The economy of first-tier and lower-tier cities: "A Tale of Two Cities"

This report analyzes the macroeconomic conditions of high-tier and low-tier cities in recent years from five aspects: population, real estate, consumption, industrial investment, and social security, providing investors with a rich perspective on the economic changes in these cities. In terms of population, the trend of population concentration in high-tier cities has slowed down in recent years, and the migrant worker group is increasingly inclined to work within their home provinces. The wage growth of migrant workers is relatively slower than the overall disposable income of residents, resulting in a "K" shaped differentiation in overall resident income. In terms of real estate, housing prices and rents in different tier cities continue to diverge. High-tier cities show signs of stabilization after a decline, while low-tier cities remain cautious, but a comparison of rental yields and financial returns may indicate that housing prices in low-tier cities are expected to gradually stabilize. In terms of consumption, while high-tier cities face significant pressure on consumption growth, low-tier cities exhibit strong resilience in consumption growth. Young and middle-aged individuals in small towns are the core group driving consumption upgrades. Additionally, the differences in consumption between high-tier and low-tier cities manifest in five major aspects: total growth, category structure, consumption formats, brand preferences, and consumer groups. In terms of industrial development, high-tier regions have a significant advantage in the mid-to-high-end industrial sector. In terms of industrial planning, high-tier regions place relatively more emphasis on the development of high-end industries, while low-tier regions balance the layout of high-end industries with the transformation and upgrading of traditional advantageous industries. In terms of social security, high-tier cities generally have better social security coverage and per capita expenditure levels than low-tier cities. However, low-tier cities perform better in terms of the proportion of per capita pension insurance expenditure to average wages and overall wage growth. In terms of macroeconomic operation, the overall mobility of the population around the Spring Festival in 2025 is expected to improve compared to the same period last year, with a moderate recovery in Spring Festival consumption and frequent highlights. Population Aspect The trend of population concentration in high-tier cities has slowed down in recent years, and the migrant worker group is increasingly inclined to work within their home provinces, resulting in a "K" shaped differentiation in overall resident income. After the pandemic, the net inflow of population in first-tier cities has basically stopped, with the resident population in 2023 accounting for 5.91% of the national total, only increasing by 0.9 percentage points compared to 2019. Second-tier cities maintain a net inflow of population, with the resident population in 2023 accounting for 18.2% of the national total, an increase of 1.8 percentage points compared to 2019, but the growth rate has also slowed compared to pre-pandemic levels. Migrant workers are an important part of the floating population. We observe that after the pandemic, more migrant workers choose to move within their provinces rather than across provinces. The number of migrant workers in the eastern region is lower than before the pandemic, while the number in the central and western regions is higher. Considering that the income of migrant workers working across provinces and in the eastern region continues to be higher than in other regions, we speculate that the increased willingness of migrant workers to work within their provinces may be due to the aging of the average age of migrant workers. Data shows that older migrant workers are more inclined to work locally, with the average age of local migrant workers being 7.7 years older than that of those who work outside. In 2023, the overall average age of migrant workers has increased by 2.3 years compared to 2019, and more older migrant workers may choose to return to their hometowns for employment, even if their income may decline Since the pandemic, the average wage of migrant workers has continued to be lower than the overall growth rate of residents' disposable income, which may be one of the reasons for the recent "K" shape differentiation in residents' income in our country. The differentiation in income is also reflected in consumer goods. According to statistics from Ma Shang Ying Intelligence Station, in Q4 2024, the sales of instant noodles increased by 5.00% year-on-year, while the sales of other instant food categories, such as snail noodles and hot and sour noodles, decreased by 12.65% and 13.86%, respectively. However, from an overall retail perspective, offline retail in first-tier cities saw the most severe decline in 2024, while the decline in lower-tier cities was relatively mild. We speculate that this may be due to the relatively stable income of the population within the system in lower-tier cities. Real Estate Aspect The housing prices and rents in different tier cities continue to differentiate, with high-tier cities showing signs of stabilization after a decline, while the wait-and-see sentiment remains strong in lower-tier cities. However, the comparison of rental yield and financial management yield may indicate that housing prices in lower-tier cities are expected to gradually stabilize. The differentiation in real estate