Profiting from China's Growing Middle Class

In less than two decades the size of China’s middle class has risen from less than 300,000 people to more than 500 million

Legal & General Investment Management 15 June, 2018 | 8:55AM
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This Perspectives article by LGIM's Global Equities fund manager, Shaunak Mazumder, is part of Your Guide to Emerging Markets. All this week, we are focusing on emerging markets, sharing their potential pitfalls – and where you can make a pretty penny.

With a middle class the size of America’s, the scale of China is often underappreciated. Despite slowing GDP growth, a dramatic shift in the underlying mix of goods and services of unprecedented proportions is underway. Having exposure to the right sectors and companies is therefore crucial as China makes its transition to the next era.

The Pudong skyline in Shanghai isn’t the only clear sign of how much has changed in China over the past twenty years. The country’s distribution of wealth has also changed dramatically. As recently as 2000, for example, more than 1.1 billion of China’s 1.3 billion population had a GDP per capita of less than $2,500. By 2017, this number had fallen to just 137 million, with the rest of the population becoming several times richer on average.

As Wealthy as Europe

Investors also need to take note of how this rise in affluence has been distributed. The country’s wealthiest citizens are likely to be found on China’s east coast. Indeed, according to figures released recently from China’s National Bureau of Statistics, China’s richest coastal regions were five times as wealthy as its poorest inland province in 2017.

By way of comparison in European terms, this means that while some of China’s western and central provinces have a GDP per capita similar to or lower than that of Georgia and Belarus, four of the eastern provinces are as roughly as wealthy as Portugal or the Czech Republic.

China's growing middle class emerging markets developing economy Asia Chinese population

China’s higher income segment is similar in size to that of the US and the EU, and several times that the size of UK. As a result of this sheer size, sectors in China that are expected to grow will become meaningful from a global context. Meanwhile, Chinese companies in these sectors could match their global peers despite the latter having aggregate country GDP per capita levels that are higher than China.

The scale of change happening in China is unprecedented. In less than two decades the size of China’s middle class has risen from less than 300,000 to more than 500 million. Other growing countries have gone through a similar level change in terms of overall GDP per capita rising over a short period of time, notably Japan between 1960 and 1980 and South Korea between 200 1976 and 1996. However, neither can match the sheer size of the middle class being created in China, due to China’s large population of 1.3 billion people.

Needs Drive Consumption

Abraham Harold Maslow was an American psychologist best known for creating his eponymous hierarchy of needs, where physiological; air, food, drink, shelter, warmth, and sleep, and safety; security, order, law, stability, needs first have to be met before moving on to belonging; insurance, education, wealth generation, esteem; education, and self-actualisation needs; travel, technology. Maslow’s hierarchy of needs can be expanded towards a framework looking at emerging or growing nations as they become wealthier, resulting in their priority of needs changing over time.

Growing nations that have seen their GDP per capita grow rapidly over time from $5,000 to over $10,000 experience a similar change in population spending, which shifts from basic needs such as food, clothing and housing, towards insurance, education, healthcare, travel, banking and other services. 

Urbanisation and the New Economy

As a larger proportion of China’s population becomes middle class, and that middle class becomes more affluent, a large cultural impact, sectorial shift and macro- economic transition is likely to ensue.

On the cultural side, there is a tough transition underway with a rise in nuclear families alongside service sector growth giving rise to a rural to urban migration. The impact of this transition is unlikely to be smooth with increasing levels of income inequality which can result in social unrest throughout China.

From a sector perspective, the impact of the above will likely result in an increasing shift towards the service economy with a rise in growth of ‘new economy’ sectors. It could also lead to a normalisation in the growth rates of ‘old economy’ sectors such as basic consumer products, low value consumer goods, or real estate – sectors that have historically experienced very strong growth.

Finally, as the economy transitions from a majority of GDP coming from manufacturing towards services, the overall annual GDP growth in China may go through periods of lower growth, i.e. adjustment, as the decline in one is not adequately offset by the rising growth of the other.

Which Stocks Poised to Profit?

There are three sectors that we believe are likely to see strong growth: insurance, travel and private wealth.


With awareness rising and the government having an incentive to reduce the burden on the state, Chinese insurance companies, including AIA, Ping An, China Life and PICC, are insuring an increasing percentage of the population.

We saw a similar boom in Japan and South Korea as GDP per capita exceeded $10,000. At this point, people tend to plan more long-term and think about preserving capital. Rising medical cost inflation in China of over 8-10% is also highly supportive of this trend.


In 2017, the 130 million outbound Chinese travellers were estimated to have spent over £150 billion on overseas travel, including airlines, airports, hotels, luxury brands and duty free. Larger disposable incomes, the loosening of visa restrictions and increasing number of passport holders are key factors. As more Chinese become wealthy enough to travel abroad, businesses that serve them are likely to experience significant increases in demand.

There are a few ways to invest this growing theme. These include direct travel-related names such as Qantas and Samsonite, which benefit directly from the purchase of more outbound travel tickets and luggage. Furthermore, Alibaba and Tencent enable travel via apps providing bookings and instant payments, while European-listed luxury companies such as Moncler or Burberry receive 30% of total sales from Chinese customers.

Wealth Management

Asia-Pacific is not currently a well-recognised private wealth market globally. By 2021, however, the region looks set to overtake North America and Europe as the world’s largest private wealth market at over $75 trillion.

As it matures with more asset management and insurance players entering the market with a focus on pension and retirement planning, it is expected that much of that wealth will make its way to potentially higher returning asset classes such as global equities and bonds.

As more global institutions make their global products available to local investors with a strong demonstration of better risk-adjusted returns with lower volatility, this should encourage a shift away from a sub-optimally invested growing private wealth market.

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Legal & General Investment Management  is one of Europe’s largest institutional asset managers and a major global investor

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