THE RISE AND RISE OF ASIA'S MIDDLE CLASS

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The day is coming when it could drive the lion's share of the continent's economy
by David Pilling, Kathrin Hille and Amy Kazmin

Zhou Yuanyan is becoming middle class  - one ring road at a time. When she moved to
Beijing as an 18-year-old from Inner Mongolia, she lived in a village on the capital's sixth ring
road, an hour and a half by bus to work. After starting out as a waitress she quickly switched
to selling property.

"I increased my commission income quite a bit over the past three years, so we were able to
move twice," she says with a flash of pride, charting her progress to the fourth ring road and,
eventually, the third.

Now 22, Ms Zhou lives with her mother in a small apartment about 40 minutes from the city
centre. She makes between 3,000 yuan ($587) and 6,000 yuan a month, depending on
commission, which puts her on the cusp of the middle class, according to a definition used
by the Boston Consulting Group. Her mother makes 1,500 yuan in a cleaning job. They
spend 2,000 yuan on rent and save about 1,800 yuan a month.

Ms Zhou feels able to indulge herself a little. She is glued to her new LePhone, a
smartphone made by Lenovo, and spends much of her free time chatting online, playing
games online and - another feature of Asia's emerging middle class - shopping online. She
dreams of buying a flat but harbours no illusions of being able to afford one like those she
sells in Beijing, where house prices are now comparable with those of Washington. "I would
have to save about a year to buy just one square metre in an apartment like that," she says.

Even so, the story of steady material progress that she and tens of millions like her can tell
gives credence to the long elusive dream of a Chinese middle class. Until recently, many
economists were openly sceptical about the idea that China, or any other emerging Asian
economy, could spirit a sizeable consuming class from the mass of poverty at the base of
the social pyramid. But that scepticism is beginning to fade.

This year could be the one when talk of Asia's export-led development begins to give way to
a realisation that much of the region's future growth will be self-generated. That could even
begin to address the global imbalances resulting from Asia's export-led model that have
been at the heart of the global financial crisis.

Not only in China but in countries including India, the world's second most populous;
Indonesia, a fast-growing nation of 240 million; and Vietnam, 85-million-strong and following
in China's developmental footsteps, the consuming class is beginning to grow. Even in less
obviously successful economies such as the Philippines, which has a population of nearly 95
million, years of steady if sub-optimal growth are creating pockets of broader affluence.

CHINA'S CONSUMING HORDES

The emergence of a middle class in Asia beyond the prosperity that already exists in Japan,
South Korea, Taiwan, Singapore and Hong Kong will have far-reaching consequences. With
growth likely to be anaemic in Europe and possibly America for many years to come,
businesses from food to insurance are desperate for new consumers with money to spend.
Many may find the opportunity they need in Asia.

In 2006,  Mr Arthur Kroeber of Dragonomics, an economic consultancy, put out a report that
poured cold water on the "fairy tale" of a Chinese middle class on anything like an American
scale. He estimated that 20 per cent of urban Chinese households - 110 million people in a
country of 1.3 billion - had significant discretionary spending power. Most belonged to what
he called "surviving China", a vast mass of poverty and subsistence outside the affluent
islands of Shanghai, Beijing and the Pearl River delta.

But Mr Kroeber is among those to have changed his mind. More quickly than expected,
many Chinese have reached a "threshold level" of income, an unpredictable point at which
consumption takes off. Furthermore, he says, the real level of Chinese income, held in cash
or hidden from view, is higher than captured in official statistics, a long-held assumption
corroborated by recent research.

Dragonomics now estimates 300 million people - 23 per cent of the population - have
significant discretionary spending and live in cities large enough to be accessible by big
companies. If those 300 million, who belong to what Dragonomics calls "consuming China",
were a nation, they would live in an economy two-thirds the size of Germany's.

McKinsey, another consultancy, expects the middle class to expand from 29 per cent of
China's 190 million urban households to 75 per cent of 372 million urban households in
2025.

"The upper middle class are the ones that are ready to buy a small apartment, that have a
car, that think about leisure activities more," says Mr Max Magni, head of its consumer
products practice in Greater China. Those in the band below are "starting to live in buildings
with multiple apartments, so they start to care about what other people think about them and
spend accordingly", he says. The lower middle class are those recently able to afford more
than the bare necessities.

INDIA'S EXPLODING MIDDLE

The emergence of an Asian middle class is certainly not limited to China. Ms Ireena Vittal, a
retail specialist at McKinsey, says India's 1.2 billion people can be divided into roughly 250
million households. Of those, 100 million live in poverty and have little realistic prospect of
attaining middle-class status. Only two million households enjoy the same standard of living
as rich counterparts in the US or Europe.

