japan and the United States, consumption began to accelerate when per capita annual income reached US$2,000, according to Credit Suisse.6 China passed this milestone in 2006, and its per capita GDP was just under US$3,700 in 2009.7

Key points

n Unlocking the power of the Chinese consumer market will require not only that the basic needs of the population are met, such as healthcare and education, but also that people are confident in their financial security and the promise of a better life.

5 Economist Intelligence Unit CountryData/Haver Analytics.

6 “Embracing China’s Consumption Boom,” Credit Suisse, Mar 3rd 2008, page 7.

7 Economist Intelligence Unit.



Will consumer spending follow a similar trajectory in China? While rising incomes should ensure sustained rapid growth in consumption, the answer to when and whether Chinese consumption reaches developed-country levels is more complicated. Academics point to the weakness of China’s social safety net, which covers only a fraction of its citizens, as one explanation for relatively high savings rates and relatively low consumption—Chinese are saving for future healthcare, education and retirement expenses. Others say that government policies favour producers over consumers, and enterprises (particularly state-owned enterprises) over individuals. Low interest rates that make it easier for companies to borrow from banks, for example, also mean that households get low returns on their savings. The state’s dominance of service sectors such as healthcare and telecommunications also inhibits competition and keeps prices high.

These are all factors in the equation—and to varying degrees they are being addressed. But more fundamentally, the unlocking of consumption will require a population that is confident in its future—not just financially, but in many other ways. Consumers that are confident about the future are naturally more relaxed about indulgence in the present, rather than delaying gratification. This is not to suggest that consumption is merely hedonistic—the theme of the Shanghai World Expo, “Better City, Better Life”, is just one illustration of the focus on improving the quality of life for Chinese people. As the Expo theme also suggests, however, a “better life” is not just about fulfilling material aspirations. But what do Chinese consumers see as a better life?

To examine this question, we have surveyed 2,651 Chinese consumers about their lives.8 What do they want, both materially and otherwise? What do they worry about?

Our two survey samples represent very different points on the consumer spectrum. At one end, we have spoken to relatively well-off urbanites who already enjoy most basic material goods. Our urban sample is not the ultra-rich, but they might be described as the upper middle class. In income terms, the sample falls in the top 21% of the population in cities, although income growth projections show this group will account for 43% of urban households by 2013 and 95% by 2020.9 The speed of economic

Figure 1China’s share of global private consumption

Rest39.1%

Western Europe26.2%

US29.1%

China5.6%

* Forecast 2010

Source: Economist Intelligence Unit/Haver Analytics

World total = US$35.9 trn*

Figure 2Private consumption as a share of GDP (2010)(%)US

Brazil

Japan

70.0

61.9

59.0

EU*

India

Russia

China35.6

50.2

55.7

57.4

* 2008

Source: Economist Intelligence Unit forecasts

8 The surveys were conducted face-to-face between Decem-ber 2009 and March 2010.

9 According to Economist Intelligence Unit and National Bureau of Statistics data. We spoke to consumers with annual household incomes of between US$10,000 and US$100,000. Of this sample, 40% have incomes between approximately US$10,000 and US$20,000, and 26% earn between US$20,000 and US$30,000. Just under 2% earned slightly less than US$10,000, and 33% earned more than US$30,000. These incomes will go farther in some cities than others – US$10,000 goes farther in Changchun than in Shanghai. Our respondents set aside one-third of their income for discretionary spending.



growth underlines the difficulty of a strict demarcation of social strata in modern day China, and in recognition that “middle class” is as much a state of mind and an attitude as it is an income strata, we sought households with more specific demographics that could refine our categories. The other criteria for participation were home ownership, a white collar job—either managers at foreign-owned enterprises, government officials, managers at state-owned enterprises, private entrepreneurs or other professionals—and at least one-third of their income available for discretionary spending.

This sample could be said to indicate the future; having satisfied many of their basic material wants, this group is likely to be focused on more intangible desires. Their concerns, in theory, should go well beyond the basics of food and shelter.

At the other end of the spectrum, we have focused on farming households.10 Our respondents largely make their living selling agricultural products, not from working in a factory or on a construction site. Of the rural respondents, 70% did not have a family member working away from home, and 56% reported sales of farm products as their main source of income. To focus on rural households, we looked at provinces where primary industry accounts for more than 10% of provincial GDP. We aimed to use an income sample that accurately reflects the population of farming households. Through collective holdings, they have title to their own home and land, and their livelihoods are still based on agricultural production.

This sample could be said to represent those largely left behind by China’s industrialisation and urbanisation—and, to a degree, by consumer gratification. These respondents still have many material wants, and their concerns are likely to be more basic.

China’s size and internal diversity, and its rapid pace of both economic and social change, mean that there is not, and never will be, a quintessential Chinese consumer. As Chinese income levels rise, so will buying power and expectations for standards of living. Over the next decade, Chinese consumers’ desire for a better life is likely to shape the development of every global industry, from pharmaceuticals to automobiles, education to computers. It will also have an impact on issues such as environmental management.

The Chinese government’s ability to understand (and balance) the needs and concerns of its citizens will be crucial to meeting its goal of maintaining economic advancement as well as social stability. The business community will also need to analyse the Chinese consumer accurately to succeed in what will surely be the largest consumer market in the future.

10 Because estimates of rural incomes in China vary widely, in designing the sample we used average adjusted income per head figures from the Na-tional Bureau of Statistics, ad-justing them upwards slightly to account for somewhat higher estimates provided by private research groups. Some 16% of our sample earns less than the equiva-lent of US$1,500 a year, 70% earns between US$1,500 and US$3,000 annually, and 14% earns more than US$3,000.



Part 1: Life near the top

As millions of people move to China’s cities over the next decade, the desires of urban, middle class residents will play an ever larger role in setting the consumer agenda for China and, by extension, the

entire world.Over the next decade, 133m people will migrate to the cities in China, according to EIU forecasts.

In 2012, urban residents will account for a majority of the Chinese population for the first time in the country’s history.

Key points

n The urban consumers surveyed—members of China’s upper middle class with great optimism about the future—want for little in the way of material goods: respondents said they could use more time and money, and many also want a new home or a car.

n While they want cars, a majority also wants less traffic, less pollution and a greener environment where they live—a promising sign for the promotion of green technology within the domestic auto industry and sustainable housing.

n Urban respondents also worry about their health, citing it as a top concern about the future, and their children’s well-being—their future job prospects, affording property and the deteriorating environment they will have to endure.

Source: Economist Intelligence Unit projections

0

5

10

15

20

25

30

20202019201820172016201520142013201220112010200920082007200620050

10

20

30

40

50

60Urbanisation rate (%), right axisUrban inflows (persons, in millions), left axis

Figure 3The long march to modernity

Not all urban residents will be wealthy, but most will be moving up the economic ladder. Urbanisation and a shrinking workforce11 (as a result of China’s three decade-old family planning policies) will lift incomes, helping to expand the ranks of middle class city residents. In China, as in other countries, there is no standard definition of what constitutes middle class. Indeed, because of the differences in the cost of living across different cities, an income level that would be considered middle class in one city might be extremely wealthy in another.

There is, however, consensus on one point: the number of people in China who could be considered middle class, according to household income metrics, is expected to surge over the next decade. Between 2010 and 2013, the proportion of urban residents earning more than US$10,000 will more than double from 21% to 43%, according to National Bureau of Statistics and EIU forecasts.

11 China’s working-age popula-tion, those between 15 and 64 years old, is projected to diminish beginning in 2015, according to data derived from the United Nations Department of Economic and Social Affairs/Population Division, World Population Prospects 2008 (medium vari-ant projections).



Many of China’s new middle class will live in cities unheard of outside of China, as the rural population migrates to less developed Tier 2, 3 and 4 cities, according to Clint Laurent, founder and chief executive of consultancy Global Demographics. Currently, half of all urban households earning over Rmb60,000 (about US$8,850) a year are in 65 of the 762 cities in China, according Global Demographics. By 2020, only 34% of households earning that amount will be in those 65 cities, with much of the other 66% dispersed among emerging township-level and satellite towns. For policymakers, this means that public expectations for a higher standard of living (including access to good healthcare and schools, affordable housing and transportation) will be rising in hundreds of smaller cities and towns. For businesses, such fragmentation will be hard to service commercially: to reach consumers of the same level of wealth, companies will need to have a presence in twice as many cities as they do today.

In general our urban sample seem a pretty happy lot. A whopping 91% said they are optimistic about the future. Asked what is missing in their life, an enviable 18% said, simply, “nothing” (Figure 4). But other answers indicate that the wants of urban consumers are moving beyond the material. Intriguingly, the second most common element missing in our urbanites’ lives was “time” (cited by 17.5%), followed closely by money (17%). Asked about their greatest desire for the next ten years, after a new home (25%), the most common responses revolved around work—career development, promotions, salary

increases and so on (cited by 17%, Figure 5). The third most common answer was around personal well-being—happiness, good health, security. Children’s education, including the desire to have them study abroad, was the fourth most common answer. Asked if they are reluctant to spend money, only 17% said yes, and indeed 98% said they are spending more than two years ago. But the nature of their concerns about the future, and their reported savings habits suggest some residual insecurities.

