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

Wanda Hotel Development

25/04/2018 07:00

* Consumption in lower-tier cities rising faster than
Beijing,
Shanghai
    * Millennials increasingly staying put in hometowns 
    * High property prices in large cities have pushed up living
costs
    * Small-town kids splurge on brands, entertainment, services

    By Stella Qiu and Elias Glenn
    XINXIANG, China, April 25 (Reuters) - 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. 
    Wu drives a 370,000 yuan ($58,800) 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," said Wu.
    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 last 10 years.
    In 2016-2020, 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  BABA.N .
    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 $70 billion, soared 58 percent 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 percent last year,
exceeding Beijing's growth of 5.2 percent. Xinxiang's gross
domestic product (GDP) was about 240 billion yuan ($38 billion)
last year.

    BIG POPULATIONS
    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 percent of millennials are staying put
in the city, its mayor, Wang Dengxi, said in a statement, when
asked by Reuters about demographic changes in the city.
    That sort of shift has attracted companies like H&M
 HMb.ST , Fast Retailing  9983.T , JD.com  JD.O , China
Evergrande Group  3333.HK  and Dalian Wanda Group.
    Magnus Olsson, the country manager for H&M China, said in
March that the fashion retailer is looking to improve brand
recognition in cities where it is not present.  urn:newsml:reuters.com:*:nL8N1R34B6
    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 over 3,300 households showed that compared with
big cities, third- and fourth-tier city residents are more
inclined to spend on leisure travel, cars and online
entertainment, according to Robin Xing, chief China economist at
Morgan Stanley. He added that much of the spending was led by
millennials. 
    More than 32 percent of General Motors' Cadillac sales in
China in the first quarter were in third- and fourth-tier
cities, GM said in a statement, while about 45 percent of its
customers are between 25 and 34 years old.
    "Many locals here drive Cadillacs," said Wu in Xinxiang,
sporting a pair of trendy black-rimmed glasses. "Now, I want to
buy a Tesla  TSLA.O ."
    Small-town kids also spend more money on online games and
live-streaming websites than their peers in first-tier cities, a
report by the internet giant Tencent  0700.HK  shows.
    This has also led to a cinema boom in lower-tier cities. Box
office receipts in third- and fourth-tier cities rose 22 percent
last year, surpassing the 11 percent 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  3333.HK  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 in 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. 

    SOURCE OF WEALTH
    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 percent increase in property prices in
relatively cheap markets brought about a 7.9 percent increase in
local consumption growth in 2016. 
    Rising property prices have also enriched older Chinese
people, like 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. 
    Li, 24, who holds a master's degree from the University of
Manchester, said business is so brisk that she is considering
hiking 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.
    
($1 = 6.2911 Chinese yuan renminbi)

 (Reporting by Stella Qiu and Elias Glenn; Editing by Ryan Woo
and Philip McClellan)
 ((yifan.qiu@thomsonreuters.com; 86-10-66271289;))