Author: Michael J. Silverstein

Departing Chinese Premier Wen Jiabao recently urged his China leadership not to pursue an urbanization policy that neglects the needs and wants of China’s significant rural population. According to the Wall Street Journal, Mr. Wen underscored how important it would be for China “to consistently apply scientific principles, to steadily push forward targeted policies, and to coordinate with rural modernization and the establishment of a new countryside.” Wen also remarked that China, “cannot sacrifice rural industry and the interests of rural residents.” Wen has been widely credited with helping lift many rural Chinese citizens out of poverty through a number of targeted policies, including removing agricultural income taxes previously imposed on farmers.

To be sure, rural China still has large pockets of poverty and deprivation. Still, many of China’s agrarian communities have undergone an undeniably radical transformation over the past 20 years. In the 1980s, and even the early 1990s, rural life focused on farming, and it was a hard existence: most people were grindingly poor and lacked basic amenities, including decent schools and health care, paved roads, and a reliable power supply.

Fast-forward two decades and life is much better. Nearly everyone has access to electricity, about 95 percent of towns and 80 percent of villages have paved roads, and some 96 percent have access to basic health care. Incomes remain low, relative to those in the city: average disposable income per person amounts to RMB 5,000 ($760), which is about one-fifth of the income in tier 1 cities. On the other hand, incomes are on the rise. In 2005, average income was $407. Four years later, it was $845 — a 20 percent compound annual growth rate. And while only 34 percent of the rural population earned more than $882 per year in 2009, this proportion is expected to reach 54 percent in 2015.

A major contributor to this increase in living standards is the diversification of employment. Farming practices in rural China have improved marginally over this period. And farmer incomes have only inched up slightly. But rural China is now about forestry, fishing, construction, and the production of bricks and cement. This is expected to continue as the Chinese government, even as it promotes urbanization, also undertakes a substantial and sustained effort to reinvest in the rural communities — to promote growth and social harmony.

For example, in our book we tell the story of Farmer Liu. She is a 58 year-0ld farmer who has seen a dramatic increase in household income as a result of the factory job her son has and the retail earnings of her daughter in law.

Our analysis shows that by the year 2020, the combined consumer markets of China and India will amount to some $10 trillion annually. Approximately $6.2 trillion of that spending will occur in China — $1 trillion of which will occur in rural towns and villages (with the other $5.2 trillion in China’s numerous booming cities).

Although China’s major current focus is urbanization, there is a significant effort on the part of the Chinese government to reinvest in the country’s rural communities, too. On the face of it, the rural population seems to offer limited interest to companies, as people increasingly migrate to cities. In China, we calculate that the rural population will fall from 53 percent of the total in 2010 to 45 percent in 2020, with rural households’ share of the country’s disposable income falling to about 15 percent, down from 25 percent today.

But the rural markets have pockets of rising wealth. Underpinning the transformation of both the urban and rural communities are two revolutions in China: one relating to infrastructure, the other to agriculture. With respect to the latter, there is no doubt that major changes are required in the years ahead, especially those that can help China meet rising urban food demand while also improving the incomes of farmers and rural residents. Specifically, China will hopefully continue to pursue:

• Enhanced education and technical training;
• Improved investment in rural infrastructure, farm mechanization, and irrigation;
• Improved R&D in advanced crop science and new farming techniques;
• Continued land reform to enable formation of more productively sized farms;
• Rural job creation in nonfarm sectors to diversify the income stream; and
• Greater use of information technology and mobile communications to empower farmers.

The good news is that many of these changes are already afoot, and Mr. Wen’s legacy will likely include an historic surge in newly affluent citizens across China’s full landscape both rural and urban.

Last week Chen Demin, China’s commerce minister, offered an upbeat outlook for China’s overall 2013 economy, forecasting steady improvement in domestic consumption and investment, and predicting that foreign direct investment over the coming year would also remain stable. In his remarks, Chen emphasized that foreign investors should look favorably upon the opportunities in China, notably those connected to China’s construction of many new small and medium-sized cities and towns.

We agree. Robust new construction in China and a soaring rate of urbanization promise unprecedented levels of consumption and overall GDP growth that should only invite greater confidence among foreign investors.

As we stress in The $10 Trillion Dollar Prize, urbanization is one of the most powerful transformative economic forces in China today. According to the National Bureau of Statistics of China, 51 per cent of China’s population, or 691 million people, are currently living in urban areas. Research suggests that by 2020, some 824 million people will be living in cities, an increase of 188 million. That’s one and a half million new urban residents every month for the rest of this decade. By 2030, according to our analysis, there will be around 270 million more new urban residents in China.

But the distribution of China’s urban population is vastly different from that of many other nations, with the majority of that population located in midsize cities ranging between 500,000 and 5 million people.

Typically, and perhaps not surprisingly, U.S. and European companies entering China have focused on the cities of Beijing, Shanghai, and Guangzhou. But we tell them that this is a mistake. There are pockets of wealth all across the country, and the wealth is spreading deep into the country’s western provinces.

By our calculations, a company had to be in 60 cities to reach 80 percent of the country’s middle class in 2005. Today, they have to be in 340 of them. And by 2020, they will need to be in 550 urban locations to reach that same percentage of the middle class population.

We regroup the cities of China into a series of four categories, including megacities, cluster capitals, specialist hubs, and horizon towns, as follows:

• Megacities. China boasts two megacities — Beijing and Shanghai — each with more than 10 million residents. There are also eight cities with more than 10 million people, and another 93 cities with more than 5 million people. To put this into context, the U.S. has only one city with more than 5 million people — New York.
• Cluster Capitals. These include Changshu, Daqing, Dongguan, Fuzhou, Tianjin, Wuxi, and Zhengzhou. These are trade hubs surrounded by smaller “satellite” cities. Wuxi, for example, is the capital of a group of six cities within a 30-mile radius in Jiangsu province: Jingjiang, Zhangjiangang, Changshu, Jiangyin, Changzhou, and Suzhou. On its own, Wuxi has a population of 2.3 million people, including 572,000 middle class consumers. Treated as part of a cluster, however, it becomes the center of a market with 6.9 million people and 1.5 million middle class consumers.
• Specialist hubs. These are cities whose growth is often closely linked to the development of local natural resources or industrial hubs. These include Anyang, Bozhou, Chengdu, Lu’an, Suizhou, Xinxiang, and Yongzhou.
• Horizon towns. Finally, there are also hundreds of small, geographically dispersed emerging-market cities. Although hard to reach, they offer ripe market opportunities — consumers in these towns usually have more basic needs than those of their counterparts in the bigger cities, but they also have a strong willingness selectively to “trade up” to pricier luxury goods.

And take note of one other very promising related trend: as reported by The Wall Street Journal last month, China’s droves of migrant workers (reportedly 252 million strong in 2011) who journey from the country’s remote rural areas into cities to offer their labor to construction and manufacturing firms are increasingly remaining in those cities for longer periods of time. If this phenomenon continues — and especially if China’s new government relaxes the household registration policy (known as “hukou“) that for years has forbidden workers from taking advantage of local benefits (including schools for their children) — these workers will constitute an ever more powerful new urban work force, and a formidable contingent of newly affluent consumers. As they are permitted to participate in the local social welfare system of the cities where they’ve relocated, these workers will feel less pressured to save every yuan they earn. They will feel newly emboldened to spend their income on a broad range of products and services, contributing to what we believe will amount to some $6.2 trillion in annual consumer spending in China by 2020. And that’s a potential milestone that few foreign investors should ignore.