China is reshaping global luxury through the consumer power of its emerging cities

If Beijing is China’s centre of power and Shanghai the business and financial giant, where is the nation’s capital of cool? A growing consensus of opinion leaders, including fashion bible Vogue, points to Xiamen, a little-known city of 3.5 million people on China’s southern coast.

Some of China’s hottest young designers – such as Shangguan Zhe and Vega Zaishi Wang – have set up shop here and are receiving fashionista pilgrims from the mega cities. Hipsters sip craft beer and browse avant-garde fashions at the Shapowei Art Zone. Xiamen’s clean air, beach walks, Hokkien cuisine and more human dimensions are among reasons consultancy PwC ranks it second in China behind Zuhai for quality of life. Such factors also make Xiamen one of China’s hottest property markets, as young professionals are drawn by its creative buzz and economic vibrancy.

The city is emblematic of how China’s explosive growth is increasingly being driven by some of its less well known and smaller cities – and no sector is being energised more by the shift than luxury. It’s a story in which bold creative visions, disseminated by social media and key opinion leaders, meet the fast growing sophistication of young shoppers with disposable income right across China.

China’s 613 cities are officially classified into ranks ranging from one to four, based on factors such as population and economic size. At the apex are Beijing, Shanghai, Guangzhou and Shenzhen, collectively known as Bei-Shang-Guang-Shen. The tech powerhouse of Hangzhou, home to Alibaba, is Tier-2. Xiamen and Zhuhai, China’s best for quality of life, are examples of Tier-3 cities – and experts say they are emerging economic dynamos.

“They have money. They’re educated. They’ve got numbers,” says Michel Gutsatz, visiting professor of marketing at the China Europe International Business School. “There is a huge untapped market in China’s Tier-3 cities.”

For global luxury, China’s emerging cities will drive staggering growth. Overall, according to McKinsey, Chinese luxury spending between 2012 and 2018 delivered more than half of the growth in luxury spending worldwide, rising from roughly $45 billion to more than $100 billion. That will continue to increase as young professionals in lower-tier cities flex their consumer muscles. Chinese consumers are on track to account for two-thirds of the global growth in luxury spending by 2025, according to the consultancy.

“China is winning half of the luxury world,” said a McKinsey report. “There is unparalleled opportunity to tap demand for luxury among the affluent residents of China’s lower-tier cities.”

Already, most of the growth in luxury is being driven not by Beijing, Shanghai and other urban colossi but by cities of a few million people. In a report last year, Boston Consulting Group and Chinese internet giant Tencent said that 58 per cent of Chinese consumers buying luxury goods live outside the 15 biggest cities in China, in urban centres classified as second-, third-tier or lower.

China’s lower-tier consumption narrative goes beyond the luxury sector to embrace FMCGs, baby products and theme parks, to name but a few. Morgan Stanley said in a report last year that private consumption in these emerging cities is on course to triple in the next decade, from $2.3 trillion in 2017 to $6.9 trillion in 2030.

China’s smaller cities are growing faster than the large ones in part because of a more flexible Hukou policy, China’s system for regulating rural to urban migration that acts as a kind of domestic visa regime for city life. Another key factor is the cost of living, which in Tier-3 cities is generally less than half that of mega-cities such as Beijing and Shanghai. The income gap is also narrowing as young professionals seek a more amenable lifestyle in emerging cities.

“These households,” said Morgan Stanley, “tend to have a stronger appetite than larger cities for discretionary spending because of their lower housing-cost burden.”

This is a point illustrated by Chinese entrepreneur Edward Lu, who founded the Organic+ line of international cosmetics after a career with L’Oréal and Montblanc. His goal was to offer natural niche products to satisfy China’s increasingly discriminating, and green-conscious, tastes. Lu launched boutiques in Beijing and Shanghai only to find engagement was disappointing. Bucking conventional wisdom, he decided to test the market in smaller Chinese cities such as Hefei. Sales suddenly boomed.

