China's consumers are spending in smaller cities. It's the power of the new middle class.

Mint

31-05-2025

After years of sluggish growth in China's property market, many investors have grown cautious about the country's broader consumption story. Yet beyond the megacities of Beijing and Shanghai, a different narrative is emerging—one that could offer fresh opportunities for long-term investors.
In China's vast network of smaller cities—often categorized as 'lower-tier" or 'third- and fourth-tier" markets—consumer spending is showing surprising resilience. From personal care and budget cosmetics to domestic travel and local e-commerce, everyday consumption appears to be holding up far better than national headlines suggest.
This divergence matters because China's economic future increasingly hinges on the spending power of its 'new middle class" living outside the country's wealthiest urban cores. While property prices in these regions have been under pressure—dragging on local government revenue and household wealth—residents in smaller cities are still spending on products and services that improve their quality of life.
Official data offers some evidence. In the first half of 2024, per capita disposable income in China's third- and fourth-tier cities grew by nearly 5.8%, outpacing the 4.8% growth seen in first- and second-tier cities. Retail sales in these markets have also held up better in categories like food and daily necessities, reflecting consistent demand for affordable, everyday products.
Hu Ling, a partner and managing director at AlixPartners, was quoted in Chinese media as saying, 'China's consumption market is gradually transitioning from being primarily driven by top-tier cities to a model of dual-engine growth."
Consumers in smaller cities often face lower living costs and less financial pressure. That economic stability, paired with rising lifestyle expectations, has helped support spending in categories such as personal care, dining out, and domestic travel—even in the face of broader economic uncertainty.
Budget-friendly domestic brands like Perfect Diary, Florasis, and HomeFacialPro have been gaining traction among younger consumers seeking quality without the premium price tags of international labels. Local tourism operators have also noted an uptick in short-distance travel bookings, especially among middle-class families and retirees eager for affordable leisure.
'Business is getting better," said Lin Meiyi, a travel agent in China's scenic Yunnan province. 'The clientele is more modest financially, I would say, compared to before the pandemic. Many come from towns instead of cities."
Lower-tier cities are also fueling the rise of value-driven e-commerce. Platforms like Pinduoduo—which built its business around bulk discounts and group-buying models tailored to price-sensitive consumers—have seen notable engagement from rural and small-city users.
In its most recent earnings report, Pinduoduo cited stronger-than-expected growth in categories like agricultural products and household essentials, much of it from outside the urban centers. Its strategy of building logistics infrastructure in smaller cities and rural areas has paid off, allowing it to reach consumers underserved by traditional retail.
The market has responded: Pinduoduo's U.S.-listed shares are up more than 40% over the past year, outperforming most major Chinese tech peers. Analysts point to its deep reach in price-sensitive regions as a durable competitive edge as national consumption habits adjust.
It's true that the downturn in China's property sector—especially acute in smaller cities—has dampened overall household wealth. But the link between housing markets and consumption may be more nuanced than previously assumed.
In lower-tier cities, where real estate is more affordable and many homes are fully owned, households are generally less leveraged. That gives consumers greater flexibility to spend on smaller-ticket items, even if they're holding off on major purchases.
Confidence among millennials in lower-tier cities is higher than in top-tier cities, with 75% of respondents expressing optimism about the national economy, compared with 65% in major cities, according to its McKinsey's 2024 China Consumer Report, which attributes this optimism in part to lower cost-of-living pressures and more stable local job markets.
The implication for investors is clear: China's consumption recovery may be slower and more uneven than in past cycles, but it is still happening—just not always where the spotlight is.
'Consumers and business people from smaller cities and towns are importing ideas from developed regions," said Kane Hu, chief analyst at Peak Investment, a boutique brokerage in the western city of Chengdu, with roughly 80 clients and around 100 million yuan ($15 million) in assets.
That creates opportunity for companies with strong regional presence, competitive pricing, and scalable operations. Domestic brands that can meet demand for affordable quality across a broad geographic footprint may be better positioned than premium brands concentrated in major metros.
For global investors, the takeaway isn't to abandon China's consumption story—but to look closer at where growth is really happening. The most promising consumer activity may be taking place far from Beijing's luxury malls, in small cities with fewer headlines but plenty of untapped spending power.
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