The Development Almost Everybody Currently Misses About Investing in China

What I Believe Is the Most Important and Completely Overlooked Development Happening Right Now

Introduction

In this article, I’m going to share what I believe is the most overlooked investment theme in China right now. It’s not top secret, but the sheer stubbornness with which investors brush it off whenever I bring it up makes me think I’m really onto something. Everyone’s busy debating the usual suspects—aging population, struggling real estate market, weak consumer spending, post-COVID blues, or the cutthroat competition leaving companies gasping for air. But no, this is something else entirely. Let me explain.

Living in a different world?

Let’s begin with two quotes from the latest earnings reports or earnings calls of Alibaba and JD.com.

Alibaba

In my opinion, restoring consumption confidence is critical, but it takes time. While macro policies have started to show positive effects, we recognize that the overall recovery trajectory remains cautious and gradual.

JD

The stimulus measures are expected to help restore consumer confidence and reduce destocking cycles, but the full recovery of consumer sentiment will take time.

The shift from consumption upgrades to downgrades in China has been identified as a significant factor driving weaker consumer spending. In October this year, the South China Morning Post released a special issue featuring 13 articles on the topic of consumption downgrades in post-COVID-19 China.

What does Pinduoduo have to say to that?

Pinduoduo

On consumer spending and macro.

We have seen an overall recovery in consumer spending and a strong growth in online consumption during the second half of this year.

In the third quarter, thanks to the steady recovery of macro consumption, our business performance remained robust.

On consumption downgrades.

[…], we have focused on offering more premium home appliances, maternity and baby products and fresh produce, driving a wave of consumption upgrades.

It seems that Pinduoduo is living in a different world. While others still see a weak macro consumption environment that will take time to recover, Pinduoduo speaks of strong online consumption and consumer recovery. While others are discussing consumption downgrades, Pinduoduo is focusing on consumption upgrades.

It turns out that Pinduoduo is indeed living in a different world.

So which world is Pinduoduo (and also others) actually living in? The “sinking market”, the lower-tier cities and rural areas.

The full quote, which I only partially shared with you earlier, is actually this one.

For those in third and fourth tier cities and rural areas, we have focused on offering more premium home appliances, maternity and baby products and fresh produce, driving a wave of consumption upgrades.

Ok let me tell you the story: (in case you don’t want to hear me talk like grandpa Simpson - there is a conclusion at the end!)

China: One Country, Many Worlds

When I talk to investors or friends outside of China, their mental image is often shaped by Shanghai, Beijing, or, if they’ve done their homework—or own a Huawei phone—Shenzhen. These first-tier cities feature towering skyscrapers, drones delivering almost anything to your doorstep within 30 minutes, and a digital payment system that makes credit cards feel quaint. You stop using credit cards quickly when you see 80-year-old women rolling their eyes as you fumble with one, disrupting the seamless flow of payments.

But let me tell you, as someone who’s spent years here, that’s just one slice of the story. A thin slice. Maybe the crust.

Take a step back, and you’ll find cities like Chengdu, Xi’an, or Chongqing—places with populations that make European capitals look like cozy villages but remain almost unheard¹ of outside China. These cities are vibrant, dynamic, and crucially, very different from the first-tier giants. The pace is different. The vibe is different.

Now, venture further into lower-tier cities and rural areas, and you’ll start to feel the weight of the contrasts. Life slows down. The infrastructure that dazzles in Shanghai might feel like a distant rumor. This is a part of China where time seems to take its own pace, and the gap between the hyper-modern and the traditional is stark.

It’s a country of extremes. Traveling in China feels like time travel. First-tier cities like Shanghai and Shenzhen are a decade ahead of Europe in terms of technology and infrastructure, while rural areas could just as easily be decades behind. The diversity is astonishing, even overwhelming, and it’s something that continues to humble me, even after years of living here.

No worries, I haven’t suddenly decided to start writing travel diaries—the literary equivalent of watching paint dry. This was just the warm-up. Now, let’s get to the real deal. Let’s talk business. Let’s talk about why this matters.

The Great Migration: From Big City Dreams to Lower-Tier Realities

If you’ve been following my train of thought, it’s clear why, for many years, young people in China dreamed of making it to the first-tier cities. Places like Beijing, Shanghai, and Shenzhen were the promised land—a world of opportunity, shiny skyscrapers, and upward mobility. Getting there wasn’t easy, though. The hukou system, China’s household registration policy, made access limited, creating an aura of exclusivity. It was the ultimate achievement: living and, one day, owning property in these cities.

But as with many dreams, reality has a way of catching up.

That trend has now done a complete 180. Young people are packing up and leaving first-tier cities, trading in the glamour and grind for the relative calm of smaller cities. Why? The answer is simple: living costs. First-tier cities have become prohibitively expensive, to the point where even a solid salary won’t get you far. Take the apartment I’m currently living in as an example. Its price trades at 92 times the annual rent (yes I was actually just sitting down and doing the math). Let me spell that out—it’s not just unaffordable; it’s a financial black hole.

