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CONSULTANCY STUDY ON SOCIO-ECONOMIC-POLITICAL TRENDS IN PAN-PEARL RIVER DELTA REGION

FOURTH MONTHLY REPORT PART I

COVERING FUJIAN, JIANGXI, HUNAN, AND HAINAN

FEBRUARY 2005

CENTRAL POLICY UNIT

HONG KONG SPECIAL ADMINISTRATIVE REGION

Socio-Economic-Political Trends in Pan-Pearl River Delta Region Fujian, Jiangxi, Hunan, Hainan (4th Monthly Report)

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Table of Contents

I. Executive Summary ----------------------------------------------------------------- 5

II. Topical Analysis ---------------------------------------------------------------------

“Development of Pan-PRD Retail Industry:

Opportunities and Challenges for Hong Kong”

Part One: South-eastern Region

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Upgrading of Consumption Demand Transforms the Retail Sector ------ 10

Full Liberalisation of the Retail Sector in 2005 ----------------------------- 15

Leisure Spending Leads a New Consumption Wave in Fujian --------- 20

Competition is Fierce in Nanchang’s Retail Sector ---------------------- 24

Convention and Exhibition Economy Promoting the Development of Changsha’s Retail Market ---------------------------------------------------- 28

The Development Potential of Hainan’s Retail Sector Awaits Exploration --------------------------------------------------------------------- 33

(Appendix) Classification of China’s Retail Stores ------------------------------ 37

III. Trends & Updates on the Four South-eastern Provinces ----------------------- 39

Economic Development Trends of Fujian in 2004 ----------------------- 40

Fujian Strives to Develop the Non-State Economy ---------------------- 42

Economic Development Trends of Jiangxi in 2004 ------------------------ 44

Individually-owned Businesses and Private Enterprises Promote Jiangxi’s Development ------------------------------------------------------- 46

Economic Development Trends of Hunan in 2004 ---------------------- 48

Changsha Introduced Measures to Speed Up Customs Clearing ------ 50

Economic Development Trends of Hainan in 2004 --------------------- 52


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I. EXECUTIVE SUMMARY

1. With the rapid development of the economy and rise in income, residents of the eight Pan-Pearl River Delta (PRD) provinces/region are upgrading their consumption patterns. This is mainly reflected in a shift in consumption from a simple basket of basic items like food, clothing and goods for daily use to a more complex basket of commercial products and services such as housing, automobile, electronic and information technology products, quality durable goods, as well as education, tourism, cultural and entertainment services. Simultaneously, the residents are starting to pay attention to the variety of choices available, track trends and fashion, look for characteristic products, and are increasingly giving importance to quality, brand name, style, packaging and after-sales services. In the Mainland market, Hong Kong products and shops have always been well known for their superb quality. Hong Kong businesses should take an active role to cultivate the Pan-PRD retail market by grasping the opportunities arising from the ongoing upgrading of consumption patterns in the Pan-PRD cities, as well as taking advantage of the Mainland’s full-liberalisation of its retail sector to foreign investors and the implementation of CEPA II which allows Hong Kong residents to set up individually-owned stores in any Mainland province/region.

2. Along with the upgrading of consumption demand, residents of the eight Pan-PRD

provinces/region are now giving higher priority to the hygiene, health, and packaging in food consumption, and paying more attention to brand name, style and variety of clothing products. Under such a trend, the traditional “big and comprehensive” and “identical” department stores are no longer able to meet consumers’ demand for specialty and uniqueness, and will gradually be phased out in the Pan-PRD cities along with the rise of the new hypermarkets. The traditional department stores will be replaced by a modern form of department stores that offers “fine and exclusive” products to meet the consumers’ demand for individualistic spending. Unlike their traditional counterparts, modern department stores drop those sections in which they have no competitive advantage, such as home appliances. They also cut down the space allocated to food items and daily consumption goods that are more suited for supermarkets, focusing instead on fashion, cosmetics, jewellery and other trendy products that meet the consumers’ demand for quality living. These products are hardly available in supermarkets that specialise in goods for daily use. Modern department stores are thus expected to become increasingly popular in the Pan-PRD cities.

3. As consumer spending becomes more individualistic, China is expected to be the next

investment hot spot for top-end international branded products. Currently, some of these brand names such as Louis Vuitton, Dior and Prada have already set foot in Beijing, Shanghai, Shenzhen and Hangzhou, and have unveiled major plans for future developments. Some Mainland human resources development organisations are already beginning to offer programmes to train up managerial staff for the chain stores of these


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branded goods. In the past year, some middle and senior staff of large-scale supermarkets were noted to join these top-brand chain stores. With the opening up of China’s retail market in 2005, which allows foreign investors to open wholly-owned shops in the Mainland, these international chain stores are expected to step up their expansion in the China market. Of the eight Pan-PRD provinces/region, Xiamen city in Fujian is among the earliest opened up to foreign retailers. In 2003, the per capita disposable income of Xiamen residents exceeded US$1,500, which was comparable to Hangzhou and trailing closely behind Shanghai and Beijing. This means Xiamen residents can afford buying luxury products. The city is hence a market that should not be overlooked by top-brand international chain stores.

