There’s a new breed of spender in charge of China’s wallets, and it’s not crazy-rich Asians.

The rise of Pinduoduo Inc. and the decline of JD.com Inc. are good proxies for this shift. Founded three years ago, the e-commerce site Pinduoduo processed transactions worth 262 billion yuan ($38.3 billion) in the second quarter, just 40 percent shy of JD’s gross merchandise volume. The smaller company now has more annual active users than JD, China’s second-largest e-commerce provider with 16 percent of the market.

The startup raised $1.6 billion in a New York IPO in July and now has a $25 billion market cap. JD has dropped 38 percent this year to a value of $37 billion.

Whereas JD’s value proposition is quality and authenticity, Pinduoduo, a Groupon-like app with social-media features, is all about good deals. Every item listed on the site has an official price and a discounted price. A consumer can get the discount by persuading a friend to make the same purchase.

Their target demographics are very different. While JD appeals to the middle classes in wealthy cities like Shanghai and Beijing, Pinduoduo serves less-well-off consumers in smaller cities. Last year, cities classed as Tier 3 and lower accounted for almost 60 percent of China’s total retail sales.

And people in smaller cities have more money to spend these days, at a time when the metropolitan middle classes are feeling pinched.

Household debt (mostly mortgages) has almost doubled as a percentage of China’s GDP since the financial crisis. Rents in Beijing jumped by one-quarter in the past year. Every time I visit my hometown, Shanghai, I find that eating out costs more than in Hong Kong, where I’m based. Meanwhile, middle-class investment portfolios can’t be looking pretty with the nation’s stock market in solid bear territory and Tier 1 cities tightening their grip on property sales by imposing a freeze on resales of apartments, among other things.

In the smaller cities, meanwhile, people are feeling a lot richer, helped by Beijing’s subsidies to redevelop shantytowns. Last year, backed by funding from the central bank, the China Development Bank alone advanced 880 billion yuan for such projects. As much as 60 percent of that money went straight to households as cash settlements.

And don’t dismiss the spending power of the millions of couriers, mostly blue-collar migrants from China’s interior, who deliver parcels and food for the internet giants. Their monthly salaries -- anecdotally, between 7,000 yuan and 10,000 yuan -- are a fortune compared with incomes in the countryside. Many remit money home.

This blue-collar army is more likely to buy a 200-yuan “authentic Guqi” Chinese-made sling bag on Pinduoduo than to spend 14,000 yuan for the Gucci equivalent on JD. With government handouts and savings from their city salaries, they’re buying new apartments in Tier 3 and 4 cities. CLSA estimates that shantytown subsidies accounted for 17 percent of property sales in such cities last year, while feeding only 3 percent of retail sales.

In other words, people in lower-tier cities upgrade their housing and bargain-hunt for everything else. After delivering packages in the rain and cold for 14 hours a day, they want the convenience of shopping from home without the cost of a high-end e-commerce site.

There’s one big danger, however, in following the theme of rising small cities.

Shantytown cash settlements are essentially helicopter money from the People’s Bank of China to underdeveloped areas, and there is evidence that this flow is slowing. Pledged supplemental lending, routed via the policy banks to fund these projects, dwindled to an 18-month low in August.

China’s blue-collar spenders may soon feel the pinch, too.


Shuli Ren
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. -- Ed.

(Bloomberg)