CICI 2018: the unexpected opportunities of China’s second-tier cities

When international businesses decide to be present on the Chinese market, most of them choose to settle in Beijing or Shanghai. They tend to overlook the great opportunities of China’s second-tier cities. They miss out on great advantages that Chengdu, Tianjin, Nanjing, Wuhan and Hangzhou as well as lesser-known cities such as Zuhai, Nanjing and Harbin are offering. The new CICI 2018 report by specialist Maxxelli Consulting offers guidance on where to settle.

China’s western city of Chengdu offers an unmatched level of retail and restaurant outlets, whereas Nanjing boasts a great number of universities and scientific organisations. Guangzhou scores high for its international schools, the level of English speaking among its population and the number of international clinics available.

All of these strengths are excellent reasons for international businesses to settle in a city. “We brought all of these reasons for settling in second-tier cities together in our CICI 2018 destinations report”, says Ronnie Kuppens, Managing Partner of Maxxelli Consulting, the Chengdu-based firm (and 13 operational offices all over China) that compiled the report.

Level of internationalisation

This year’s edition of the China International City Index (CICI) measures the degree of internationalization of China´s emerging second-tier cities. Maxxelli’s researchers conducted in-depth research on 29 cities, measuring them across 44 key indicators.

But what makes a city ‘second-tier’? In Maxxelli’s definition, they are not of the same size as Beijing and Shanghai, but nevertheless have a large population, a strong economy and are internationalized across a number of indicators. If cities show a higher degree of internationalization, they hold greater appeal for foreign companies due to their increased market potential, accessibility, livability and growth prospects.

Seven categories

In the CICI report, Maxxelli measures a city’s degree of internationalisation based on seven categories: Global Economic Strength, International Commerce, Education, International Community, Infrastructural Connectivity, Government and Political Engagement, and Culture and Tourism. These seven categories are explained more in detail in the methodology section at the end of this report. The CICI report provides graphical comparisons between the cities. Each chart is accompanied by a concise city “Profile”. This expounds upon what progress the city is making and the direction it is heading in. Where we think the city should and will improve is covered in our “Future Opportunities” section.

The high scores

But which are the most promising second tier cities, in order of their level of internationalization? After Guangzhou and Shenzhen, which are effectively first tier cities already, Chengdu (considered to be ‘rising first-tier’), ranks 3rd. Other strong performers are Tianjin, Nanjing, Wuhan, Hangzhou and Chongqing, ranked 4th to 8th. Nanjing is a climber (3 places to 5th) due to strong consolidation in Education and improvement in its Tourism and Culture appeal. Also, Zhengzhou, has climbed a number of spots, thanks to its strong and positive development.

An interesting trend that the report points out is that “construction companies are shifting their strategic focus from first-tier to second-tier cities – with Shijiazhuang, in Hebei province, Chengdu in Sichuan province and Nanchang in Jiangxi province being particularly attractive. Whereas real estate rents and prices in top-tier cities such as Shanghai and Beijing have been notoriously expensive, the relative affordability of property markets in lower-tier cities means lower living costs, which is attractive for both business and labour.”

Cities are competitors

It is interesting to see that second-tier cities are competitors, with job-seeker subsidies as a weapon. Nanjing is offering job-seeker subsidies, and Changsha is offering living and rent allowances to boost their respective graduate population. This type of policy innovation is shared by Chengdu, Ningbo and Wuhan.

Ronnie Kuppens (Maxxelli Consulting) points out the opportunities in second-tier China have been highlighted by many. A recent report by Morgan Stanley emphasized the need for investors to switch their attention from top-tier cities to lower-tier cities, citing that, “two-thirds of incremental growth in national private consumption will be generated below the top-tier cities.” Kuppens: “Based on our data and our experiences in supporting companies that want to settle in China, we fully agree with this.” In other words: China is a lot more than the two cities of Beijing and Shanghai. “The report, complemented by our additional services as an expert guide to these cities, can lead to well-informed decisions for businesses that want to have a head start in China.”

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