East Asia’s middle-classes are set to number over 3 billion by 2030. How is this rise being facilitated and what does it mean for global demand dynamics, from gold to mortgages to holidays?
The OECD projects that the world population will grow to over 8.2 billion by 2030 and that China and India will be home to roughly two thirds of the global middle-class. By then, some estimates suggest Asian-Pacific (APAC) countries will have seen a growth in their middle-classes by over 500% in the 20 years up to 2030, compared with 2% growth in Europe and a decline of nearly 5% in America. In 2011 the total number of middle-class in Asia overtook the total in Europe. There are now around 1.5 billion middle-class in Asia, all demanding higher standards in their lives for food, energy, tourism, hospitality, education, healthcare, luxury goods and property.
The growth in the Asian middle-class has in recent years been particularly noticeable in China, but it is the developing nations in Asia that are making their presence felt: GDP growth for countries such as India, the Philippines and Vietnam outstrips the rest of the region at 6-7% annually. In developing Asia, the higher spending segment of this group of people, or ‘upper-middle-class’, now numbers about 150 million and is expected to easily grow by 100 million or more in the next few years as an accelerator phenomenon takes effect. This surge in numbers has already been observed in China and the most aggressive growth is now being seen in Indonesia and Vietnam, although in terms of the percentage of the population Thailand and Malaysia are leading.
Seeing it first hand
On a visit to developing Asia, say Manila, you notice most cars that pass you are new (including the odd Ferrari or Lamborghini), likewise in Ho Chi Minh where the new part of the city now has the tallest skyscraper in east Asia, surrounded by thousands of new apartments blocks. However, one observation you can make from afar is that more and more Asian are enjoying their new wealth via travel: it’s not difficult to see more and more far-flung Asian tourists appearing.
Thirty years ago, the Japanese were enjoying similar prosperity and queued outside Louis Vuitton in Hong Kong and invaded Hermes in Paris, now the Chinese have taken over. When venturing out of Hermes with a coveted purchase, you are most likely to be approached by a Chinese scalper who will bid for the newly sewn handbag – and to fill the demand-supply gap the Japanese are gleefully selling their inventory of mostly unused vintage brand goods at a profit through tourist targeted stores around the country.
Emerging South East Asia is putting itself economically back on the map again after a 300-year absence when Western Europe and America became fabulously wealthy through the 1700-1900s, leaving Asia far behind. The Asian Tiger economies of Hong Kong, Singapore, South Korea and Taiwan were the first to make the comeback following the rapid industrialization throughout the 1950s and 60s and then followed China through the 90s and 2000s, these economies have now entered a maturing phase. In the 60s and 70s toys, clothes, pots and pans used in the West were often ‘Made in Hong Kong’, today Hong Kong makes nothing except money and consumers, almost a third of whom annually go to Japan for a holiday. Now it is the consumers of the Tiger Cub economies of Indonesia, Malaysia, Philippines, Thailand and Vietnam that are making their presence felt.
As incomes rise and the number of households entering the middle-class rises, goods and services that are purchased go further upmarket. After buying the first TV, smartphones for the family, a car and the first holiday abroad, typically an income earner on $20,000 – $25,000, will turn towards financial products and ways to ensure their future security. This bodes well for the development of the financial markets in emerging Asia that have historically seen little demand for the basics such as creditcards, mortgages, savings plans or ways to store value in something other than local cash or dollars. In time this will filter into equities, bonds and non-local currencies including gold.
Gold, Dollars vs. Local Currencies
The volatile nature of the emerging markets currencies means that locals need to think in two currencies, historically this has been their own currency and the US dollar – just ask a taxi driver in Jakarta what today’s rupiah rate is, he’ll know to the penny and will likely accept dollars, giving change in local currency, something a London cabbie would not do.
Gold is a popular store of value around Asia: China and India are the biggest consumers of gold globally, the Japanese stash gold (it’s compact and doesn’t burn) and you can buy bullion from shops in Hong Kong. Indeed, gold’s transportability has seen a smuggling out of Hong Kong in recent years.
Feeling the strain
As tourists start to travel further, the long-term prospects for businesses facilitating this new-found wealth and demand for property, goods and services are promising. The new middle-class are relatively young and have a high familiarity with e-commerce: for example, in China, cash is dead and at US$5 trillion annually, the e-payment market now accounts for 42% of the world’s e-commerce transactions. The upper-middle-class in China and Asia have become comfortable users of credit cards and until the recent clampdown, innovative systems such as cryptocurrencies.
New legions of financially savvy global travellers will be a boon for the tourism sectors of destination countries but they are starting to suffer from too much of a good thing. The rapid rate of increase of these newly minted travellers is starting to strain resources and the patience of the locals in destination countries. In Hong Kong, shopping malls have had to be shuttered during peak times to avoid fights in stores over goods, while Australia and Western Canada, where many wealthy Hong Kongers previously fled, have imposed restrictions on the new waves of tourists, particularly with respect to buying property. In Japan the near three-fold increase over the past 12 years in tourists from Asia has put a severe strain on budget accommodation, public transportation and the supply of popular goods. Ask an average resident of Kyoto and they’ll tell you the city can’t cope any more, public transport is so overburdened you can’t get on a bus to go to work.
Population growth in these countries will propel this further. The Philippines, for example, will see about 2.5 million babies this year, born to millennials who have a growing interest in better, more comfortable lives with higher incomes. This ensures the long-term growth of this powerful Asian consumer base, they are here to stay and we will need to adapt worldwide.
Neil Newman is an Asia business development expert and contributing analyst for Gavekal Research Limited