China's middle class is starting to look a lot like America's, and that's not a good thing

• Housing is increasingly unaffordable for China's middle class, and household debt levels are rising.
• China's middle class faces the real possibility of not being able to do better than their parents.

China's middle class has grown explosively in the past twenty years.

In 2000, roughly 3% of the country's population was classified as middle class. By 2018, more than half of China's population — 707 million people — had entered the country's middle-income bracket, according to calculations from the Center for Strategic and International Studies that defined the middle class as those spending between $10 and $50 a day.

As China's middle class has expanded, it has in many ways also started to look like America's. In its most recent middle-class analysis, the Pew Research Center in 2016 classified 52% of the US population as middle class. (Methodology for defining the middle class varies, but many experts — including Pew — define the middle class globally as those who live on $10.01 to $20 a day per person, which straddles the poverty line in the US.)

And while the growth of China's middle class is a good thing — those 707 million people have risen out of poverty, after all — some of the similarities it now shares with the US are distinctly less positive.

Max Zenglein, chief economist for the Berlin-based Mercator Institute for China Studies (MERICS), told Insider China's middle class will soon face very similar challenges to the US and European middle classes: "Wage growth is not strong enough to make it easy for them to afford their dreams."

"It's very difficult to move upward, but there is a risk for them to move down, and that's something new," Zenglein said of China. "They might be hitting a ceiling."

Priced out of the housing market and increasingly relying on personal lending networks

In China and the US alike, housing prices are rising.

The rise in US home prices has been especially pronounced during the pandemic. In April, home prices rose by 14.6%, the biggest price spike in 30 years. And housing prices, which kept hitting new highs throughout 2021, could surge another 16% in 2022, Goldman Sachs said in October.

In this environment, Ben Winck recently wrote for Insider, middle-class homebuyers are out of luck: The US is running out of starter homes, and, on the coasts especially, contractors are prioritizing expensive homes that are out of reach for middle-income earners.

In China, real estate prices have has also been climbing over the past two or three decades. From 2003 to 2013, for example, housing prices in tier 1 cities like Shanghai, Beijing, and Shenzhen saw an average annual growth rate of 13.1%. Recently, amid market concerns sparked by real-estate giant Evergrande's debt woes, that trend has seen a reversal: In October, home prices in China started falling for the first time in six years.

Despite the massive growth in China's home prices over the past decades, nearly 80% of households in China are homeowners (compared to 65% in the US). So while housing in and of itself is not out of reach (the country certainly has no shortage of homes), the price of houses is. That's why homebuyers, and younger generations of homebuyers in particular, are increasingly turning to personal lending networks to be able to pay the required 30% down payment on a home.

"It's not a problem of housing availability," Logan Wright, director of China markets research for research group Rhodium Group, told Insider. "It's a problem of price relative to income, especially in desirable places to live."

Rising levels of household debt

Largely because of the rising cost of housing, household debt in both the US and China has increased.

Total household debt in the US exceeded $15 trillion in Q3 2021, according to the Federal Reserve. That's $1 trillion higher than it was at the end of 2019. The typical American household has roughly $145,000 in debt, per the US Department of Housing and Urban Development — nearly $100,000 more than it did in 2000. That's also significantly higher than the median household income in the US, which is currently $79,000.

Meanwhile, China's household debt is lower than in many developed countries — but has been steadily on the rise since the financial crisis, Bernard Aw, an economist overseeing the Asia Pacific for Coface, previously told Insider.

In 2020, China's household debt rose to 128% of income, according to a Rhodium Group report. And at the end of October, China's total household debt hit 70 trillion yuan (US $10.98 trillion), Wright said, citing data from the People's Bank of China.

"Household debt has increased rapidly, so they're leveraged. It's a combination of high leverage, weaker economic growth, and lower income growth," Zenglein said of China's middle class. "So something's gotta give."

At risk of falling out of the middle class

Something is giving: In both China and the US, it's increasingly difficult for the middle class to do better than their parents.

The US middle class is shrinking, and it's struggling. From 1979 to 2017, household income growth for the middle class grew more slowly than incomes in both the top and bottom 20% of American earners. And as middle-class wages stagnated, the cost of living in the US soared.

While 61% of American adults were classified as middle class in 1971, that number shrank to 50% by 2005, according to data from the Pew Research Center. And per a paper from nonprofit research group Rand Corporation, 2.7 million Americans fell out of the middle class from 2007 to 2017.

In China, the difficulty of remaining in the middle class is a new predicament.

"For younger generations, they are coming from parents who came from the dark times in China's development and who improved every year significantly in wealth," Zenglein said. "For the new generation, they can no longer take for granted that they will be better off as a whole."

Zenglein clarified that there's a wealth divide within the trend, too: "This is probably less relevant for the lower-income groups, like migrant workers. Even though inequality is rising, it'll be easier for their kids to have a better life than for those who are coming from the middle class."

Notably, the plight of the middle class extends beyond China and the US; on a global scale, 54 million people fell out of the middle class last year amid the pandemic.

Not a mirror reflection

To be sure, for all their similarities, the two countries' middle classes have their differences.

For one, America's middle class is more established. For decades, it was the richest middle class in the world (it lost the title to Canada in 2019).

While real estate is important for wealth-building in both the US and China, the role homeownership plays in each country is not comparable. "The role of real estate for wealth and social standing in China is significantly different than it is in the US. If you don't have a house, you're not going to get a wife," Zenglein said of China. In China, 70-80% of household assets are tied to real estate, which is higher than it just about any other developed country.

The US-China similarities are also not uniform throughout China; instead, they're prominent mostly in China's developed, urban centers — cities like Shanghai, Shenzhen, and Beijing. As Zenglein put it, it's "the biggest winners of China's economic success that are starting to look more like the US middle class."

That said, the resemblance between the two is strong, and it's stronger than it's been before.

Wright said there are growing risks to the economy and standards of living in China if the property sector starts to weaken considerably: "If housing is still people's primary asset, even if they're borrowing in order to engage in the housing market, that's going to have an implication for whether people feel or act like middle class as well."

"It's not a one-to-one match," Zenglein said of the US and China middle classes, "but it's getting into an area where the similarities are increasing."