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China's tier 3 cities will drive growth

News, 10 February 2017
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BEIJING: China's smaller cities will be the main engines of growth in the future, as government polices seek to tackle the problems of urban density in top tier cities, analysts have said.

"Lower tier cities are going to be a new bright spot for China's next economic boom," according to Lin Caiyi, chief economist at Guotai Junan Securities.

"As market saturation accelerates in first-tier cities, some industries would have a second chance to gain profit by moving or expanding in smaller cities," she told the South China Morning Post.

This is not news for Shaun Rein, managing director of China Market Research Group, who claims to have spent years persuading people to focus more on second and third-tier cities.

He argued that people in lower-tier cities were "much more confident" than those in top-tier cities, thanks to factors such as affordable housing and greater disposable income.

"First tier cities are becoming pretty much depressing these days, with some of the big companies cutting their budgets," he noted. "The middle class is feeling the pain of reduced payments."

Government policies aimed at restricting the flow of migrant workers to top-tier cities are also likely to increase the attractiveness of third tier-cities such as Lanzhou, Guizhou and Sanya, which operate as prefecture level or county-level capitals.

"Population growth would definitely boost these cities' economy," according to Zhu Chaoping, China economist at UOB Kay Hian in Shanghai.

"A large portion of people from the countryside who want to become citizens would have to choose lower tier cities after the launch of those policies."

And as more people settle there, he anticipated they would start families, leading to growth in sales of baby and children's products, while the education sector will also likely boom.

Zhu did not think that bricks-and-mortar retailers would necessarily benefit, however. "Physical stores are increasingly losing out to e-commerce platforms like everywhere else in China," he warned.

"Only those companies who do thorough research about local customers can survive in lower tier cities."

Data sourced from South China Morning Post; additional content by Warc staff

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