In China, Urbanization Is A Two-Way Street by Tassos Stassopoulos, AllianceBernstein
China’s economy may be slowing down, but consumers haven’t stopped spending. Internal migration trends may partly explain the conundrum—and are often hidden from government statistics.
The Chinese consumer seems oblivious to the broader state of the economy. While GDP growth in China has fallen from 7.9% two years ago to 6.9% in the last quarter, retail sales growth has held firm at about 11%. Although sales growth of big-ticket items such as cars has been relatively modest, spending on smaller items and services, from movie tickets to mobile phone subscriptions, has increased at an explosive pace, (Display).
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There are many explanations for the consumer’s resilience. China’s government is actively promoting policies to shift its economy toward consumption. Income per capita is rising and the middle class is growing, driven by urbanization, which typically involves the movement of populations from rural areas to coastal cities.
Bright Lights, Big City
But urbanization is a two-way street. In fact, we believe that some of the strength in Chinese spending can be explained by people moving back to smaller cities after trying their luck in the large Tier 1 cities, such as Shanghai and Beijing, where migrant workers often discover that life isn’t easy.
Beyond the bright lights of the big city, housing is very expensive, so workers often live in run-down neighborhoods and long commutes are the norm. Some are welcoming government incentives to look for opportunities back in third and fourth tier cities, where lower wages are offset by a lower cost of living, so disposable income remains the same or improves. These trends often fall below the radar of official government statistics that nourish the markets.
City Moves Fuel Inequality
For example, take the story of Lin, a 24 year old from Mianyang, a Tier 3 city of 4.5 million, in Sichuan province. Lin’s parents moved to Shanghai seeking better education, healthcare and income. Their higher incomes were reflected as part of a trend that further widened the urban-rural disposable income gap (Display).
But when Lin followed his parents to Shanghai, he found that work was a struggle. He told us that he lived in a poor area, left home at 4 a.m. to commute to work and didn’t return until 9 p.m. each day. And he didn’t really fit in culturally with his new Shanghai acquaintances.
He returned to Mianyang after finding a job there with an online retail business. It paid 25% less than he earned in Shanghai, but his rent was lower and he had no commuting costs. So despite a decline in disposable income, Lin’s discretionary income actually increased. And lower tier cities have developed dramatically in recent years, with modern transport infrastructure, Internet connectivity and excess apartment inventory that supports lower rents. Lin says he feels much more at home, and hasn’t really given up any of the comforts of big-city life.
Looking Beyond the Statistics
Official data miss the nuance of Lin’s story—and millions like him. Lin will be counted as having always lived in Mianyang, because his hukou (household registration) there hasn’t changed. It won’t reflect his move to Shanghai and back. Lin’s fall in income will appear as a slowdown in GDP growth, because his wages dropped when he left Shanghai. And his rise in discretionary income—and better quality of life—won’t be visible at all to data analysts.
Of course, the economic slowdown in China is driven by many factors, primarily the sluggish industrial sector and weakening investments. But to understand what’s really going on in China’s economy, you have to dig deeper. By looking beneath the surface, the dynamics of Chinese consumer spending can be revealed in ways that shed light on the government’s efforts to rebalance economic growth from the industrial sector toward the consumer.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom.