GaveKal Research points out that urban per capita net income stood at RMB17,175 (£1,651) in 2009, compared with RMB5,153 (£495.5) in the countryside, which is the widest gap since the economic reforms began in 1978.

Rural reform in China is particularly important to the NPC as it is still home to the majority of Chinese, 730 million people or 55% of China’s total population. The NPC has taken clear steps towards rural development and in order to achieve the current administration’s aim of a ‘harmonious society’ there has been continued spending on Central and Western China, which encompasses second and third tier cities (Chongqing, Chengdu, Kunming, etc.) as well as significant rural areas. Spending to support farmers and agriculture grew by 22% in 2009 (GaveKal Research) and of the stimulus package that the Chinese enacted in 2009, 53% was focussed on fixed asset investment in Central and Western China.

Second tier cities

Over the past few weeks while travelling to see privately-owned mining, cement and forestry companies in China I have visited second tier cities such as Hangchou, Chengdu, Kunming and Puer in Western China. What is amazing is the scale and pace of development in these cities. For example the city of Chengdu in Sischuan Province, West China has a central city population of circa 5 million and a local merchant banker told me that they are currently selling 200,000 new cars a month!

The banker also described the central government’s commitment to the Go West campaign, which is the urbanisation programme of Western China. Following the earthquake on the 12 May, 2008, near Chengdu, Sischuan Province, a stimulus package of 1 trillion RMB has been dedicated by the government to be spent over three years. As he told me, ‘China depends on the World, and China depends on Sischuan’. (Although at present this should read ‘the World depends on China, China depends on Sischuan.’)  It is no surprise then that the companies I visited were booming off the back of local consumption and development.

Manufacturing growth

During a trip to see a forestry company one of the private equity executives told me a story about a hotel he stayed at recently in Qionglai, a small town near Chengdu. Entering the courtyard to the uninspiring 3 star hotel he found the courtyard filled with new Mercedes, BMWs and even one Bentley. Local first generation entrepreneurs were sitting around gambling and drinking. These business owners are growing extremely wealthy and are beginning to spend significant money on luxury goods.

Infrastructure development is allowing and encouraging manufacturing to move further inland in order to use cheaper sources of labour and capital and also to sell directly to the growing inland consumer base. For example in November 2008 PepsiCo announced a $1 billion investment plan in China which over the next four years will focus on expanding manufacturing capacity and sales in Western and Central regions. They launched the plan in October 2009 by opening a manufacturing plant in Chengdu. PepsiCo plans to open additional plants in Kunming, Zhengzhou, Lanzhou, Nanchang, and Quanzhou. Altogether, these six cities have a total population in excess of 43 million.

Another example is Huaqiang Holdings which last year announced plans for a $2.2 billion development in Hunan province, Central China. The development, which will be China’s equivalent of Disney, will have two theme parks and bases for creative industries (film, TV etc). As a background Huaqiang Holdings built its first theme park in Chongqing in 2006, which proved to be a huge success.

The significant government, and increasingly corporate, spending in less developed Central and Western provinces of China is leading to a wave of new consumers. Many of these consumers are buying their first car or house or taking their first trip to the theme park. Given that the region’s current boom is largely a result of government spending, which in turn is affected by global macroeconomics, there is no doubt that this boom could swiftly reverse. However, we believe in the secular trend of the growing consumer class of inland China, which in turn leads us to be extremely positive on the long-term outlook for the country.