Figure 4What is missing in your life?Urban survey response (Top five answers, % respondents)Nothing

Time

Money

18.1

17.5

17.0

Car/house

Child

35.6

50.2

3.8

15.0

Source: Economist Intelligence Unit

Figure 5What is your greatest desire for the next ten years?Urban survey response (% respondents)

Buy a new home 25.0

Move to the countryside/suburbs 4.0

Other 71.0

Top five “Other” answers:

Work focus—career development, promotion, increase salary 17.1

Family/personal—happy, healthy, safe 14.3

Child—education (including desire for child to study abroad) 7.9

Travel 7.9

Materialistic—new car, house 7.9




The wants: New homes and cars, but a greener environment

HomesMost of our urban sample looked, on paper at least, like middle class consumers anywhere in the world. More than 80% had between three and five people in their household, and most were between the ages of 20 and 65. As is to be expected of our relatively well-off urban survey respondents, many already enjoy most of the modern conveniences of their counterparts in more developed countries: televisions and mobile phone ownership were universal in our sample (Figure 6). Ownership of refrigerators, washing machines, personal computers, gas cookers, hot water heaters and air-conditioners was nearly universal. The two material goods still being sought after are a car or house. These were the only material items to come up among responses for what is “missing” from urban middle-class lives.

Asked what is their greatest desire over the next decade, one-quarter of the urban survey respondents chose a new home, and just over one-fifth said a house or apartment would be their next major purchase (though 61% said they envisaged buying a new home at some point in the future).

Given that all respondents are already homeowners, this response suggests two things. The first is pent-up demand for better housing. Many already live in relatively new dwellings—45% live in a flat/

Figure 6Which of the following consumer goods do you own?Urban survey response (% respondents)Television

Mobile phone

Refrigerator

100

100

99

Washing machine99

Personal computer99

Gas cooker98

Hot water heater95

Air conditioner95

DVD player74

62

61

Audio system

Car

20Motorcycle

5Dryer

1Electric cooker

1Satellite dish


Figure 7How old is the house/apartment in which you live?Urban survey response (% respondents)< 1 year

1-5 years

6-10 years

2

43

39

11-20 years

> 20 years2

14


Figure 8How big is the house/apartment in which you live?Urban survey response (% respondents)< 100 sq metres

100-160 sq metres

160-200 sq metres

37

60

3

> 200 sq metres0.3




house that is less than five years old, while 84% live in houses that are less than ten years old (Figure 7). And homes are not small by urban standards—63% live in homes of 100 square metres or more (Figure 8). This represents a dramatic improvement in living standards, at least for this group of citizens: in 1990, the per capita floor space in China’s urban housing averaged a mere 13.7 square metres, but this had grown to a per capita average of 26.1 square metres by 2005.12

Surprisingly, 58% of our urban respondents have been living in their current home for less than five years—but new does not necessarily mean good. Asked what they would like to change about their living conditions, slightly more than two-thirds of respondents said they wanted to make their homes more comfortable by having such things as better temperature control (Figure 9). Given that 95% of respondents have air-conditioning and 81% use some sort of heating in winter, the comfort factor is likely related to deficiencies in building and appliance quality (and indeed, the fact that 65% of the homes occupied by our respondents do not have insulation). Beyond more comfort, 61% of the urbanites sampled said they wanted a larger apartment, while 56% wanted better interior design.

The second thing suggested by our respondents’ keenness to buy property is the already well-documented use of real estate as an investment vehicle in China. Indeed, across the four tiers of cities covered by our survey, 42% of our respondents owned more than one property (a finding which we cover in more depth later in the report). With low returns on bank deposits, a volatile stock market and limited legal ways to invest abroad, many Chinese consumers have turned to real estate as an investment, spurred on by rising house prices and local governments that have come to depend on revenues from land transfers to developers. The National Bureau of Statistics estimates that the volume of residential property sales rose 44% in 2009 over the year before. Overall real estate prices (including commercial units) jumped 24%, the biggest increase in 15 years.

The passion for property raises a number of challenges—and opportunities—on the policy front. In terms of challenges, the rising prices that have resulted from the recent boom are putting the dream of home ownership out of reach of many Chinese consumers, especially in the biggest cities. The rapid price rises are also driving migrants back to their hometowns, or to smaller cities where the cost of living—and property—are lower. In big cities in eastern China, housing prices have risen to more than ten times average incomes today, compared to between four and six times a few years ago (the ratio is even higher in some areas of these cities, and varies significantly between cities).13 By comparison, other indices put the figures for New York City and London at about 7.14

Beijing has responded by cracking down on speculation in property. Regulations introduced this spring

12 China Statistical Yearbook 2007.

Figure 9What would you like to change about your living conditions? Choose all that apply. Urban survey response (% respondents)More comfort (eg, temperature control)

More space

Better interior decoration

67

61

56

More energy efficient34

More privacy (from neighbours)16

Other, please specify2


13 Peter Bottelier, “Beijing’s new challenge: China’s post-crisis housing bubble,” Carnegie Endowment for International Peace Policy Outlook, Jun 30th 2010.

14 “6th Annual Demographia International Housing Affordability Survey: 2010,” www.demographia.com. The survey measures metro-politan markets across six developed countries. The latest survey is from Q3 2009. Affordability is defined as the median house price in each market divided by the median household income.



prohibited the purchase of second and third properties, and introduced residency requirements for home buyers, forcing the property market to a standstill in some cities. The government has also pledged to increase spending on affordable housing, pouring Rmb63.2bn (US$9.3bn) into the sector this year. It has promised to build 3m low-income houses and renovate 2.8m dilapidated properties before the end of the year. But in the absence of alternative investment vehicles, the tendency of the more well-off consumers—whose ranks are growing—to invest in the property market will be difficult to contain.

One policy opportunity presented by the continued churn in the property market, combined with the pent-up demand for better housing, lies in the area of improved energy efficiency, a stated goal of the Chinese government. China has set a target of reducing its carbon intensity, or greenhouse gas emissions per unit of GDP, by 40-45% below 2005 levels by 2020. It has also pledged to reduce its energy intensity—the energy used per unit of GDP—to 20% below 2005 levels by the end of this year.

There are many different issues to be addressed in trying to improve energy efficiency. One place to start is with consumer education. For now at least, Chinese consumers tend to conserve energy at home more than their Western counterparts: their homes, on average, are smaller, with fewer appliances, and many homeowners use wall-mounted air-conditioners and switch them off when leaving a room. But as they grow richer, the demand for larger, better-equipped homes will increase.

Our survey findings indicate that there is still scope to educate. Even among our well-off, well-educated urban sample, awareness of sustainable housing (described as “energy-efficient housing with insulation in the walls and double-glazed windows and special materials to reduce noise”) has room to improve (as it does in other countries). Energy efficiency ranked fourth in terms of what these urban consumers would like to improve about their homes. But among those who were aware of sustainable housing, 80% said they would consider sustainability issues when buying a new home or making improvements to an existing one (Figure 10).

This trend is significant, as according to one estimate15 residential buildings in China account for 16% of China’s energy consumption, or more than the iron and steel industry (and this does not include the energy consumed to make building materials and construct housing16).

Given rapid urbanisation and rising incomes, the demand for new and more comfortable housing will continue to increase, with buildings (and the raw materials that comprise them) remaining a major source of energy consumption. The demand factor, articulated by informed consumers, will be crucial in changing industry practices: Peggy Liu, chairperson of the Joint US-China Collaboration on Clean Energy (JUCCCE), notes that individuals have less of a say in determining the energy efficiency in residential

Figure 10Have you heard of sustainable housing (energy-efficient housing with insulation in the walls and special double glazedwindows and special materials to reduce noise)?Urban survey response (% respondents)

Yes

No


60

40

If yes, is sustainability something you would consider when making improvements to your home or buying a new home?(% respondents)

Yes

No

80

3Not sure

17

15 Lawrence Berkeley National Laboratory; Boston Consult-ing Group/National Resources Defense Council (NDRC) analysis, as quoted in “From Gray to Green, How Energy-Efficient Buildings Can Help Make China’s Rapid Urbaniza-tion Sustainable,” Oct 2009. In total, commercial buildings and residential buildings accounted for 25% of China’s energy use in 2007. If the energy used to produce build-ing materials and that used in construction is included, buildings account for 30-40% of China’s total energy usage.

16 Testimony by Jennifer L. Turner, Director, China En-vironment Forum, Woodrow Wilson Center, before the US-China Economic and Security Review Commission, Apr 8th 2010. http://www.uscc.gov/hearings/2010hearings/hr10_04_08.php.



buildings in Chinese cities because property developers and management companies make decisions about inputs such as insulation and air-conditioners for the entire building.

However, the government sets the rules by which companies must operate. Beijing and several local governments are already taking steps to address the issue of energy efficiency in general, and for buildings in particular, by setting standards, conducting audits and supporting the construction of green buildings as pilot projects. In 2006, the then Ministry of Construction (later renamed the Ministry of Housing and Urban-Rural Development) introduced rules to encourage the use of energy-efficient technologies, including insulation, heating and cooling systems, and lighting. Beijing is strengthening labeling requirements for home appliances such as refrigerators. The Ministry of Housing and Urban-Rural Development has been setting up an association for green buildings.

With many studies and directives underway, the challenge going forward will not be the standards and laws, but the personnel to enforce them. China still needs more people trained in auditing compliance with these standards.