“The consumption power in Tier-3 cities is often much stronger than the young person living in Beijing or Shanghai,” says Lu. “If a young woman in Beijing or Shanghai wants to buy luxury cosmetics goods, she has another big burden of paying a huge rent. In Tier-3 they live at home or in their own apartment. So actual disposable income is much higher.”

He adds that there’s no longer anything “provincial” about the consumption tastes of millennials in Tier-3 cities. Through the reach of WeChat, Weibo and other social-media platforms, Tier-3 consumers are as plugged in as Shanghai shoppers.

The phenomenon is driven by China’s social-media influencers. Angelababy, a Hong Kong-based model, has 87 million Weibo fans. Fashion blogger Gogoboi garners more than 100,000 views per post on WeChat. And Kakakaoo, who chronicles her life on a vlog (video blog), attracts a Weibo audience of more than 10 million.

A McKinsey survey suggested that 96 per cent of Chinese get information about luxury brands by word-of-mouth (which increasingly means word-of-mobile-device) and 95 per cent from influencers – while only 39 per cent get such information from traditional advertising.

In Tier-3 cities, Lu discovered a deep vein of unmet luxury need among consumers seeking ways to stand out from the crowd. While global brands such as Louis Vuitton, Burberry and Chanel remain hot sellers – and will benefit handsomely from the luxury consumption surge in cities big and small – today’s trendy Chinese are more inclined, he says, to hunt for hidden gems that reveal a unique personality. It’s a turnaround from their parents’ relentless pursuit of iconic labels, on Paris shopping sprees, to conform to notions of prestige.

“Younger generations are not only looking for big brands. They’re looking for products that fit their lifestyle,” says Lu. “These people have a much stronger taste for beauty, better taste in fashion, better taste in art.”

A finer consumer eye also feeds the luxury creation boom in smaller cities such as Xiamen. The island city – swimming distance from Taiwan – is home to the “Xiamen Gang,” a loose grouping of globally-acclaimed avant-garde designers. They include Shangguan Zhe (of cult menswear label Sankuanz) and Min Liu, behind the “modern femininity” Ms Min brand – both finalists for the prestigious LVMH Prize.

Xiamen’s creative energy, attractive lifestyle and hipster scene (it boasts the world’s longest elevated cycling path) have in turn fuelled an impressive property boom. New home prices have risen about 19 per cent annually since 2015 – more than twice the national average – although there have been recent signs of cooling.

New luxury residential properties include Sino Group’s Mayfair by the Lake – with lush views and a landscaped swimming pool – and New York architect Robert A.M. Stern’s Heart of Lake, a complex reminiscent of his Manhattan landmark, 15 Central Park West. The development rush helps to explain why, according to Bloomberg, a 1,000sq ft apartment in downtown Xiamen costs nearly as much as the average London home.

Meanwhile, malls are cropping up in Xiamen to feed the appetite for luxury, in line with a nationwide projection of 7,000 new malls in the next five years. The compact city has seen three shopping malls go up recently, including the glitzy ITFC Mall offering luxury retail over 60,000sq m of space. Despite concerns of a bubble, global property firm Savills says: “Xiamen’s vacancy rates continue to trend down even with increasing average rents, indicating strong demand in the market.”

The vibrancy of China’s Tier-3 cities often comes down to quality of life. Trendy young Chinese are increasingly fed up with the chaos, pollution and prohibitive costs of Beijing and Shanghai.

That’s precisely what drew one of Xiamen’s brightest fashion lights – Vega Zaishi Wang – to the coastal city from Beijing. The crisis came when Wang spiralled into a depression triggered by the capital’s poisonous air, frenetic lifestyle, soaring prices and dehumanising urban sprawl.

It caused her to name her 2014 autumn/winter collection “The Dark Night of the Soul”. Her next collection was called “The Dream Catcher”.