4. With the lifting of restrictions on geographic location and on the number of shops that

foreign retailers are allowed to set up in each city on December 11, 2004, foreign enterprises can now freely expand into all Mainland cities, including those in the Pan-PRD. Some foreign retail giants that entered the China market earlier have already started planning their networks in the second-tier cities, and are revising their plans for opening new shops in the Mainland, in preparation for massive expansion of their businesses upon full-liberalisation of the Mainland market. Since the restrictions on shareholding will also be lifted, foreign investors are more likely to proceed with their expansion plans through mergers and acquisitions, rather than opening shops directly by themselves. Over the past year, a series of mergers, acquisitions and restructuring have taken place in the Mainland retail market. As multinational retail giants speed up their expansion, capable local retailers are also stepping up their efforts in mergers and acquisitions to order to increase their scale. However, experts have warned that behind such a high-speed expansion, there could be a risk of running out of capital. They suggest local retailers to focus instead on details such as the concept of service to attract customers and strengthen their competitiveness.

5. Among the eight Pan-PRD provinces/region, the retail sectors in Fujian and Hainan are

the earliest opened up to foreigners. In 1992, the special economic zones of Xiamen in Fujian and Hainan itself were among the 11 pilot locations selected for the opening up of China’s retail sector. As China relaxed the geographic restriction on retail industry in June 1999, foreign enterprises started to expand into the capital cities of the eight Pan-PRD provinces/region, initially focusing on Fuzhou, Changsha and Nanchang in the southeast. Attracted by various preferential tax treatments offered in the western region following China’s adoption of the strategy to develop the Western Region in 2001, the foreign enterprises started to enter the capital cities of the south-western provinces/region, including Chengdu, Kunming, Guiyang and Nanning. Currently, among the eight Pan-PRD provinces/region, only Hainan has failed to attract any foreign retailers to the province due to the small size of its retail market. At present, the world’s three largest retail giants, namely Walmart, Carrefour and Metro A.G., have all grabbed a share of the Pan-PRD market. The entry of foreign retailers has increased competition in the


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Pan-PRD retail sector, and has already hit some local shopping malls. Overall, however, they have introduced advanced retailing techniques and concepts to the region.


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II. TOPICAL ANALYSIS

“Development of Pan-PRD Retail Industry: Opportunities and Challenges for Hong Kong”

Part One: South-eastern Region

Upgrading of Consumption Demand Transforms the Retail Sector ------ 10

Full Liberalisation of the Retail Sector in 2005 ----------------------------- 15

Leisure Spending Leads a New Consumption Wave in Fujian --------- 20

Competition is Fierce in Nanchang’s Retail Sector ---------------------- 24

Convention and Exhibition Economy Promoting the Development of Changsha’s Retail Market ---------------------------------------------------- 28

The Development Potential of Hainan’s Retail Sector Awaits Exploration --------------------------------------------------------------------- 33

(Appendix) Classification of China’s Retail Stores -------------------------------- 37


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Upgrading of Consumption Demand Transforms the Retail Sector1

Along with rapid economic development and income growth in recent years, the quality of living of residents in the eight Pan-Pearl River Delta (PRD) provinces/region has improved. The improvement is being enjoyed by both urban and rural residents, with the level of urban household consumption rising from tens of thousands to hundreds of thousands of Renminbi, while that of the rural households starting to exceed Rmb10,000 from previously only thousands of Renminbi. For the urban households, in particular, improvement is mainly reflected in a shift in consumption from a simple basket of basic items like food, clothing and goods for daily use to a more complex basket of commercial products and services such as housing, automobile, electronic and information technology products, quality durable goods, as well as education, tourism, cultural and entertainment services.

Breakdown of Expenditures of Residents of the Eight Pan-PRD Provinces/Region

Food & Clothing Residence, Transportation & Communication, Education,

Culture and Recreation Services

As a % of Per Capita Expenditure (%)

1997 2003 1997 2003 Fujian 63.5 50.0 23.3 36.0 Jiangxi 60.5 40.5 26.8 28.0 Hunan 57.2 46.0 27.1 37.2 Hainan 62.5 49.8 23.3 33.4 Guangxi 57.1 46.5 30.2 38.3 Yunnan 59.0 51.5 25.0 32.3 Guizhou 63.3 50.4 21.4 34.3 Sichuan 61.4 48.2 23.9 34.6 Guangdong 52.2 43.0 30.2 40.5 National 58.9 46.9 24.8 36.2

Source: China Statistical Yearbook

Simultaneously, the residents are starting to pay attention to the variety of choices available, track trends and fashion, look for characteristic products, and are increasingly giving importance to quality, brand name, style, packaging and after-sales services. In the Mainland market, Hong Kong products and shops have always been well known for their superb quality. Hong Kong businesses should take an active role to cultivate the Pan-PRD retail market by grasping the opportunities arising from the ongoing upgrading of consumption patterns in the Pan-PRD cities, as well as taking advantage of the full-liberalisation of the Mainland’s retail sector2 to foreign investors and the implementation

1Please refer to the appendix of this report for the classification of China’s retail stores. 2For details of the full liberalization of China’s retail industry, please refer to the analysis in “Full Liberalization of the Retail

Sector in 2005” of this report.