JUCCCE’s Ms Liu argues that discussion of sustainability with consumers in China should focus on the consequences of the environment for health and wealth, as well as the importance of awareness and policy interventions at the current stage of the country’s development.

“China has a unique opportunity to set new habits for an entirely new culture,” says Ms Liu. “We’re setting new habits when it comes to driving, residential living space, what we eat, what we wear. All of this is being defined now. I think education of youth is really important.”

Of course, China is not the only country struggling with this issue. In the US, for example, the residential building sector is responsible for about 20% of energy consumption.17 A recent report on the US market for energy-efficient homes notes that while public awareness of energy efficiency has increased, there is still opportunity to educate not only homeowners but construction professionals as well.18 Incentives are important: the 2009 American Recovery and Reinvestment Act extended incentives to consumers who installed renewable energy sources, such as solar electric power or geothermal heat pumps, in their homes. The act also provided subsidies for purchases of certain plug-in electric vehicles. Legislation, financial incentives and tax credits have acted as major catalysts for the market, but the report expresses concern that the momentum may be lost if funding is taken away.

CarsSomewhat surprisingly, given their relative wealth, only 61% of our urban survey respondents own a car. Only 11% of current car owners had plans to upgrade. But in a sign of the national popularity of the car culture, one-third of all urban respondents listed a car as their next major purchase. As PT Black, a Shanghai-based partner and consumer culture researcher at Jigsaw International, a market research firm, puts it: “the massive automobilisation of the country is just starting.”

Despite government incentives designed to spur car purchases, a car does not seem to be within immediate reach of a good number of the urbanites surveyed. Of the 39% of respondents who didn’t already own a car, 80% planned to buy one. But only one-quarter of those said they would buy one within the next year. One-third said the purchase was more than two years away.

This could be explained by a number of factors beyond price. It could be that consumers place a

17 “The State of the Nation’s Housing 2009,” Harvard Joint Center for Housing Studies, 2009.

18 Energy Efficient Homes, Pike Research, 2010.



higher priority on buying homes, or on saving. Or it could reflect the relatively undeveloped market for car loans and consumers’ reluctance to borrow money. But it could also reflect the more expensive tastes of this well-off group: though the F3 from local car-maker BYD, which sells for US$8,830, has seen a surge in sales in recent months, among the car owners in our sample 87% owned a more expensive foreign brand. This suggests that rather than take advantage of the availability of cheaper models (or government incentives aimed at spurring car sales, particularly promoting more fuel-efficient small cars), this group of consumers would rather hold off for the model of their choice. All of the top five best-selling brands are still multinational marques (though made in China in joint ventures with local companies): VW, Toyota, Hyundai, Honda and Nissan.

China’s passenger car market is at once huge and undeveloped. In 2009, it overtook the US as the world’s largest car market, with just under 10.5m cars sold that year—growth of 55% over the previous year (Figure 11).19 China had not been expected to surpass the US market for car sales until 2020, but government incentives for car purchases in China and a decline in sales in the US as a result of the financial crisis accelerated its rise. The Economist Intelligence Unit is forecasting more modest growth of 16% for 2010, with sales hitting 12.2m units.

Still, China’s car penetration rate, at about 28 vehicles per 1,000 people—is well below other countries (Figure 12). In smaller cities, the rate is closer to 10 vehicles per 1,000 people. By comparison, the US has 434 cars per 1,000 people and in the UK the figure is 506.

There are many opinions on what is driving car purchases. Some analysts see a desire to “keep up with the Zhangs”.20 “What’s driving the demand for automobiles is the life stage that consumers are in, where they now have the ability to afford something that represents the achievement of a certain level of success in their career,” says Bill Russo, a Beijing-based senior advisor at Booz &

19 Economist Intelligence Unit Industry Briefing.

20 “Rush Hour for China’s Automakers,” Finance Asia, Apr 14th 2010.

Figure 12Passenger cars per 1,000 people* (2009)

Brazil

China

France

110

28

501

India12

Russia204

UK506

US434

* Estimates


* Registrations. ** Figures for 2007-2009 for China are estimates. *** Figures for 2010-2014 are forecasts.


0

5,000

10,000

15,000

20,000

2014***2013***2012***2011***2010***2009**2008**2007**20062005

Figure 11Passenger car sales*(in thousands)

US China



Company, a consultancy, who specialises in China’s car market.But Jian Shuo Wang, Shanghai-based founder of online classified company Kijiji and a proud Nissan

owner, said that the value of a car as a status symbol was declining as the number of car owners rose. “The show-off function only works when 5% of the population have a car,” he says. Today, his friends are buying cars because they need them for commuting.

In meeting the consumer desire for cars China faces both challenges and opportunities. As we see in the next section, environmental issues, particularly air pollution and traffic, are growing concerns among the urbanites surveyed. At the same time, the relatively low car ownership in China presents a huge opportunity to steer the industry—and consumers—towards greener cars.

The worries: Environment, health and children

The environment Asked what they would like to change about the area where they live, a majority of urban respondents (54%) said they wanted less pollution, better air quality, a greener environment and better hygiene (Figure 13). Traffic in particular was mentioned by more than one-quarter of respondents as an area they would like to improve.

Figure 13Thinking about the area in which you live, what would you like to change?Urban survey response (Top five answers, % respondents)

Less pollution/better air quality/better environment/more green 54

Traffic (more convenient/fewer jams) 26

Better public security/lower crime 10

Transport (distinct from traffic) better/more convenient/wider roads/more metros 8

More prosperity/higher income/faster growth 8


Taken together, it’s clear that some Chinese consumer appetites may make others harder to satisfy. Consumers want more cars, but they also want cleaner air, less traffic and more trees in their neighborhoods. Many also say they want fewer traffic jams. Even in the leafier suburbs, Chinese consumers won’t be able to have it all: more cars by definition means more pollution and traffic.

Chinese consumers tend to blame the government (and look to it for solutions) more than people in other countries for environmental pollution. In a 2008 survey by Landor Associates, a brand consultancy, 39% of respondents said that the central government was primarily responsible for environmental problems. By comparison, more Americans blamed private companies than any other group.

Beijing is trying to encourage cleaner development of the country’s car industry, based on a recognition that the country’s development will not be sustainable if it is built on the same energy consumption model as Western economies. When it introduced measures to boost the car industry as part of its overall plan to protect the economy from the global financial crisis, Beijing introduced incentives on cars with engine displacement smaller than 1.6 litres. It slashed the tax levied on those vehicles in



half. That tax rate was lifted to 7.5% for 2010, but it’s still below its previous high. In June 2010, Beijing announced more plans to stimulate and direct sales of cars. It is also offering a subsidy of Rmb3,000 (US$440) per car for purchases of models with engines 1.6 litres or smaller.

More substantially, China announced a pilot programme in Shanghai, Shenzhen, Hangzhou, Changchun and Hefei (cities where Chinese green car manufacturers have their headquarters) to offer incentives of Rmb50,000 (US$7,380) on every qualified plug-in hybrid sold and Rmb60,000 (US$8,850) for pure electric cars.21 Separately, Beijing has set a goal of selling 60,000 alternative energy vehicles in ten cities by 2012. Miao Wei, vice minister of industry and information technology, has indicated the plan is to have alternative energy vehicles account for 15% of total sales by 2020. Assuming that car sales reach 20m units annually by that date (a modest assumption22), that would mean sales of 3m alternative energy vehicles annually.

A key factor in the success of this plan will be price. Hybrids and battery-powered cars still account for only a tiny fraction of total car sales in China, largely because they are more expensive than petrol-powered cars, but also undoubtedly because infrastructure to support them is not yet widespread. (As part of its package to promote hybrids and electric cars, Beijing has promised investment in related infrastructure in the five cities being used as pilot programmes.)

A made-in-China hybrid Toyota Camry sedan, which went on sale this spring, costs between Rmb319,800 (US$47,170) and Rmb364,800 (US$53,810; by comparison, a traditional Camry only costs Rmb189,800). Chinese manufacturer BYD sold only 48 F3DM plug-in hybrids last year for Rmb148,000 (US$21,830) each. By comparison, it sold more than 290,000 petrol-powered F3s, which carry a sticker price of Rmb59,800 (US$8,820). Toyota did slightly better, selling 271 units of the Prius, which carried a Rmb259,800 (US$38,320) price tag.23 Toyota sold almost 140,000 Priuses in the US in 2009. Even with the subsidies, the lowest-cost hybrid, the F3DM, will cost about US$6,000 more than the conventional F3.

Mr Russo says he expects that most of the cars sold under the new incentive plan will be sold not to individuals, but to fleets run by taxi companies and other organisations. But the sales will allow the manufacturers the chance to develop their cars further.

As well as reducing the impact of increasing car ownership on the environment, China’s policymakers also hope to spur development of the domestic auto industry by encouraging a focus on new technologies. More than half of the fuel-efficient cars approved for the Rmb3,000 subsidy were those made by joint ventures involving foreign automakers. But the fact that the pilot scheme for hybrid and electric models is limited to cities with local carmakers suggests that China’s green car subsidies are aimed at boosting sales of domestic brands, and by extension the “domestic” green car industry.24 The cities concerned will undoubtedly support the scheme. The southern city of Shenzhen, home to BYD, has said it expects private purchases of “new energy” cars will increase to 25,000 units by the end of 2012.25

With government subsidies and Chinese consumers’ demonstrated interest in cars as a status symbol, the key to unlocking greater sales of green cars in China may well be making them cool. Our sample expressed a strong preference for models made by foreign-invested joint ventures: of those who owned cars, 21% had a VW model, 11.3% drove Hondas, 11% drove a GM car and 10% drove Toyotas. By comparison, Chery, a popular local maker, accounted for only 2.5% of the cars owned by our urban

21 “Green car subsidy program not to affect China’s fuel demand,” Xinhua, Jun 7th 2010.

