Small cities fuel rising consumption binge

Oversaturation, excessive product choices dampen sales within big urban centers

Recent economic data coming out of China suggest that the world's second-largest economy is steadily transitioning toward consumption-led development, and in particular, counties and county-level cities are quickly emerging as another key dynamo in China's consumption engine.

The thirst for upgraded consumption and a confluence of socioeconomic developments — such as rising household incomes, shifting demographic trends and improved product-penetration rates — are facilitating the ascent of counties and county-level cities, said experts and executives.

Retail sales, a major gauge of China's consumption vitality, grew 8.2 percent year-on-year in the first half to 22.76 trillion yuan ($3.1 trillion), with a contribution to economic growth of 77.2 percent, said the National Bureau of Statistics.

In particular, retail sales of consumer goods in urban areas represented the lion's share at 19.75 trillion yuan, up 8.1 percent year-on-year.

According to experts and observers, a significant contributing factor to the rise in overall urban consumption was the enormous population in counties and county-level cities, with their rapidly rising purchasing power and expanding market size.

China had 1,866 counties and county-level cities at the end of 2021, roughly twice as many as prefecture-level cities and above, with a permanent resident population of some 250 million, or nearly 30 percent of the total number of people living in urban areas nationwide, said Gao Guoli, director of the China Center for Urban Development.

More rural residents are buying homes and relocating to counties and county-level cities as part of China's ongoing urbanization process, which adds to their steady population rise, Gao said, adding that the rising population in these areas indicates a larger market size and stronger potential consumption.

It is not just about sheer numbers, however. As many as 54 counties and county-level cities had their respective gross domestic product exceed 100 billion yuan in 2022, with cumulative figures amounting to 8.6 trillion yuan — or 7.1 percent of the nation's total economic output — according to a report released by market research firm CCID Consulting in June.

More importantly, residents of counties and county-level cities boast strong purchasing power as most don't shoulder heavy mortgage pressure, and their incomes, which are the main factors determining consumption, remain stable, said Xu Hongcai, deputy director of the China Association of Policy Science's economic policy committee.

Average annual household incomes in these regions stand at around 95,000 yuan, while annual household spending amounts to 48,000 yuan, according to a report on consumer demand among young and middle-aged people in county-level markets released by BA Capital, a Shanghai-based venture capital firm focused on the consumer sector, last year.

In addition, 60 percent of people in these regions own their homes and 30 percent reside in their parents' homes, leaving only around 6 percent opting for rental properties. Meanwhile, they are not under a lot of debt stress as the majority are free of debt or receive parental assistance, the report said.

Even though higher property prices tend to correlate to higher consumption, high mortgage payments have the potential to crowd out consumption. A good balance of housing affordability and disposable incomes can be found in China's counties and county-level cities, said Xu.