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of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) II1, which allows Hong Kong residents to set up individually-owned stores in any Mainland province/region. Therefore, Hong Kong businesses should take advantage of the opportunity to actively develop the retail market in the Pan-PRD. Hypermarkets knocking out traditional department stores

With the upgrading of consumption demand, residents of the eight Pan-PRD

provinces/region are now giving higher priority to the hygiene, health, and packaging in food consumption, and paying more attention to brand name, style and variety of clothing products. Under such a trend, the traditional “big and comprehensive” and “identical” department stores are no longer able to meet consumers’ demand for specialty and uniqueness, and will gradually phase out in the Pan-PRD cities along with the rise of the new hypermarkets. For instance, Wuhua Commercial Building (五華商廈), which was once among the top 4 state-owned department stores in Kunming and a symbol of the city’s prosperity in 1990s, closed down on November 28, 2003 because it could not meet consumers’ demand for new shopping concepts. Shengxing Group (盛興集團), a local non-state commercial enterprise, announced the purchase of Wuhua Commercial Building and renamed it Shengxing Building (盛興大廈), with plans to turn the 40,000-square-metre department store into a hypermarket with brand new business style and strategies.

Compared with the traditional department stores, the hypermarkets are better in the

following three aspects. Firstly, the diverse and comprehensive variety of foodstuff items offered by hypermarkets draws consumers away from the traditional department stores. Secondly, by selling non-foodstuff items such as clothing, home electric appliances, and cosmetics at lower prices, the hypermarkets also outdo the traditional department stores. Thirdly, hypermarkets have already successfully lured away some counter lessees from the department store. The rapid development of hypermarkets not only accelerated the demise of traditional department stores, but also spurred the development of modern department stores, as the heated competition between them saturates the market. A weakness of the traditional department stores is its stereotyped product supply. Unfortunately, as competition tightened, even the hypermarkets became afflicted with the same weakness. Besides, as consumers have already met their basic needs on food and daily commodities, they start to turn to stylish individualistic consumption. As such, only modern shops2 offering unique and specialty products are able to meet consumers’ increasingly individualistic consumption needs.

1For details on the impact of CEPA II on the retail sector, please refer to “Fully Understanding the Business Opportunities of Zero Tariff” in Part II of this report covering the south-western region.

2For details on the development of modern department stores, please refer to “Repositioning Kunming’s Department Stores” in Part II of this report covering the south-western region.


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Supermarkets adopting features of department stores

To meet the shoppers’ increasingly individualistic consumption pattern, a brand new mode of retail business operation is burgeoning in the Mainland. They are known as “super shops”. Super shops refer to supermarkets with some features of department stores – a new mode of retail operation that has emerged from the transformation of hypermarkets into modern shops to regain their market share. There are two types of transformation. Firstly, the addition of individualistic and branded features to supermarkets by interlacing the operation with professional stores, specialty stores, and discount stores; and secondly, the direct transformation into modern shops. The transformation usually takes place in supermarkets that are facing fierce competitive pressure. Some of them are located in the more prosperous cities and are facing keen competition, while others are regular supermarkets that have grown to realise the importance of developing more individualistic businesses; an example of the latter is Bubugao (步步高) in Hunan.

In the eight Pan-PRD provinces/regions, Bubugao in Hunan has keenly adopted the operating mode of super shops. As early as in 2001, Bubugao set up a flagship shopping mall with an area of 24,000 square metres in Xiangtan (湘潭 ) . At the end of 2002, Bubugao set up the second flagship shop in Shaoyang. On June 12, 2003, Bubugao opened its Guo’an Shop (國安店) in Zhuzhou (株洲). All these shops adopt the mode of operation of super shops, developing mainly its department-store-style business, while using supermarket more for the reason of attracting shoppers. In recent years, the mode of operation of Bubugao’s super shops has performed well. Currently, its two flagship shops in Xiangtan and Shaoyang together already account for one-third of the overall turnover of Bubugao, reflecting the development potential of this mode of operation in Hunan. At the same time, the potential of super shops in other Pan-PRD cities, where there is fierce competition in the retail sector, should not be overlooked. Hong Kong businesses with intention to establish hypermarket businesses in the Pan-PRD region should not overlook this. Supermarkets substituting farmers market

As consumption demand grows, increasing importance is given to the hygiene and safety standards of foodstuff, spurring the substitution of farmers markets by supermarkets in the Pan-PRD region – a trend that is increasingly apparent in the Mainland. If this trend continues, the farmers markets will gradually diminish and be replaced by the supermarket chains that carry fresh food items. The operation and popularisation of the supermarket chains will not only enhance the appearance of city areas (as farmers markets are less clean and tidy, and are difficult to manage), but will also provide consumers with a wider choice of foodstuff that are of high safety standards, sourced from reliable suppliers, and are more affordable. These are important for meeting the consumption needs of a population that is adopting better-off living standards.