22 The Economist Intelligence Unit’s forecast for passenger car sales in 2014 is 17.3m.

23 “China drivers shun hybrids, electric cars on lack of subsi-dies,” Auto China, Apr 22nd 2010.

24 Yang Jian, “GM: The unintended winner of Beijing’s push for green vehicles,” Automotive News, Jul 6th 2010.

25 “Subsidy on private pur-chases of new energy vehicles underway in Shenzhen,” Xinhua, Jul 12th 2010.



sample. It is safe to assume that these well-heeled consumers will continue to prefer foreign marques unless they have good reason to go domestic.

Though China’s car market undoubtedly has different dynamics than America’s, it still may be useful to look at the motivations of green car buyers in that country. In a survey of Prius owners by the New York

Times, the number one reason buyers cited for their purchase was that the car “makes a statement about me.”26 Lower emissions ranked fifth, behind higher fuel economy and distinctive styling. A 2008 study at Harvard University’s John F. Kennedy School of Government found that just 6% of existing hybrid car purchases were attributable to tax incentive schemes, while 33% were driven by personal and social preferences, and 27% to rising gas prices.27 Company incentives for use of alternative energy and highly fuel-efficient cars, like those offered to their employees by Google, Bank of America, Timberland and Clif Bar in the US, could also help. In China, local governments in cities where green vehicle manufacturers are headquartered may add their own subsidies, as Shenzhen (home to BYD) is already doing.28

HealthAir pollution is directly related to another urban concern: health. Among our survey respondents, 46% said they worry about their health, and 60% listed it as one of their top concerns about the future (Figure 14).

Why do they worry about their health? Job stress was the factor most frequently cited (by 31%), while pollution was the second most common.

Perhaps not surprisingly given their rising economic status, quality was the healthcare issue of most concern to the relatively well-off consumers we surveyed. Overall, 49% cited the quality of doctors and hospitals as their biggest health-related challenge, while only one-third

Figure 14What is your greatest concern about the future? Please rate the following concerns from 1 to 5, where 1=very concerned and 5=not at all concerned.Urban survey response (% respondents)

HealthVery concerned 1 2 3 4

Job

Child

Money

253129 11 4

217 172233

25 9102630

40268 818

Natural disaster

Pollution

Crime

271710 1927

242627 816

22126 3525

Not at all concerned 5


Figure 15What are the major health challenges facing your household?Choose all that apply.Urban survey response (% respondents)Quality of doctors/hospitals

Cost of healthcare

Access to doctors/hospitals

49

34

28



26 Micheline Maynard, “Say ‘hybrid’ and many people will hear ‘Prius’,” New York Times, Jul 4th 2007.

27 Kelly Sims Gallagher, Erich Muehlegger, “Giving Green to Get Green: Incentives and Consumer Adoption of Hybrid Vehicle Technology,” Working Paper RWP08-009, John F. Kennedy School of Govern-ment, Harvard University, Feb 2008.

28 Chen Hong and Li Fangfang, “More Sops for Green Cars,” China Daily, Jul 7th 2010.



Figure 16What are the major healthcare challenges facing your household?(% respondents by city tier)

Cost of healthcare

Other

Access to doctors/hospitals

34

3825

2222

585252

3339

30

9

69

5

Quality of doctors/hospitals40


Tier 3 Tier 4Tier 1 Tier 2

said they were concerned about the cost of healthcare (Figure 15). Quality was a bigger issue beyond Tier 1 cities (it was cited by 40% in Tier 1 cities, but by 58% in Tier 2 cities, and 52% in Tiers 3 and 4). Perhaps counter-intuitively, access was seen as a bigger issue in Tier 1 cities, cited by 38% of respondents. In the other tiers, the second most common healthcare challenge was cost (Figure 16).

A survey conducted in 200829 sheds more light on expectations in terms of quality. Respondents to the survey—middle class residents in Beijing, Shanghai and Chengdu—said they want greater privacy and dignity in the care-giving process. They also want more say regarding their care. They would like more personalised attention from a regular doctor, and they rely strongly on family and friends to advise them on whom to trust. Not surprisingly, they place importance on hygiene, efficiency and courteous staff. These concerns are much the same as they are in other countries. But one interesting result is the emphasis on convenience—the respondents to the 2008 survey felt strongly that their doctor or hospital should be located in a residential area. Our survey results suggested convenience was also a concern. Of the 14% of urban survey respondents who said that they do not visit a doctor when a member of the household is ill, the most common reason cited for this was convenience—52% said it was inconvenient,

29 “Emerging Trends in Chinese Healthcare: The Impact of a Rising Middle Class,” Chang J, Wood D, Xiaofeng J, Gifford B, The ChinaCare Group, 2008.

Figure 17When a member of your household is ill, what do you normally do? Choose one.Urban survey response (% respondents)Visit local doctor/hospital

Visit local medicine shop

Treat at home by doctor’s visit

87

13

0



Figure 18If you do not visit a local doctor, why? Choose all that apply.Urban survey response (% respondents)

Inconvenient to visit a doctor/hospital

Too expensive

Don’t trust

52

34

22


If you do not visit a local doctor, why? Choose all that apply.(% respondents by city tier)

Inconvenient to visit a doctor/hospital

Too expensive

Don’t trust

Not available

Other, please specify


55

40

16

17

2000

72

22

21

5

44

4037

1932

2825

37




though this could also be explained by long waiting times for treatment as well as the location of clinics (Figures 17 and 18). The issue was highlighted most strongly in Tier 2 cities, where 72% of respondents said inconvenience was the reason for not visiting a doctor or hospital. Those pointing to a lack of trust in the doctors or hospitals available ranged from a high of 32% in Tier 4 cities to 16% in Tier 1.

Consumers have other good reasons to be worried about the quality of healthcare. Hospitals that were previously fully state-funded have been increasingly relying on diagnostic tests and drug prescriptions to improve their bottom lines, which has affected the quality and raised the cost of care in some places. China suffers from a shortage of doctors, particularly those with specialised qualifications. Despite rising healthcare expenditures, China’s healthcare spending is still low by international standards—it spent an estimated 4.7% of GDP in 2009, while OECD countries spend around 8% of GDP.30

Their relative wealth can explain in part why our urban survey respondents are less concerned about cost, but this lack of concern may not be realistic. China’s ambitious healthcare reform programme, aimed at turning its healthcare system into one that provides universal basic care that all can afford, is laudable. But it is unlikely to meet the rising demands of well-off urbanites, and a two-tier system seems inevitable.

If a challenge for the government, the demand among upper middle class Chinese consumers for high quality healthcare is an opportunity for the private sector. A number of providers have already entered the market, and new models for cooperation between public and private partners are being developed. Mainland Chinese who can afford it may well join the growing ranks of medical tourists—people who travel overseas to receive treatment at prices or a standard of care that would be inaccessible to them at home. Already, Taiwanese companies are looking to exploit the mainland’s medical tourist market, and Hong Kong does a booming business delivering babies for mainland mothers.

ChildrenUrban consumers are not only worried about themselves. They are also worried about their children’s future. Some 55% of respondents named their children as one of their greatest concerns for the future, behind health (cited by 60%) and only slightly ahead of pollution (53%) but far ahead of their job (28%), money (34%), natural disasters (27%) or crime (18%).

On the surface, given the incomes of our urban sample and the massive expansion of the post-secondary education sector in recent years, this seems curious. But there is justification for concern. With the huge increase in university enrolment in China over the past decade, the number of university graduates (estimated at 6.3m in 2010, up from 1.5m in 200231) now exceeds that of entry-level jobs. Although government data indicate that 87% of China’s 6.1m university graduates found work in 2009, others doubt the reliability of these figures. “Analysts say that number is vastly inflated because of both dishonest reporting by colleges and the fact that … many graduates were forced to accept low paying jobs they did not want,” a state-owned newspaper reported in March this year.32 Indeed, there are now so many university graduates looking for work in big cities like Shanghai and Beijing that the recent grads are known collectively as the “ant tribe”. China’s highly educated ants live in cramped shared apartments and work temporary jobs for low wages as they look for more stable positions.

Jing Jun, professor of sociology at Tsinghua University, argues that these swelling ranks of underemployed and unemployed youth are a direct reflection of the quality of their university educations.

30 Economist Intelligence Unit.

31 Mucun Zhou and Jing Lin, “China: Graduate unemploy-ment on the rise,” University World News, Apr 12th 2009.

32 Daniel Chinoy and Wang Xiaotian, “Workers Falling Through Skills Gap,” The China Daily, Mar 5th 2010.



The conversion of vocational schools to colleges and universities as part of the Ministry of Education’s attempt to expand access to higher education has produced a glut of underqualified graduates from such institutes, he argues, reinforcing employers’ prejudices. “Employers continue to hire graduates of traditional colleges and universities,” he says.

