China’s smaller cities fueling a $9.7 trillion consumer market

Spending power in the world’s most populous nation may just be revving up.

China’s smaller cities will fuel a $9.7 trillion consumption market by 2030, according to Morgan Stanley. That excludes megacities such as Beijing, Shanghai, Guangzhou and Shenzhen as well as 26 so-called tier-2 cities such as Tianjin and Xian. To put that spending power in perspective, it’s more than double the current size of Japan’s economy and not far behind China’s annual output.

The lower-tier cities, as Morgan Stanley defines them, make up 59 percent of the nation’s nominal gross domestic product and 70 percent of total urban population by place of registration, according to the report. Still, those aren’t remote villages. The bank defines Lanzhou, the largest city and capital of Northwest China’s Gansu province, as lower-tier city even though its 3.7 million population is almost the size of the city of Los Angeles.

Businesses making strides in tapping that market of more than 1 billion people in smaller cities will excel, according to the report by Morgan Stanley analysts. Government and household consumption drove more than two thirds economic growth in the first quarter, highlighting the shift toward depending on services and away from smokestack sectors.

That power is bolstered by rising income as smaller cities catch up with larger ones. Per capita disposable income for urban households in small cities should almost double to $8,261 in 2030, which would be 64 percent of big city levels, from $4,482 today, the analysts wrote. That’s up from 55 percent last year and 45 percent in 2006.

Better infrastructure and transportation, government-led redistribution of revenue and more affordable housing in smaller cities will also help support spending, according to the report.

That has implications for various business sectors ranging from food, automobiles, and internet. In 2020, box office sales in China will reach $12 billion in a base case. Overseas travel will also see a fresh boom if the huge market in smaller cities are tapped given that, right now, outbound travelers mainly come from Shanghai, Guangdong, Beijing and coastal provinces like Jiangsu, Zhejiang, and Shandong.

The report also evaluated the potential for consumption at the smaller cities by measures including their income growth, saving rate, highway density. Xuzhou in Jiangsu province topped the list, followed by Taian and Weifang in Shandong.

Here’s another statistic that captures China’s potential. The nation’s urbanization rate is still low at 57.35 percent compared to about 80 percent for developed peers, Liu Aihua, a spokeswoman at the National Bureau of Statistics said at a press conference Wednesday.

“We still have a long way to go,” she said. “There is a huge potential for boosting domestic demand, and it is key to find the right driver.”