How China’s middle-class is transforming the nation

Introduction The rise of China as a global power is inextricably linked to the growth of its middle- class. Decades of establishing and refining the social market economy has led to financial prosperity for hundreds of millions of Chinese citizens. However, associated with the speed and magnitude by which China’s middle-class has been established are the severe growing pains of a developing country. As a result, China faces a myriad of challenges in the upcoming decade, ranging from environmental to social. Whether China can sustain its middle-class may determine the stability of the nation. Thus, this essay will discuss how the problems associated with China’s newly established middle-class have already transformed China’s policies and political system and how it may affect the nation in the near future.

How was China’s Middle-Class Formed? In order to assess the modern relationship between China and its middle-class, the establishment of the middle-class must first be discussed. This can be traced back to the socialist modernization policies of Deng Xiaoping. Prior to Deng Xiaoping, China’s economy was subject to central planning and “Chinese style Federalism”, which allowed local governments to take action to fulfil the goals of the federally mandated five-year plans (Qian and Xu, 1993). These plans were focussed on creating an economically self-sufficient China that could avoid foreign trade and foreign influence through public ownership and central planning. Unfortunately, the economic system failed to provide for its people, as it resulted in the Great Chinese famine from 1959 to 1961, which led at least 30 million citizens to starve to death (Smil, 1999).

In response to the failure of the rigid command economy, Deng Xiaoping and the Chinese Communist Party (CCP) attempted to modernise and expand China’s economy by inviting foreign direct investment and supporting trade with foreign countries (Fung, Iizaka and Tong, 2004). However, rather than replace the existing framework of five-year plans and central planning, the “Open Door Policies” of the time allowed the free market to act as a supplement to the planned economy instead of an alternative.

This can be seen most clearly in the dual pricing system established in the 1980s. Prices and quotas on all goods were set by the CCP, however, if a surplus remained, companies were able to sell at market prices (Jinglian and Renwei, 1987). This allowed private markets to slowly develop through the fulfilment of CCP policy. This gradual development was the product of Deng Xiaoping’s political philosophy, which centred around pragmatism and gradualism. As a result, China’s economy quickly began to grow and the middle-class slowly began to develop alongside its private sector.

The success of Deng Xiaoping’s socialist modernization paved the way for further market reforms in China. By 1992, Jiang Zemin and the CCP had announced their intention to create a “socialist market economy”, which would unleash the private sector and market forces from their supplementary role under Deng Xiaoping. This included easing the price controls of the dual pricing system and allowing companies to choose their own supply and price according to the demand of the market. The reforms succeeded in pulling millions of citizens out of poverty and planted the seeds of the substantial middle-class that we see today. From 1991 to 2002, the amount of Chinese citizens earning less than the $1.25 per day poverty line dropped from 40.77% to 11.85% (Yuan, Guanghua and Khor, 2011). In that same period, the percentage of households earning between $4–$10 per day increased from 10% to 33% (Yuan, Guanghua and Khor, 2011).

However, the state still had a central role in the economy, as it claimed the responsibility to oversee and regulate the market in order to best serve the needs of the nation. This included the right to set prices of goods in industries deemed significant to the national interest, such as some goods and services in the healthcare, agricultural, and construction industries, as well as full control over large enterprises in strategic industries such as telecommunications and energy (Geng, Yang and Janus, 2009). Therefore, although market forces were given significantly more power in the economy, the CCP still had the authority and capability to reign the markets in. This is significant in regards to the relationship between the CCP and the Chinese population as Jiang Zemin made it clear that short-term economic growth would not be pursued at the cost of the socialist ideology at the core of the CCP and Chinese society. Thus, the goal of the socialist market economy could be described as providing economic benefits to Chinese citizens, while avoiding the harmful effects of free market capitalism, such as exploitation and inequality.

The economic reforms of the socialist market economy culminated in China’s accession to the World Trade Organization (WTO), which signaled a complete reversal from the economic policies of Mao. Instead of a closed off, self-sufficient economy, China was now fully integrated into the global economy, with foreign trade and investment now streamlined through tariff reductions, the enforcement of intellectual property rights, and the translation of relevant Chinese economic and trade law into WTO approved languages. Alongside other policies of economic liberalisation, China became one of the fastest growing economies in history, with the GDP per Capita of China growing from $959 in 2000, just before accession to the WTO, to $4,550 in 2010 and $12,556 as of 2021 (WDI - Economy, 2023).

These economic gains were able to lift hundreds of millions of Chinese citizens out of poverty as in 1990, 98.1% of the population survived on less than $5.50 a day, whereas by 2010 this number dropped to 53.5% and has continued to lower to 15.8% of the population as of 2019 (China Poverty Rate 1990- 2023, 2023). However, as Chinese citizens were lifted out of poverty, they quickly established a massive middle-class. Between 2000 and 2018, the size of China’s middle-class, defined as those earning between $3,650 and $18,250 a year, increased from just 3.1% of the population to 50.8% of the population (‘How well-off is China’s middle class?’, 2017).

