The Rise Of The Chinese Middle Class Driving Chinese A Shares Skyward

By Author: zhang.z
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Western retailers should take note of the new market opening due to increasing prosperity among the Chinese population. China may no longer be solely a supplier of goods; there are new opportunities for Western financial service providers and insurance companies as well. With that comes increased affordability for luxury goods production, automobile manufacturers, and cosmetics companies. All this adds up to an increased demand for Chinese products, a good omen for Chinese A Shares according to leading China investment research firms.

In fact, according to one leading Chinese equity analyst, For investors, the middle class signifies those Chinese with their own capital to invest - a phenomenon that is heating stock markets around the world. Investing in China stock and Chinese A Share companies could prove to be all the more profitable in the near future.

Who are some of the big players? Wal-Mart, Best Buy and Home Depot are retailers who have recently expanded into China by investing in or establishing a joint venture with local retail chains. In addition, hypermarkets, such as Carrefours, see ...
... much success in urban China. In Shanghai, for example, about 63 percent of the entire retail trade is done at modern hypermarkets. China's home improvement market is the fastest growing in the world - increasing at 12% a year. Housing stock has changed from entirely state-owned to nearly 70% privately owned today, encouraging this growth.

Another market affected by growth in the Chinese middle class is educational investments. There is much competition for slots in top schools and this leads to pressure-spending to buy a good education. Under the one-child policy, the aspirations of two parents and four grandparents are all pinned on one student. As household income and salaries increase, it is a likely assumption that more spending will go towards advanced education according to Zhang Zhengfeng, a leading China company research analyst and specialist in Chinese A Share companies.

As China is still predominantly cash based, there is not likely to be the mass credit crisis as seen in US markets. Cards in China are used solely for ATM or debit purposes. There is a smaller volume of outstanding loans than in other countries, leaving more disposable income to stimulate China's economy. A study by ACNielsen cites that, in terms of credit lines, only two percent of Chinese cardholders frequently roll over their bills, as opposed to paying in full each month. Roll over creates large income streams for credit card issuers.

Similarly, as the middle class expands, car sales in China are skyrocketing. There is now roughly one car for every 120 people. Many large cities are banning motorcycles in urban areas, which further fuels [no pun intended] this trend. Along with purchasing automobiles, there is a surge in the purchase of luxury goods. The Chinese often attach a premium to the real thing [as opposed to fake high dollar items] and will pay 30 to 40 percent more...than what is charged in New York. For example, brands such as Estée Lauder, Chanel and Dior benefit as many Chinese women enter the middle class...they start to purchase ‘affordable' luxuries, like skin creams and cosmetics.

About two fifths of Chinese people will be in the middle classes in ten years time, according to Andy Xie, Chief Economist for Asia-Pacific at Morgan Stanley Dean Witter and expert on Chinese A share companies. China's State Information Center also anticipates a total of 200 million new middle class people in the next 5 years. China's imminent entry to the World Trade Organization and the hosting of the 2008 Olympics will be anchors for stability and reform this decade.

Zhang Zhengfeng is a senior vice president of a multinational China investment research firm. He has extensive experience leading teams developing China company research, equity research in China and Asia economic research. For more details on Chinese A Shares and China company research please visit our website.