The Growing Power of China's Secondary Markets

Beijing: 1996. Along the 3rd-ring road, you could see all kinds of factories. At that time, the 4th-ring road hadn't come into being yet, and there were very few private cars. The traditional shopping attractions, such as Xidan and Wangfujing, were full of shoppers swarming the various floors for assorted household appliances.

Beijing: 2001. No trace of industry is left along this route. All the factories along the 3rd-ring road had been moved. Beijing had become a massive construction site due to large-scale citywide housing developments. Demand for building materials was quite strong. That year, the 4th-ring road was completed and put into use, with half of the 5th-ring road to be finished. New malls mushroomed. People began to turn their attention from household appliances to housing and automobile, and construction material sales began to boom.

Beijing: 2007. With most of the new construction now found outside the 5th-ring road, the reconstruction of the downtown area is nearing completion. There are now too many people and too many cars, among which privately owned cars number more than a million. Nerve-racking traffic jams are everywhere. More motorways are being built and re-built. Tourism and financing are taking priority over housing and automobiles.

It's taken Beijing more than ten years to transform itself from a large traditional Chinese city to a city based on consumption and services. In that time, all of the large factories have been moved from downtown Beijing to satellite towns. The size of the middle-class is increasing rapidly, and residential consumption continues to rise. 90% of the white collars over 30 years old purchased at least one car or house; 30% of them have purchased at least two. Today, in addition to sufficient traditional consumables available in Beijing's market, international brands compete with domestic goods. Intermediary businesses are generating small profits. High and middle-income people have become more interested in tourism and financing.

Beijing is a metaphor for the entire country. In the last ten years, Many Chinese people in this city have accumulated unusual wealth, and continue to upgrade their consumption. In 1996, the per capita disposable income of people in cities and towns was RMB4,838 (US$631.3), with bank deposits totaling RMB3.85 trillion (US$502.4 billion) and total retail spending for the year amounting to RMB2.46 trillion (US$321 billion). By 2006, these three figures had soared to RMB11.76 trillion (US$1.53 trillion), RMB16.15 trillion (US$2.1 trillion), and RMB7.64 trillion (US$997 billion) respectively. National consumers' purchasing power is four times that of ten years ago, and the scale of the consumer goods market has doubled.

In a recent survey, management consulting firm McKinsey & Company followed the consumption changes in 620 Chinese cities. By per capita income and population, the cities were arranged in a multilayer pyramid order. On the top layer were Beijing, Shanghai, Guangzhou and Shenzhen. On the second layer were Chongqing, Tianjin, Nanjing and Chengdu. The third and fourth layers consisted of emerging cities such as Dongguan, Ningbo, Zhenjiang, Zunyi, Yueyang and Zhumadian.

As the pyramid shows, China is a multilayered, diversified consumer market. The "center of gravity", however, is rising continuously, although different cities have different consumption hotspots. Tier-1 cities, such as Beijing and Shanghai, in which the demand for consumption by wealthy people is gradually rising above traditional levels, are on the forefront of upgrades in city construction and consumption. As for the tier-2, 3 and 4 cities, since their development lags behind tier-1 cities, their consumption is not rising as fast. But the huge consuming potential of those emerging cities allows them to join the mainstream consumer cities.

Dongguan, in South China's Guangdong province, for example, was trying to squeeze into the chain of global factories ten years ago. It eventually became a global center of garment, sports shoes, furniture, and electronic products. But the consumption culture and consciousness was a bit behind the times in this city of millions. So a few years ago, the Dongguan government started large-scale reconstruction. As the road network took shape, demand for automobiles was driven up. And its housing market became very active due to the emergence of new business centers. Surprisingly, the per capita income of Dongguan was No.1 in China based on population. The consumer awakening of this emerging city will soon vault it to the top of the consumer pyramid.
Similarly, although the consumer levels of some tier-3 and 4 cities such as Zhumadian in Central China's Henan province, and Zunyi in Southwest China's Guizhou province, haven't yet risen, their large populations, in addition to the many counties and towns around them, provide hope for dramatic development. It's a critical element in a city's consumer demand since economic principles show that population is both the starting and end points of consumer demand. As income increases, the residents of tier-3 and 4 cities will eventually surpass critical consumer demand levels, thus forming a huge consumer market.

In the next 20 years, the growth of multinational companies and homegrown enterprises will be achieved mainly in the emerging tier-3 and 4 cities, which are still virgin territory for many established brands. The opportunities for new brands will also abound in these simple and practical emerging urban cultures.

This is the abstract of a Special Coverage on www.cbfeature.com.
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