Subject: China IMP/EXP News (cn940316)

From: [email-masked] (wangc)
Date: Wed, 16 Mar 94 13:40:24 CST

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  #           A WEEKLY NEWSLETTER FROM THE CHINA-LINK CLUB             #
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                    March 16, 1994 (CN940316)

CONTENTS                                                             LINES
==========================================================================
A) Trade official explains regulations 
   of foreign investment in retailing...................................98
B) Pitfalls abound,  but dream of huge market draws foreigners.........130
==========================================================================
A) PRC TRADE OFFICIAL EXPLAINS RULES FOR FOREIGN INVESTMENT IN RETAILING
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Source: US Ambassay in Beijing
  Date: March 4, 1994

1.  Summary.  It is still too early in China's  experiment  of  opening  up
department stores to foreign investment for consideration of further market
opening measures, a trade official recently told us.  Other than department
stores,  the only other retail sector allowing foreign investment is speci-
alty stores, which in theory can only sell products made at their own  fac-
tories  in China.  To gain government approval to set up a specialty store,
a foreign investor must submit to  two  municipal  commissions  a  detailed
business  plan  including  a  plan for foreign exchange balancing, which is
still required despite the recent unification of  China's  currency  rates.
China  may also open up wholesaling and chain stores to foreign investment.

2.  A PRC trade official recently told us that it is  still  too  early  in
China's  "experiment" of opening up department stores to foreign investment
to consider further market opening measures.  In the second half  of  1992,
China  allowed  two  foreign-invested department stores to be opened in six
cities -- Beijing, Shanghai, Guangzhou, Tianjin, Dalian, and Qingdao -- and
five  special  economic  zones  --  Shenzhen,  Zhuhai, Shentou, Xiamen, and
Hainan.  No movement on department stores until end of 1994...

3.  China will need at least until the end of 1994 before it  can  make  an
assessment  of  the  success  of  this  experiment, the official said.  The
LUFTHANSA (YENSHA) department store is already a clear success in terms  of
both  efficiency  and  profitability.  Other stores, however, have not even
opened.  The second foreign-investment department store in Beijing, for ex-
ample,  is  still  being constructed by HONG KONG investors near the famous
Wangfujing shopping street.

4.  Regardless of whether the foreign investment experiment is  a  success,
China  needs  many more modern department stores, the official said.  Beij-
ing, for example, has only 27 large  department  stores  with  over  10,000
square  meters  of  floor space.  In comparison to the LUFTHANSA and YAOHAN
centers, he said, Beijing's state-run stores are  excessively  crowded  and
unattractive.   Beijing's  previous  mayor  set  a goal for the city of 100
large department stores by the year 2000.  The current  mayor  has  similar
ideas about the capital's need for more retailers.  Foreign investment also
allowed in specialty stores.

5.  The official explained that Chinese retailers use four kinds of distri-
bution  channels:   --  buying  directly from manufacturers, -- buying from
wholesalers, -- selling on consignment for  manufacturers  (and  presumably
some  wholesalers),  and  --   "specialty stores," which are often owned by
manufacturers and sell only one line of products, such as clothing.

6.  Other than the experiment with department stores, the only other retail
sector  allowing foreign specialty store can only sell products produced at
factories in China owned by its parent company.  In  other  words,  foreign
companies  can  only  own  retailing operations here (other than department
stores) if they also engage in manufacturing.  (The  official  acknowledged
that  foreign-invested  specialty stores have been technically breaking the
law by also selling goods made by other manufacturers.  Other  foreign  re-
tailers have, for example, told us that they sell clothing accessories such
as ties and belts made by other  manufacturers.)  procedure  for  specialty
store investments.

7.  China's laws and regulations for foreign investment in specialty stores
are  shaped  by  the presumption that the foreign company's primary line of
business is manufacturing, not retailing, the  official  said.   Therefore,
the  investment  approval  rules  for  specialty  stores are those used for
manufacturing companies.  For example, if a foreign company's investment in
a factory (cum retailing business) exceeds 30 million dollars, it needs the
approval of the state council (in which case the  state  council  typically
asks the Internal Trade Ministry to study the investment project and make a
recommendation).  For total foreign investments of  less  than  30  million
dollars, only provincial or municipal-level approval is necessary.  By con-
trast, every foreign investment in a department store (which is  clearly  a
retailing and not manufacturing operation) requires approval of the central
government's State Council, regardless of the amount of investment.

8.  In the case of Beijing, a foreign company must apply to both the  Muni-
cipal  Commission  of Foreign Economic Relations and Trade (COFERT) and the
Beijing Planning Commission (Jihua Weiyenhui), the official noted.  Regard-
less  of  whether  the  proposed project is wholly foreign-owned or a joint
venture with a Chinese partner, the foreign company must also submit a  de-
tailed business plan, including calculations of what percentage of its fac-
tory output will be exported in order to balance the Renminbi earnings from
its  retail  sales.   In the case of a joint venture, this plan foreign and
Chinese partners.  Wholesaling and chain  stores  may  also  be  opened  to
foreign investment.

9.  At some point, China may also open  up  wholesaling  and  chain  stores
(Liansuodian) to foreign investment on an experimental basis, in which case
they are also likely to need state council approval.  The  official  denied
that  any  foreign  retailing joint ventures had been granted permission to
open a wholesaling center in Beijing.  Currency unification:  No effect  on
foreign exchange balancing rules.

10.  China's currency reform measures taken  January  1  --  including  the
abolition of the fec and the impending establishment of an interbank market
for foreign currency -- will have no legal effect on the export performance
and  foreign exchange balancing requirements of specialty stores, the offi-
cial stressed.  The Ministry of Internal Trade's position is that  foreign-
invested  companies  should not resort to swap or interbank markets to bal-
ance their foreign exchange.

