Flourishing Cities Offer Beijing a Lesson in Thinking Small
Even in slowdown, a Yangtze River town bursts with consumer vitality
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The new version of Fengdu was created up the Yangtze River from the Three Gorges dam a decade ago. It now has about 850,000 people and is one of many smaller cities that now help drive China’s growth.Photo: Agence France-Presse/Getty Images
FENGDU, China—This “Ghost City” on the banks of the Yangtze River in southwest China has been reborn.
In legend, Fengdu is where the King of Hell sits in judgment on the souls of the deceased; pilgrims and tourists flock to its temples. Its own day of reckoning came a decade ago when construction of the Three Gorges dam forced all the residents to abandon their homes at the river’s edge and relocate to higher ground in a purpose-built city on the opposite shore. They were reluctant at first, but a short move across a muddy stretch of water catapulted these refugees from an ancient world into modernity.
The new Fengdu quickly filled up and is now bursting with consumer vitality, one of hundreds of small cities wrenched into existence in recent years whose aspiring middle classes have become the single most important engine of China’s economic growth.
Some 20 million people each year swap rural life for an urban one, often in places like Fengdu, which now has 850,000 people, a high-speed rail link, well-stocked supermarkets and at least two (unauthorized) Apple dealers.
About 1,600 small cities account for 40% of China’s 1.3 billion population, 42% of GDP and 35% of retail sales, according to the market research firm Nielsen.
If these striving cities lose momentum, China fails. That’s now the danger.
Small cities are China’s future, which is why the cascading effect of a national financial crisis-in-the-making on communities like Fengdu poses a far more severe threat than the stock losses of punters in privileged cities like Shanghai and Beijing as the markets crash.
Despite what the prophets of doom say, however, there’s plenty of growth left in China—if it can pull through its financial turmoil. And although it’s gone largely unnoticed abroad, the country is already well on track to rebalance its economy away from exports and investment toward domestic consumption.
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A view of a god's statue built on a hill is seen in the "Ghost City" in Fengdu.Photo: (Photo by China Photos/Getty Images)
That economic transformation is on display in Fengdu. Yangtze riverboats still disgorge tourists on their way to the area’s shrines and pagodas, but visitors also arrive by the high-speed train from the nearby megacity of Chongqing. At night, riverfront plazas turn into open-air bars. Ju Bo,who owns the franchise for the Danish beer Tuborg, a local favorite, says the retail price of a bottle has jumped fivefold since Fengdu’s forced move. “We love to eat and drink,” he says.
Jobs are plentiful and wages are rising. Local hot-pot chefs earn about $12,000 a year, higher than the urban average of $9,000. Wang Yan, the manager of one of Fengdu’s stores selling iPhones, says sales have come off a bit since the stock market collapse. That’s because of drop-off in demand from traders who used them to check live prices and who have now been burned. But the broad trend is upward. “I’m very optimistic,” she says.
Indeed, there’s not much hard evidence that confidence in smaller cities is suffering amid a nationwide economic slowdown led by a property slump. Sales of consumer goods like shampoo and razors in these places rose 11% in the first three months of this year compared with the same period last year, against 4% growth in big cities, Nielsen figures show.
Kenneth Courtis,an economist and former vice chairman of Goldman Sachs Asia, reckons that the sector of the Chinese economy that includes shops, restaurants and other services will exceed 50% of the total this year, with manufacturing at only 42%. “Isn’t this exactly what the West has been hectoring China to do?” he asks.
In Fengdu, property prices have fallen in the past year, but only by about 10%, says Xia Shan,a sales manager marketing an upscale housing project called Gold Coast. That could change quite quickly if the national economy turns down sharply. Many of Ms. Xia’s customers are migrant workers from Fengdu who’re doing well in the big cities and feel rich enough to buy a smart apartment as an investment.
Some of these migrants are trickling home, like Chen Zelan, a 35-year-old who left with her husband a decade ago to try her luck in coastal Guangdong province. The general store they opened outside a factory didn’t work out as well as they expected, but in their absence Fengdu took off, and now she says, “We’re staying put.”
Her future, to a large extent, depends on the political choices of China’s nominally socialist masters. They’ve created a massive problem for themselves by investing in state-aggrandizing projects with low returns, or none at all—vast infrastructure, monumental public buildings -- and policies that encourage urban extravagance.
The government now faces a critical challenge: to unwind the credit excesses that fueled a decade of often wasteful growth without triggering a panic that could stall the overall economy, perhaps for decades, which was Japan’s fate when a bubble burst in the early 1990s. That will require deft handling of the markets. Beijing’s clumsy efforts so far account for a collapse in global investor sentiment toward China.
To turn this around, Beijing’s economic masters will have to show a clear plan to curb the vanity that’s become a hallmark of its development. In Chongqing, Fengdu’s gigantic neighbor, the iconic downtown landmark, the People’s Liberation Monument, is surrounded by almost completely deserted stores selling gold watches, diamond earrings and Paris fashions.
If China wants to move to the next stage of growth, it will have to learn from the modest ambitions of cities like Fengdu. The residents there made their difficult transition to a new economy; the question is whether the proud mandarins in the capital will follow the example.
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