Imagine being a young graduate in Shanghai, working insane hours, living in a cramped apartment, and still seeing no light at the end of the property ownership tunnel. The question they’re asking themselves is, “Why?” Why work themselves to exhaustion for a mediocre lifestyle, when the same effort in a lower-tier city can offer a much better quality of life?

And that’s what they’re doing—relocating to smaller cities where life is simply better. Salaries may be lower, but costs are dramatically reduced. That same paycheck can now get them a spacious apartment—or even a house with a garden. Yes, you read that right. For the price of a shared apartment in Shanghai, you could be sipping tea on your lawn in a lower-tier city.

The Ripple Effect: First-Tier Habits, Lower-Tier Cities

This migration isn’t just about where people live—it’s reshaping the entire country. Young people aren’t leaving their first-tier habits behind. They’re bringing them along, introducing trends like specialty coffee shops, modern fashion, and even co-working spaces to smaller cities. What’s more, with the rise of remote work, some don’t even need to compromise their big-city careers². They’ve effectively created the best of both worlds.

Here’s where it gets interesting: because living costs are so much lower, even those earning less have greater disposable income. That extra spending power is fueling economic growth in these emerging hubs. Lower-tier cities, once dismissed as sleepy and underdeveloped, are now becoming vibrant centers of activity. Companies have noticed. Coffee chains, apparel brands, and fast-moving consumer goods companies are all making their move, opening stores and operations in places they once ignored.

A few years ago, these cities were struggling to catch up with their first-tier counterparts. Today, they’ve become China’s new growth engines. This transformation hasn’t gone unnoticed by the government, which is actively supporting the development of lower-tier cities. Policies encouraging urbanization, infrastructure investment, and business expansion are aligning perfectly with this migration trend.

An Overlooked Trend with Massive Implications

While much of the world fixates on China’s aging population or its economic slowdown, this shift is flying under the radar. It’s one of the most significant yet overlooked trends in the country today. The rise of lower-tier cities isn’t just a fascinating social shift—it’s a key driver of China’s economic future.

The lesson? Growth in China is no longer confined to the usual suspects. The next wave of opportunity lies in places you may never have heard of—places where dreams are now a little bigger, apartments a little roomier, and gardens a real possibility.

Conclusion

This shift toward lower-tier cities is reshaping China’s economic landscape, creating significant investment opportunities. Companies that understand and cater to these markets—adapting their products, pricing, and strategies—stand to benefit from this migration trend. As investors, the key is to identify businesses with the agility to tap into this growth, making the rise of lower-tier cities an overlooked but powerful driver of long-term returns.

Okay, let me get a little more concrete. Let’s just follow the breadcrumbs and see who gets the online advertising revenues. Have you seen Baidu? Yes, you’re seeing that right, -4%! Out of the larger companies, it is evident that those with more operations in lower-tier cities—such as Pinduoduo, Kuaishou, and Meituan—are performing well and capturing a big portion of the advertising revenue.

I know it’s not an apples-to-apples comparison because sometimes it’s not pure online marketing ad revenue. However, directionally, it should be right.

Take Meituan, for example. They’ve recently partnered with Kuaishou (as I’ve written about here), the short video platform with a much higher penetration rate in lower-tier cities than other platforms. In their latest earnings call, Meituan mentioned the phrase “lower-tier cities” 14 times - very subtle. It’s the lower-tier cities, stupid! These lower-tier cities are vastly outgrowing their higher-tier counterparts, and it’s clear where both Meituan and Kuaishou are pinning their hopes: local life services in lower-tier cities.

Still not convinced? Here is a study by McKinsey on consumer confidence in China: third- and fourth-tier cities show the highest levels of confidence.

On a personal note

So, this is the 50th article I’ve published on Substack—what started out as me criticizing Alibaba’s management and thinking, “This definitely calls for a memo,” somehow turned into well, whatever this is. Honestly, I’m as surprised that some of you are still here, reading along. Truly, your tolerance levels must be impressive.

That said, I’m genuinely grateful for your time and attention. It’s been a fun journey so far - at least for me. I’ve met quite a few interesting people along the way. So, thank you to all of you for sticking around. Here’s to the next 50—or however many I can manage before you all decide you’ve had enough!

1. I remember asking a new PhD student from China that I was supervising where his hometown was. He shrugged and said, “Ah, it’s a small place, you’ve probably never heard of it.” Naturally, I asked how small. “Oh, about six million people,” he replied casually. This was before I had spent much time in China, so I was truly blown away, because that’s essentially twice the size of Berlin.

2. Here’s a little personal anecdote: I recently hired two people in Hangzhou, and I’m paying them about 30-40% less than what I pay people in Shanghai. But here’s the twist—it’s still a win-win! For them, it works out perfectly because even with the lower salary, their living standards are higher than they’d be in Shanghai with a bigger paycheck. And we’re not talking about some sleepy little town—this is Hangzhou, home of Alibaba and what some like to call a “new first-tier city.” It’s just a breezy one-hour train ride from Shanghai. Thanks to China’s amazing fast train system, they can work online most of the time and still have the option to meet in person. It’s like getting Shanghai talent at Hangzhou prices—who could resist? And now, you can only imagine how wide the gap must be between Shanghai and a second-, third-, or fourth-tier city—not Hangzhou.