How consumption is rebounding in China’s second- and third-tier cities
Lianhe Zaobao journalist Li Kang notes that there is an increase in spending in non-first-tier cities in China, in contrast to people tightening their belts in first-tier cities such as Shanghai. How long will this last, and can the domestic market prop up China’s economy?
Even as many Shanghai residents are living frugally, 41-year-old Zhang Peng, who lives in Suzhou, feels that his personal and family expenses have not decreased significantly.
Zhang said when interviewed that apart from regular household expenses, he continues to book a field to play soccer with his friends and his child’s tuition fees have remained the same. “As long as the seller’s market hasn’t been downgraded, the buyer would still have to pay,” he said.
Ms Liu, 26, who lives in a fourth-tier city in Hubei, believes her spending has actually increased this year. She said that her expenses for dining out with friends are comparable to those of people in big cities. “I spend a few hundred RMB a month just on milk tea,” she shared.
Rising comsuption in second- and third-tier cities
While consumption downgrading is dragging down spending in first-tier Chinese cities, consumption in second- and third-tier cities is instead booming, becoming the latest engine driving China’s consumer market.
Official statistics show that while the total retail sales of consumer goods rose 3.7% year-on-year in the first half of the year, the performance of the four first-tier cities was significantly lower than the national average over the same period, with Shenzhen rising 1%, Guangzhou remaining unchanged, and Beijing and Shanghai both down 0.3% and 2.3% respectively. In June alone, total retail sales of consumer goods was down in all four cities by 9.4% in Shanghai, 6.3% in Beijing, 9.3% in Guangzhou, and 2.2% in Shenzhen.
... among the 31 second-tier cities defined by China’s National Bureau of Statistics, 23 cities saw a year-on-year increase in total retail sales in the first half of the year, while three cities saw a decline.
However, the vast majority of other cities outside of first-tier cities continue to see consumption growth. According to calculations by Lianhe Zaobao, among the 31 second-tier cities defined by China’s National Bureau of Statistics, 23 cities saw a year-on-year increase in total retail sales in the first half of the year, while three cities saw a decline. Data for five cities have yet to be released.
Among the 35 third-tier cities defined by the authorities, apart from three cities that saw a decrease in total retail sales in the first half of the year, the remaining 26 cities recorded an increase, with the data of six cities yet to be released. Among them, 22 cities saw an increase equal to or above the national average of 3.7%, and 13 cities recorded increases exceeding 5%.
Among these cities, Liaoning’s Jinzhou saw the highest increase in total retail sales for the first half of the year at 8.2%, closely followed by Jiangsu’s Yangzhou and Shandong’s Jining, with increases of 7.8% and 7.2% respectively.
Plunge in figures for luxury shopping malls in first-tier cities
The decline in consumption in first-tier cities is first reflected in the performance of luxury shopping malls. Based on the financial report of Swire Properties, which operates numerous luxury malls, retail sales at Taikoo Li Sanlitun in Beijing fell 3.5% as of the end of June, while retail sales at HKRI Taikoo Hui in Shanghai plummeted 19.6%.
In contrast, Seazen Holdings, which operates shopping malls in 137 cities across China and has a huge presence in second- and third-tier cities, saw its rental income rise steadily over the past six months, reaching 5.796 billion RMB (about US$818 million) in the first half of the year, far surpassing the same period last year.
... the catering industry is thriving in some other non-first-tier cities. For example, in Chongqing, where competition in the catering industry is fierce, catering consumption in the first half of the year rose 11.9% year-on-year.
Car-related sales, which account for over 25% of retail sales of enterprises above the designated size, have also diverged significantly. Statistics from Tianfeng Securities Co., Ltd. show that car sales in Beijing, Guangzhou and Shenzhen fell 13%, 8.3% and 3.2% respectively in June.
However, car sales were booming in the central and western provinces, with Sichuan’s car sales up 18.6% in June, of which new energy vehicles grew 59.2%. Automotive retail sales in Hubei grew 11.7% in the first half of the year, with new energy vehicles recording a 67.7% increase.
In terms of F&B consumption, Beijing’s figures fell 8.2% from January to July. In Shanghai, half of the high-end restaurants with an average customer expenditure of over 500 RMB have shuttered over the past year, with some others forced to offer more affordable “poor man’s deals” to survive.
Yet the catering industry is thriving in some other non-first-tier cities. For example, in Chongqing, where competition in the catering industry is fierce, catering consumption in the first half of the year rose 11.9% year-on-year. The catering consumption of Fuzhou and Wuhan also increased 10.8% and 10.7% respectively.
Reflects shifts in China’s distribution of benefits
Tommy Xie, head of research for the Greater China region at OCBC Bank, said when interviewed that the consumption slump in first-tier cities is related to numerous factors. One, financial and tech enterprises, which are concentrated in first-tier cities, have been affected by the current wave of salary cuts and layoffs, leading to consumption downgrading among professionals in these sectors. Two, amid the property downturn, first-tier cities are hit harder due to their higher absolute values.
... increase in consumption in second- and third-tier cities also reflects a shift in China’s benefit-sharing model... — Tommy Xie, Head of research for the Greater China region, OCBC Bank
As for second- and third-tier cities, Xie thinks that smaller cities already have lesser real estate financial activity to begin with. When property prices go down, residents are even less motivated to invest in or buy properties, instead channelling some of the funds originally intended for home purchases to consumption, thereby releasing some of their purchasing power.
He also pointed out that first-tier cities have a higher concentration of stock investors and securities professionals whose consumer confidence has been affected by the country’s stock slump over the past two years. Moreover, the overall decline in foreign investment in China and the reduction in the number of expatriates in the country have also contributed to a decrease in consumer spending in first-tier cities to a certain extent.
As China moves to promote the high-quality development of its manufacturing sector, Xie also observed that the halo effect of the financial and technological sectors, which are concentrated in the major cities, has faded away. Instead, the manufacturing sector, covering second- and third-tier cities, is gaining more attention and receiving a bigger piece of the pie. Thus, the increase in consumption in second- and third-tier cities also reflects a shift in China’s benefit-sharing model.
The dual consumption landscape of China’s first-tier and second- and third-tier cities also reveal that in light of China’s economic transition, the outside world must adopt fresh perspectives and more diverse standards. Xie said, “China’s economy is so large that it is still trying to figure things out, like blind people feeling an elephant. We need to look at it in a more holistic and comprehensive way.”
This article was first published in Lianhe Zaobao as “抵御消费降级寒风 中国二三线城市消费逆势回暖”.
