Still "Two Chinas" -- but a Third Is Being Born

by Richard Burkholder, International Bureau Chief

"Third China" now responsible for the bulk of all product purchases

So far, Gallup's analysis of the new Gallup Poll of China has focused on two Chinas. The first, "urban China," is a realm of rapidly increasing affluence and opportunity, particularly for those in the country's largest and most economically developed cities. "Rural China" is in many ways the mirror image of urban China -- far less affluent, and with fewer opportunities for personal advancement. Though some change has come, rural China remains a traditional, agrarian realm.

The booming cities of Beijing and Shanghai are the twin peaks of urban China. The latter is China's largest city, with a population of 10.84 million (city proper), easily surpassing the populations of New York City's five boroughs (8.16 million). Even Beijing, China's second most populous city, has a population twice that of Los Angeles (7.74 million compared with 3.87 million).

There is more to China's urban realities, however, than the remarkable success of these two metropolitan powerhouses. A mere 1.4% of all Chinese live in either Shanghai or Beijing. Even more telling: Just 3.8% of the country's population resides in any of China's 10 most populous cities.

So where do nearly 90% of urban China's residents actually live? In the "Third China" -- a rapidly expanding set of second-tier cities beyond the country's 10 largest, which most non-Chinese, and even some Chinese themselves, have never heard of. Even though it is still predominantly rural, China has 45 cities with populations of 1 million or more within the city proper, each with a population greater than that of the City of Detroit. The United States has only nine such cities. 

Even more remarkably, China has 181 separate urban agglomerations with at least 1 million inhabitants. Hezhou, Guangxi province: population 2.09 million. Qiqihar, Heilongjiang province: 1.43 million. Nantong, Jiangsu province: 1.29 million. Laiwu, Shandong province: 1.23 million.

Driven by Powerful Export-Led Growth, China Plans for Its Future

This "Third China" is where much of China's future growth is planned, and -- as our poll of China demonstrates -- where many important clues to its future lie. More than two decades ago, China began to woo foreign direct investment aggressively -- particularly to five tax-free Special Enterprise Zones in the coastal south and southeast. The response was dramatic -- the largest importation of offshore capital in history. Fast on its heels came a massive influx of workers from China's countryside, lured by manufacturing jobs paying many times what they could ever hope to earn at home.

The export-led development model's success was so great it was unsustainable, in both geographic and political terms. Resources were badly stretched as the populations of these areas grew explosively, while the country's regional income disparities also deepened dramatically. As a result, the government's policy planning now aims at steering future investment toward China's interior, and toward the second-tier cities of the Third China.

Living Standards and Product Adoption in the Third China

The Third China is best understood as a hybrid of the country's most-developed and least-developed spheres. While the Gallup Poll of China shows average household income and savings levels in the Third China are nearly three and five times, respectively, what they are in rural China, income and savings levels remain only about two-thirds the levels enjoyed in China's 10 largest cities. Like their rural counterparts, those in the Third China also tend to experience personal financial pressure. While they report an average household income of 23,100 RMB ($2,790) per year -- well above the national average of 14,700 RMB -- they also say it takes 26,225 RMB per year for families like theirs "just to get by these days."  

Despite its slightly lower level of affluence, due to its sheer size alone, the Third China -- not the country's 10 largest cities -- is now responsible for the bulk of all product purchases in China. It often appears that Western marketers have lost sight of this crucial point, given that their efforts are so heavily focused on the latter group. However, foreign firms face important distribution challenges (and entrenched local competitors) when attempting to market within China's second-tier cities, so this criticism is not entirely fair.

The pattern of product ownership across these sectors serves to highlight the "trickle down" nature of product adoption and purchasing within the Third China. For some items -- including mobile phones, color televisions, and even life insurance -- respondents in the second-tier cities were nearly as likely to be purchasers and owners as those living in China's 10 largest cities. For other items -- such as computers, microwave ovens, and video cameras -- the likelihood of ownership falls roughly midway between that of households in the country's largest cities (relatively high) and those in rural China (minimal).

The ownership pattern for one product in particular -- motorcycles -- demonstrates an important link between the infrastructural realities of China's second-tier cities and the country's rural sector. Relatively few households in the country's 10 largest cities yet own automobiles (6%), but they often have access to public transportation systems that make travel by motorcycle unnecessary; thus only 12% own a motorcycle. In contrast, a third (34%) of all households in the Third China have at least one motorcycle -- a rate of ownership nearly as high as that in rural China (39%).

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