The government itself has indicated its concern through various policies to ameliorate the situation, most notably through funding job-creation schemes. The government has also tried to increase postgraduate enrolments, and to encourage graduates to take jobs as government officials in rural areas. In May this year the Ministry of Education announced a policy to encourage new graduates to start their own businesses.33

The growing ranks of unemployed university graduates have provoked a debate about living conditions amongst the “ant tribe” and, more fundamentally, about whether China’s education system is adequately preparing its youth for real-world jobs. More parents are sending their children abroad for education, a trend which has had support from the government and seems highly likely to continue (Figure 19). In 2009, 220,000 Chinese studied abroad, an increase of 50,000 from the year before. This movement initially resulted in semi-permanent emigration for many students, but an ever-increasing number are returning home due to weaker job prospects overseas. The Ministry of Human Resources and Social Security reported that more than 100,000 Chinese students returned in 2009, up 56% from the previous year.34

Unlike our rural sample (more on that in the next chapter), the emphasis amongst our urban

respondents on children is not necessarily self-interested. Only 45% of the urbanites surveyed expect to live with their children when they get old (Figure 20), and only 21% expect their children to support them financially in their old age. This suggests that the concern is based more on the overall quality of life and happiness that will confront the next generation—not only their children’s prospects for a job, but also the ability to afford a house and the pollution levels the next generation will have to endure.

33 “China issues new policies to help college graduates start businesses,” www.gov.cn, May 15th 2010.

34 “100,000 overseas Chinese students returned last year,” People’s Daily Online, Mar 19th 2010.

Source: China Statistical Abstract, 2010

0

50,000

100,000

150,000

200,000

250,000

20092008200720062005200420032002200120001999

Figure 19Chinese students studying abroad

Figure 20How do you envisage living as you grow old?Urban survey response (% respondents)


Alone24%

With children45%

With otheradults/family

31%



Parents in every country worry about their children. But China’s parents, who know how dramatically their country has changed over the past generation, are particularly keen to make sure their children get the best possible opportunities. Ultimately, the expectations of our respondents’ children, in turn, will shape Chinese policy over the next decade and beyond.



Part 2: Life near the bottom

Although China will become more urban than rural over the next decade, rural consumers will still represent almost half of the population: by 2020, according to EIU estimates, the rural population

will shrink to 596m and the urban population will expand to 807m.35 To put this in perspective, the US crossed the 50% urban line in its 1920 census. China’s rural residents, who have lower incomes and less access to government-subsidised healthcare, have been a key focus of the policies of China’s leaders over the past six years. Such policy reforms have slashed agricultural taxes, overhauled the rural health care system, made basic education free and funneled subsidies to rural areas. The bulk of social expenditures in the 2009 stimulus package, introduced in response to the global financial crisis, was directed towards the countryside.

Rural consumers face challenges that urban consumers do not. Incomes are much lower and growing more slowly in the countryside than in cities.36 One reason is that there are fewer employment opportunities. The legal status of rural land generally means that land cannot be sold and is therefore not a major driver of wealth creation. Logistics and distribution are not as well developed as in cities, so retail prices for some products can be higher in rural areas, discouraging potential shoppers. Lastly, because rural local governments often have smaller tax bases than cities, and financing for medical care is decentralised in China, residents may pay more out of pocket for these services.

Figure 21Do you save?Rural survey response (% respondents)


If yes, what is the average annual savings as a proportion ofhousehold income?(% respondents)

No58%

Yes42%

1-14%

15-24%

25-34%

17

32

>34%24

28

35 Economist Intelligence Unit, China Regional Forecast-ing Service. By comparison, in 2010, the EIU estimates the rural population is 675m and the urban is 655m.

36 “China reports income increase for urban, rural residents in 1H,” Xinhua, Jul 15th 2010.

Key points

n Most of the rural Chinese surveyed make their living by farming, however 95% of these respondents do not expect their children to be farmers, and almost half of all rural respondents said their greatest desire for the next decade was to send a child to university.

n Rural consumers’ second top desire was a new home, but only a small minority planned to buy one, and most of those would not do so for at least two years.

n Health was a concern for 84% of rural respondents, but unlike the urban survey respondents, rural consumers are more worried about the cost of healthcare than the quality.

n Going online remains expensive for this group, and poor internet penetration in the countryside risks widening the information gap between urban rich and rural poor.



The respondents in our survey have substantially lower incomes than the urban middle class. The proportion of their earnings that they save is also smaller. Nearly 70% of rural respondents earned between Rmb10,000 and Rmb20,000 a year (US$1,475 and US$2,950).

Only 42% of the rural consumers surveyed are able to save (Figure 21). The largest group of rural respondents (32%) saved 15-24% of their annual income. By contrast, less than one-third of rural residents saved 25-34% of their earnings.

Even these relatively low-income rural consumers are starting to shop, but only just. Almost all of the rural survey respondents had TV sets and 92% had mobile phones, while nearly 70% had a washing machine, and 57% had a motorcycle (Figure 22). Beyond these items, ownership of white goods and consumer electronics began to taper off, but was still significant. Half of the rural respondents had a DVD player and 49% a refrigerator, 43% had a fixed line phone and 40% a gas cooker. Across most of these categories, rural consumers were more likely to own a local brand of appliance than a foreign one. Only 16% of rural consumers had a PC at home, and a staggering 90% lacked an internet connection at home.3737 This is likely to change

quickly, given government commitments to improve China’s IT infrastructure in rural regions.

Figure 22Which of the following consumer goods do you own?Rural survey response (% respondents)Television

Mobile phone

Washing machine

99

92

69

Motorcycle57

DVD player50

Refrigerator49

Fixed line phone43

Gas cooker40

Satellite dish22

20

17

Hot water heater

Air conditioner

16Personal computer

11Radio

6Microwave oven

4

2Car

0Dryer

Electric cooker


Figure 23Among the goods you already own, which ones are you considering upgrading (ie, buying a bigger/better version)?Rural survey response (% respondents)Television

Mobile phone

Washing machine

Motorcycle

17

9

6

DVD player

6

Refrigerator

3

Gas cooker

2

Personal computer

1

Hot water heater

1

Air conditioner

1

1

1Satellite dish

Radio1

1Fixed line phone

0Car

0Electric cooker

0Dryer

0Microwave oven




Of their monthly household income, 35% went to food purchases (compared to 26% among our urban sample), while 9% each went to health and utilities. In the case of health, this was more than double the share spent by the well-off urban households surveyed, and in the case of utilities about one percentage point more.

Despite their low incomes and thrifty habits, this group is looking forward to a better life—91% said they are optimistic about the future. This is no doubt because they can see improvements in their surroundings. Asked what has been the biggest change in their lives in the last five years, 35% of respondents pointed to a better quality of life or living conditions. But they are placing heavy expectations on their children’s future to ensure that life continues to improve.

The wants: A university education for the children and a cozier home

EducationCompared to their urban cousins, rural consumers have modest tastes, no doubt in part because of their lower incomes. Only 18% were planning to buy another home. Few were planning to upgrade the goods they already owned, with the exception of their TV, which 17% planned to upgrade, and their mobile phone (9%, Figure 23). Even among the half of the survey sample that do not own a refrigerator, only 40% plan to buy one, and one-third of those see it as a purchase that is more than two years away (though the relative lack of interest in refrigerators may be due to the habit of daily purchases of fresh food at local markets; Figure 24).

Figure 24Among the goods you do not already own, which is your top priority?Rural survey response (Top five answers by number of responses)

When will you buy it?(% respondents)


Refrigerator

Air conditioner

Car

205

192

169

PC

Washing machine118

169

RefrigeratorWithin 1 year Within 1-2 years More than 2 years

Air conditioner

Car

PC

3926 36

25 4728

9 7812

2428 48

Washing machine2337 40



Although 57% of respondents in rural areas had a motorcycle, only 20% of those who don’t own one plan to buy one. Car ownership, reported by only 2% of respondents, is also a distant dream: only 17% of those who currently do not own a car plan to buy one, and for the vast majority of these respondents the purchase is more than two years away.

The farmers we spoke to intended to remain farmers and stay in the countryside: 67% said they would like to keep the current size of their farms or expand them (Figure 25). Only 21% said they would like to move away from farming, and only 14% said their greatest wish for the next decade was to move to a city (Figure 26). But a staggering 95% do not expect their children to be farmers.

Indeed, what came across most powerfully in the rural data is how badly farmers want a better life for their children. They were willing to postpone improvements in their own quality of life in order that their children might get off the farm.

As the surest route off the farm, higher education is a top priority for rural residents. Aside from equipping citizens with the education to cope in the urban job market, admission to university brings an urban hukou or residence permit, which is more valuable than the rural hukou.

The fact that a majority of respondents planned to continue farming themselves is no doubt in part a reflection of their lack of confidence to leave, based on their financial position, their age and their own education levels: only 56% of interviewees had a secondary education. But 42% said their greatest desire for the next decade was to send a child to university (Figure 26). Of the households with school-age children, 91% said the children were in school, and of those who were not, three-quarters of respondents said they wished their children were. The figures were somewhat lower, however, for those households which only had children of secondary school age, suggesting that dropping out of school is still a problem in many households—84% of teenagers from the households sampled were in school, and of those who were not, 76% of respondents said they wished the teens were.