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The substitution of farmers markets by supermarkets is ongoing. The process mainly takes two forms; firstly, the existing farmers markets are remoulded into supermarkets and secondly, developers are solicited to build new supermarkets with government policy support. The Blue Sky Volume Sales Store1 (藍天量版) , located at Fuzhou, Fujian Province in Pan-PRD, is the first enterprise in the Mainland to successfully substitute a farmers market with a supermarket. It started another operation in Nanchang, Jiangxi on December 25, 2004, naming it as the Century Sky Volume Sales Store (世紀天成量版). The trend of supermarkets substituting farmers markets in Jiangxi is noted to have begun in 2004, with Nanchang, Jiujiang and Jingdezhen selected as the pilot cities. Some government officials predict that if the transformation process is smooth, the farmers markets in these three cities will phase out within three to five years’ time. Quick access to top-brand international chain shops

As consumer spending becomes more individualistic, China is expected to be the next investment hot spot for top-end international branded products. Currently, some of these brand names such as Louis Vuitton, Dior and Prada have already set up a foothold in Beijing, Shanghai, Shenzhen and Hangzhou, and have unveiled major plans for future developments. Some Mainland human resources development organisations are already beginning to offer programmes to train up managerial staff for the chain stores of these branded goods. In the past year, some middle and senior staff of large-scale supermarkets were noted to join these top-brand chain stores.

2003 Disposable Incomes of Urban Residents in Selected Cities

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Shenzhen

Shanghai

Guangzh

ou

Beijing

Xiamen

Hangzho

u

Fuzhou

Changsha

Nanning

Chengdu

Haikou

Kunming

Guiyang

Nanchang

US$

Source: CEIC Data

With the opening up of China’s retail market in 2005, which allows foreign investors to open wholly-owned shops in the Mainland, these international chain stores are expected to 1Volume sales stores originated from a Japanese term “量販”, which means bulk sales. The mode of operation of volume sales stores is to gain profits by selling in large quantity at low mark up prices, which is very popular in Japan and Taiwan.


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step up their expansion in the China market. Of the eight Pan-PRD provinces/region, Xiamen city in Fujian is among the earliest opened up to foreign retailers. In 2003, the per capita disposable income of Xiamen residents exceeded US$1,500, which was comparable to Hangzhou and trailing closely behind Shanghai and Beijing. This means Xiamen residents can afford buying luxury products. The city is hence a market that should not be overlooked by top-brand international chain stores.


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Full Liberalisation of the Retail Sector in 2005 In accordance with China’s World Trade Organisation (WTO) commitments, the

country will fully open up its retail sector to foreign investors within three years after its accession to WTO. On December 11, 2004, China lifted all restrictions on retail operations of foreign business in terms of geographic location, number of stores, shareholding percentage, etc., which marks a milestone in the development of China’s retail sector. It is expected that the development of foreign retail enterprises in China will be further accelerated, and that market competition will become keener. Statistics show that foreign retail enterprises have entered the Mainland for 12 years, since the approval of the first Sino-foreign retail joint venture -- Shanghai Yaohan Department Store (八佰伴百貨) -- in 1992. According to incomplete statistics, among the top 50 retail enterprises of the world, 70% of them have set their foot in the Mainland. Some world famous retail enterprises such as Walmart from the U.S., Carrefour from France, Metro A.G. from Germany, Trust-mart (好又多) from Taiwan, and Ito-Yokado (伊藤洋華堂) from Japan, are playing important roles in the Mainland’s retail sector. The mode of operation of foreign retailers includes department stores, supermarkets, shopping malls, warehouse stores, convenience stores, professional stores, etc. Foreign retailers are generally operating in small scales but enjoying relatively high returns

Prior to China’s accession to WTO, the pace of opening up of Mainland to foreign

retailers was gradual, allowing at most two foreign retail shops in any one city. In 1992, the first lot of pilot cities selected for opening up to foreign retailers included the 6 cities of Beijing, Shanghai, Tianjin, Guangzhou, Dalian and Qingdao, as well as the 5 special economic zones of Zhuhai, Shenzhen, Shantou, Xiamen and Hainan. On June 25, 1999, China issued a set of “Provisional Regulations on Foreign-Invested Commercial Enterprises”, which allowed foreign investors to set up joint venture retail enterprises in 27 provincial/regional capital cities, 4 municipal cities1, 4 special economic zones, and 5 cities separately designated under the State Plan2 upon obtaining the approval of the State Council. Currently, foreign retailers operate mainly in major cities such as Beijing, Shanghai, Shenzhen and Dalian.

Given the restrictions on geographic location and number of stores, the expansion of

foreign-invested retailing enterprises was relatively slow. As such, the overall scale and market share of foreign retailers were much smaller than that of their local counterparts. In 2003, the sales turnover of foreign retailers was less than 3.5% of the overall sales turnover of consumer goods in China. In the list of China’s top 30 chain store enterprises ranked by the

1Apart from Beijing, Shanghai and Tianjin, Chongqing, which became a municipal city in June of 1997, is also included. 2The 5 cities separately designated under the State Plan are Shenzhen, Xiamen, Dalian, Qingdao and Ningbo.


