China City Tier System: How it Works and Why its Useful

I have gotten many questions relating to the meaning and differences of first, second, and third tier cities, and how this affects strategies for doing business in China.

First off, it is important to note that the commonly referenced tier system is broadly up to interpretation. While originally stemming from the Chinese government’s classification system, many economists, consultants and businesses use slightly different methods for classification including the government classification, GDP, population, retail sales, etc. Also remember, China’s extraordinary pace of development has led to massive changes across China that aren’t spread equally across this list.

Why do tiers matter?

In my experience, this is one of the most effective ways, when used alongside regional market clusters, to slice China into specific local categories for the sake of understanding consumer behavior, income level, and local trends, therefore enabling companies to tune their strategies to suit local conditions.  On regional market clusters, McKinsey has a great article entitled Is your Emerging Market Strategy Local Enough? (Link), or  see Patrick Chovanec’s article titled The Nine Nations of China (link).

By the numbers:

According to Nielsen’s Winning in China, Insights and Strategies for 2011 (link):

Tier 1 Cities:

  • 16 million households, 1 trillion income value

Tier 2 Cities:

  • 38 million households, 2 trillion income value

Tier 3 Cities:

  • 75 million households, 3 trilllion income value

Tier 4 Cities:

  • 86 million households, 3 trilllion income value

Tier 5 Cities:

  • 169 million households, 4 trilllion income value

Based on this breakdown, it is easy to see the market potential of lower tier cities, but keep in mind that these are spread out across China, making them more difficult to access than the Tier 1 megacities that most people associate with China. Consumer habits, disposable income, and even lifestyles are very different across this spectrum, not to mention the costs of doing business locally, including labor costs, land, rent, operating costs of a retail store, etc. Among foreign firms with a retail presence in China, many subscribe to a philosophy of “Look pretty in Tier 1, make money in Tier 2 and 3”. 

Without further ado, here’s the rundown by tier:

Tier 1 Cities:

Large densely populated urban metropolises with huge economic, cultural and political influence in China. Tier 1 cities attract great attention from foreign enterprises due to income levels much higher than the national average, and larger middle class representation and increasing consumption habits. Cities that fall within this category represent China’s most developed markets in terms of consumer behavior. 

  • Shanghai
  • Beijing
  • Guangzhou
  • Shenzhen*
  • Tianjin*
  • Chongqing*

* Due to their size and government classification, many will also include these in the Tier 1 category, although it is up for debate.

Tier 2 Cities:

These are generally made up of Provincial capitals, sub-provincial cities, SEZs, and other more developed cities with cultural and economic influence. Over the past decade, Tier 2 cities have received increased attention and investment from foreign companies due to lower labor costs, less competition, lower operating costs for retailers, and rapidly increasing consumer spending habits. It is important to note that not all Tier 2 cities are created equal, and with a large number falling into this category, there are substantial differences in the economic, population, and consumer habits in each. It could easily be argued that many of these could fall into the Tier 3 city category based current levels of economic development. The list includes: 

  • Changchun 
  • Changsha
  • Chengdu
  • Dalian 
  • Fuzhou
  • Guiyang 
  • Haikou
  • Hangzhou 
  • Harbin
  • Hefei 
  • Hohhot
  • Jinan
  • Kunming
  • Lanzhou 
  • Lhasa
  • Nanchang
  • Nanjing
  • Nanning
  • Ningbo 
  • Qingdao 
  • Sanya
  • Shantou 
  • Shenyang 
  • Suzhou 
  • Taiyuan 
  • Urumqi 
  • Wuhan 
  • Wuxi
  • Xiamen 
  • Xian
  • Zhengzhou
  • Zhuhai 

Tier 3 Cities:

These are generally made up by open coastal cities, high income cities, and cities with significant economic development which you may not have heard of. The list includes:

  • Beihai
  • Changzhou
  • Dongguan
  • Foshan
  • Guilin
  • Huizhou
  • Jiangmen
  • Jiaxing
  • Jinhua
  • Lianyungang
  • Nantong
  • Qinhuangdao
  • Quanzhou
  • Shaoxing
  • Shijiazhuang
  • Taizhou
  • Tangshan
  • Wiehai
  • Wenzhou
  • Xining
  • Xuzhou
  • Yantai
  • Yinchuan
  • Zhangjiang
  • Zhenjiang
  • Zhongshan
  • Zibo

Tier 4 and 5 Cities:

I am leaving out a lot from these categories, however would like to touch on some of the more well-known cities. It’s also important to note that this is not necessary a scientific classification at this point, and the rapidly changing rates of development across China have great potential to change many of these lower classifications. Nevertheless, I will throw these in. 

Tier 4:

  • Anshan
  • Baotou
  • Chaozhou
  • Daqing
  • Datong
  • Fushun
  • Handan
  • Huzhou
  • Jilin
  • Liuzhou
  • Luoyang
  • Qiqihar
  • Weifang
  • Wuhu
  • Yangzhou
  • Zhangzhou
  • Zhoushan
  • Zhuzhou

Tier 5:

  • Leshan
  • Lijiang
  • Mianyang
  • Nanping
  • Putian
  • Rizhao
  • Taian
  • Taizhou
  • Xiangfan
  • Xiangyang
  • Yan’an
  • Yichang
  • Yueyang
  • Zhaoqing