July 2011 Archives

We often hear of China’s first or second or third tier cities, yet what actually makes a city tier? The terms are so often used, yet there is actually no official formula for determining what tier a city falls in. Instead, everyone makes up their own rules. 

There are a few common views on which Chinese cities fall in which tier, often pointing to population, development of services and infrastructure, and the cosmopolitan nature of the city. First tier cities are naturally the fewest and easiest to find common ground on. China’s four city municipalities (Beijing, Shanghai, Tianjin and Chongqing) are candidates as a clearly-defined group of leading cities. Yet this group doesnt hold up in terms of the development and stature criteria mentioned above, and in their stead a different quartet is often put forward: Beijing, Shanghai, Guangzhou and Shenzhen – four huge metropolises with well-developed property markets. 

It becomes much more trickier when we move down to second tier cities. According to Xavier Wong, head of research at the Knight Frank real estate office in Hong Kong, to be considered in the second tier, a city should have a population of at least three million and a minimum GDP equivalent to USD 2,000 per capita. By this definition, back in 2007 when Wong made the calculation, there were about 60 Chinese cities that qualified as second tier. In addition to the simple population and income guides, according to Wong, the cities should also have a strong history of exports, a robust record of foreign direct investment and good policy initiatives. This seems at least a more robust definition than simply grouping China’s 28 provincial capitals as the second tier cities, as some (including apparently AC Nielsen) have done before, and grouping prefecture and country level capitals as third tier cities. 

In 2009, RightSite.com, an online property trading website, identified five criteria for defining a city tier in China, namely 
  • Propulation of more than five million people 
  • Povincial GDP of at least RMB 250 billion, or RMB 350 billion in more prosperous provinces 
  • Cities with strong economic growth (for which RightSite provided no threshold) 
  • Geography, i.e. cities which are the most significant in their area, like Xiamen (even though it only has around 2.5 million people) 
  • Advanced transportation infrastructure 
  • Historical and cultural significance. Here Rightsite provides the example of Guilin, which is relatively small yet could be considered second tier due to it being a tourist centre 

Due thus to the fact that there are many different views on what delineates a city tier, some have ditched the term altogether. A China consumer study published in 2009 by consulting firm McKinsey, for example, recognised the limitations of using city tiers, and opted to use a classification of city clusters instead, which are groups of cities that are developing around one or two large cities. The report identified 22 such clusters in China, divided into groups of mega, large and small (for the full report and map showing the clusters, click here). 

Dividing China’s cities into different tiers has obvious advantages, as it can illustrate how economic development is moving inland or westwards in China, and how China’s large metropolises are being gradually matched by cities with rapid economic growth yet that are not yet quite as big or have as many people. The idea seems simple and practical enough. Yet the snag of using the tiers system is in setting the exact parameters for them, because with so many different classifications being used, the result is confusing and contradictory. So the only way to go about it if you really need to divide all China’s cities into tiers, is to put forward (your own) clear formula for what makes a first tier city and especially what makes a second or third tier one. Perhaps its just case of 'know one when you see one' to define a second or third tier city - not exactly a science. 

Then again you can opt to sidestep the whole tiers issue altogether, like McKinsey did. Yet it seems that ‘tiers’ have made such a strong impression on foreign observers of China that the confusing term will be with us for a long time still, in its various guises. 

Without any mention of tiers, however, a map of China’s major cities (the municipalities, provincial capitals and fastest-growing cities) would look like this: 

CHINA IN NO TIERS 
China's Major Cities.jpg
How would you define China’s city tiers? Do we even really need them? Please let us know in the comments.

(Roy Binkowicz contributed to this posting)

Droughts, Floods and Inflation

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Controlling inflation remains a top priority for China's policy makers and June's Consumer Price Index rose 6.4% from a year earlier, a 3-year record. This has been largely attributed to soaring food costs, which in turn have been largely attributed to unfavourable weather conditions. Yet what exactly is the link between bad weather and inflation?

Drought

This year China faced a severe drought in March-May which was reportedly the most severe in 50 years. The drought affected eight provinces in northern China, severely impacting most of China's wheat-producing regions. This impacted China’s economy, affecting agricultural production and prices through lower output and higher irrigation costs. Yet it also created expectations for higher inflation and inspired more speculative activity. The outcome was higher prices for food and raw materials. In Hubei province the price of rice increased by 20% in May to RMB 2.6 per kg. In Hunan province locally produced lotus root also climbed 20% during the same period to RMB 4.2 per kg. In the city of Wuhan the average price of 20 monitored vegetables climbed 7.3% in one month and additionally the price of cabbage almost doubled in May to RMB 2.22 per kg, according to China’s Ministry of Agriculture.

The drought also brought water levels in some of the country's biggest hydropower producing regions to critical levels, and partially because of this China is currently facing the most severe power shortage in the last seven years. This exerts pressure on coal-fired power plants to increase production, at the time of globally rising coal prices. All this contributes to increasing power prices, which will increase the cost of production, which will make manufacturers charge higher prices, which causes inflation to rise. Its all linked in a spiralling chain reaction.

Flooding

At the beginning of June the drought suddenly gave way to weeks of serious flooding which, according to some farmers, was the worst in the past 20 years and has left vast areas of Hubei and Zhejiang with more than 432,200 hectares of farmland flooded. 7,000 homes have either been damaged or have collapsed and the financial damage could amount to around USD 930 million. This has reduced vegetable output by 20%, which caused shortages of grains and fruits. As a result, at markets in Hangzhou, the provincial capital of Zhejiang, the prices of some fruits, vegetables and grains have risen by as much as 40% since early June, according to Xinhua. In the south of China the floods also pushed up the average wholesale prices of 18 staple vegetables by 2.3% as a whole, with the wholesale price of cabbage increasing first by 20.3% and then by a further 17.9%.

This has also impacted pork prices, which have steadily increased, partially due to the shortage of grain, which is mainly attributed to corn (the main feed of hogs), the production of which was severely affected by both floods and the drought. All this contributed to pork prices in June rising 57.1% y-o-y.

Is it all about food?

So is China's rising inflation overbearingly about rising food prices, which based on the above, are clearly very susceptible to factors like droughts and floods? The answer seems to be an unequivocal yes. Food prices have been the biggest driver of China's inflation, constituting nearly two-thirds of the rise in CPI. Food prices rose 14.4% in June from a year earlier, up from an 11.7% in May, and as long as they are edging upwards, all the other prices will follow in their wake. 

The China-Australia trade relationship is well-known for the flow of natural resources from Australia to China. Yet in the other direction, China has in the last decade become the leading supplier to Australia of machinery and electronic equipment. The two bubble charts below in Figure 1 illustrates the progress that China has made from 2000 to 2009 in becoming Australia’s leading supplier of machinery and equipment. In 2010, machinery and electronic equipment accounted for 39% of the total (see Figure 2), and China went from supplying 4% of Australia’s imports of these items in 2000 to 21% in 2010 (see Figure 1).

Figure 1:
Figure 1.png
In 2010 Sino-Australian total trade of goods amounted to USD 87.57 billion. China’s total exports of goods to Australia in 2010 was worth USD 35.26 billion, growing with a CAGR of around 20% between 2001 and 2010 (see Figure 2). Resources is clearly only one side of China-Australia commerce. The other side is the machinery and electronic equipment that Australia is sourcing from China, which respectively constitute 28% and 21% of China's exports to Australia. 

Figure 2:
Figure 2.png