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Ministry of Commerce, in 2003, there were only four foreign retailers: Carrefour, Walmart, Trust-mart, and Metro A.G. However, the business performances of the foreign-invested enterprises are generally better than those of their domestic counterparts, taking a leading position in sales growth. According to a survey of more than 14,000 chain stores of nearly 400 supermarket operators in China by the Chinese National Business Information Centre in 2003, the annual average sales output generated by each square metre of the foreign-invested retail shops was Rmb21,000, among which Taiwan enterprises recorded Rmb39,000, and European enterprises recorded Rmb30,000. For the domestic enterprises, it was only Rmb14,000, among which Shanghai enterprises recorded Rmb21,900 and Beijing enterprises recorded merely Rmb17,000. The foreign retailer respondents reported a sales growth of 33%, higher than the 29.6% reported by the domestic enterprise respondents. Currently, foreign retailers are leading obviously in large-scale supermarkets. Penetrating Mainland cities of all sizes

With the lifting of restrictions on geographic location and the number of shops that

foreign retailers are allowed to set up in each city in 2005, foreign enterprises can now freely expand into all Mainland cities. Some of the foreign retail giants that are early comers to the China market have already started planning their networks in the second-tier cities, and are re-adjusting their plans for opening new shops in the Mainland, in preparation for massive expansion of their businesses upon full-liberalisation of the Mainland market. On September 15, 2004, Hongta District (紅塔區) of Yuxi City (玉溪市), Yunnan province transferred the property right of a 25-mu (Chinese unit of area equivalent to 1/15 of a hectare) lot to China Rehouse (Yuxi) Co., Ltd. (泛華置業(玉溪)有限公司) and announced that Walmart would build a store on the site. The project signalled the first move of foreign retailers into the second-tier cities in China. As the world’s biggest retailer, Walmart is planning to open more than 10 new stores in the Mainland each year over the next three years. In 2005, it plans to set up 10-15 stores. Currently, Walmart operates 42 stores in 20 Mainland cities, spanning from Harbin in the north to Kunming in the south.

In addition, the world’s second largest retailer, Carrefour, is also planning to expand

towards western and southern China. In 2005, Carrefour will open 12 stores each in the cities of Beijing, Shanghai, Guangzhou and Shenzhen, in addition to 6-8 stores each in some other major cities. As the biggest foreign retailer in China, Carrefour currently operates 53 supermarkets in the Mainland, recording a sales turnover of US$1.6 billion in 2003. In addition, Metro A.G., the retail and wholesale magnate based in the Yangtse River Delta area, is also planning to expand its clout throughout the entire country. In 2005, Metro A.G. will open 10 new stores in China. At present, Metro A.G. is running 21 warehouse stores in China. It plans to infuse an additional EUR300 million in the next five years to speed up business expansion in China.

Meanwhile, Europe’s top construction material retailer, UK’s B&Q, is also planning to


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open 10 new stores in China in 2005. Its investment will extend to the mid-western and northern parts of the Mainland, covering Chongqing, Chengdu, Dalian, etc., which are brand new markets for B&Q. B&Q has signed agreement with PriceSmart to pay £6.95 million for the acquisition of PriceSmart stores in Heilongjiang, Sichuan, Tianjin, Shandong, etc. to expand its business in the Mainland. In addition, Yichu Lotus from Thailand is also rapidly opening stores in China, owning 33 supermarkets, each with an operating area of over 15,000 square meters. However, most of them are located in the provincial capital cities only. According to its new expansion plan, Yichu Lotus will open 100 supermarkets in China within three years, most of which will be located at the district-level cities and the small- and medium-sized cities. Gaining market share via mergers and acquisition

Along with the lifting of restrictions on geographic locations and shareholding by

foreign retailers, the newcomers into Mainland’s retail sector will adopt a different strategy when entering the market. The foreign investors are more likely to proceed with their expansion plans through mergers and acquisitions, relying less on directly opening shops by themselves in the future, to make better use of the experience and network of domestic retailers. According to the analysis of some experts in the Mainland, in the first three years of China’s entry to the WTO, foreign retailers entered the Mainland market mainly by marking their territories. In the future, more retailers will turn to acquisitions of local retailers.

Over the past year, a series of mergers, acquisitions and restructuring have taken place

in the Mainland retail market. In July 2004, UK’s top and the world’s third biggest chain store, TESCO, paid £260 million pounds for a 50% stake in Legou Supermarket (樂購超市), which is affiliated to Tinghsin International Group (頂新集團) of Taiwan, taking its first stride into the Mainland market. At end-November, at the price of Rmb600 million, Taiwan’s President Group (統一集團) acquired shares of N-mart Hypermarket of the non-state Nuoheng Group (諾衡集團 ). This was followed by the purchase of five Nuoheng-affiliated PriceSmart shops in north-western and north-eastern China by UK’s B&Q. The shops will be turned into construction material supermarkets.

While mergers and acquisitions have become powerful tools for rapid expansion by the

international magnates, the more competent domestic retail enterprises are also stepping up their mergers and acquisitions drive to increase their scale. On December 8, 2004, Wangfujing of Beijing announced the acquisition of 50% stake in Shuang’an Commercial Centre (雙安商場), which is affiliated to the Everbright Group, at the price of Rmb192 million. In September, Lianhua Supermarket (聯華超市) of Shanghai paid Rmb77 million to acquire Wanlifu Supermarket (萬利福超市) in Shijiazhuang, which is one of the biggest supermarkets in Hebei province. Lianhua indicated earlier that it had prepared Rmb400


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million for even more merger and acquisition deals in the key cities in northern, southern and south-western China. In the Mainland, the retail industry is still very dispersed. The top 5 chain stores account for only 25% of the overall retail market. Whereas in the developed countries, the retail sector is highly centralized. The top 5 chain enterprises in Europe have a market share as high as 70%. In Australia, the top two enterprises command a 60% share of the market. This means there remains substantial room for mergers and acquisitions in the Mainland retail sector.

