Who Will Benefit From China's Huge Middle Class?

China’s explosive middle class is spicing things up.

Despite some worries as of late, the burgeoning middle class in China is now a force to be reckoned with on the global stage. In just three decades since Deng Xiaoping’s economic reforms in the mid 80s, China now finds itself home to the largest middle class on Earth. This includes over 225 million households which now find themselves in this category.

These 225 million households represent an astronomic shift from the 5M households of just 16 years ago. According to the Economist, the current criterion for those within the middle class involves earning between $11,500 and $43,000 a year in current U.S. dollars. Chinese people are seeing prosperity, the likes of which many have not seen before.

Because of its growth, China is now the second largest economy in the world. Chinese people are experiencing increased quality of life, as well as becoming a bigger target for foreign companies.

But what is the recipe for this success?

A Pinch of History

In the 1990s, China barely had a middle class. Much of the population was poor and agrarian, and the population had been largely isolated from the rest of the world since the Communist revolution of 1949.

China of 1990 had a lot of work ahead of it, but was ready for the taking. In 1992, Deng Xiaoping accelerated market reforms to establish a “socialist market economy,” revolutionizing the economic platform at that point. In 1994, China established permanent connection to the internet, instituted a 9-year compulsory education system in 1995, and gave greater autonomy to universities in 1999.

Of course, the 90s was not simply a period of eternal happiness, but things in China were largely on a fast track to catching up to the developed world. According to a research paper presented at an international conference on sustainable development from 2005, China managed to reduce the proportion of the population in severe poverty from 250M to 26M between 1978 and 2004.

China traversed a difficult point to reach where they are today, but they appear to be making it count.

A Dash of Increased Consumer Spending

From the opening of the first McDonald’s (NYSE:MCD) in Beijing back in 1991 to now, the rise of consumerism in China has dramatically altered the way people are spending their money. According to research by Global X, the issuers of the China Consumer ETF CHIQ, Chinese GDP growth is expected to be propelled largely by consumption.

According to the annual average, per capita income of households grew 9.4% in 2014 alone. Smaller cities in China are becoming more urbanized, with the Urbanization Plan targeting 60% national urbanization by 2020.

Newer generations in China that have lived under better economic standards are more confident about personal income growth, are more loyal to brand names, and often are less hesitant to try new products and services. Retail sales have grown every year since 2005, and current trends show no indications of that changing.

Essentially, the Chinese have shifted towards having more money to spend and less apprehension about spending it.

A Taste of Companies Cashing In:

With a market like China that is now realizing its purchasing power, there are many companies that can put themselves in a position to capitalize. Here are a few that have already made their presence in the region count, and plan on continuing to do so moving forward.

General Motors (NYSE:GM)

On Thursday, our team reported that General Motor’s China sales rose 5.3% in the first half of 2016. The improved performance was driven by solid sales of the Cadillac and Buick brands along with increased demand for the Baojun brand.

GM accounted for 14.9% of China’s vehicle market last year, and is believed to either remain either at or above that proportion by the time sales in the overall market reach 30 million in 2020.

Although analysts have revised earnings estimates downward for Q2 from $1.51 to $1.48 per share and from $5.62 to $5.56 for this fiscal year, China could prove to be a promising cushion moving forward.

GM Currently sits at a Zacks Rank #3 (Hold).

Starbucks (NASDAQ:SBUX)

For the past few years, Starbucks has had a clean run in China. It already runs 2,000 stores in 100 different cities in China, and as our team highlights, plans on doubling its presence in the China and Asian-Pacific region to 10,000 stores by 2019. One-fourth of that 10,000 will come from China alone.

By establishing themselves as a cultural symbol in China, SBUX has attracted much of the middle class to try their comparatively expensive beverages. Consumers want to be seen at Starbucks stores drinking lattes while holding their gadgets.

Although SBUX faces increased competition from such international café chains as U.K. based Costa Coffee and Maan Coffee from South Korea, SBUX is on track to continue their success in the region.

Starbucks currently sits at a Zacks Rank # 3 (Hold).

China Eastern Airlines (NYSE:CEA)

China Eastern Airlines is one of the largest airliners in the country. It is the primary air carrier serving Shanghai, the economic heart of China as well as the company’s headquarters.

According to data from the World Bank, the number of tourists in China has continually risen. Tier 1 cities such as Shanghai and Beijing draw the bulk of these tourists, so a company like CEA is in prime position to benefit from increased international tourism.

Domestic tourism is also a key factor here, because as mentioned the growing middle class also has more discretionary income which will be used for domestic tourism. All in all, CEA will likely be seeing more customers in modern day China.

China Eastern Airlines currently sits at a Zacks Rank #3 (Hold).

China Telecom Corporation (NYSE:CHA)

China Telecom Corporation is a state-owned company, and currently the largest fixed-line and third largest mobile telecommunication provider in China. Along with this, CHA provides internet access to over 38 million subscribers and about 62% of China’s overall internet bandwidth.

As per internetlivestats.org, China currently has over 721M people connected to the internet, in the lead by 260M users against second place India. As the previously mentioned ETF research states, current urbanization plans target 60% of China being urbanized by as soon as 2020. More urban centers mean more people who now can connect to the internet, and companies like CHA will have to meet that higher demand.

As such, it is worth investors’ time to keep an eye out for CHA moving forward.

China Consumer ETF CHIQ

The Global X China Consumer ETF designed to reflect the performance of the consumer sector in China. It has exposure to companies whose main business operations are in the consumer sector and are either based in or run their main business operations in China.

With all signs pointing towards a more consumerist China, this ETF will be worth watching as well. Although currently sitting at a Zacks Rank #4 (Sell), investors should realize that the Zacks ETF Rank involves next year, and it doesn’t take into account long term prospects.

Bottom Line

China is no longer the same country that it was thirty years ago, and may not be the same country thirty years from now either. A rapidly growing economy and resurgent middle class has dramatically altered the social and political landscape in China as well.

Although there are questions about China’s recent economic slowdown and potential political unrest, investors can rest assured that China is, and will continue to be, a very active global player. Foreign companies will invest more in hopes that they can tap into the 1.4B people market; however, whether or not they will succeed is something we all should keep our eyes on.