As a corollary, many farming families seem concerned whether they will attain the dream of seeing their children succeed: 81% of respondents said they were concerned about their children’s future (59% said they were “very concerned”), with children’s success seen as their second biggest concern after health. Though fewer than half of the respondents reported saving money, 55% of those who do save

Figure 25What do you plan for the future of your farm?Rural survey response (% respondents)

I would like to move away from farming

I would like to reduce the size of our farm

I would like to keep the current size of our farm

21

10

I would like to increase the size of our farm20

I would like to grow different crops, please specify2

47


Figure 26What is your greatest desire for the next ten years? Choose one.Rural survey response (% respondents)

Send child to university

New house

Move to a city

42

22


14




reported they were saving for their children’s education, compared to 22% who were saving for a major consumer good (Figure 27).

China has had a nine-year compulsory education system since 1986, and since 2008 the first nine years have been free. Between 1990 and 2000, illiteracy rates for the population over 15 years old more than halved in rural areas, according to government figures. China’s high literacy rate, particularly compared to other developing countries like India, has been a cornerstone of China’s rapid economic growth.

But for many rural students, education stops after the first nine years. Many fail the high school admission exam, or their family cannot afford tuition fees.

For those who want their children to go to university, the hurdle is even higher. Admission to university hinges on passage of the standardised National College Entrance Exams, better known as the gaokao. In 2009, 10.2m people took the gaokao, competing for 6.3m spaces in universities. Though the odds should improve based on China’s demographic profile—China’s college age cohort (aged between 18 and 22 years) peaked in 2008 and has been declining since then—the number of spaces at tertiary institutions is not the only issue for rural students. How well students prepare for the exams, administered over three days in early June each year, depends in part on the quality of their high school education.

Resources are not distributed equally among schools, and institutions designated as provincial “key schools” fare the best. That means that teachers at junior high schools and high schools in rural areas often have lower qualifications than in the cities, the student-teacher ratio is higher in rural areas and government spending per student in rural areas is generally lower than in urban districts. One study, the 2010 UNESCO Education for All Global Monitoring Report, found that per student expenditure in junior high schools in Beijing and Shanghai was 18 times that of the poorest provinces.38

Even for the lucky few who pass the exam, admission to a top university is extremely difficult. Gaokao pass rates are set by quota, which is determined on a provincial level. This means that while the overall gaokao pass rate has risen to more than 62%, the number of places at key provincial universities available to students from large rural provinces is limited. While academic estimates vary and good public data is not readily available, it is widely believed that the ratio of university students from rural areas is below that of urban areas, and may even be falling.39

The State Council, China’s cabinet, this spring approved an education reform plan that would see China increase spending on education, with a particular emphasis on rural areas, over the next decade. It aims to increase spending from 3.48% of GDP to 4% by 2012.

In order to satisfy rural residents’ desire for the upward mobility that education brings, Beijing will need to ensure that more financial support goes to schools and teachers in rural areas. It will also need to

Figure 27What are you saving for? Choose all that apply.Rural survey response (% respondents)

Children’s education

Retirement

Medical emergencies

55

43

Emergencies—in case of lack of enough money for farming input28

Purchase of major consumer goods22


41


38 “China’s quiet education revolution,” The China Daily, Apr 21st 2010.

39 Wang et al, “What is keeping the poor out of college? Enrol-ment rates, educational barri-ers and college matriculation in China,” Rural Education Action Project, Working Paper 210, Sep 2009.



level the playing field more between rural and urban provinces to allow more deserving students from the countryside spaces at the country’s top universities.

As our survey shows, rural parents’ hopes for their children’s futures run high. Unlike the well-off urbanites in our survey, these farming households have even more at stake in seeing their children succeed, as the next generation is expected to provide security for the current—71% of respondents expect to live with their children when they grow old, and 72% plan to rely on them financially.

A cozier homeBeyond a university education for their children, the next desire—and a distant one in comparison—was a new home, cited by 22% of rural respondents. This is unsurprising given the age of the housing stock. Rural residents live in much older homes than their counterparts in cities. Some 36% of rural respondents said their home was 11-20 years old, and another 17% said their home was more than 20 years old.

But new homes would seem to be beyond the reach of most rural respondents. While 22% dreamed of a new home in the next ten years, only 18% said they planned to buy one, and 85% of those reported that the purchase was more than two years away. This may well reflect regulatory issues, although certain cities such as Chengdu, Chongqing, Harbin and Ningbo are experimenting with land reform for farmers in their respective outlying districts.

The rural property market in China is very different to the urban. Townships and village collectives legally own rural land in most of the Chinese countryside, and local authorities keep a tight control over land transactions and the transfer of rights that allow farmers to build on their plots. Only local famers are eligible for land, and when given the right to build a home, the size of the plot is determined by the number of people in the household. But farmers are free to improve their existing homes, and in terms of what they would most like to improve about their housing, rural respondents expressed a desire for better interior fittings more than any other improvement to their home, with 59% saying that was their top priority.

The next most common desire (47%) was more comfort, such as better temperature control. It is little wonder. Unlike the urban survey respondents, most rural respondents lack any semblance of modern

Figure 28How do you envisage living as you grow old?Rural survey response (% respondents)


With other adults/family7%

Alone22%

With children71%

Figure 29When you grow old how will you support yourself?Choose all that apply.Rural survey response (% respondents)Support from children

Savings

Pension (state or private)

72

35

16

Insurance10

Government welfare payments9





climate control: 83% do not own an air-conditioner, and 49% depend on burning coal to stay warm in the winter. Almost 40% did not have any heating at all, and 96% lacked insulation in their homes (only 25% had heard of sustainable housing, and only 17% said that energy efficiency was something they would like to improve).

Although rural residents may yearn for improvements to their living conditions, realisation of those upgrades are not immediate goals, either for reasons of priority or income. Among those who do not own an air-conditioner, only 23% planned to buy one, and for nearly half of these respondents the purchase was more than two years away. Utility costs may also be a factor, as these accounted for 9% of monthly expenditure among our survey respondents—more than the 6% of monthly expenditure paid for education, which is clearly the higher priority amongst households surveyed.

Part of China’s response to the financial crisis was a scheme offering a 13% subsidy for rural consumers to buy appliances. But it would seem that until our survey respondents’ higher priorities are addressed, any consumerism on their part will remain muted. Undeniably, they are spending more—94% say they are spending more than they did two years ago. While 41% attribute this to higher disposable incomes, an almost equal number chose other reasons, mainly the increased costs of their household based on rising prices or their children’s educational needs. Only 16% attribute it to more confidence in the future.

The worries: Health and money

HealthWhile their children’s future is of great concern, health is the most common worry among our rural respondents, with 84% citing it as a concern for the next decade (62% were very concerned, Figure 30). Unlike urban consumers, rural consumers were most worried about the cost of healthcare: 61% cited cost as the biggest healthcare issue facing their household, and less than half that number (26%) mentioned the quality of doctors and hospitals. Another 24% said they were concerned about access to care. Of the rural residents we surveyed, 22% did not see a doctor when they fell ill. Of those who did not see a doctor,

Figure 30What is your greatest concern about the future? Please rate the following concerns from 1 to 5, where 1=very concerned and5=not at all concerned.Rural survey response (% respondents)

HealthVery concerned 1 2 3 4

Land

Child

Money

92262 4 3

2515 211525

59 56822

173233 89

Natural disaster

Pollution

Crime

182733 1111

252423 1215

181614 3815

Not at all concerned 5




66% said it was because it was too expensive to do so. Four out of ten rural residents said they were saving for medical emergencies.

They have good reason to save. Despite efforts by Beijing to expand healthcare cover for farmers since 2003, residents still pay for much of their healthcare costs out of pocket. More than 80% of China’s rural residents had no health insurance as of 2006.40

Beijing has set a goal of providing all Chinese citizens access to basic healthcare by 2020. Improving rural healthcare was a priority in its US$124bn healthcare reform plan, announced in 2009, to upgrade its healthcare system. In rural areas, Beijing has been overhauling the rural healthcare system by updating the old Cooperative Medical Scheme so that rural residents and governments both contribute to a pool of money annually to cover healthcare costs. The reforms are having an impact: by 2008, there were more than 800m rural residents participating in cooperative medical care, according to the United Nations Economic and Social Council, or 92% of the rural population.41 But under the new scheme, benefits are limited to serious illness and in-patient services, and patients still have to pay up front for partial reimbursement later.42 Indeed, our survey shows that cost remains a major concern among poorer farmers.

MoneyFinancial insecurity is a theme that underpins all of the other concerns expressed by our survey respondents. Two-thirds cited money as one of the issues they were worried about over the next decade, after their health (84%) and children (81%). As mentioned above, their main worry about health was their inability to pay for medical care.

This financial insecurity manifests itself in rural residents’ savings plans and their modest consumer appetites. While millions of farmers have tried to improve their livelihoods by migrating to the cities to work in factories or on construction sites, government policy over the next decade will need to find ways to raise incomes of farmers like those we surveyed who have no intention of leaving their land. China’s policymakers have made the improvement of the lives of rural citizens a priority, but for the group we surveyed it would seem necessary to do more. Closing the gap is not only a matter of maintaining social harmony, but also a prerequisite for increasing China’s overall domestic consumption and rebalancing its economy.