According to the analysis of Mainland industry experts, in response to the rapid influx of foreign retailers, large-scale local enterprises are generally expanding and enlarging their scales of operation. However, the experts have warned that behind such high-speed expansion, there could be a risk of running out of capital. They suggest local retailers to focus instead on details such as service concept to attract customers and strengthen their competitiveness. According to the experts, given the country’s enormous market size, foreign retailers will continue to favour the bigger cities when penetrating the China market. Retail markets in the small- and medium-sized cities and rural countryside will remain dominated by local retail enterprises. Foreign-invested enterprises are unlikely to gain significant market shares in the countryside market in the next 20-30 years. Developing trends of foreign retailers in the Pan-PRD region

Among the eight Pan-PRD provinces/region, the retail sectors in Fujian and Hainan are the earliest opened up to foreigners. In 1992, the special economic zones of Xiamen in Fujian and Hainan itself were among the 11 pilot locations selected for the opening up of China’s retail sector. As China relaxed the geographic restriction on retail industry in June 1999, foreign enterprises started to expand into the capital cities of the eight Pan-PRD provinces/region, initially focusing on Fuzhou, Changsha and Nanchang in the southeast. Attracted by various preferential tax treatments offered in the western region following the adoption of the strategy to develop China’s Western Region1 in 2001, the foreign enterprises started to enter the capital cities of the south-western provinces/region, including Chengdu, Kunming, Guiyang and Nanning. Currently, among the eight Pan-PRD provinces/region, only Hainan has failed to attract any foreign retailers to the province due to the small size of its retail market2.

At present, the world’s three largest retail giants, namely Walmart, Carrefour and Metro

A.G., have all grabbed a share of the Pan-PRD market. The entry of foreign retailers has increased competition in the Pan-PRD retail sector, and has already hit some local shopping malls. Overall, however, they have introduced advanced retailing techniques and concepts to the region. The operating conditions of the major foreign retail magnates in the eight provinces/regions are briefly described below. 1The western Mainland areas include the 12 provinces/cities/district s of Xinjiang, Ningxia, Shanxi, Gansu, Qinghai, Tibet, Guangxi, Inner Mongolia, Yunnan, Guizhou, Sichuan and Chongqing.

2Please refer to “The Development Potential of Hainan’s Retail Sector Awaits Exploration” of this report.


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1. Walmart

Walmart has opened three stores in Fuzhou, making Fuzhou the second Mainland city after Beijing to have three Walmart stores. Besides Fuzhou, Walmart has entered Kunming, Guiyang, Changsha, Nanchang and Nanning between the years 1999 to 2004, and has decided to open a store in Chengdu in 2005 -- its first store in Sichuan. The turnover in the first week of operations of Walmart’s Nanchang store in August 2003 was a record high, outpacing all other stores of Walmart worldwide. 2. Carrefour

Carrefour has once signed an agreement with Fuzhou city in May of 2000, intending to invest US$12 million in Fuzhou’s retail market. But it later turned towards Xiamen, and then entered Changsha, Chengdu and Kunming. Carrefour’s second store in Kunming took only 28 days for planning and preparation. It entailed the shortest lead-time for opening any Carrefour store worldwide.

3. Metro A.G.

Metro A.G. chose Fuzhou as the venue for its first store outside the Yangtze River Delta

region, and then entered the cities of Changsha, Nanchang and Chengdu one after another. Metro A.G. is known to be preparing to open its second store in Chengdu in 2005, and is in the process of selecting a site for its third store.


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Leisure Spending Leads a New Consumption Wave in Fujian Along with the rapid development of economy in recent years, the living standard of

residents in Fujian has improved substantially. Their consumption patterns are constantly upgrading, with the proportion of expenditures allocated on foodstuff declined significantly, as reflected by a lower Engle Coefficient1. Having met their basic requirements on food, clothing and commodities for daily use, Fujian residents are now increasing their spending on leisure enjoyments to achieve quality living. This has particularly become a trend since the government’s implementation of 5-day work week in May 1995, and the introduction of three week-long holidays2 each year in September 1999, as people started to have more leisure time. A basic change in the residents’ concept of consumption has taken place. Confronted with a faster pace of living and increasing pressure at work, the residents are realising the importance of leisure life on their overall well-being – both physically and psychologically. Leisure spending is becoming an increasingly acceptable form of consumption, particularly for the young consumers and those enjoying medium- to high-level incomes. This form of new lifestyle has become a new driver of retail development.

Breakdown of Leisure Spending in Fujian

Medical and healthcare

16%

Education, Culture and Recreation Services

43%

Transportation and

communication41%

Source: China Statistical Yearbook

Leisure spending develops rapidly

Leisure spending refers to expenditures on activities and entertainment enjoyed by people at their discretion during their spare time. In a broader perspective, this includes medical healthcare, transportation, communication, education and entertainment. Statistics show that the urban residents in Fujian are spending more on leisure activities, and upgrading their living standards. Over the past decade, leisure spending by urban residents in Fujian 1Engle Coefficient refers to the proportion of expenditures on food to overall spending. Engle Coefficient is usually higher

among the poorer households, and declines as household income rises. 2The three week-long holidays are: Chinese New Year, May 1 Labour Day and October 1 National Day holidays.


