Sep 28, 2012 07:54 PM

What Does 'Middle Class' Mean Anyway?

We often hear about the rise of the middle class in Asia, and in particular in the fast-developing countries such as China and India. However, what exactly is the "middle class?"

The term is widely cited around the world, applied without hesitation by all sorts of people. Nevertheless, it means different things to different people in different places.

In some countries, being middle class might mean owning a house and a car. In others, it may just represent having a roof over your head and a toilet.

Even within the same country, its implication can be different in different places. What "middle class" implies in Beijing could be very far indeed from what it means in Wuxi, Jiangsu Province, or Chaozhou, in Guangdong.

The meaning of middle class will also naturally change over time. In the 1980s, when China had only just begun its economic reforms, people with a refrigerator and a TV set were to be envied, whereas today this is far from enough for many urban Chinese, who expect a higher standard of living comparable to those in Singapore, Taiwan and Hong Kong.

Even more complex is the fact that "middle class" also contains other layers. In many places in Asia, such as Hong Kong, Taiwan, Singapore or South Korea, it is almost a synonym of "middle income." However, in India, "class" implies one's social status, education, or caste lineage.

Therefore, if a comparison is to be made between places, it's probably better to be made using "middle income" from the purely economic point of view. But even so, the problem persists. Within one country or city, each individual may draw a different boundary. Even if we use reliable data, it is still difficult to define middle income. Should it be 50 percent of the households in the city or 68 percent?

The Market Definition

Just as the market can determine the prices of stocks or properties, we can also use it to define middle income.

We posed two identical questions in ten Asian cities where we conducted surveys. First, for a typical family consisting of a couple with a school-age child, what levels of income belong to the "low-income" and the "high-income" groups? With the boundaries of high and low, we'd be able to find the "middle."

We investigated more than 500 respondents in each city following statistical indicators. This sampling size is sufficient in providing representative results. Inevitably, online questionnaires ignore inhabitants with particularly low or high incomes within these cities. This is because the ones with very low income may not have Internet access, whereas the rich are less likely to participate in such a survey. However, our method still covers a wide range of incomes (from the lowest 10 percent to the highest 10 percent), professions, and age groups (18 to 54 years old).

The results of the survey were a surprise. None of the cities can define clearly what low, middle or high income is. All the investigated cities lack a definition that a majority of people would agree with.

For instance, in Beijing and Shanghai, the most common definition for a "low-income household" is to have a monthly income of 5,000 to 7,499 yuan, however, this represents opinions of 33 percent of all respondents. The answer that comes second, with 25 percent, is 2,500 to 4,999 yuan for a monthly household income. The most common definition for a "high-income household" is a monthly income of 20,000-29,999 yuan, but this also represents only 27 percent of all respondents.

If there is a lack of a consensus about what rich and poor are, then can a "middle class" or "middle income" really exist? Or do Asians somehow live in a classless society? These questions are worth thinking about.

According to our survey, people usually define levels of income in relation to their own household income. The more one household earns, the higher their definition of what a high income is.

Many people's income will change with age, experience, education and environment. Their definition of rich and poor will also evolve accordingly as time passes. Some might always feel they don't have an adequate amount of money. Even if one has made a fortune, one's standard of wealth might go up at the same time.

This also explains why some people take significant investment risks. The taste of success will yield even greater expectations. Unfortunately, excessive expectation may result in substantial losses. The spread of this kind of mentality may also increase market volatility.

In the developed world, people generally attach more importance to preparing for one's retirement. Market volatility thus tends to be lower in general. Often, people's financial management behavior is based on their need rather than their desire, which are two very different concepts. To many Asians, at a personal level, it's perhaps easier to differentiate the "need" and the "desire" than to obtain a consensus on the definition of the middle class. This would also be more helpful.

The author is director of Fidelity's Asia-Pacific investment communications

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