The income gap between countryside and city has been increasing over the past decade. Average urban per capita income in 2009 was Rmb17,175 (US$2,530), more than three times the Rmb5,153 (US$760) average income in rural areas, according to the National Bureau of Statistics.43 This gap was the widest since economic reforms began in 1978, when city residents earned, on average, 2.5 times as much as people in the countryside.44

One way to improve the prospects of rural households may be to close the digital divide. Only 28% of internet users in China today are in rural areas, according to the state-controlled China Internet Network Information Center (CNNIC).45 At 107m at the end of 2009, the number of rural users had grown by 26% over a year earlier, but the rate of growth had slowed and the overall rural penetration rate was still around 15%, compared to 45% penetration in urban areas.46

This was somewhat higher than the rate among our rural survey respondents. Only 10% had an internet connection, and only 16% said they ever used the internet (Figure 31), the same percentage

40 Yuanli Liu and Keqin Rao, “Providing Health Insurance in Rural China: From Research to Policy,” Journal of Health, Politics, Policy and Law, Feb 2006, pages 71-92.

41 United Nations Economic and Social Council, “China’s health-development strategy 2009,” http://webapps01.un.org/nvp/frontend!policy.action?id=1203.

42 WHO-China Country Coop-eration Strategy, 2008-2013, World Health Organization, 2008. http://www.wpro.who.int/NR/rdonlyes/BB787F03-A760-4F01-908E-D17D8DB75178/0/CCS_EN.pdf.

43 Fu Jing, “Urban-rural income gap widest since reform,” China Daily, Mar 2nd 2010.

44 “China’s urban, rural income gap widens,” Xinhua, Jan 22nd 2010.

45 CNNIC’s data is based on a survey of 72,000 consumers aged six and over.

46 “25th Statistical Survey Re-port on Internet Development in China,” China Internet Network Information Center, Jan 2010.



which reported owning a personal computer. According to CNNIC, the largest growth area in internet penetration overall in China is through mobile connections, which accounted for 61% of total internet users. Two-thirds of rural residents polled in CNNIC’s survey used mobile phones to get online, compared to 58% of urban residents.47 As for our respondents, their take-up of mobile access is still low: while 92% own a mobile phone, only 9% said they used their mobile phones to get online.

The government, infrastructure providers and private equipment suppliers are starting to reach out to rural areas with content services. Lenovo and China Telecom last year began offering a year of free streaming for online movies and soap operas for rural customers. Lenovo has also partnered with the Ministry of Agriculture to help its customers access government databases for market price information and agricultural data. In May, Nokia announced plans to offer Ovi Life Tools, a service that sends information on agriculture, health and education to mobile subscribers in rural areas of China.

The price of a connection is undoubtedly an issue among our survey respondents. Access costs vary across regions, and are often bundled in packages that are difficult to understand. The lowest rate found for broadband access was Rmb68 (US$10) per month in Gansu, but most packages were in excess of Rmb100 (US$15) per month (which, for 70% of our survey respondents, represents between 12% and 24% of monthly income). Nokia’s service costs as little as Rmb5 a month to subscribe to one stream of

Figure 31Which media/information sources do you use?Rural survey response (% respondents)

TelevisionDaily At least once per week Less than once per week Never

Radio

Newspapers

Magazines

89 9 1

4 54 88

6 691212

1182 78

Internet

Neighbours

358 84

2362 77


Figure 32How has this changed in the past two years?Rural survey response (% respondents)


Watching TVI spend more time No change I spend less time

Listening to radio

Reading newspapers

Reading magazines

3547 17

3 1979

8 1676

784 18

Using the internet

Talking to neighbours

7710 14

5332 14

47 “Rural netizens grow faster in China,” NewsTrak Daily, Jun 8th 2010.



information—regular updates on health-related issues, for example, cost Rmb5 a month, while local agriculture information costs Rmb8 per month, plus Rmb1 for additional requests for information.48

The CNNIC report concluded that despite government efforts to bring appliances to the countryside (subsidies were offered for PC purchases), the price of going online was still relatively high. The report urged the government and companies to find ways to make internet access more affordable for rural consumers. But progress will require more than just discounts. According to CNNIC, among non-users in the countryside, 39% of them say they do not understand how to access or use the internet, while 20% do not have access devices. Only 3.5% say it is because there are no internet services in their region.

Failing to improve internet penetration in the countryside risks widening the gap between urban rich and rural poor in access to knowledge and information. One study found that increasing access to basic information technology such as mobile phones, PCs and fixed line phones (not including the internet) raised average incomes among low and lower-middle income populations in developing countries by between 3% and 6%.49 Accessibility to the full range of IT infrastructure would yield even better returns.

Our survey suggests that farming households would benefit from better access to information—for advice on agriculture, 66% of our survey respondents reported that they rely on neighbours, and 64% rely on relatives (Figure 33). Only 40% of our survey sample had heard of organic food (defined as food grown without the use of pesticides and chemical fertilisers). Better information could help them to improve farm incomes.

Jian Shuo Wang, founder of Chinese classified website Kijiji, says that he does not expect to see many people in rural areas using his service anytime soon. Many internet users in the countryside are still in their first year of internet use, when users typically mostly log on for email and messaging. “The first year is all about email and communication, in the second you get information, and in the third and fourth years you get to entertainment,” he says. “Their use of the internet does not depend on their identity as a farmer but their identity as an entry-level internet user.”

More use of the internet could benefit the rural population in other ways, however. It could help rural teachers get access to more teaching material and help their students keep pace with their better-resourced urban counterparts. It could also help provide affordable access to medical advice.

48 Nokia website.

49 Michelle Fong, “Digital divide: the case of developing countries,” Issues in Inform-ing Science and Information Technology, Volume 6, 2009.

Figure 33What is your key source of advice when it comes to agriculture? Please rate in order of importance, where 1=very importantand 5=not importantRural survey response (% respondents)

NeighboursVery important 1 2 3 4

Relatives

Local officials

Retailers

173135 8 9

32 1091732

16 21142722

272818 1512

Not important 5




China is not alone in dealing with a digital divide. Even the US, where internet penetration in rural areas is about 75%, compared to a national average of 89%, earmarked US$7.2bn under its economic stimulus plan to boost broadband availability in the countryside, targeting healthcare providers and schools, among others.



Part 3: Confidence in the future

Surveys of Chinese citizens consistently show that they feel good about the direction their lives are taking, and our sample was no exception: 91% of all respondents in both rural and urban areas said

they were optimistic about the future.But some of our survey findings belie such confidence. Underlying insecurity manifests itself in

savings rates which are still very high. In theory, the wealthier one is, the more confident and the more willing to spend. Given the income bands we have targeted in our survey, respondents in Tier 3 and 4 cities should be very well off indeed based on the assumption that their incomes will go much farther in light of the lower cost of living in these cities. But we found that their confidence does not seem to show a proportional gain: savings rates were actually higher in the lower tier cities. In Tier 1 cities, 67% of respondents said they saved 25% or more of their household income, and 33% said they saved more than 35%. In Tier 2, 3 and 4 cities, the figures were even higher: 70% of respondents in Tiers 2 and 3 and 69% in Tier 4 saved 25% or more of their household income (Figure 34). By comparison, the Swiss, not known as profligate spenders, had a savings rate last year of 14.8%.

What are these urban consumers in China saving for? Children’s education is the top priority across all cities. Beyond that they are largely saving for the future, and for life’s uncertainties. Few respondents were concerned about losing their jobs (the highest proportion, some 26%, were in Tier 1 cities, which were the worst affected by the financial crisis, with many job losses in export-related industries and financial services). But respondents were more concerned about retirement and medical emergencies than they were about buying consumer goods (with the notable exception of Tier 1 respondents, for whom consumer goods were of more concern than medical emergencies, suggesting a degree of confidence in medical

Figure 34On average, what proportion of annual household income doyou save?Urban survey response (% respondents by city tier)

< 25%

25-35%

> 35%


33

34

33

30

34

36

30

3738

3331

31


Key points

n Despite optimism about the future, the relatively well-off urban survey respondents continue to save a substantial amount, indicating lingering insecurities.

n These insecurities are evident in consumers’ expectations that they will fund their retirement and medical needs in whole or in part through personal savings, and in their unwillingness to borrow money to finance the purchase of a home.



insurance and accessibility to medical services that afforded them the luxury of greater consumption of material goods, Figure 35).

A tenuous net—even for the well-offThe lack of a social safety net for most respondents would seem to be an obvious explanation for these concerns. Even for the well-off consumers surveyed, it is still an inadequate publicly-funded net. A previous study showed that in 2007 just 65% of the urban workforce was contributing to the mandatory basic pension scheme or the separate civil service scheme.50 Among more affluent consumers, the rate is higher. A survey by a private insurance company51 conducted in the first quarter of 2009 showed that 79% of middle class respondents across six cities had some form of insurance under the mandatory Social Insurance scheme (jointly paid by the employer and employee). Nearly all (97%) had retirement savings under the scheme.

But clearly, pensions remain inadequate, despite China’s laudable effort to build a pension system that prepares all of its citizens for retirement (and prepares the state to cope with a rapidly ageing society). Among our urban survey sample, 84% said they plan to rely on a pension to support themselves in retirement. But 74% said they would also be relying on savings. Confidence in pensions was highest in Tier 1 cities, where 88% said they planned to rely on them, and lowest in Tier 4, where 80% said they would rely on a pension and an equal number counted on savings as well. Across the urban survey sample, only 21% of respondents were expecting financial support from children.