across different tier cities in our country is reflected in multiple aspects. In terms of prices, new home prices have shown significant improvement month-on-month, with first-tier cities' new home prices stopping the decline for two consecutive months, and second-tier cities also halting the decline by the end of the year, while the decline in third-tier cities has narrowed. As of December 2024, among the 70 large and medium-sized cities, the sales price index of newly built commercial residential buildings recorded month-on-month changes of 0.2%, 0.0%, and -0.2% for first, second, and third-tier cities, respectively. In terms of transaction volume, since the introduction of the 930 real estate new policy, the new home transaction area data in first and second-tier cities has recovered better than in third-tier cities, with bottom rebound rates of approximately 58%, 94%, and 41%, respectively. In terms of the de-stocking cycle, although the inventory scale of newly built commercial residential buildings nationwide has significantly decreased, the de-stocking cycle in lower-tier cities is still not short. In terms of rent, the current housing rental market shows a structural differentiation trend, with rents in high-tier cities declining while rents in lower-tier cities are rising against the trend in 2024. Regarding rental yield, due to the regional differentiation of housing prices and rents, the current rental yield (the ratio of rent to housing price) in first-tier cities has fallen to below 1.7%, while the rental yield in lower-tier cities has risen to above 3%. Internationally, rental yield is used as a standard for whether a property is worth investing in. We believe that, given the current housing price expectations have not significantly reversed, the increase in rental yield affects selling decisions more than buying decisions. The asset allocation behavior of residents in our country shows a differentiation characteristic based on city levels, with residents in high-tier cities having a higher acceptance of risk assets, while residents in lower-tier cities primarily allocate assets to real estate. Based on this, we believe that when using the rental yield indicator, high and low-tier cities may correspond to financial management and deposit yields, respectively. Considering that the current rental yield in lower-tier cities has exceeded deposit rates by more than 150 basis points, the comparison of rental yield and financial management yield may indicate that housing prices in lower-tier cities are expected to gradually stabilize. Consumption Aspect The differences in consumption between high and low-tier cities are reflected in five major aspects: total growth situation, category structure, consumption format, brand preference, and consumer groups. Total consumption: The difference in consumption growth rates between high-tier and low-tier cities began during the current real estate downturn. From 2020 to 2021, the decline in consumption growth in low-tier cities was greater than that in high-tier cities. However, from 2022 to 2023, low-tier cities have shown strong resilience in consumption growth compared to high-tier cities, primarily because the balance sheets and income statements of residents in low-tier cities have been relatively less damaged. Consumption structure: Over the past decade, high-tier and low-tier cities have exhibited different characteristics in consumption upgrading. Notably, low-tier cities have shown significant upgrades in durable goods such as automobiles and mobile phones, while high-tier cities have seen more pronounced upgrades in service consumption. Consumption formats: The proportion of "offline consumption" in low-tier cities is higher than in high-tier cities, but in recent years, the market share of "online consumption" in low-tier cities has also been continuously expanding. Platforms such as Pinduoduo, Diantao, and JD.com have the longest average monthly usage time in low-tier cities, with a preference for group buying, social interaction, discounts, and cashback online models. Consumption brands: Consumers in low-tier cities are more sensitive to "price," favoring high cost-performance products, and they have a higher recognition of domestic brands. Consumer groups: "Young and middle-aged people in small towns" are the core driving force behind consumption growth and upgrading in low-tier cities, specifically including young people in small towns and affluent middle-aged families. Ample leisure time, high consumption willingness, and steadily growing consumption capacity are the core reasons for the high consumption growth of this group. Industrial Development Aspects High-tier regions have a significant advantage in the mid-to-high-end industrial sector. Although both high-tier and low-tier cities face competitive pressure, the pressure in high-tier regions is relatively smaller. In future planning, high-tier regions place more emphasis on the development of high-end industries, while low-tier regions balance the layout of high-end industries with the transformation and upgrading of traditional advantageous industries. The main conclusions regarding the differences in industrial development progress and planning between high-tier and low-tier regions are: In terms of industrial advantages, high-tier regions have gained advantages in emerging industries such as integrated circuits, automobiles, and equipment manufacturing, with the output value of related industries significantly higher than that of low-tier regions. The advantageous industries in low-tier regions reflect a "localized" characteristic (e.g., agricultural and sideline products in Heilongjiang, liquor in Guizhou, new energy generation in Xinjiang, and transportation manufacturing in Hunan). In terms of industrial planning and layout, both high-tier and low-tier regions focus on cultivating and expanding strategically emerging industries encouraged by policies, such as new energy vehicles, low-altitude economy, artificial intelligence, information technology, and robotics. There is a certain degree of convergence in layout, and low-tier regions also emphasize promoting the digitalization, high-end transformation, and green upgrading of traditional advantageous industries (e.g., traditional energy, liquor, agriculture, textiles). Regarding prices and profits, both high-tier and low-tier regions face downward pressure on prices, with greater volatility in prices in low-tier regions. The profit pressure faced by high-tier regions and mid-to-high-end industries is relatively smaller than that faced by low-tier regions and mid-to-low value-added industries. Social Security Aspects High-tier cities perform better than low-tier cities in terms of social security coverage and per capita expenditure levels, but low-tier cities have more impressive performance in the proportion of per capita pension insurance expenditure to average wages and overall wage growth rates. First, from the perspective of social security coverage, in 2023, the coverage rate of basic urban pension insurance in various regions shows a positive correlation with the level of economic development. The coverage rate in high-tier areas is significantly higher than that in low-tier areas. The average coverage rates of basic urban pension insurance in 2023 for the Beijing-Shanghai region, other developed regions, relatively developed regions, and underdeveloped regions are 87.1%, 55.0%, 41.8%, and 33.2%, respectively. Second, in terms of pension insurance expenditure, the per capita pension insurance expenditure in high-tier areas is generally higher than that in low-tier areas. However, the proportion of per capita pension insurance expenditure for urban employees in low-tier areas relative to the average wage level is higher than that in high-tier areas. In 2023, the proportion of per capita pension insurance expenditure for urban employees in the Beijing-Shanghai region, other developed regions, relatively developed regions, and underdeveloped regions relative to the average wage level of employees in urban non-private units is 30.9%, 36.6%, 42.3%, and 50.3%, respectively. Regarding medical insurance expenditure, the per capita medical insurance expenditure and the proportion of per capita medical insurance expenditure relative to the average wage level in high-tier areas are both higher than those in low-tier areas. Third, we expect that by 2025, the pension benefits for urban and rural residents, primarily for rural residents, will be significantly increased, with an increase of 20-60 yuan/month per capita, accounting for 1.1%-3.3% of the per capita disposable income of rural residents. This will help narrow the pension benefit gap between high-tier and low-tier areas. Fourth, in terms of minimum living allowance assistance, the urban minimum living allowance standards in high-tier areas are relatively high, but the proportion relative to the average wage level shows some differentiation, with the highest proportion in urban minimum living allowance standards in developed regions outside of Beijing and Shanghai. In terms of rural minimum living allowance, the amount and proportion of rural minimum living allowance in high-tier areas are significantly better than those in low-tier areas. Fifth, from the perspective of average wage levels, in 2023, the average wage of employees in urban non-private units in high-tier areas is significantly ahead, but the average wage growth rate of employees in urban non-private units in low-tier areas is generally higher than that in high-tier areas. Macroeconomic Operation Tracking Residents' travel has increased compared to the same period last year, with a mild recovery in consumption during the Spring Festival, showcasing many highlights. In terms of residents' travel, the overall mobility of the population around the Spring Festival this year has improved compared to the same period last year, with daily year-on-year readings showing a "low at both ends, high in the middle" pattern, which may reflect that the rhythm of returning home and resuming work during this year's Spring Festival is relatively delayed. Overall, consumption during the Spring Festival has shown a mild recovery, with many highlights. In tourism, data from local cultural and tourism departments show that tourism consumption performed well during the Spring Festival holiday; in the retail sector, according to data disclosed by local business departments, during this year's Spring Festival, the sales revenue of the commerce and catering industry in many places increased by about 10% to 15% compared to the same period in 2024; in terms of box office revenue, during the Spring Festival of 2025, the overall box office revenue is at its highest level since 2019, up 24% compared to the same period in 2024 and up 40% compared to the same period in 2019. Author of this article: Yang Fan (S1010515100001), Maxigao Wa, Wang Ximing, Li Xiang, Zhang Liyang, Source: CITIC Securities, Original Title: "Macroeconomics | The 'Dual City Record' of High and Low Tier Cities" Risk Warning and Disclaimer The market has risks, and investment requires caution. 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