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has grown rapidly, accounting for an increasing proportion of their overall consumption expenditure. From 1993 to 2003, their expenses on medical healthcare, transportation and communication, and education, culture and recreation services grew nearly 8 times from Rmb316 to Rmb2,115. The proportion of expenses on these items to overall consumption expenditure doubled from the original 13.1% to 28.8%.

Proportion of Leisure Spending to Overall Consumption Expenditures of Urban Residents in

Fujian

0

5

10

15

20

25

30

35

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

%

Source: China Statistical Yearbook, Fujian Statistical Yearbook

At present, Fujian’s various consumer groups have different patterns of consumption in

different areas. For instance, the leisure spending of the lower-income group is mainly on the traditional items of newspapers, magazines and TV; they spend less on tourism, higher education and training. Meanwhile, higher-income groups have a wider range of leisure spending items, mainly on tourism. Besides, their consumption of information and education, culture and recreation services are of higher-level. According to statistics, in the first half of 2004, households in the top 10% income bracket in Fujian spent 42.1% of their overall consumption spending on medical healthcare, transportation and communication, and education, culture and recreation services. The proportion is more than double that of households in the lowest 10% income bracket, which allotted only 20.8% of their expenses to leisure spending. For every 100 residents of households belonging to the top 10% income bracket, Rmb45,168 was spent on tourism, compared with only Rmb856 for households belonging to the lowest 10% income bracket.

Influenced by factors such as income levels, consumption preferences, etc., different age groups show significant differences in their preferred form of leisure spending. Constraint by a relatively lower level of income, the younger consumers mainly spend on information, cultural and recreation services, while the middle-aged consumers with established financial capability and the elderly with more leisure time mainly spend on


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tourism items. According to statistics, the urban residents of Fujian with highest spending on tourism are mainly those in the age groups of 30-40 years old and above 50 years old. In 2003, those in the age group of 55-66 spent most on tourism, averaging Rmb132.7 per person. They were followed by those in the age group of 35-40 years old, averaging at Rmb121.4 per person. Though those in the age groups below 30 years old are more willing to accept new things, they spend less on tourism due to their lower incomes. Leisure spending promotes the development of leisure industry

The emergence of leisure spending is not only conducive to expanding consumption

needs and upgra


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to obtain information online, nor as supplementary aids for learning or research, hence not fully reaping the benefits of the Internet. Thirdly, identical modes of consumption: affected by the operating hours and high entrance fees of parks and museums, Fujian’s residents have little choices in their leisure activities. For example, for having exercise, most people just stroll or jog within their community. Only a handful of those with higher incomes can afford working out in gyms.

In addition, while the leisure industry is still in its initial stage of development,

operations remain mostly unregulated, giving rise to frequent occurrence of consumers being cheated. For instance, tourists often complain of poor service quality, excessive crowds in tourist areas, and scams in shopping areas. As for cultural and recreation services consumption, while people pay more attention to education, they generally think the cost of educational items is high, but this is often just due to exorbitant charges. In the consumption of information products, consumers are also often charged with unregulated prices, and their interests are severely hurt.

In summary, whether the leisure industry would develop healthily in Fujian depends

mainly on whether residents can be guided to adopt a consumption pattern of more reasonable pricing, higher grade and better quality, and whether the proportion of consumption on items with greater cultural and spiritual content can be increased. In tourism consumption, apart from promoting sightseeing tours, efforts should also be made to develop other characteristic tour products such as those with higher cultural content. In cultural consumption, more Internet applications should be adopted. The development of leisure industry not only requires constant innovation; it also needs to comply with rules of the market economy, with service quality enhanced and service charges regulated. Only with the adoption of these measures can the leisure industry develop healthily, spurring a faster growth in consumption. Various signs signalling the emergence of leisure spending as a new consumption wave in Fujian have emerged. The sector thus deserves the attention of Hong Kong investors wishing to tap the province’s retail market.


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Competition is Fierce in Nanchang’s Retail Sector Driven by the opening up of the economy, the methods of marketing and distributing

retail products in Jiangxi have undergone continuous improvement. In recent years, new modes of operation such as chain stores, supermarkets, shopping malls, hypermarkets, distribution centres, general distributors, agencies, etc. have developed. The impact of rising economies of scale in the consumption market has become more evident, stimulating stronger growth in consumption needs. In the first three quarters of 2004, Jiangxi’s retail sales of consumer goods was Rmb74.32 billion, an increase of 14.1% over the same period in the previous year. The pace of growth was 3.4 percentage points higher than that of the same period in the previous year. The development of large- and medium-scale trading enterprises has been rapid. In the first three quarters, the turnover of retail enterprises above designated size increased 25.8% from the same period a year ago; and the pace of growth was 11.7 percentage points higher than enterprises below designated size. As the market develops, competition in Jiangxi’s retail sector is heating up, cutting into retailers’ profit margins, leaving them with less room for survival, and leading to the cease in operation of an increasing number of less competent retailers. Therefore, Hong Kong businesses intending to take up retailing in Jiangxi should carefully assess their competitive advantages and how they can excel under such a tightly competitive environment. This is particularly important for entrants into the province’s capital city, Nanchang, where the operating environment is extremely competitive. Foreign retailers rushing in