Medical insurance would seem to be similarly insufficient. In the survey, 95% of respondents had some form of medical insurance under the mandatory scheme. In addition, 69% had some form of non-mandatory cover, with 59% having bought the insurance themselves and the remainder having it provided by their employer. Still, when asked how they would pay for hospitalisation in the event of accident or illness, 78% said personal savings would be the most important source of finance, followed by insurance at 69% and monthly income at 52%. The study found that the reliance on personal savings, or monthly income was almost the same regardless of whether or not the respondent had insurance, or whether insurance was provided by an employer or self-purchased, suggesting that the employer-provided insurance cover is not very comprehensive.

Figure 35What are you saving for?Urban survey response (% respondents by city tier)

Children’s education

Retirement

Purchase of major consumer goods


63

58

53

65

62

50

66

6157

4847

Medical emergencies

Emergencies in case of job loss

Other

5052

5752

2624

2319

77

610

68


50 “China’s Long March to Re-tirement Reform,” Center for Strategic and International Studies, 2009.

51 Commissioned by Sun Life Financial. The survey covered 2,485 respondents in Shang-hai, Beijing, Guangzhou, Nan-jing, Tianjin and Chongqing. Annual incomes ranged from Rmb120,000 and up in the first-tier cities, to Rmb60,000 and up in Tianjin and Chong-qing, and Rmb72,000 and up in Nanjing.



The overall conclusion is that if China’s richer consumers feel uncertain about these issues, one can assume that less well-off consumers worry even more.

Building securityWith few options for increasing their personal wealth and security, it is little wonder that those Chinese consumers who can afford it are passionate about property investment. Our sample shows that the less developed the city, the more likely residents are to own more than one property. While 38% of Tier 1 residents had two or more properties, about 44% of residents in Tiers 2, 3 and 4 had the same number of investments (Figure 36). This could well reflect the relative affordability of housing in less developed cities: 65% of Tier 4 residents said they planned to buy a new home, compared to 55% in Tier 1.

Figure 36How many properties do you own?Urban survey response (% respondents)

Tier 1Number of properties 1 2 3 4

Tier 2

Tier 3

Tier 4

3362 4 1

43858

154054

56 737


Figure 37What was the main source of financing for the home in which you live?(% respondents by city tier)

Own income

Parents/family

Bank


47

28

17

49

28

12

57

2335

1310

Housing fund8

1077

48


Figure 38If you plan on buying a new home, what proportion of thecost will you borrow?(% respondents by city tier)

Above 70%

51-70%

30-50%


4

9

47

6

8

37

3

76

3638

Below 30%

0%

1721

2828

2328

2520

8




Confidence is also reflected in the amount consumers are willing to borrow. In Tier 1 cities, 75% of respondents said that they had relied on their own earnings or on family and friends to finance the purchase of the home where they lived. But in Tier 4 cities, that figure rose to 83% (Figure 37). This thinking appears to be deeply ingrained. Though 61% of urban respondents planned to buy a new home, they do not plan to borrow much to finance it. Respondents in Tier 1 cities seemed to be more willing than others to take on debt, suggesting familiarity with mortgages and managing credit—47% said they would borrow between 30% and 50% of the price of their new home (Figure 38). Even so, respondents are wary of taking on high debt levels: 40% said they would borrow less than 30% of the purchase price, with 23% saying they would not borrow at all. In the other tiers, an average of 37% of respondents said they would borrow between 30% and 50%.

In general, though they should be relatively better off, respondents in Tiers 3 and 4 seem to remain more focused on climbing the economic ladder and accumulating wealth. When asked what their main motivation would be for changing jobs, 56% of Tier 3 respondents said more money, compared to 47% in Tier 1 (where 22% were concerned with promotion, compared to 17% in Tier 3 and 12% in Tier 4).

Shifting aspirationsAmong our relatively well-off urbanites, it is not surprising to find that consumers are seeking more than material goods. But they are also showing some residual insecurities. They are worried about their health, and worried about their children—and these are worries shared by their rural compatriots, though for different reasons.

Chinese leaders are increasingly aware of the public’s shifting aspirations. Last month, Bo Xilai, party secretary of the city of Chongqing, raised the idea of a “happiness index” in a speech, suggesting that GDP was not the only way to measure China’s development.52 “Improving people’s livelihood doesn’t only mean eating braised pork in brown sauce or wearing pretty clothes,” Bo said. “A healthy spiritual life is also very important.”

The popularity of Bo’s address in the Chinese press is one illustration of the growing consensus around a need for Chinese policy to focus on these needs. A “better life” may be more than simply the slogan for the Shanghai Expo; it may become a pillar of policy—for both city and country residents—for the decade ahead.

52 The idea of measuring the success of a society by hap-piness did not originate with Bo Xilai. The idea of “gross national happiness” has been around since the early 1970s in Bhutan, where it is in use today. Last year, French president Nicolas Sarkozy announced that France would include happiness and wellbe-ing in its measurements of the economy.

AppendixSurvey results



Appendix

About the researchIn order to gauge confidence and spending priorities of Chinese consumers, the Economist Intelligence Unit surveyed 2,651 individuals in mainland China in urban and rural areas between December 2009 and March 2010. Profiles of the survey respondents are as follows:

Urban survey respondentsFor the urban survey, we spoke to 1,650 respondents in China’s 50 largest cities by GDP. We aimed to speak to “middle class” respondents, using a definition that encompasses more than income levels. We have used a stratified sampling method based on city GDP, respondent income levels and professions. (Please see “Cities” below for the proportion of respondents from each city and the list of cities surveyed divided by tier.)

Survey respondents have annual household incomes between US$10,000 and US$100,000. Of our sample, 40% of urban respondents have incomes between US$10,000 and US$20,000, and 26% earn between US$20,000 and US$30,000. About 2% earned less than US$10,000 and 33% earned more than US$30,000. Regardless of where their income falls within this range, after accounting for food and housing, respondents also have one-third of their income left for discretionary spending, and they own at least one property. Respondents, who are between 26 and 59 years old, are also professionals: they are either managers at foreign- or state-owned enterprises, government officials, private entrepreneurs or other white-collar workers.




Distribution of urban survey(% respondents)

Shanghai

BeijingGuangzhou

54

3

32

2

2

2

2

2

2

2

2

2

2

2

2

2

2

2

2

2

2

2

2

2

22

2

2

2

2

22

2

2

2

2

22

2

2

2

2

22

2

22

2

ShenzhenSuzhou

TianjinCangzhou

ChangchunChangsha

Changzhou

Chengdu

Chongqing

DalianDaqing

DongguanDongying

FoshanFuzhou

HandanHangzhou

HarbinJiaxing

JinanJinhuaJining

Kunming

LinyiLuoyang

Nanchang

Nanjing

Nantong

Ningbo

Qingdao

Quanzhou

Shaoxing

Shenyang

Shjiazhuang

TaizhouTangshan

Weifang

WeihaiWenzhou

Wuhan

WuxiXiamen

Xi’an

Xuzhou

Yantai

Zhengzhou

Zibo


Cities




Cities by tier

Tier 1 Tier 2 Tier 3 Tier 4

Beijing Changzhou Changchun Cangzhou

Dalian Dongguan Changsha Chongqing

Daqing Nanjing Chengdu Fuzhou

Dongying Qingdao Jiaxing Handan

Foshan Shaoxing Jinan Harbin

Guangzhou Shenyang Jinhua Jining

Hangzhou Tangshan Nanchang Kunming

Ningbo Tianjin Quanzhou Linyi

Shanghai Xiamen Shijiazhuang Luoyang

Shenzhen Yantai Taizhou Nantong

Suzhou Zibo Wuhan Weifang

Weihai Zhengzhou Wenzhou

Wuxi Xi'an

Xuzhou


Rural survey respondentsFor the rural survey, we spoke to 1,001 respondents living in rural areas across mainland China. We have used a stratified sampling method based on the range of provinces to be covered and the target income range. (Please see the figure below for the proportion of respondents from each province.)

In order to accurately focus on rural households, we conducted the survey in provinces where primary industry accounts for more than 10% of provincial GDP. We aimed for rural consumers who make at least one-third of their living selling agricultural products and have at least one family member living on the farm full-time. Based on the information provided by the respondents, 56% rely on farm income as their main source of income, and only 30% had a migrant worker in the family.

We aimed to survey a range of incomes comparable to the range for the rural sector at the national level. Of those surveyed,16% earn less than the equivalent of US$1,500 per year, 70% earn between US$1,500 and US$3,000 per year, and 14% earn more than US$3,000 per year. Because estimates of rural incomes in China vary widely, in designing the sample, we adjusted the National Bureau of Statistics average adjusted income per head figures upwards slightly to account for somewhat higher rural income estimates provided by private research groups.




Distribution of rural survey respondents(% respondents)Sichuan

Henan

Hunan

12

11

8Guangxi

8

Anhui7

Yunnan7

Hebei7

Hubei6

Guizhou5

5

3

Jiangxi

Gansu

3

3

Shaanxi

Heilongjiang

3Xinjiang

2Fujian

2Jilin

2Liaoning

2

2

2

Chongqing

Inner Mongolia

Hainan


Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclu-sions set out in the white paper.

Cover image - David Simonds

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