How has China previously reacted to the effects of the Middle-Class on the Nation? Nonetheless, China’s success in establishing a middle-class with greater than 700 million citizens is only one part of the equation. In addition to creating the middle-class, China must also support and maintain it, which has its own set of socioeconomic challenges. However, China has shown evidence that it is capable of addressing such issues so far. Ideologically, this is best exemplified by the success of Hu Jintao in establishing the concept of a “harmonious society”. Faced with an expanding urban-rural divide, a significant increase in regionalism, and the possibility of separatist movements, Hu Jintao attempted to address the source of these issues: the socioeconomic inequality caused by asymmetrical economic growth (Zheng, 2007).

By focussing discourse on the concept of a “harmonious society”, Hu Jintao indicated that the CCP recognized the social effects of China’s meteoric rise and was committed to addressing issues of socioeconomic inequality. This was especially significant, as the CCP justified the establishment of the socialist market economy on the premise that economic reform would best provide for the population and deliver on China’s socialist values. By claiming to hold the interests of the Chinese population and society above the goal of economic development, China had to fullfil the “socialist” portion of the socialist market economy and deal with issues regarding its middle- class, such as housing, education, and healthcare if it wanted to maintain legitimacy.

In terms of practical policy, four major policy changes were made under Hu Jintao: the creation of the social insurance system, the establishment of the social assistance system, the “new socialist countryside” campaign, and improvements in providing for migrant workers (Gao, Yang and Zhai, 2018). The social insurance system was successful in tackling both the issues of socioeconomic inequality and the urban-rural divide as it guaranteed both pension and health insurance regardless of residence or employment status, which was especially helpful for migrant workers (Howell and Duckett, 2019). The social assistance system helped diminish the opportunity gap for low income families, especially those in rural areas, by providing them with subsidies for healthcare, housing, and education (Gao, 2017). In addition the countryside campaign was able to further support citizens in rural areas, especially farmers, as the rural poverty line was increased in order to better reflect reality and increased investment into rural infrastructure and subsidies (Frazier, 2014). Lastly, labourers and migrant workers in general were aided by the 2008 Labour Contract Law, which mandated employers to provide formal labour contracts to employees and provide them with social insurance (Cheng, Smyth and Guo, 2015). On top of this, the federal government directed cities to integrate the children of migrant workers into their school systems to fulfill their compulsory education requirement.

How is the Middle-Class affecting China today? However, past success may not be indicative of future capabilities, as the problems China faces today are more complicated and on a much larger scale than before. The logistics of upkeeping the improved lifestyle of the middle-class are daunting in itself, nevermind the associated issues of social inequality. For example, with the growing size and demands of the Chinese middle-class. Housing has become an especially difficult problem facing the Chinese government.

As property is practically a cultural prerequisite for marriage in modern China, it is imperative that China’s middle-class is able to afford to own their own housing if China’s population is to avoid a collapse (Gao, Pang and Zhou, 2022). However, formal private housing in Chinese cities has become virtually unattainable for individual buyers. As of 2020, the average price to income ratio of a home in a Chinese city was 7.2, with affordable housing being considered anything less than a price to income ratio of 3.0 (Sun, 2020). This has led to a situation where young men must borrow large amounts of money from their personal network of friends and family in order to pursue marriage, inflating housing prices. However, if the young man is unable to earn and borrow enough money to afford a house, they will be unable to marry, which will eventually exacerbate the issues of China’s ageing population (Gao, Pang and Zhou, 2022). This is made even more difficult by the high down payment requirement on first home mortgages. In the United States, the median down payment on a house was about 6% for first time buyers, whereas the minimum required down payment in China for first time buyers is 30% (Shepard, 2016). Combined with the fact that China’s largest cities will require an additional 30,000 km2 of floor space just to keep up with the demand for housing and retail, the future of China’s housing market seems bleak for the middle-class (Barton, 2013).

In addition to housing, one of the largest problems facing China’s growing middle-class is access to clean freshwater. It is believed that China’s urban population alone will require 20 billion m3 of water in its largest cities in order to meet demand in the near future (Barton, 2013). Part of this demand is the change in preferences of the new urban middle-class of China, which continues to shift towards a higher calorie diet that is made up of more meat, which is more water-intensive than grain and vegetables (Tan, 2014).

