Growth of China's cities poses major challenge

11 June 2010

BEIJING: The growth of China's cities will provide opportunities and pose challenges to companies hoping to make an impact in the country, a study by Deloitte has argued.

By the end of 2009, some 622 million people were living in developed areas of China, but while this figure was twice the size of the US population it still only equated to an urbanisation rate of 47%.

"Foreign executives visiting China's huge coastal cities are sometimes surprised to learn that China is still a predominantly rural country," Clarence Kwan, national managing partner of Deloitte's Chinese services group, said.

However, the proportion of urban-dwelling Chinese has jumped from just 18% in 1978 to almost 50% today, and is expected to reach 67% by 2030.

This will require the migration of some 280 million people from the countryside, a transition that will directly influence categories from utilities to consumer goods.

The Academy of Social Sciences has reported that a 1% increase in the number of shoppers in China's cities boosts the share of GDP attributable to domestic demand by 1.6%.

"Higher disposable incomes associated with urbanization will also be critical to finally unleashing latent consumer demand," said Kwan.

"US businesses have already been deeply affected by the urbanization of China's workforce – first in terms of low-cost production and more recently, in terms of top-line revenue growth."

However, the changing trading climate in China also presents an obstacle to brand owners as to where to focus their efforts, he added.

For example, there are now 655 cities in China that have over 100,000 inhabitants, around 120 with populations of at least 500,000 and a similar number with a million residents.

One simple way to prioritise is to "follow the money", and Deloitte implemented a test model by assessing which cities were likely to enjoy major investment in their transport infrastructure.

Firstly, it looked at the 26 cities that are due to receive some of the $130bn (€108bn; £89bn) in funding that the Ministry of Transport has allocated to build "urban mass transit systems".

All of these cities contain a minimum of three million people and generate revenues of 10bn yuan, which Deloitte argued is "suggestive of favourable markets for goods and services".

It then compared this group with that drawn up by the Ministry of Railways to form part of a high-speed rail link across China, and reduced its roster to 20 cities where work would begin this year.

Finally, it used predictions from State Grid, the power company, regarding which cities will see demand for energy rise most quickly, a "barometer of the future vitality of an urban economy."

Based on this methodology, it reduced the “dizzying universe" of 655 cities to seven: Changsha, Chengdu, Chongqing, Fuzhou, Nanchang, Xi'an and Wuhan.

All of these provincial capitals were also found to have delivered comparable growth in disposable income to Tier One cities like Beijing, Guangzhou, Shanghai and Shenzhen. 

"This is obviously a simple example … yet for many US executives, such exercises will become increasingly commonplace as companies try to get out in front on one of the most critical business opportunities of the 21st Century," Kwan concluded.

Data sourced from Deloitte; additional content by Warc staff