'Small-town kids' shape future of China's consumption

By Stella Qiu and Elias Glenn XINXIANG, China (Reuters) - The bright lights of Beijing or Shanghai have never held much allure for Wu Tongxu, a 24-year-old civil servant earning a modest salary in the nondescript city of Xinxiang in China's central Henan province. But his lifestyle is anything but parochial. Wu drives a 370,000 yuan ($58,800) Cadillac sedan, owns a downtown apartment and dines out at restaurants. He can sometimes be found at rock concerts in Hong Kong or on jaunts up Mount Fuji in Japan - financed by his doting parents. "If I were to live in Beijing or Shanghai, I'd never be able to afford the lifestyle I'm having now," said Wu. Until now, China's consumption has been led by residents of the capital and free-spending coastal cities. But the hinterland has been catching up fast, transformed by industrialization and rapid urbanization in the last 10 years. In 2016-2020, around 50 million households will enter the middle and upper classes, with half of them likely to be located outside China's top 100 cities, according to a report by The Boston Consulting Group and AliResearch, a unit of the e-commerce giant Alibaba . That transformation has already helped spur a spending surge in the hinterland. In a report by UnionPay/JD.COM, consumption in third- and fourth-tier cities, generally cities with gross domestic product of less than $70 billion, soared 58 percent last year. Taken together, the cities have a total population of nearly 700 million. Much of that spending is happening in cities like Xinxiang, a city of 6 million, that has benefited in recent years from the rapid development of nearby Zhengzhou, Henan's capital. The rise of cities like Xinxiang has coincided with soaring living costs in big metropolises, particularly over the past 18 months as rents hit historic highs. Beijing and Shanghai are also tightening controls on migrants in an effort to control urban sprawl and curb the growth of their 20 million-plus populations. As a result, so-called "small-town kids" around the country are increasingly staying in their hometowns. They are splurging on cars, fashion and entertainment, reshaping China's consumption landscape as their peers in Shanghai and Beijing contend with high living costs. Retail sales in Xinxiang soared 12 percent last year, exceeding Beijing's growth of 5.2 percent. Xinxiang's gross domestic product (GDP) was about 240 billion yuan ($38 billion) last year. BIG POPULATIONS For decades, migrants from smaller cities headed for large urban centers where the country's economic boom first took root. That is changing. In Xinxiang, some 90 percent of millennials are staying put in the city, its mayor, Wang Dengxi, said in a statement, when asked by Reuters about demographic changes in the city. That sort of shift has attracted companies like H&M , Fast Retailing <9983.T>, JD.com , China Evergrande Group <3333.HK> and Dalian Wanda Group. Magnus Olsson, the country manager for H&M China, said in March that the fashion retailer is looking to improve brand recognition in cities where it is not present. [nL8N1R34B6] Morgan Stanley expects China's private consumption market will more than double to $11.8 trillion in 2030, from $4.7 trillion currently, with two-thirds of the increase coming from third- and fourth-tier cities. A survey of over 3,300 households showed that compared with big cities, third- and fourth-tier city residents are more inclined to spend on leisure travel, cars and online entertainment, according to Robin Xing, chief China economist at Morgan Stanley. He added that much of the spending was led by millennials. More than 32 percent of General Motors' Cadillac sales in China in the first quarter were in third- and fourth-tier cities, GM said in a statement, while about 45 percent of its customers are between 25 and 34 years old. "Many locals here drive Cadillacs," said Wu in Xinxiang, sporting a pair of trendy black-rimmed glasses. "Now, I want to buy a Tesla ." Small-town kids also spend more money on online games and live-streaming websites than their peers in first-tier cities, a report by the internet giant Tencent <0700.HK> shows. This has also led to a cinema boom in lower-tier cities. Box office receipts in third- and fourth-tier cities rose 22 percent last year, surpassing the 11 percent growth in first- and second-tier cities, according to calculations by Reuters, based on data from the online ticketing service provider Maoyan. China Evergrande Group <3333.HK> is aiming to build 200 cinemas nationwide in the next five years. In Xinxiang, millennials are also swarming new western-styled bars and clubs at night. Tian Zeng, a coffee shop owner, frequently hits the bars with his wife and their friends after a night out in the movies. "My philosophy towards life is to enjoy it to the fullest, so I spend money as long as it makes me happy," the 30-year-old said. SOURCE OF WEALTH Much of the spending power in China's lower-tier cities comes from rising property values over two decades, analysts say. An analysis of 45 Chinese cities of all tiers by Haitong Securities showed a 1 percent increase in property prices in relatively cheap markets brought about a 7.9 percent increase in local consumption growth in 2016. Rising property prices have also enriched older Chinese people, like Wu's parents, many of whom are happy to finance the lifestyle of their often only child, according to interviews with over a dozen young people in Xinxiang. Many young people are also finding their own business opportunities at home. Li Jiao, who owns four apartments, started renting them out under Airbnb last year. Li, 24, who holds a master's degree from the University of Manchester, said business is so brisk that she is considering hiking rental fees to 300 yuan a night from 250 yuan, almost on par with prices in cities like Beijing. "A lot of my renters are local students here who have been longing to try something new and different," she said. ($1 = 6.2911 Chinese yuan renminbi) (Reporting by Stella Qiu and Elias Glenn; Editing by Ryan Woo and Philip McClellan)