How developed are China's second tier cities?

The 2019 publication is Maxxelli’s fifth edition of the China International City Index (CICI), which ranks 28 second-tier and 2 first-tier cities by their level of internationalization.

Maxxelli integrated 47 indicators in the CICI divided into seven categories: Global Economic Strength, International Commerce, Education, International Community, Infrastructural Connectivity, Government and Political Engagement, and Culture and Tourism. 

For the purpose of this report, Guangzhou and Shenzhen are considered as second-tier China, though the cities are first-tier by definition. For Maxxelli they are the benchmark for emerging first-tier Cities. Beijing and Shanghai are simply far too developed to realistically compare them to the 30 listed cities that are featured in the 2019 CICI. 

The cities currently covered by the index are Chengdu, Chongqing, Dalian, Wuhan, Xi’an, Changsha, Guangzhou, Shenzhen, Fuzhou, Xiamen, Zhuhai, Kunming, Hangzhou, Nanjing, Ningbo, Suzhou, Wuxi, Harbin, Tianjin, Shenyang, Qingdao, Changchun, Urumqi, Jinan, Liuzhou, Hefei, Shijiazhuang, Zhengzhou, Zhanjiang and Changzhou. Further cities can be included in the CICI upon request. 

1. Report Outline

The report will showcase the research results with a top 30 list of the cities, with number one being the most international according to our data. Afterwards, we summarize some of the interesting changes in this final list, before we outline some of our expectations for developments in 2020. 

We then cover each individual city in-depth, with background information, city strengths, weaknesses and recommendations. Each individual city’s score will be followed by an interview from that respective city’s foreign expert, who will share information about the development of the city, as well as expat life and potentially interesting industries. 

After the city’s overviews, we outline the top 10’s in some of the categories, before the methodology is explained. The report is then finalized with our conclusion. 

2. Overall Rankings:

A recent report by Morgan Stanley emphasized the need for investors to switch their attention from top-tier cities to lower-tier cities, citing that, “two-thirds of incremental growth in national private consumption will be generated below the top-tier cities.” Maxxelli data agrees with this. We are uniquely positioned to deliver strategy and expertise for our clients in line with this assessment, precisely due to our network and long-standing experience operating and thriving in second-tier China.

A recent report by Morgan Stanley emphasized the need for investors to switch their attention from top-tier cities to lower-tier cities, citing that, “two-thirds of incremental growth in national private consumption will be generated below the top-tier cities.” Maxxelli data agrees with this. We are uniquely positioned to deliver strategy and expertise for our clients in line with this assessment, precisely due to our network and long-standing experience operating and thriving in second-tier China. 

3. Main Headlines

• Chengdu nearly overtaking 2nd place in this edition’s ranking, proving its growth to First Tier city level.
• Xi’an climbs to 7th, its  highest position due to increased number of Foreign Direct Investments and number of Fortune 500 companies.
• Nanjing drops 4 places, almost falling out of top 10, after reduced FDI and GDP per capital compared to last year.
• Zhengzhou has seen strong consolidation as a central city in the region. 
• GDP per capita trends indicate second-tier cities are narrowing the gap between China’s established first-tier cities. 

4. Future Developments

Residential

Looking at the residential sector, investment in real estate and property prices are highly influenced by government policies. The Chinese government has regularly driven the sector in the direction which benefits the country the most. In recent decades to increase Chinese GDP growth levels, but in 2016 and 2019 also to control the property price inflation levels. As President Xi’ aspiration that property should be ‘for living and not for speculation’, we expect the Chinese government to grasp tighter control on the market, aiming to restrict the massive property price increases in some cities well simultaneously using the sector to drive domestic GDP growth. 

This will result in enough opportunities for investment while purchasing and rental prices will likely grow closer to their actual value. Whereas real estate rents and prices in top-tier cities such as Shanghai and Beijing have been notoriously expensive, the relative affordability of property markets in lower-tier cities mean slower living costs, which is attractive for both business and labour. There is especially room for growth in those 2nd tier cities located in major planned ‘city clusters’ (Pearl River Delta, Yangtze River Delta and the Beijing-Tianjin-Hebei area) where there are high levels of population inflows, social housing programs and low mortgage interest rates (Wang and Zhao 2018).

Foreign Direct Investment

While the current geopolitical environment results in a complicated business environment, we do expect growth levels of Foreign Direct Investment in 2020. Not only is China seeking to offset complicated relations with America by signing new trade agreements and encouragements with other countries (Europe, OBI countries, South-East Asia), it also opens new investment in several industries by loosening rules and regulations related to company structures. In addition, almost all 2nd tier cities offer clusters or specific areas with incentives for foreign investment, which is likely to attract both mature companies as well as aspired entrepreneurs.

Tourism

A final development we expect in 2020 is growth in outbound tourism, which holds great potential for investors. China’s millennials make up the fastest growing segment of the outbound tourism market. Besides well-known factors such as growing middle class and disposable income levels, factors such as the growing amount of Chinese passport holders (double to 240 million) and an increase in easiness of international travel (visa-exempt agreements, visa on arrival and e-visa agreements) also fuel this estimation. 

According to Ctrip CEO Jane Sun, currently only 120 million Chinese citizens, or 8.7% of the population, are passport holders. This just shows how much room for growth the industry has to offer. The China Tourism Academy has also noted that interest in foreign travel in second and third-tier cities is increasing dramatically.

Conclusion

With Guangzhou leading the rankings in the China International Cities index thus far, there is considerable scope for score improvements amongst the other cities, particularly those in the northern and eastern regions. 

The situation in second tier China is rapidly evolving, generating great anticipation for the coming year in how each of the cities in this Index will progress in various categories. There are countless foreign development projects that are seen to be in progress in many of the cities within this report. The scene is changing, and positions also may change.

Since the last CICI report, one second tier city has been added to the Index. It is hoped that this resource can be used as a comprehensive and reliable source from which insights may be gained about the internationalization of second tier China. For future CICI reports, if there is a particular city whose ranking you are interested in seeing, that has not yet been included here, please do not hesitate to contact us.