The Power of Lower-Tier Cities in China’s City Cluster System

25/06/2019

China’s city clusters are built mostly around the largest hubs, but the system also relies on a large number of satellite cities. And those lower-tier towns are eventually going to represent the core engine of the plan, having the highest growth potential

 

China is growing and it is growing fast on several different levels. And the Dragon does not intend to leave its economic growth to chance. Therefore, Beijing has already planned a coordinated development of regions, divided into city clusters.

With an urban population on course to hit 1 billion by 2030, the country plans to build 19 city clusters to sustainably manage its rapid urbanization. The goal of these clusters is simple: to support the national economy, promoting the coordinated development of regions and participating in international competitions and cooperation.

This will also allow smaller cities, which tend to be at earlier stages of industrialization, to move up the value chain and away from heavy polluting industries, while bigger cities can move further up the value chain by focusing on innovation and the Made in China 2025 industrial strategy.

Often lumped together, Tier 4 and Tier 5 cities represent the majority of China’s urban population and combined income. And these smaller towns are eventually going to be the core engine of the plan, having the highest growth potential and a less saturated market compared to higher-tier cities.

 

lower-tier cities - chenzhou - hunan - cifnews

© Xuehua. Anyang, Henan. City clusters include large cities like Zhengzhou that are, however, surrounded by satellite towns like Anyang, which play a crucial role in the cluster’s growth.

 

In the last four decades, urbanization in China reached extraordinary results, especially compared to other areas in the world. In 1978, when Deng Xiaoping’s policy of “reform and opening-up” was launched, the urban population was just over 171 million. But since then, hundreds of millions of people were lifted out of poverty, and the urbanization ratio changed from about 19% to about 59% between 1978 and 2018, an increase of 1% per year on average.

Therefore, urbanization in the PRC has been both a trend and a proactive policy. Rural residents migrated to the big cities for job opportunities created by industrial policies and by the creation of special economic zones that attracted billions of dollars in foreign investments for export-oriented manu­facturing.

City clusters have been part of the PRC’s urbanization strategy since the 2006 National Urban System Plan and then they have been includ­ed in the National New-type Urbanization Plan and the 13th Five-Year Plan in 2016.

A city cluster usually comprises one or two large cities as hubs and with a few geographically adjacent cities linked by commuting corridors, with increasing social and economic interdependence. Typically, city clusters exhibit a higher population density and a higher level of productivity when compared with national averages.

 

The main goal is to improve the distribution and layout of urban areas and population, as well as the management of natural and economic resources, by organizing city cluster development along east-west and north-south corridors.

 

Although some sources report that planning could be extended to as many as 22 clusters, China’s city cluster plan actually consists of 8 medium and 8 small sized areas, as well as 3 “super” clusters, which are the Pearl River Delta, the Yangtze River Delta, and the Beijing Tianjin Hebei cluster. The central government prioritizes these last 3 “super” regions to become world-class clusters by 2020, meaning that they will be the most innovative and internationally competitive, driving national economic development.

A recent report from Morgan Stanley Research identifies five key city clusters – Jing-Jin-Ji Area, Yangtze River Delta, Guangdong Bay Area, Mid-Yangtze River Area, and Chengdu-Chongqing Area – where satellite cities will likely be the key beneficiaries of the government’s interregional development plan and the country’s expanding transportation network. These city clusters’ satellites are actually lower-tier cities, among which fourth and fifth tier cities are going to play a fundamental role in the development of the region.

However, although, the government has been creating super-regions to facilitate urbanization, the driving forces behind these lowest cities are strongly related to their location and their efforts to join China’s macroeconomic trends to innovate pillar industries. Location is extremely important especially for what concerns smaller cities from northern China, where much of the economy is struggling compared to China’s dynamic eastern and southern regions and to the booming west.

Nevertheless, the rise of lower-tier cities has brought huge investment opportunities in the daily consumption, education, and elder care markets. Indeed, consumption growth in fourth-tier cities is nearly 1.5 times larger than that of first-tier cities, according to the 2017 Consumption Upgrade Big Data Report.

Some analysts claim that, for the short term, these lower-tier cities will continue to suffer from the talent and capital disadvantages over first-tier cities, which have more abundant cash flows. But as these markets start to be saturated, many businesses and talented individuals may still choose to settle in lower-tier cities as they continue to offer lower living costs and a variety of investment incentives.

 

lower-tier cities - clusters - cifnews

© Fung Business Intelligence Centre. China’s city clusters: the spatial configuration.

 

Even if few, some of China’s city clusters are mainly formed by the lowest tier cities and, therefore, are more likely to benefit from the implementation of regional cooperation. This is the case of the Hohhot-Baotou-Ordos-Yulin Megalopolis, in which Hohhot and Baotou – capital and prefecture of the Inner Mongolia autonomous region – are third-tier cities while Ordos and Yulin – in Inner Mongolia and Shaanxi province, respectively – belong to the fourth-tier group.

Compared to mature and middle-weight city clusters, regions like the Hohhot-Baotou-Ordos-Yulin are considered emerging city clusters, right because of their economic and geographical peripheral nature. While medium-sized clusters each comprise about 3 to 9% of national GDP and focus on driving regional economic development, each emerging small-sized cluster is equal to or less than 2% of China’s GDP and thus focus on driving provincial economic development.

Therefore, these smaller and less economical influencing areas are particularly important for many reasons. For example, the Hohhot-Baotou-Ordos-Yulin city cluster is not only the national high-end energy and chemical industry base but it also serves as the pilot zone for urban-rural integration in an ethnic minority region.

 

For China’s smaller and developing cities, the city cluster project represents a spatial strategy to achieve not only urbanization but also a balanced regional development and above all a further opening up in inner regions.

 

Since consumption remains a reliable driver of growth for the world’s second-largest economy, in fourth and fifth-tier cities, the city cluster strategy and its intended urbanization will be crucial for China’s economic growth as urban dwellers with higher incomes generally consume more than rural dwellers. In addition, clustering will also increase China’s productivity and innovation in lower-tier cities by grouping more companies and thus boosting the size of the labor market.

With poor accessibility to goods and services, product-penetration rates in lower-tier cities have often been low for major retailers and consumer companies. Improved accessibility and connectivity are changing that: retailers and distributors can now find inroads to tap into the vast consumer base and demand that China’s lower-tier cities have to offer.

Therefore, thanks to the city cluster plan, cities are carving out specific niches within their regions rather than competing with neighbors directly. Beijing is thus encouraging cities with existing clear regional roles to develop their natural advantages further, while also providing guidance for cities still defining their competitive assets.

China’s cities have, until recently, developed rapidly on the back of a one-size-fits-all model that emphasizes high levels of investment and fast growth. Now, the central government has called on smaller cities to limit their dependence on investment and to focus on new growth drivers that are more sustainable and better-suited to building competitive cities in a globalized economy, creating a new set of complex city dynamics.

The Dragon has learned that rejecting one-size-fits-all approaches and promoting competition among cities is a valuable means of achieving breakthroughs in development strategies. And in this game, fourth and fifth-tier cities are playing the most dynamic role, both leveraging and also improving Beijing’s plans.

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