In search of the middle-class dream

Its ranks are growing, but exactly how big is it, and what do those who belong to it want?

How big is China's middle class? It's not an easy question to answer because it seems everyone has their own definition of the term middle class. McKinsey, Forbes, Bain & Co, Euromonitor and the Chinese Academy of Social Sciences are just a few who have had their say on the matter.

But they all agree on one thing: China's middle class will grow at a brisk pace.

A report by the Chinese Academy of Social Sciences deemed to be the most official report given the academy's status as a top government think tank, says 40 percent of China's population will belong to the middle class by 2020.

It defines middle class as the group of people who enjoy high incomes, stable careers and strong spending power.

For financial companies, such as banks, insurers, pawnshops, trust firms and fund managers, the growth of such a class undoubtedly offers a wealth of opportunities, and it is no exaggeration to say the future of financial players hinges on how well they serve this group.

The desire of these people to buy financial products and their ability to do so are clear, but getting them to open their wallets is not easy. You have to understand their spending habits to offer them exactly what they need.

Most importantly, Chinese are great savers who do not borrow greatly to buy. The habit of saving for rainy days does not fundamentally change even among middle class consumers, who are supposed to have more financial common sense, enjoy better social services and have no worries about their retirement income.

There is plenty of evidence that when a country's per capita GDP exceeds $1,000 (738.9 euros) a year its middle class gradually become great consumers and are keen to borrow and to buy almost everything they need. Lending-related businesses then start to take off.

Such is not the case in China, because saving habits inherited from parents prevents the middle class from borrowing a lot.

But there is one thing Chinese will not hesitate to buy with borrowed money: housing.

Unlike many Westerners, Chinese see owning real estate as an essential token of success. That psyche is particularly prevalent among entry-level middle-class young people who have an annual income of about 60,000 yuan ($9,600; 7,100 euros). Mostly in their early 30s, they are the most keen to buy a property.

Foreign financial companies should take full advantage of their expertise and service quality to lure this particular group.

For example, these firms can promote fund products of higher yields, which usually involve high risk, to entry-level middle class consumers. To collect enough savings for deposits they would like to invest in financial products with high, quick returns. That is a good time for financial companies to sell these products.

Apart from traditional financial services such as giving out loans, foreign financial firms can offer them a basket of tailor-made financial services. That is the advantage of most established foreign financial players, which have extensive experience in designing good solutions based on individual consumer needs. Solutions could cover areas such as banking, insurance, mortgage and asset evaluation.

Chinese financial companies, which only in recent years have been permitted to conduct cross-sector businesses and are weak in customer service, cannot deliver such services.

The other field in which foreign financial companies can beat their Chinese peers is children-related financial products.

China's middle class basically belongs to the post-1980 generation, and many have married and have young children.

Chinese parents are perhaps the world's biggest spenders when it comes to children's products. They may buy their children a lot of expensive things they would not buy for themselves.

According to a survey on 1diaocha.com, a polling website, 43 percent of people who took part in a survey of consumer habits said their family spending doubled after they had a child; more than 20 percent said their spending more than tripled in the first year after they had a child.

They will certainly spend more as their children grow. These parents will spend a lot more on items such as children's education. This can be seen in the mushrooming of international, high-end preschool education institutions in big cities.

The family-planning policy, coupled with the keen interest of Chinese in their children's education, determines that these parents will become generous spenders on anything their children like or need, or anything they think their children like or need.

Foreign financial companies can offer high-end financial services, such as insurance and fund products, by teaming up with other foreign companies such as international kindergartens and hospitals.

Mainland middle class parents are brand conscious and would not choose made-in-mainland products or services, for their children. This point is supported by the fact that baby formula is often out of stock in Hong Kong supermarkets because they are scooped up by mainland parents.

More than that, China's middle class will be keen to spend on financial products relating to pensions and health.

That is because these people are highly tuned in to matters of health and are keen to maintain quality of life into their retirement.

But China's social safety net cannot satisfy the middle class with their quality-of-life preoccupations. It is they who demand high-end health insurance and pensions; it is they who can afford to see doctors at expensive private or international hospitals. Naturally, they dislike going to crowded public hospitals.

Again, foreign financial players can step in with their expertise and services that put the customer above all.

Financial solutions products designed for the entire family or for the lifetime needs of a middle-class consumer can be a special selling point.

But it is not to say that the rise of China's middle class is not a readily accessible gold mine. Those looking to reap rewards first need to negotiate a couple of hurdles.

First, they need to revive the investment sentiment of these consumers.

Heavy investment in aggressive financial products, such as stock-based ones, among the middle class hit a low in recent years, after China's stock market fell into a lull in 2009.

Many middle class investors experienced their first major setback in financial investment when the A-share market nose-dived from its peak of 6,000 points in 2008 to a low of 2,000 last year. It has slowly recovered in the past few months.

For investors, failure is the best education, and these young, daring investors became conservative, cautious and sophisticated.

So financial companies should cater to their changed outlook. Generally, "fixed return", "low risk" and "long-term commitment" are the ideas that financial firms should sell to their customers.

The other thing these companies should keep in mind when they deal with the Chinese middle class is that retail investors dominate the country's financial market.

Figures have shown that 70 percent of China's stock investors are individuals.

According to a survey by Universal Consultancy, a consultant in Shanghai that focuses on the consumer market, in 2011, 57 percent of middle class investors said they would make investment decisions on their own. That means they are not going to buy products such as funds or investment-themed insurance products. Instead, they will invest in mostly stocks and bonds on their own. (Consultants deem a consumer with an annual income of 90,000 yuan middle class, higher than the standard other institutions use.)

That D-I-Y mentality is totally different from Western markets.

It is therefore crucial that financial companies cater to this thinking and adjust their product portfolio. When they design a plan for their customers they could leave scope for customers to make some of their own particular investment decisions. For example, they could allow customers to pick a few stocks with a limited investment quota.

The author is a financial analyst in Shanghai. He can be reached at michaelzhoufeng@gmail.com