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Oil and China: Where is the Middle Class?

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The Rich and the Poor - Beijing by Digital Watts.

By Matt Wells

Quick question: why is oil demand in China dropping so drastically? Easy answer: China's manufacturing base has been hit hard by plummeting consumer spending in the United States.

So there you have it. This is the answer given to us by economists from Goldman Sachs and other institutions. Except there's one problem with this nice and easy explanation: where is China's vaunted "middle class" in all this? You've no doubt heard of this middle class: they are the millions and millions of upcoming young Chinese men and women that have apparently benefited from the boom years to become fantastically over-indulgent consumers, just like us. They've been all over the news for years. You know the usual images: fashionable youngsters zipping about the broad, bright streets of the country's mega-cities, cell phones in hand as they work, shop, and socialize, perhaps all at the same time. Shouldn't their spendthrift ways in some way make up for the shortfall in American demand for oil and the oh so many products it plays a role in producing?

What's interesting is that we've heard little in the media about this middle class ever since oil fell and China's economy began to suffer, both events occurring virtually simultaneously in the late summer and fall, and accelerating at similar rates into the new year. Oil fell hard, and China's economy went with it, not going into recession mode, but growing at about half its peak rate from the boom years. If China is really an emerging superpower with a multifaceted economy, should its fortunes really be pinned so closely to the price of oil? Answering this question will require exploding many of the myths beloved by free market economists, who believe that middle classes and complex economies "grow" naturally from such inauspicious beginnings as China's sweatshop-model manufacturing sector.

Let's return to the issue of oil prices. Talk of China's increasing demand for oil has been a big issue for much of the decade. In 2007 the International Energy Agency released a report that claimed that given "the country's booming economy, oil product demand is projected to increase by 5.6% per year on average to almost 10 million bpd by 2012, consolidating its position as the second largest oil consumer after the US." As early as 2004, an "energy specialist" with the Asian development bank stated "More than a billion Chinese are joining the oil market. How can prices go down?" . And this was when the stuff was going for $55 a barrel.

When oil pushed into the triple digits and well beyond in the summer of 2008, fears of China's insatiable demand seemed to be justified. But then a funny thing happened on the way to Peak Oil: the bottom fell out of the market, and prices plunged. The International Energy Agency, that ever-fickly prognosticator, now states that "demand for oil will fall this year at the fastest rate since 1982." While Western economic factors are largely to blame for this drop, the group noted that "in China, total oil demand is still growing, but the rate of increase has slowed very sharply." The Washington Post, in a recent article on the issue, stated that "Paul Ting, an independent oil analyst, says preliminary estimates suggest that petroleum consumption in China fell more than 6 percent in January compared with the month in 2008." As the same article states, "Oil use in China, which most forecasters a year ago assumed would be the engine for increasing global demand, has screeched to a halt."

As stated above, economists have easy explanations for this plunge in oil demand, connecting directly with the decline in demand for China's manufactured goods in Western countries. Yet this direct connection between Western demand and Chinese supply is not in keeping with notions of China's development as an independent superpower, with a self-supporting economy to go along with it. Rather, the situation seems more akin to that of Venezuela, where, according to the same Washington Post article, "oil accounts for 95 percent of exports and about half of fiscal revenue." If you convert that oil into cheap manufactured knick-knacks, as China does, then the two countries appear to be in similarly desperate situations: trying to export goods to rich Western countries that don't want them anymore. But has any economist ever dared to equate China with Venezuela?

If external demand for China's goods is dropping, and China really is an emergent superpower with a growing middle class, than internal demand should alleviate at least some of the damage done to the country's manufacturing economy, which would keep oil prices aloft. That clearly isn't happening. So where is this Chinese middle class now that the country needs it? Well, maybe it isn't there.

The idea of "growing" middle classes has been beloved by Milton Friedman-loving laissez-faire capitalists for a long while now. In the 90s, though, the idea even became popular with so-called "economic liberals", many of whom were ostensibly liberal overall in their political thinking. Former President Bill Clinton was one of the front-row champions of the globalization mania. In a 2000 speech at Vietnam National University in Hanoi, he uttered the now widely-quoted statement, "Globalization is not something we can hold off or turn off. It is the economic equivalent of a force of nature -- like wind or water." Everyone was getting in on the globalization game in those days, promising that political liberties would follow the opening of the worldwide economic floodgates.

While globalization is a multi-faceted issue, with regards to the development of middle classes, the thinking can be summarized as follows. For several decades, the trade gap between the West and developing countries has widened, as our governments have allowed businesses to import goods made on the cheap in manufacturing enterprises outside respective national borders. This, of course, sparked something of a worldwide competition to see what country could produce goods the cheapest. Puerto Rico was an early winner, with Taiwan and Southeast Asia later rising to the fore. But none of these countries has been as successful in this game as China. No country has such a vast reservoir of poor, underprivileged people to exploit. No country has been quite as willing to exploit their populations, working them under the harshest conditions and paying them next to nothing. No country has been as willing and able to suppress any voice of dissent coming from those toiling in such places. If you forget about human rights and simple morality, China is the paradise of paradises for manufacturers and the companies that work with them.

While a loud minority of folks here do in fact point to the human rights issue, the economic liberals and Friedman fans have persistently pushed them aside. They say that human rights will come when those at the bottom of the ladder get with the program. They may make piddling salaries, but those salaries will be put to good use. They will provide for themselves and their families, who will become better educated and better-informed citizens. Their children will go to better schools, get into better careers, become good young consumers, and maybe, just maybe, become politically organized. This last step is a bit problematic, in that the Chinese government clearly isn't interested in turning itself into a democracy. So the Western champions of China's economy prefer to focus more on the consumer spending, and less on the messy political stuff. Still, the result will be the same, somehow. Things will be better down the road.

