The Rise of Inland China

on March 15 2011 | in Lifestyle Retail Trends | by | with No Comments

Recently, China claimed runner-up to the United States as the world’s second-largest economy, finally beating out Japan for economic second place. Its rapid growth and huge population—1.3 billion—has many investors sinking their capital into Chinese ventures. The situation has many financial forecaster predicting that China will lead the way in this century’s investment opportunities.

As international investors begin to hover, however, the Chinese government is taking time to look inward. China’s recent economic increase is in part due to the nation’s focus on developing its interior. According to Kathryn Langridge, manager of Jupiter’s Global Emerging Markets Fund, “China has more than 150 cities that have a population of one million or more—but most people outside of China have never heard of them.”

With its huge geographic spread, Langridge thinks of China as a continent, not a single country. Many of China’s provinces are significantly larger than entire countries in Europe. China currently relies heavily on a few major cities to drive its national economy; according to Langridge, the nation is seeking to reduce that reliance by developing its central and western regions.

Some point to this internal development as a sign that China’s growth is not sustainable.

“Much of the growth in GDP has been in large government-funded infrastructure schemes,” said Tim Cockerill, head of fund research at wealth manager Ashcourt Rowan.

According to Cockerill, many Chinese regional governments offered a double-digit pay raise for government employees in 2010. Economists worry that this kind of dramatic increase will lead to inflation problems, which could lead outsourced foreign factories to relocate to less-expensive Asian countries like Vietnam.

But from a more social perspective, pay raises like this could be a great benefit to merchandisers as it encourages the growth of a Chinese middle class with the disposable income to be a major consumer market.

Psigma Investment Management’s chief investment officer, Thomas Becket, hopes that China will recognize the buying power of its own people and focus on domestic consumption to develop its middle class and stabilize itself during this rapid growth. Becket says he sees signs of it already, with a few “pretty empty” Western luxury shops springing up in China’s hinterlands. Although business may be slow for now, Becket believes that if the government can negotiate the next few telling years, such luxury shops in the Chinese interior may not be so uncommon—or so empty.

Interestingly, recently both Barbie and Best Buy have shuttered stores in commercial hubs like Shanghai in favor of a shift to inland China.

Mattel, U.S. toymaker of Barbie, announced a focus on a broader Chinese market. “In 2011, Mattel will roll out a new Barbie brand strategy in China designed to take the brand across the country reaching more consumers,” said Linda Du,  spokeswoman for Barbie.

Meanwhile, Best Buy has closed its self-branded stores and will focus on its subsidiary, Five Star, which generated $1.7 billion in sales in fiscal 2011 with about 170 small stores in seven Chinese provinces.

Best Buy plans to open 40-50 Five Star stores in China in fiscal 2012, mostly in less affluent cities. The company has yet to decide on a single or multi-brand strategy in China. Regardless, Best Buy plans to grow its Asian business 20-30 percent according to its Asia President Kal Patel. “Relative to other parts of the world, the China market is explosive,” Patel said, “We are looking at the center of China.”



image credit: dv yang

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