Tim Hanson is in China researching stocks with the Global Gains team. This column is one of the dispatches he wrote in Beijing and emailed back to international investors interested in China's growth story. To sign up for all of Tim's dispatches from China, visit china2010.fool.com.

Here's a key insight regarding China today: There's a huge difference between the big "tier 1" cities, such as Beijing and Shanghai, and the rest of the country. And the gap isn't just financial -- it's cultural, too. People in Beijing were dismissive about our next destination, Shenzhen (population 14 million), calling it a backwater and a "very small city." And Xi'an, where we are now, is generally considered too rural to be taken seriously. Learning that we were once again traveling to Xi'an, one of our friends in Beijing shook his head and said, "I don't know why you always go there."

And yet, the gap between tier 1 and tier 2 cities appears to be narrowing. Not only have tier 2 cities been growing faster thanks to government incentives and their relatively smaller exposure to the financial sector, but consumers here in Xi'an also seem far wealthier, more fashionable, and worldly then they did when we first visited the city in 2007. Even so, there's still a gap: I'm typing this dispatch outside a Starbucks at the posh Century Ginwa mall. Although the shoppers seem unfazed by an American drinking espresso (which wasn't the case three years ago), I became a bit of a spectacle when I opened up my laptop (the Starbucks locations in Beijing are packed with laptop users).

But even if "narrowing" and "gone" are two different beasts, the fact is that Xi'an today feels more like a tier 1 consumer town than it ever has before -- a development that should be further aided by a strengthening Chinese currency and the economic growth here. If this observation holds true in other tier 2 cities, now might be a smart time to get some exposure to Chinese consumers.

Timing is everything
That stands in contrast to last year, when we warned you to avoid Chinese consumer stocks, such as Ctrip.com (Nasdaq: CTRP) and Li Ning. At the time, the sector was expensive relative to our diminished expectations of Chinese consumers. Not only did we expect a wealth gap to persist in the second half of 2009 and early 2010, but we also thought job losses in the stressed manufacturing sector would hold back consumer spending.

That thesis turned out to be largely correct, and those of you who invested in rural China and the agricultural sector have been rewarded over the past year. But now, China's stimulus efforts and the government's decision to float its currency, the yuan, have the potential to spur a consumer market that has attractive fundamentals: It's large, growing, largely debt-free, and its shoppers are extremely brand-conscious. As evidence of that last point, consider one of the more interesting footnotes in Yongye International's (Nasdaq: YONG) 10-K filing: The fertilizer company leases and provides cars for its distributors. Why? CFO Sam Yu says it's because the distributors are motivated by status. By giving them a nice car if they meet their growth targets (and having the power to take it away if they don't), Yongye has created a relatively low-cost incentive for its distributors to do a good job.

So it goes with brands
But you don't have to root through 10-Ks to see how much cache brands carry in China. It's evident in the number of knock-offs you see on the street. Our favorite on the trip so far is an Armani Exchange T-shirt. How did we know it was a knock-off? The logo below the Armani name was a Nike swoosh!

Brands matter here, and people want to own them. As Chinese consumers grow wealthier, they'll prefer the real deals over the fakes, and eventually we won't have to speculate whether the Burberry, Kappa, Adidas, Louis Vuitton, and Oakley products here are legitimate.

What's more, as domestic Chinese brands try to grow in prominence, we expect the Chinese government to enhance its protections of trademarks and intellectual property. After all, the Chinese government is much more likely to pay attention to the problems of piracy when the likes of Li Ning, 361, HTC, and other domestic Chinese companies get hurt by it.

And although true luxury brands remain out of the reach of most Chinese consumers, companies such as Coach and Tiffany have proven in the United States that they can make some of their wares more affordable without marginalizing the value of their brands. This might work in China, too.

How it plays out
All told, if Chinese consumers grow wealthier, the government better protects trademarks, and multinational luxury-goods companies move slightly down-market, long-term investors could do very well in this sector. We'll be looking hard at consumer companies in Shenzhen and Hong Kong over the next few days.

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