Such folks naturally look to historical precedents to make their case. They may cite the rise of merchant and artisanal economic and political power in medieval and early modern Europe. Or they may point with pride to the American Revolutionary war. Those on the left may even cite the rise of labour unions in the late nineteenth and early twentieth-centuries. All of these, they say, were examples of cases in which individuals with growing wealth were able to organize themselves and gain more rights and freedoms from their evil overlords.

Unfortunately, these examples falter under close scrutiny. The artisans and merchants of Europe were able of exploit the period's chaotic mix of competing political interests (and after the Reformation period, religious interests) to force wedges into which they could gain controlling interests in particular towns and regions. The first major "modern" commercial city, Amsterdam, was essentially created from scratch following a miss migration from the area now comprising Belgium, which was warring with Spain at the time. London grew party as a result of the chaos of the civil war years of the mid-seventeenth century. In areas where absolutist rule was more entrenched, such as tsarist Russia, no substantial "middle class" political power ever emerged. Most i
mportantly, however, the artisans and merchants represented only a fraction of the overall European population, perhaps as little as ten percent. Most people were still tenured peasants living off of the land in varying (though typically low and limited) degrees of wealth and freedom.

The situation in the American colonies which led to the Revolutionary war was also unique, in that an ever-growing population of colonists, pushing aside the original inhabitants of the land, were able to develop an increasingly independent economy and political mindset supported by Enlightenment-era thinking. The sheer number of immigrants (especially when compared to the colonies created by France and Spain), coupled with a weak English crown, and the natural isolation provided by the Atlantic ocean, allowed the colonists to win their independence (at least those who were white and landowning, of course). To try and compare this unique set of circumstances with those of China is simply foolish.

As for labour unions, one can't argue with their successes, but they came within a societal and political framework that did allow for limited forms of public dissent. The gains labour unions did make did not come without plenty of violence and bloodshed – I could cite a number examples here, but I'll point to the Winnipeg General Strike as one important, yet relatively unknown example (even amongst many Canadians, regrettably). The main point here is that labour unions didn't overthrow totalitarian regimes; rather, they fought their battles in countries in which important freedoms had already been established in law, and even then their struggles were legion.

But back to the present. One of the underlying dreams behind the creation of a middle class is that it will then provide the poor a means to pull themselves up to an attainable higher rung in the socio-economic ladder. In China, by all accounts, this isn't happening, and it is now estimated the upwards of 20 million Chinese migrant workers are moving en masse out of the factory towns on the Pacific coast of the country back to the towns and villages where they came from, jobless and no better off than they were before. Countless others jam "job centres", though it is estimated the millions more factory positions will be eliminated in the coming months.

These factory jobs did provide incomes that their workers could not find at home: these folks could earn "10 or 20 times more money in the factories than in the villages," according to the article cited above. But that's natural when one moves from a subsistence economy, in which most of what is grown and consumed is produced rather than purchased, to a purely capitalist economy, in which pure income must provide for everything. That's not to deny the lure of entering into a capitalist economy, with its apparent freedoms and opportunities to break from traditional patterns of rural life. But to examine solely the jump in income in percentage terms is one reason why Western observers failed to foresee China's recent severe economic troubles.

The re-migration of millions of ex-factory workers reflects the true situation in China. These people, when work was available, were making enough for them and their families to get by. Now that these jobs are disappearing, they have nothing left. They don't have skills they can use elsewhere. They don't have the means to educate themselves and explore other career opportunities. And thanks to the dismantling of the country's social safety net in its efforts to embrace the global free market, they can't turn to the state for assistance either. They are still at the bottom of the ladder.

There are those who have been trying to warn us for a while now that China's middle class was merely an illusion. In a 2007 article for BusinessWeek, Arthur Kroeber, editor of China Economic Quarterly, stated blankly that, "China doesn't have a middle class.". He blamed deceptive figures released by the Chinese government for our misperception of the situation, and estimated that total purchasing power in China to be half of what was being reported at the time. And such purchasing power was concentrated among the well-off in a few privileged urban areas. "As far as significant retailers are concerned, out of China's 1.3 billion people, 1.2 billion simply don't count," he stated.

Such views were recently echoed by David Goodman, professor at the University of Technology in Sydney. Goodman argues that the "middle class" that we see in China's urban centres are an exclusive elite forging ever-closer links with the ruling Communist party. "They are neither independent of nor excluded from the political establishment, which on the contrary seeks actively to incorporate them," he states. He attributes this development to former party leader Jiang Zemin, who "opened the doors for capitalists to join the party."

While everyone seems to have an opinion about China, these arguments seem to be supported by recent events. As China's manufacturing sector has witnessed a significant drop in foreign demand, its earnings, as well as the money that in turn pours into government coffers, have dropped substantially. As a direct result of this, the growth of China's domestic economy has plummeted. The privileged elites that were connected to the political and economic infrastructure that created the boom are suffering as well. As for the independent middle class that could "spend" the country out of economic decline (if one even believes that such a thing is possible), it simply isn't there. An elite of 100 million people may seem like a lot, but proportionally that group represents less than eight percent of the total population. Even peasant-heavy early modern Europe could do better than that.

If nothing else, this global downturn has proven time and time again that the assumptions of the free market enthusiasts that managed to take control of our financial and economic infrastructure were – like those of any other group of wide-eyed fundamentalists – based more on arrogant faith than on sound facts and careful reasoning. It was okay to exploit China's poor classes so that we could buy cheap clothes and electronics, they told us, because the poor over there were going to benefit from the work we tossed their way to become just like us. Turns out we really were just exploiting them.