Defining China's Second and Third Tier Cities

In China the market buzz in 2009 centres on the opportunities available in second and third tier cities. Production is cheaper in lower tier cities, real estate has more potential for appreciation in these areas, and overall economic growth rates are climbing more steeply than in the overheated tier one metropolii or the distant hinterlands. However, second tier and third tier cities are like good art-hard to define, but you know them when you see them.

For those of us who haven't had time to visit all the second and third tier cities in China, however, the talk of these economic wonderlands can get confusing. There is no official government classification of what is which tier, and one person's second tier may be another's third, and vice-versa.

Why These Tiers May Be Important

The Chinese government recognizes that these second-tier cities are quickly becoming the economic rungs on the ladder of China's growth. It continues to promote development of second-tier cities through investment, targeted tax incentives and the establishment of economic and technological development zones. According to figures from the US Commercial Service, 15 of China's second-tier cities account for 8 percent of the population but 54 percent of the total imports from the US.

The First Tier

This is the easy part. Everyone agrees that Beijing and Shanghai are first tier cities, and the majority of people would include Guangzhou and Shenzhen in this group. The occasional Western China partisan or spicy food enthusiast might throw in Chongqing as well.

Finding Tiers Two and Three

Its in classifying the cities of the second and third tiers that confusion kicks in. There are many references to particular city or group of cities as second or third tier, but few serious attempts at setting standards. In a recent document, AC Nielsen defined the tiers as follows:

1st tier: Key cities - Shanghai, Beijing, Guangzhou and Chengdu

2nd tier: Secondary provincial capitals (consisting of 23 cities)

3rd tier: Prefecture or county level city capitals

In fact, these references to capitals and other political criteria are only useful for comparing cities to their immediate neighbors in their own provinces. What is a capital in a sparsely peopled province may be a village in a more populous province.

In the US, the organisation Meeting Planners International defines a second tier city as a city with a population of more than 300,000 and less than one million. In China, a city of less than one million people is usually just a village or a district of some larger metropolis, so this standard is also of little value.

One recent academic study looked internationally and defined Second Tier Cities by economic structure rather than by size:

" ... spatially distinct areas of economic activity where a specialized set of trade-oriented industries takes root and flourishes, establishing employment and population growth trajectories that are the envy of many other places." (Markusen, Lee and DiGiovanna, 1999, page 3). However, this approach doesn't take into account that second tier cities have comparatively strong growth characteristics in terms of both population and employment.

So to help promote clearer discussion of China's economic and political progress, we are pleased to propose our own criteria for what constitutes a second or third tier city in China.

The RightSite Criteria

Population

While there are no official standards, in most areas of China, a population of more than 5 million people will warrant a city consideration as a second tier centre.

Economic output

Once again, there are no authoritative guidelines (which leaves us free to make up our own), but in most provinces a city with a GDP of RMB 250 billion or more would make it into the second tier. In more prosperous provinces, such as Jiangsu, Zhejiang or Guangdong, however, expect this standard to raise to RMB 350 billion per year or more.

Economic growth

Cities which are on the upswing also tend to be seen as of a higher tier than their more sedate brethren. Suzhou's high level of GDP, coupled with a 2008 year on year GDP growth of 13 percent rates it as a solid tier two, despite the fact that at around 6 million in population, it just scrapes past the population standard.

Geography

Cities which are the most significant in their area may be more likely to be classified as second tier than cities which are overshadowed by larger neighbors. Xiamen in Fujian province is only 2.5 million people, but is usually seen as second tier. Nantong in Jiangsu province has over 7 million people, but because it sits close to Shanghai, it is usually classified as a third-tier city.

Transportation

The presence of high grade transportation facilities is more of an indicator of status than a criteria, but the presences of an international airport, even if it's only for flights to Hong Kong, is a good way of telling the higher level cities.

Historical and Cultural Significance

The presence of important historical or cultural landmarks can also raise a city's importance in the eyes of investors and the public. Guilin in Guangxi province, despite it's population of less than 2 million people and small GDP would often be seen as tier two because of its fame as a tourist attraction and scenic wonder.

Combining Criteria

These factors can cross over as well. While five million people might make a city second tier in Gansu, it makes it might make it only middle of the third-tier road in Jiangsu.