A little less than a year ago, when the reality of the pandemic had yet to hit California, I caught up with my friend, Ron Cao, on one of his regular trips to Silicon Valley. Ron is a seasoned venture capitalist who has spent two decades in China, invested in many of the biggest hits of the last decade — Meituan, ByteDance, etc. — and eventually opened up his own fund called Sky9 Capital. Our favorite topics whenever we get together are, of course, cross-border learnings and future opportunities. With China’s growth decelerating, I wanted to know, where was he going to invest? Was he, perhaps, going to try his luck in Southeast Asia like so many other managers we knew? Or how about India — wasn’t that one of the places touted as the next China? “No, Rui,” he replied earnestly, “the next China is China.”

What Ron is referring to is the exponential rise of what I like to call “developing China,” the vast inland area in the central and western parts of the country that is much poorer on a per capita basis than the eastern coast. While everyone is well aware of this economic disparity — the government’s much touted “Western Development Strategy” has been around since 1999 — it really wasn’t until the smartphone became ubiquitous in China that people truly saw the extent of the gap. In fact, Kuaishou, the latest Chinese internet company to go to IPO and now hovering at nearly $200 billion in market capitalization, was actually largely unknown to most Chinese people until an article in 2016 went viral and alerted people to its existence. Its significant user base was mostly from rural China, a population whose habits and lifestyles are strange and unfamiliar even to their fellow countrymen.

The reality is that growth in China’s digital economy in the first 15 years of this century primarily came from the 400 million or so urban dwellers along its eastern coast. These are the latte-sipping, yoga-practicing, globetrotting inhabitants of first and second-tier cities in China. They lead lives comparable in access and diversity — at least in a material sense — to large metropolises even in the most developed Western nations. However, there are a billion or so Chinese people whose lifestyles are much more similar to those in so-called “developing” countries. In Chinese, this demographic is referred to as the xiachen shichang or “sinking” market. That differentiates them from the “upgrade” or xiaofei shengji opportunities in higher-income households that multinational corporations and enterprising Chinese entrepreneurs have catered to.

They may be sinking no more. Disposable income per capita for rural China is expected to grow much faster than in urban China, from $4,000 in 2017 to $10,000 by the end of this decade. Ron was an early investor in Pinduoduo, the gamified social e-commerce platform that became the second largest online shopping destination in China by user count in just three years. By market capitalization, the five-year-old company is already the fourth largest Chinese internet company ever — dwarfing its much more established competitor JD.com — and is a third of the way to overtaking China’s e-commerce king, Alibaba. Pinduoduo’s wild success is almost entirely due to its recognition that “developing China” was an untapped, blue-ocean market opportunity. China’s investment into basic infrastructure and the proliferation of smartphones generated hundreds of millions of rural mobile internet users. Existing goods and services had largely been built for urban China; these users needed new apps and channels to accommodate their budgets and situation. Pinduoduo and Kuaishou weren’t the only companies to realize that these price-conscious, entertainment-hungry consumers were up for grabs, but they were two of the most successful. 

Rural China has a way to go before incomes could even begin to approach those on the coast. And as long as the difference remains stark and a convergence inevitable, the opportunity to capture this growth is as enticing as ever. 

Ron is convinced that they won’t be the only beneficiaries of the “population dividend,” as investors liked to call the surge in this vast, underserved, and newly online market segment. And I dare say he’s right. Rural China has a way to go before incomes could even begin to approach those on the coast. And as long as the difference remains stark and a convergence inevitable, the opportunity to capture this growth is enticing. For example, in the last few months, we have seen a frenzy of investment and expansion activities in online community group buying (CGB), which is a re-imagining of the grocery and convenience store in areas of the country that have poor offline retail infrastructure for food and sundries. After all, what are traditional grocery stores but large concrete refrigerator boxes and pantry shelves we visit once a week for mostly the same few supplies? Surely if we were to build something today completely from scratch, it would look different. Plenty of investors agree. In November, Pinduoduo raised $6.1Bn in the capital market, a portion of which will go towards CGB. Other internet giants have announced similar intentions and sprung into action. The nation is now dotted with more than half a million “pickup spots” for people who are willing to buy their groceries over WeChat and pick up the next day. 

So yeah, I suppose I agree with Ron. China has enjoyed a four-decade run of impressive economic growth, but plenty of underdeveloped markets await. As the government disclosed last year, 600 million people still live on less than $140 per month. Why go abroad when there’s still so much to do at home — and there is the benefits of exploring markets with a shared written language, currency and software such as the ubiquitous WeChat app? For those who are willing to put in the time, as the founders of Kuaishou and Pinduoduo did on unfamiliar ground, the “next China” — the place with a large, somewhat homogenous population with years of high growth ahead — may very well be this China. It’s just a different China than most of us know. 

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