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Chinese City-Tier System: A Guide for Foreign Investors in 2022

china-city-tier-system

The Chinese City-Tier System is a classification of the 613 cities that categorize into 4 different tiers (with “1” being the highest and “4” the lowest) according to different factors such as GDP, income level, administrative level, and population.

Understanding how these tiers work and the opportunities arising from each of them is of vital importance for foreign investors, as it allows them to gain a much broader view of the different markets existing within the country.

This is particularly important to finally bust the myth of China as a single amalgamated market which often leads to a bad market entry decision strategy as many factors (such as the ones described above) are not taken into account.

As a matter of fact, the areas of influence for the consumer market in China are not concentrated only in the major cities of the country such as Beijing, Shanghai, Shenzhen, and Guangzhou but also in other areas, the lower-tier cities, where the vast majority of the most “vibrant” consumers are found, namely those that are still seeing significant growth in their income, purchasing power, product awareness, and consumer behavior. 

The Chinese city-tier system

The Chinese city tier system is a framework that was created to categorize cities in China. The system is useful for businesses and organizations when making decisions about investment, expansion, and marketing. The tiers are determined by several factors, including economic development, infrastructure, amenities, and population size.

Megacities on the coast, with important trading sites, modern airports, and top enterprises (both local and international) will undoubtedly rank as a Tier 1. Currently, the only cities ranking as Tier 1 are Beijing, Shanghai, Guangzhou, and Shenzhen.

However, the tier system is not static, a city may move up or down in the rankings as its development changes over time.

There are many important and wealthy cities inland that have been developing at a very fast pace in recent years (also backed up by government economic development plans), jumping up several tiers in the process. Chengdu, for instance, is now a Tier two city.

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Tier 1 cities – the most developed and desirable locations for foreign investors

When foreign investors are looking at potential markets to enter, tier 1 cities are often at the top of the list.

Anyway, there are pros and cons.

These cities have a large population with high levels of income, making them an attractive target for businesses. Along with market size, people who live in these areas are generally more aware of the latest trends and products on the market and have the disposable income to purchase them.

However, these cities are also much more crowded and expensive than others and consumers are often more price-sensitive. Rent and labor costs can be very high, making it difficult for businesses to turn a profit. In addition, competition in these markets can be fierce, and foreign investors may find it difficult to establish a foothold.

One way to approach the market is by focusing on niche products or services that can fill a particular need or to form partnerships with local businesses that already have a strong presence in the market.

Companies must carefully consider all factors before making a decision, but foreign investors who do their homework can find success in these dynamic markets.

Tier 2 cities – still attractive investment destinations, with lower costs and opportunities for growth

Although tier 1 cities have long been the traditional target market for many businesses, in recent years there has been an increased interest in tier 2 cities. This is due to several factors, including the lower costs of doing business in these locations, steady income growth, economic development plans backed up by the central government, and the opportunity for greater market share.

Consumers in tier 2 cities are typically younger and more brand-conscious than those in tier 1 or 3 cities. They are also more likely to be working in sectors that are experiencing high levels of growth, such as technology, finance, and healthcare. As a result, they have more disposable income and are willing to spend on premium products and services. In addition, foreign brands are often seen as being more luxurious and aspirational than local brands.

However, it is important to note that while the overall cost of doing business in tier two cities is lower than in tier 1 cities, the costs of labor, land, and rent are still relatively high. In addition, many of these cities are located in central or western China, which can pose challenges in terms of logistics and transportation even though many plans have been enhanced to better connect these locations to the local and global supply chain.

Generally speaking, businesses that are willing to invest in developing a market presence in these locations can often reap significant rewards. Of course, success still depends on having a well-crafted marketing strategy that takes into account the unique needs and preferences of consumers in these cities. But for those businesses that are willing to take on the challenge, tier 2 cities can be extremely attractive investment destinations.

Tier 3 and 4 cities – less developed, but with potential for future growth

In recent years, the Chinese economy has been shifting away from a reliance on first-tier cities and towards the development of second-and third-tier cities. This is due in part to the fact that first-tier cities are becoming increasingly saturated, both in terms of population and economic activity. By contrast, second and third-tier cities offer more room for growth and investment. In addition, many of these cities are located in strategic locations that make them well suited for future growth, and in recent years the Chinese government has made it a priority to develop these areas as part of its plan to promote balanced regional development.

Consumer habits in these cities are also changing as incomes rise and more people have access to discretionary spending. This presents an opportunity for businesses that can tap into this growing market not only by targeting consumers but also by contributing to the development of the region.

For these reasons, these cities are often seen as having greater potential for future growth than their higher-tier counterparts.

However, it is important to note that such areas are often still in the process of developing their infrastructure and implementing their development plan. As a result, there can be significant risks associated with investing there. But for businesses that are willing to take on those risks, there is significant potential for growth.

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Factors to consider when choosing a city in China for investment

When it comes to choosing a city in China for investment, there are a number of key factors to consider.

Firstly, it is important to assess the size of the market and the level of economic development in the region.

Secondly, it is crucial to understand the Chinese government’s development plans for the area, as this can affect both the short- and long-term prospects for investment.

Thirdly, infrastructure and transportation links are another crucial consideration, as good access can make it easier to move goods and people around the region.

Finally, the availability of skilled labor is also an important factor, as this can impact the cost of production. By taking all of these factors into account, investors can make informed decisions about where to invest in China.