Asia’s middle class is one of the fastest growing population groups in the world. According to the World Bank, the middle class of South and East Asia accounted for 1.4% of the global population and 2.1% of global income in 2000. By 2030, the World Bank forecasts that this same group will account for 8.9% of the population and 7.7% of global income - - much higher than the middle class growth in other developing regions, according to Deutsche Bank Research.
There are two reasons for Asia’s better prospects. One: faster population growth in South Asia means that these countries’ middle classes are growing more quickly. Two: although the population in East Asia is growing more slowly than in other regions, its annual per capita income growth is much higher (almost twice that in Sub-Saharan Africa) so it will still increase its share of global income in that time frame. The burgeoning of Asia’s middle class makes it an important consumer market, an engine of economic growth in the region, and an important global political force.
DBR says China’s National Bureau of Statistics defines the urban middle class (2nd quintile to 4th quintile groups) as households with disposable per-capita income between RMB 8,900 ($1,300) to RMB 16,386 ($2,400). In India, according to the McKinsey Global Institute, a lower middle class household earns between $8,000 and $15,000 annually.
A growing consumer market
DBR says in its recent report, that the potential of Asian (especially Chinese) consumers to take up the mantle from the US as “world consumer of last resort,” has captured the imagination of many observers in recent months. For that to happen, the surge of the middle class would be a key ingredient. Current projections, alas, show that it will likely take a long time for emerging Asia to match the US’s consumption prowess. Nevertheless, the emergence of a large and dynamic middle class raises Asia’s profile as an attractive market destination in its own right. It heralds a rise in earnings and disposable income (defined as post-tax income available for spending and saving). The DBR economists say that studies demonstrate that as income increases, a smaller percentage of it is spent on necessities such as food and more is spent on optional items. Thus, it is evident that in comparison to lower-income households, the middle class has a greater amount of discretionary income (i.e. income available after taxes and essentials such as food and shelter are taken care of) to use and it will be more diversified in its consumption choices.
The DBR economists say that for essential purchases such as food, middle class consumers may tend to switch consumption to more expensive, better tasting foods or spend more time eating out. In addition, this demographic group will spend a larger percentage of their income on non-essential categories.
In a study of 13 developing countries (including India and Indonesia) by Banerjee and Duflo (2008) about the middle class and consumption, they found that the share of expenditure devoted to entertainment went from virtually zero for the very poor to 1-5% of total income for those in the next income group which had per capita expenditure of $6-8 per day. This trend continued at the different income levels. Similar results can also be found for consumption on alcohol, healthcare, household goods and infrastructure (such as utilities). This can help explain the boom in consumer products such as televisions and mobile phones throughout Asia. As income levels continue to rise, the middle class not only diversifies its spending but also increasingly demands more quality and innovation in the goods that it purchases. This drives competition amongst suppliers and the opportunity to target goods to specific niches of consumers.
Along with demand for traditional consumer products, the demand for a variety of financial services increases in many countries as the middle class expands. In many Asian nations, there is evidence of an increased reliance on credit (in particular personal credit cards) to finance expenditures. In countries such as Malaysia and Singapore which already boast more than one credit card per person, this simply means additional or supplementary credit cards in a household while in other places such as India this entails capturing first time users.
There is also evidence of increased lending for personal mortgages in some countries. For instance, in India, the amount of mortgage loans outstanding grew over 25% between 2006 and 2007 and over 12% between 2007 and 2008. More sophisticated financial services, such as investment advice or trust and estates preparation, have generally been geared towards the high-net-worth segments of the population. However, this trend is also shifting and these products are being increasingly marketed to the middle class populations in the region.
Household wealth will be adversely affected by asset market corrections
DBR says that during the ongoing global financial crisis, the MSCI Emerging Asia stock index fell 66% peak-to-trough. It says there are no easily comparable statistics on equity investment by Asian households.
For instance, portfolio investment (which includes stocks and government bonds) accounted for 37% of Taiwanese households’ gross financial assets and 28% of net assets in 2006, down from 43% and 31%, respectively, in 2002. In India mutual funds accounted for 7.7% of households’ total financial assets in 2007/08, up sharply from only 1% in 2003/04. And according to a 2007 survey, 32% of Hong Kong’s adult population were stock owners and 36% were stock investors, with the average investor earning HKD 22,000 a month. Judging from local bourses’ statistics, participation of domestic retail investors is relatively high in Korea (around 50% of trading value in 2008), and somewhat lower in Malaysia (41% of total trading value as of April 2009). In the case of Thailand local retail investors accounted for 54% of total turnover at the Stock Exchange of Thailand in 2008 and estimates for China put the share of retail investors at around 50-60%.
Australia and Emerging Asia
The Australian Minister of Trade Simon Crean, said in Melbourne on Wednesday: "We are putting some key markers in place and earlier this month, I was in Singapore meeting with trade ministers from the Asian region. In Singapore, we committed to redouble our efforts to ensure that the ASEAN-Australia-New Zealand Free Trade Agreement comes into force on January 1, 2010. This is a region that is home to 600 million people and with a GDP of more than A$3 trillion (€1.75 trillion).
In Singapore, we also resolved to work towards further regional economic integration with senior officials examining a Free Trade Area spanning the ASEAN region - plus six other countries. That is the ten nations of ASEAN (Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) plus China, Korea, Japan, India, Australia and New Zealand. This would create a trade region with a combined GDP of A$16.5 trillion."
Crean said Australia is a country of just 22 million people. Its landmass may be positioned on the periphery of Asia, but Asia is absolutely central to Australia’s trade and investment future.
Australia's top three export categories are: coal, iron ore and education services.
Research by the Australian Farm Institute in 2007, examined recent trends in animal protein demand in 12 Asian nations and developed projections of likely demand trends over the period to 2020. Future demand trends are based on population growth rates, increasing consumer wealth, and trends in consumer diet preferences.
Over the period to 2020, the research projects that annual beef, pork, chicken and dairy product demand within these 12 nations will increase by between 30 and 50%. This is projected to result in increased import demand for 1.9 million tones (Mt) of beef, 1.2 Mt of pork, 1 Mt of chicken meat and 5.2 Mt of dairy products. These are very large increases compared with current volumes of international trade in these products.
The research also indicated that there will be additional demand created for between 350 and 450 Mt of feedgrains by 2020, a 20–30% increase on then global production levels.
