The majority of Chinese are off the radar for western companies, writes Clifford Coonan.

An affluent middle class in China has long been a holy grail of global capitalism, a vast pool of willing consumers keen to buy Western goods. Lancashire cotton mill owners in the 19th century dreamed of the untold wealth that awaited if pigtailed Chinese would add just one inch to their shirt-tails, just as the mandarins of the Detroit car industry today look to Chinese buyers to dig them out of the stagnant mire of US auto consumption.

Markets are frantic with speculation about a consumption boom in China and investment fund managers drool at the prospect of hundreds of millions of wealthy Chinese clad in Burberry jackets and Gap jeans clambering into BMW X5s while talking into their slimline Nokia 9300s, ready for a day's shopping at Tesco.

The most bullish investment bankers say the Chinese shopper will displace the American consumer as the engine of global growth by 2015.

However, this sits uneasily with another vision of China, where hundreds of millions of people earn less than €1 a day and the government is forced to make huge rural investment to stop a politically destabilising wealth gap emerging.

Some put the number of middle-class Chinese at 600 million, some at 30 million - a huge difference, arising from different views on what qualifies one as middle-class.

So just how big exactly is China's storied middle class? The answer is: probably about half the size, and much more scattered, than the China bulls believe, and with much lower purchasing power than the Lancashire mill-owner or the Detroit car-maker imagine in their dreams.

But a lot of the argument boils down to what qualifies as middle-class, which basically means not poor and not rich and contains a lot of leeway.

For the most part, China remains what it has always been, a large country with a lot of people, most of whom do not have any money, says Arthur Kroeber, managing editor of China Economic Quarterly, and co-founder of Dragonomics, which recently published a comprehensive report on China's middle class.

"The best way to think of it is to quantify the meaningful consumer market in China, those with the right income, in the right place. The total spending power of this group is just over $200 billion (€150 billion), which is about 3 per cent of that in the US and not that big in aggregate terms," said Mr Kroeber.

Around 150 million of China's 1.3 billion people have a per-capita GDP of $5,000 (€3,700), a level identified as one beyond which people are able to make discretionary purchases.

They are mainly located in three areas - 82 million around the Yangtze River delta, which includes Shanghai; 43 million in the Pearl River delta in the booming southern province of Guangdong; and another 25 million in the Beijing-Tianjin corridor.

"There is no question that China is becoming wealthier and that consumers in the big cities on the coast are buying an ever wider range of products. But stories of a Chinese consumption boom are largely fantasy," he said.

China had 577 million urban residents at the end of 2006, or nearly half the population, of which 412 million live in the 287 cities with over 1.25 million people.

This is a sales manager's dream on paper. But the majority of these people do not count as effective consumers for Western companies - not too many Irish firms are thinking of moving to, or have even heard of, Liaocheng or Zhengzhou. Also, these are difficult markets in terms of distribution and access. So you end up looking at Shanghai, Beijing and Guangzhou and the other first-tier cities.

These still offer fabulous growth potential, which gives investors experiencing low expansion in saturated Western markets an incentive to go to Wall Street and tell them a story of untold riches in China.

By Mr Kroeber's reckoning, China's middle class will only reach the size of the current US middle class (280 million) in 10 years. At that point, the spending power of the Chinese middle class will only equal a quarter of US middle-class spending power.

"Most of the growth will be at the lower end, people earning $7,000 to $10,000 (€5,000 to €7,500). They can afford some stuff, but not a lot of stuff," said Koerber.

Jonathan Anderson, chief Asia economist at UBS in Hong Kong, says defining the Chinese middle-class is a real problem. "If you want to estimate the size of the mainland middle class . . . well, good luck," he said.

Nearly the whole population has a mobile phone at this point, but only a tiny fraction of Chinese live a developed country lifestyle like in Ireland, the US or Japan.

"A more useful definition would be the ability to sustain above-average spending on 'luxury' items according to Chinese standards: a decent flat, a car, nice appliances and an entertainment budget," he said.

According to a UBS research note, there are 100 million people within this bracket, who have per capita GDP of $3,300 (€2,450) at the lower end. Meanwhile those who can afford these basics and own their own flat, for which they need a per-capita GDP of $6,000 (€4,450), number 25 million.

US personal consumption expenditure was $9,300 billion (€6,900 billion). This means that total Chinese consumer spending was only 12 per cent of the US level, even though China's population is four times that of the US.