Building China’s Middle Class

Real GDP per capita grew three-fold from 1980 to 2007, and is expected to double again by 2014

6,000Real GDP per capita, 2005 US$

2,000

3,000

4,000

5,000

,

Annualized growth rate from 1980 to 2008: 5.5%

0

1,000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Source: International Monetary Fund, World Economic Outlook.

China’s rising purchasing power: Will domestic demand be the new engine of growth?

1855

Purchasing-power-parity (PPP) based GDP% of world total

PPP based GDP% of world total

681012141618

30

35

40

45

50

55

Major advanced countries (G7)

Source: International Monetary Fund, World Economic Outlook.

024

20

25

30

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

China

Middle class consumption, now and future2009 2020

2005 PPP$ Share of 2005 PPP$ Share of (billions) world total (billions) world total

U.S. $4,377 21% China $4,468 13%Japan $1,800 8% U.S. $4,270 12%Germany $1,219 6% India $3,733 11%France $927 4% Japan $2,203 6%U.K. $889 4% Germany $1,361 4%Russia $870 4% Russia $1,189 3%$ $ ,China $859 4% France $1,077 3%Italy $740 3% Indonesia $1,020 3%Mexico $715 3% Mexico $992 3%Brazil $623 3% U.K. $976 3%Source: Brookings Institution.

A snapshot of China’s middle class

• Disposable income per capita in 2008: $1500-$3700;S 22% f th i i Ni t h i• Save 22% of their income. Nine percent have no savings;

• 46% invested in stocks, 80% of whom took a loss in 2009;• 32% own a car, 25% plan to buy a car within three years;• More than 70% of families have at least one credit card; 98% have

at least one debit card;

Source: CLSA.

Consumption patterns of China’s middle class families: Education is a top priority

Entertainment5%

What would you increase spending on if you had higher income?

Grocery32%

Healthcare10%

Transport8%

Communication8%

5% if you had higher income?

38%34%

32%29%

24%20%

EducationGroceries

Home appliancesClothing

HealthcareRent/Mortgage

Children's education

15%Housing

12%

Clothing10%

18%3%

8%

TransportCommunications

None

Percent of all families surveyed

Source: CLSA.

What keeps them up at night?

• Income declineU l t• Unemployment

• Children’s education• Medical costs• Home prices/rents• Retirement/pension

Source: CLSA.

Thoughts on the Chinese government

• 78% have confidence in how the government is handling the economic downturneconomic downturn

• Think the government’s top priority over the next 12 months should be: – Unemployment – Property price– HealthcareHealthcare– Stimulus plan – Education

Source: CLSA.

Gross income in big Chinese cities is still low on an international scale

30

Gross income per hour, US$

$26.1

$19.7 $19.4 $18.0 $18.0 $17.1 $16.6$14.4

$8.8 $8.0 $7.7 $7.1 $6.9 $6.5 $6.4 $5.6$3.3 $2.9 $2.6 $1.35

10

15

20

25

30

0

Sources: UBS, Milken Institute.

Purchasing power is the key

100.0100

Domestic purchasing power, index, New York = 100Domestic purchasing power adjusted annual income, New York = 100

82.2 80.4 77.6 76.969.5 65.9 61.3 58.9 58.1 57.4

49.443.4 41.2 39.9

34.027.3 26.0 23.8 21.8

0

25

50

75

100

0

Sources: UBS, Milken Institute.

Dressing for success is expensive

175

Price index for clothings, New York = 100Price index for clothing, New York = 100

155.6

105.2 100.0 98.581.5 77.0 71.9 67.4 65.2 63.0 60.0 58.5 57.8 56.3 55.6 54.8

43.7 42.2 40.024.4

255075

100125150175

0

Sources: UBS, Milken Institute.

Housing condition of China’s middle class

Homeownership is a yardstick for success

14Percent change, yearago

•87% are homeowners•13% are renting•24% have a mortgage•Two-thirds of mortgage holders have a loan-to-value ratio less than 40%•14% plan to buy property in the next 12 months

2

4

6

8

10

12 Home sales price index for 70large- and medium- sized cities

Source: CLSA.Note: This survey was conducted by CLSA in 2009. 250 middle-class families were interviewed in five major cities.

