"Small-town kids" shape future of China's consumption

"Small-town kids" shape future of China's consumption

Thu, 17/05/2018 - 15:01
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LIFESTYLE: Residents in second-tier cities such as Nanning are driving an emerging new era of Chinese consumption. Photo: Shutterstock

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Rising purchasing power in second-tier cities is the latest indicator China’s ‘smaller markets’ are big opportunities for Australian exporters.   

The bright lights of Beijing or Shanghai have never held much allure for Wu Tongxu, a 24-year-old civil servant earning a modest salary in the nondescript city of Xinxiang in China's central Henan province.

But his lifestyle is anything but parochial.

Mr Wu drives a 370,000 yuan ($77,000) Cadillac sedan, owns a downtown apartment and dines out at restaurants.

He can sometimes be found at rock concerts in Hong Kong or on jaunts up Mount Fuji in Japan – financed by his doting parents.

"If I were to live in Beijing or Shanghai, I'd never be able to afford the lifestyle I'm having now," Mr Wu said.

Until now, China's consumption has been led by residents of the capital and free-spending coastal cities.

But the hinterland has been catching up fast, transformed by industrialisation and rapid urbanisation in the past 10 years.

In 2016-20, around 50 million households will enter the middle and upper classes, with half of them likely to be located outside China's top 100 cities, according to a report by The Boston Consulting Group and AliResearch, a unit of the e-commerce giant Alibaba.

That transformation has already helped spur a spending surge in the hinterland.

In a report by UnionPay/JD.com, consumption in third- and fourth-tier cities, generally cities with gross domestic product of less than $US70 billion ($93 billion), soared 58 per cent last year. Taken together, the cities have a total population of nearly 700 million.

Much of that spending is happening in cities like Xinxiang, a city of 6 million that has benefited in recent years from the rapid development of nearby Zhengzhou, Henan's capital.

The rise of cities like Xinxiang has coincided with soaring living costs in big metropolises, particularly over the past 18 months as rents hit historic highs.

Beijing and Shanghai are also tightening controls on migrants in an effort to control urban sprawl and curb the growth of their 20 million-plus populations.

As a result, so-called “small-town kids” around the country are increasingly staying in their hometowns.

They are splurging on cars, fashion and entertainment, reshaping China's consumption landscape as their peers in Shanghai and Beijing contend with high living costs.

Retail sales in Xinxiang soared 12 per cent last year, exceeding Beijing's growth of 5.2 per cent. Xinxiang's gross domestic product was about 240 billion yuan last year.

For decades, migrants from smaller cities headed for large urban centres where the country's economic boom first took root.

That is changing.

In Xinxiang, some 90 per cent of millennials are staying put in the city, mayor Wang Dengxi said.

That sort of shift has attracted companies like H&M, Fast Retailing, JD.com, China Evergrande Group and Dalian Wanda Group.

Magnus Olsson, country manager for H&M China, said in March the fashion retailer was looking to improve brand recognition in cities where it was not present.

Morgan Stanley expects China’s private consumption market will more than double to $11.8 trillion in 2030, from $4.7 trillion currently, with two thirds of the increase coming from third- and fourth-tier cities.

A survey of more than 3,300 households showed that compared with big cities, residents in lower-tier cities are more inclined to spend on leisure travel, cars and online entertainment, according to Robin Xing, chief China economist at Morgan Stanley.

He said much of the spending was led by millennials.

More than 32 per cent of General Motors' Cadillac sales in China in the first quarter were in smaller cities while about 45 per cent of its customers were between 25 and 34 years old, the company said.

“Many locals here drive Cadillacs,” said Mr Wu in Xinxiang, sporting a pair of trendy black-rimmed glasses. “Now, I want to buy a Tesla.”

Small-town kids also spent more money on online games and live-streaming websites than their peers in first-tier cities, a report by the internet giant Tencent showed.

This has also led to a cinema boom in lower-tier cities. Box office receipts in third- and fourth-tier cities rose 22 per cent last year, surpassing the 11 per cent growth in first- and second-tier cities, according to calculations by Reuters, based on data from the online ticketing service provider Maoyan.

China Evergrande Group is aiming to build 200 cinemas nationwide in the next five years.

In Xinxiang, millennials are also swarming new western-styled bars and clubs at night.

Tian Zeng, a coffee shop owner, frequently hits the bars with his wife and their friends after a night out at the movies.

“My philosophy towards life is to enjoy it to the fullest, so I spend money as long as it makes me happy,” the 30-year-old said.

Much of the spending power in China's lower-tier cities comes from rising property values over two decades, analysts say.

An analysis of 45 Chinese cities of all tiers by Haitong Securities showed a 1 per cent increase in property prices in relatively cheap markets brought about a 7.9 per cent increase in local consumption growth in 2016.

Rising property prices have also enriched older Chinese people, like Mr Wu's parents, many of whom are happy to finance the lifestyle of their often only child, according to interviews with over a dozen young people in Xinxiang.

Many young people are also finding their own business opportunities at home.

Li Jiao, who owns four apartments, started renting them out under Airbnb last year.

Ms Li, 24, who holds a master's degree from the University of Manchester, said business was so brisk that she was considering lifting rental fees to 300 yuan a night from 250 yuan, almost on par with prices in cities like Beijing.

"A lot of my renters are local students here who have been longing to try something new and different," she said.