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B) Pitfalls abound,  but dream of huge market draws foreigners.........130
--------------------------------------------------------------------------
Sources:  UPI  Business  World
By GENE LINN     HONG KONG (UPI)   March 07, 1994
  
The  dream  of  retail-sales  managers around the world of a vast Chinese
consumer  market  opening  to  foreign  firms  appears  to be moving toward
reality on the wave of new government policies.

   There  certainly  have  been  advances  in tearing down the bureaucratic
roadblocks  to doing business in the People's Republic, but appearances can
be deceiving.

    Paul  Kua,  president  and chief executive officer of Tiger Enterprises
Ltd.,  which  distributes  leisure  wear  and accessories in China for Hong
Kong-based Giordano Holdings Ltd., can attest to that.

    Giordano  expects  to turn a profit on China operations this year after
losing some $14 million in 1992-93 on huge writeoffs of unsold inventory.

    "Our  experience  goes  against  the superficial claim that selling has
gotten any easier," Kua says.

    He  attributes  the  improved  results  to  the  company's  hard-earned
experience since it started operations in September 1992.

    "There's  no  one dramatic lesson," Kua says. "We get sales information
from the point of sale and analyze it day to day."

    Kua  and  others  in  the  retail  business  agree there have been many
improvements in the Chinese market some superficial, others substantial.

    Probably  at  the top of the list is the greatly increased buying power
of  consumers,  thanks  to  double-digit  annual economic growth in coastal
areas since China launched market reforms in 1978.

    China's  State  Statistical  Bureau estimates the nation's retail sales
will rise 22 percent this year to $153 billion.

    And  Robert  Broadfoot  of  Hong  Kong-based  Political & Economic Risl
Consultancy  Ltd. estimates some 150 million Chinese mostly in rich coastal
areas can afford to buy foreign products.

    Retailers'  big break came in June 1992, when China opened the door for
foreign investors to set up retail outlets in 11 large cities.

    China  has  since  approved 11 Sino-foreign retail joint ventures, with
two  actually opening their doors so far Yansha Friendship Department Store
in Beijing and Eastern Department Store in Shanghai.

    "You  can  see  the  market  fling  open," says Mary Wong of the quasi-
government  Hong  Kong  Trade  Development  Council.  "There are more entry
points.  Before,  there were markets only in key cities, but now the second
tier  of  cities  is opening. Tariffs are down, rules are starting to relax
and become more uniform."

    A  few  years ago, foreign consumer-goods companies had to work through
large Chinese department stores.

    Now,  many  Chinese  manufacturers  and  other  enterprises have retail
licenses and are eager to work with foreign companies.
    Although  wholesaling  still  is  legally  off  limits  to  foreigners,
Giordano  affiliate  Tiger typically sets aside an upper floor of stores in
Guangdong  Province to sell to Chinese retailers and private entrepreneurs,
who then sell the clothes in outlying cities.

    "It's a bit of a gray area," Kua says. "Guangdong has approved it. "

    The  Hong  Kong trade Development Council is also preparing to set up a
fashion  wholesale center in the Guangdong Province city of Panyu the first
of several planned operations.

    "It  seems that the horizon is suddenly opening for ways of cooperating
in retailing," Wong says.

    Many Hong Kong companies make consumer products in China. Their factory
contracts  require  them  to export a certain percentage of output, but the
rest can go to the Chinese market.

    Giordano  makes all its products in China. It owns six stores and works
with  Chinese  enterprises  that run 17 shops with total sales of about $40
million a month.
    Retailing  could  get  a  boost  as  several corporations under China's
Internal Trade Ministry set up the first chain stores in China.

    The  current  practice  is  for  7-Eleven  convenience stores and other
companies that run chain stores outside China to set up each store in China
as  a  seperate  joint  venture  with  a  local  enterprise  or  government
department.

    The  central  government  is  expected  to  further liberalize rules on
importing  and  foreign  investment  to  enable China to rejoin the General
Agreement on Tariffs and Trade.

    "Three  years  ago  it  was  a  sellers market," Wong says. "Now it's a
buyer's market. Consumers are getting more and more clever."

    Foreign companies have a shopping list of problems.

    A  creaking transportation system and chaotic distribution network make
it  difficult  to get goods to market. Each of the many layers of local and
national government throw up a bureaucratic barrier.

    The  immature  market  is  highly  fragmented  between different income
levels  and  tastes  in  products.  Economic reforms that address long-term
needs often give foreign firms headaches in the short run.

    At  the  beginning  of  the  year,  for  example,  China  abolished its
artificial  exchange  rate  for  the  national  currency, the renminbi. All
transactions  now  are  made  at  the  more  flexible rate used by currency
adjustment markets in big cities.

    That  is  a step toward making the renminbi a convertible currency. But
the  immediate  effect  was  to substantially devalue the renminbi, causing
many  retailers  to  lose money and some raised prices to compensate. A new
value-added  tax also cuts into profit margins, often forcing further price
rises.

    Looming  over  all  these  problems  is  China's boom and bust economic
cycle.

    Many   foreign   economists   predict  rampant  inflation  and  painful
devaluation  of  the Chinese currency will cause China to put the brakes on
the economy around the middle of the year.

    Despite all these problems, Kua of Tiger Enterprises encouraged foreign
retailers to plunge into China.

    "I see great potential," he said. "If you don't get in now, you will be
too  late  to  establish  yourself. The key is to establish yourself before
other  people  do.  When  it's  too easy when legal, bureaucratic and other
obstacles are out of the way it's too late." (release at will)

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