The interesting segment from a retail standpoint is the next level down, she says. There are
14 million to 15 million households with an annual income of US$7,000 ($9,075) to
US$10,000 - a number set to explode to 40 million households, or 200 million people, within
five years.

India is like China in 2001, says Ms Vittal. "After two decades of systemic growth, the whole
bell curve of income distribution moves to the right."

These households spend a lower proportion of income on food, devoting more to housing,
private education, healthcare, motorcycles, kitchen fittings, air conditioners and clothes, she
says. Even if India's economy grows at an annual 7.3 per cent - below the current 8.5 per
cent - McKinsey reckons that by 2025 it would have a middle class of 580 million people.

The era of the free-spending Indian consumer is not here quite yet. Ms Chaitra Manjunath,
the 26-year-old daughter of a carpenter, is typical. Although she has a relatively well-paid job
at a foreign back-office outsourcing company in her home town of Shimoga, 70 per cent of
her salary goes to the 200,000 rupees ($5,717) she spent on an MBA programme. With the
rest, she buys an occasional "luxury", such as dress material. The rest of her income - like
that of many in high-savings India - goes on gold, insurance and shares.

INDONESIAN TRAFFIC JAMS

If progress is a three-hour traffic jam to the capital's airport, Indonesia too is going places.
Over the past decade the number of vehicles on Indonesia's often inadequate roads has
nearly quadrupled from three million to at least 11.3 million.

"There are so many cars now," says 25-year-old Amanda Sompi, who works for a Jakarta-
based information technology company. "Ten years ago there weren't so many, but so many
people have moved to Jakarta."

Ms Sompi may not be able to afford a car of her own just yet. But she too has worked her
way up in a short time from Starbucks, where she was paid 2 million rupiahs a month, to an
advertising agency paying her 3.1 million rupiahs and to her present job as an event
manager at an IT company, earning5.4 million rupiahs. "I can pay for myself and give a bit
for my little sister's education," she beams. "I just became an independent woman."

 Euromonitor, a market research group, expects the number of Indonesian households with
annual disposable income of US$5,000 to US$15,000 to rise from 36 per cent today to about
58 per cent in 2020.

THE SMALL-CITY PHENOMENON

Asia's three biggest developing economies are all now witnessing something new: The
emergence of a consuming class outside the biggest conurbations.

"The growth of the middle class and its spending will be much faster in small-town China
than in the biggest cities many foreign companies have concentrated on so far," says Carol
Liao, a partner at BCG. Property prices in Beijing, Shanghai and Guangzhou are starting to
squeeze people's income, she adds. BCG expects the middle class in cities with a
population below 1 million to grow twice as fast as in other cities.

Neither is India's emerging middle class confined to New Delhi, Mumbai, Bangalore and
Hyderabad. Numerous smaller cities - places including Ludhiana, Chandigarh, Pune,
Coimbatore, Aurangabad and Surat - are experiencing growing affluence thanks to better
education, sharply increased land values, and the service and manufacturing jobs created by
India's economic boom.

Shimoga, where Ms Manjunath lives, is a feeder city to Bangalore, 300km away and the
centre of India's IT and outsourcing revolution. Even there, brands such as Nike, Adidas,
Levi Strauss and the local Peter England have started to appear.

To be sure, in the boardrooms of western companies, "middle class" tends to conjure up

unrealistic images of American suburban life and consumption patterns. By this measure,
emerging Asia's middle class remains relatively small. Someone with an annual income of
US$7,500 may be able to live fairly comfortably in China or Indonesia but would be
considered below the poverty line in the US, where gross median household income is
nearly US$50,000. In India just 30 million people pay taxes, an indication of the limited
number of well-off Indians as well as the inefficiency of the tax system.

Still, much of developing Asia seems to have reached a tipping point. If the projections of
consultants are anything like accurate, the growth of the region's middle class will have
enormous economic and commercial implications, not to mention environmental ones as a
new consumer class puts further strain on the world's resources. Nomura reckons that by
2014, retail sales in China may surpass those of the US.

While much of that consumption will be in "surviving China" - and thus of limited interest to
big multinationals - a substantial part will be driven by a newly empowered and aspirational
middle class. That is why the Chinese already purchase more cars and mobile phones than
Americans and will soon buy more computers too.

The Asian middle class is not quite yet in a position to power the global economy. But the
day is fast approaching when it will drive a much greater share of Asia's own. THE
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