•Among those who plan to buy a house in the next 12 months, 29% are first-time buyers, 23% already own two or more apartments.

-2

0

2

1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010

Source: Chinese National Bureau of Statistics.

“A sweet home” is getting out of reach for most middle class families in Beijing

• Price for a house located within Fourth Ring is growing by 35$4 591

US$ per square meterFourth Ring is growing by 35 percent a year;

• In 2009, per capita income for a typical Beijing resident grew by 8 percent;

$2,706

$4,591$3,932

• Some estimate speculation accounts for more than 40 percent of transactions.

Q2 2008 Q1 2010 Annual per capita income for a

Beijing resident

Sources: Beijing Bureau of Statistics, Milken Institute.

Wages account for a declining share of GDP

3555Percent of GDPPercent of GDP

25

30

45

50 Wages (left axis)

Companyprofits (right axis)

15

20

35

40

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: Chinese National Bureau of Statistics.

One China, many faces2008 households’ consumption spending, yuan

>20,00010,000 to 20,0006,000 to 10,000<6,000 Source: China Statistical Yearbook 2009.

One China, many faces2008 disposable personal income for urban residents, yuan

>16,00013,000 to 16,00012,000 to 13,000<12,000 Source: China Statistical Yearbook 2009.

Where are Chinese millionaires located?

>5015-495-140-4 Source: 2009 Hurun Report.

Rising inequality in China

0.6Gini coefficient

0.24

0.400.37

0.410.44 0.46

0.50?

0.2

0.3

0.4

0.5

0

0.1

1984 1994 1997 2000 2003 2006 2010

Sources: Chinese National Bureau of Statistics, Milken Institute.

Moving up to be part of the middle class…Net annual income by occupation

$74 100 $78,300New York CityBeijing

3.6x 3.4x

$34,600$29,000

$57,500 $55,200

$74,100 $ ,

$11,600$20,400 $22,900

Beijing

15.7x 10.0x

12.2x 4.8x

$2,200 $2,900 $4,700$11,600

Buildinglabourers

Skilledindustrial workers

Femalefactory workers

Engineers Productmanager

Department head

Sources: UBS, Milken Institute.

What are the barriers for social mobility andfor becoming middle class?

U l di t ib ti f d ti l• Unequal distribution of educational resources• Political representation for middle class• Hukou system• Tax structure• Distorted housing markets

Why should building China’s middle class be a policy priority?• Social stability

S i l• Social concensus• Domestic demand• Tax

Steven Roach slides

The global consumer

1 2 0 0 0U S $ b illio nsUS$ billions

P erso n a l C o n su m p tio n : 2 0 0 8

4 0 0 0

6 0 0 0

8 0 0 0

1 0 0 0 0Personal consumption: 200812,000

10,000

8,000

6,000

4 000

Sources: National Sources, UN, Morgan Stanley Research.

0

2 0 0 0

U S E U -1 5 Jap an C h in a In d ia

4,000

2,000

0U.S. EU-15 Japan China India

China’s untapped macro potential

80Personal consumption as % of GDP

30

40

50

60

70Personal consumption as % of GDPServices as % of GDP

Sources: CEIC, Morgan Stanley Research.

10

20

30

52 56 60 64 68 72 76 80 84 88 92 96 00 04 08

Pro-consumption agenda for China’s 12th Five-Year Plan

Mechanism Goal

Support to rural household incomes

Blueprint for large-scale services industries

Harmonious society

Labor absorption

Reduce precautionary savingSafety net imperatives

Source: Morgan Stanley Research.

A brief history of the world

Western Europe

Former Soviet Union

United States Japan China India

1500 17.9% 3.4% 0.3% 3.1% 25.0% 24.51600 20.0 3.5 0.2 2.9 29.1 22.51700 22.5 4.4 0.1 4.1 22.3 24.41820 23.6 5.4 1.8 3.0 32.9 16.01870 33.6 7.6 8.9 2.3 17.2 12.21913 33.5 8.6 19.1 2.6 8.9 7.61950 26.3 9.6 27.3 3.0 4.5 4.11973 25.7 9.4 22.0 7.7 4.6 3.11998 20.6 3.4 21.9 7.6 11.5 5.02008 17.1 4.4 18.6 5.7 17.5 6.72015e 15.9 4.0 18.3 5.5 17.8 7.6

Sources: Angus Maddison, The World Economy: A Millennial Perspective, OECD (2001), IMF, Morgan Stanley Research.Note: Based on 1990 international PPP dollars.