However, as demand continues to grow, the supply of suitable freshwater continues to dwindle. The Ministry of Ecology and Environment estimated that as of 2018, 30% of Chinese groundwater was not fit for consumption,and 16% being unfit for any use, including industrial and agricultural usage (Collins and Reddy, 2022). In addition to a decrease in quality, China must now deal with a massive decrease in quantity, as it was almost 50% below the mark for acute water scarcity as of 2020 (Collins and Reddy, 2022). This can be mainly attributed to inefficient agricultural water consumption, which made up 74.6% of China’s total consumption in 2019 (Li et al., 2021). China’s inefficient agriculture is inherently linked to the water- intensive production of rice, of which Chinese farmers use an average of 1,321 litres of water to grow each kilogram of rice (Debra Tan, Katie Tsang, Dawn McGregor, 2014). Considering China is the largest producer of rice in the world with 149 million tons produced in 2021 and that rice is a staple food for 70% of the population, the future of Chinese agriculture will continue to be water-intensive (Fang et al., 2021; Gao, Gao and Lorenc, 2022). What makes tackling this problem even more difficult is the distribution of the population in comparison to the distribution of China’s freshwater resources. The Northern regions of China make up 46.4% of the population, but can only utilise 20% of China’s freshwater resources. On the other hand, The southern regions of China have access to the other 80% of freshwater resources (He, Harden and Liu, 2020).

In addition to these logistical issues, the government must now also answer its most difficult socioeconomic issue to date: how to maintain social mobility. After bringing hundreds of millions of citizens from poverty to the middle-class in just 40 years, the government must now figure out how to provide even more success for the next generation. China’s new generation grew up enjoying the luxuries of the middle-class lifestyle, but now face the challenge of having to climb a social ladder that is quickly falling apart. This can be seen in the downward trend of intergenerational occupational mobility and intergenerational educational mobility in the most recent generations (Xie et al., 2022).

This has resulted in the cultural movement of “lying flat”, by which youth professionals raised in the middle-class reject the “rat race” of education and employment, as they believe that there is little to no chance of upwards social mobility (Bandurski, 2021). This is especially concerning for the CCP as it may be a sign of the social and cultural change that modernization theory predicts to follow significant periods of economic development and ultimately results in middle-class demands for democratic rights (Liu, Su and Wu, 2022). Combined with the recent pro-democracy protests in Hong Kong and anti-covid lockdown/Urumqi fire accountability protests throughout the nation, the public’s challenges to China’s government and society are clearly growing (Gan, 2022).

How can China respond to today’s challenges? Given that China’s massive middle-class will continue to raise monumental challenges in the near future, Xi Jinping and the Chinese government must act quickly in order to provide for the Chinese population. From a legal standpoint, China is quite capable of doing so, as it is able to shift the interpretation and implementation of law and policy in order to meet the needs of society. Following in the tradition of pragmatism associated with Deng Xiaoping, all policy is required to be grounded in “actuality”, which allows the state to shift its priorities and laws with the realities of the day, rather than devote resources to draft new laws and replace old policy (Yu, 1989). Combined with the pragmatism of “political incrementalism”, by which the Chinese government tackles issues by running political experiments throughout the country to find the most effective policy, China can act quicker and learn from its mistakes quicker than most western democracies (Zheng, 1999).

This could be especially useful for issues of housing, water, and agriculture, as local governments and cities can experiment with ways to subsidise housing, decrease water wastage, and increase agricultural productivity and pass on this information to the central government, which could support the most efficient of these policies. In addition, China’s government has shown it is capable of incorporating demands for political reforms into its political system. This is especially visible in its reform to include the cadre accountability system. In this system, government officials are removed or penalised if the public believes they have performed poorly or been negligent of their needs (Zhao, 2010).

Given these tools, the Chinese government has already begun to tackle the problems of both today and tomorrow. Regarding the housing crisis, the People’s bank of China has allowed local governments to lower the floor of mortgage rates for first time buyers, easing some of the pressure on pricing and potentially allowing more young men to afford both housing and marriage (Cao et al., 2022). In regards to the freshwater crisis, China has invested upwards of $80 billion constructing a system to divert 25 billion m3 of freshwater a year from the south to the north (Barnett et al., 2015). However, agricultural water inefficiency was also addressed by working with western institutions, like the World Bank, to provide farmers with more efficient equipment and devise more efficient pricing and allocation systems (Cho, 2018).

In terms of inequality and opportunities for the youth, Xi Jinping has taken Hu Jintao’s “harmonious society” one step further by advertising his campaign for “common prosperity”. Although vague at first, “common prosperity” is now understood to be both an attempt to redistribute the gains of China’s economic development from the ultra-rich to the rest of society, as well as an attempt to address the social issues caused by the rapid growth. This has included policies to regulate excessively high incomes, reduce working hours, and promote health and family wellbeing (Chipman Koty, 2022).

Although these policies may not solve all of China’s issues, they do indicate the flexibility, pragmatism, and priorities of the Chinese government. Overall, the magnitude of China’s middle-class growth has already significantly transformed the nation and will continue to do so on both the societal and political level until its needs are adequately addressed. Xi Jinping and the CCP have made large strides in addressing some of the largest issues of the day, but the speed and scale by which both current and future crises may erupt will continue to test the durability of China’s political system.

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