Gary Shilling slides

Chinese exports and consumption

60Percent of GDP

Lastdata points: 2008

20

30

40

50

Last data points: 2008 Exports: 36.5%, Consumption: 36.1%Private consumption

E t f d d i

0

10

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Exports of goods and services

Source: Asian Development Bank.

Country shares if global GDP2008

23.7%U.S. Total

2.5%2.6%2.8%

3.8%4.4%4.7%

6.0%7.3%

8.1%16.6%

CanadaBrazil

RussiaItalyU.K.

FranceGermany

ChinaJapan

U.S. Consumer

Sources: International Monetary Fund, U.S. Bureau of Economic Analysis.

1.6%1.7%1.8%2.0%

0% 5% 10% 15% 20% 25%

South KoreaAustralia

MexicoIndia

Chinese households saving rateAnnual average, Q1 2003 to Q3 2009

30Chinese householdsaving rate, percent

24

26

28

Source: China National Bureau of Statistics.

20

22

2003 2004 2005 2006 2007 2008 2009

One-year benchmark Chinese deposit and lending ratesJanuary 1, 2005 to April 19, 2010

8%Percent

L t i t 04/19/10

4%

6%

Last points :04/19/10Deposits: 2.25%, Lending 4.14% Lending rate

Deposit rate

Source: People’s Bank of China.

0%

2%

2005 2006 2007 2008 2009 2010

Exchange rate for the Chinese yuanDaily, January 1, 1981 to April 19, 2010

10Chinese yuan per U.S. dollar

4

6

8

Last point: 04/09/106.82

Source: Federal Reserve Bank of St. Louis.

0

2

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Matt Crakes slides

The expanding world middle classPeople with incomes between $6,000 and $30,000

4 500Millions of people 2008

1,5002,0002,5003,0003,5004,0004,500

World

World ex China and India

Source: Goldman Sachs.

0500

1,000

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

IndiaChina

New entrants to the world middle class: China, then India and the N-11 Five-year moving average of annual changes in people with incomes between $6,000 and $30,000

Millions of peopleIndia2008

-20

0

20

40

60

80 China

N-11

Source: Goldman Sachs.

-60

-40

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

The exploding middle classTop seven countries: Shifting towards middle income countries

1980 2007 2030 2050

GDP Income GDP Income GDP Income GDP Income Country rank rank Country rank rank Country rank rank Country rank rankU.S. 1 12 U.S. 1 9 China 1 49 China 1 45

Japan 2 19 Japan 2 22 U.S. 2 12 U.S. 2 15

Germany 3 17 Germany 3 16 India 3 63 India 3 61

France 4 9 China 4 56 Japan 4 29 Brazil 4 46

U.K. 5 18 U.K. 5 10 Brazil 5 47 Russia 5 28

Italy 6 21 France 6 17 Russia 6 35 Indonesia 6 60

Canada 7 15 Italy 7 20 Germany 7 22 Mexico 7 44

Average 16 Average 21 Average 37 Average 43

Source: Goldman Sachs Economic Research.

80$ billions

Real retail salesChange from January 2007 to present

-20

0

20

40

60

80

China

-60

-40

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

U.S.

Sources: National Sources, GS Global ECS Research.

Asian structural themes

0 50 100 150

Number of appliance per 100 households in China

Correlation of Asian agricultural consumption to GDP, household expenditure and urbanization

0 50 100 150

Air conditioner

Refrigerator

Computer

Washing machine

RuralUrban

GDP per capita

Household expenditure Urbanization

Wheat 0.22 -0.15 0.44

Rice -0.45 0.20 -0.64

Vegetables 0.38 0.14 0.53Washing machine

Color TV

Hi-Fi

Dairy 0.46 -0.14 0.71

Meat 0.58 -0.05 0.87

Source: UBS Investment Research. Source: UBS Investment Research.