In May 2002, the Pacific Shopping Mall (太平洋購物廣場) established by Pacific

General Merchandise (太平洋百貨) of Taiwan with an investment sum of Rmb230 million opened for business in Nanchang. The shopping mall boasts of a range of trendy and fashionable products, providing consumers with specialties sourced locally and from overseas. The mall has been enjoying rising sales performance since opening, taking the market-leader position in Jiangxi. In August 2003, the world’s biggest retail giant, Walmart landed in Hongcheng (洪城), opening an 18,000-square-metre store with nearly 200 underground parking spaces in Nanchang. The sales in the first week of operation of this store broke the record of all Walmart stores worldwide. On December 11, 2004, China fully liberalised its retail market. One of the world’s top 500 enterprises, Metro A.G. from Germany, announced it would set up operations at Qingshan Lake (青山湖) of Nanchang, starting the first self-service wholesale business there. Trust-mart from Taiwan also took the opportunity to enter Nanchang, planning to open its store at Xianghu Lake (象湖) around Chinese New Year in 2005.


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Retail giants from other provinces shutting down

Amidst fierce competition, of the three Shanghainese retail giants which have been in Nanchang for less than three years, Lianhua (聯華) and Hualian (華聯) have already shut down one after another. Only Nonggongshang (農工商) remains in business. According to the statistics of China’s Franchising Association, Lianhua ranked among the top 100 retailers in China in 2003. The daily sales in its Nanchang store reportedly reached Rmb200,000-300,000 after its opening in September of 2003. However, it later dropped to only Rmb50,000-70,000, and a monthly loss of Rmb600,000-700,000 was eventually recorded until it went out of business on June 23, 2004. Hualian, meanwhile, was the third largest local retailer in China. Its Nanchang store opened in December 2001, and ceased operation in mid-September of 2004 due to unsatisfactory business performance.

Since the two Shanghainese retail giants have left Nanchang, in order to attract more

shoppers, the remainder, Nonggongshang, started to provide free shuttle services for shoppers from their residential districts to Nonggongshang. It became the second supermarket to provide free shopping transportation services in Nanchang (the first one was Walmart). In addition, Nonggongshang set up a snack market of Shanghai Chenghuang Temple (城皇廟) in 2004, offering Nanchang residents the taste of original Shanghai Nanxiang Soup Dumplings (南翔小籠包). Nevertheless, Nonggongshang is still facing difficulties. Since its business opening in December 2001, it has changed several store directors. According to the Nanchang Statistics Bureau, the average daily sales of Nonggongshang’s Nanchang store in 2003 was only Rmb110,000, while Walmart’s Nanchang store recorded Rmb980,000. When Walmart opens its second store in Nanchang in 2005, the market share for Nonggongshang’s single store will be further reduced.

Local retailers stepping up cooperation

Although Lianhua and Hualian from Shanghai have left Nanchang, local retailers strived

to have their operations intermingled with the daily lives of the residents. The local retailers in Nanchang mainly include Hongke Mart (洪客隆), Hongcheng Grand Market (洪城大市場), Nanchang Department Store, etc. Hongke-Mart owns the Bayi Store (八一店), Railway Store, Xiangshan Store (象山店), Liantang Store (蓮塘店), Jinxian Store (進賢店), and the Fortune Plaza Store (財富廣場店) that was opened on the National Day of 2004. In addition, its Dishan Road Store (疊山路店), which is part of the “supermarkets substituting farmers markets”1 project in Nanchang, will open in 2005 to provide quality foodstuff at competitive prices, meeting the consumption needs of local residents who are increasingly better off.

1Please refer to “Upgrade of Consumption Demand Transforms Retail Sector” in this report for details related to the

substitution of farmers markets by supermarkets.


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Meanwhile, some larger local retailers are cooperating to enhance their strength. As the leader in Nanchang’s retail sector and one of the top 25 retailers of China, Nanchang Department Store has signed a cooperation agreement with Huaou Estate Co. Ltd. (華歐實業有限公司) of Jiangxi to build a giant department store with a construction area of 21,000 square meters in the Vienna Shopping Mall (維也納購物廣場) at Liantang Town of Nanchang. Expected to open before May 1, 2005, it will be the biggest shopping mall in Nanchang. The new department store will continue the company’s lead in the sales of clothing, clocks, jewellery, office products, home electric appliance, etc., providing one-stop shopping service for the local residents. The Vienna Plaza is invested and constructed by Huaou Estate Co., Ltd. of Jiangxi, with an area of 50,000 square meters. Besides Nanchang Department Store’s Liantang Branch, the Plaza also features the first high-quality commercial pedestrian street in Nanchang, together with more than 280 other shops.

Hypermarkets entering the community retail sector

Along with the rapid development of Nanchang’s retail sector, there is a plethora of

shops around the central district of the city, such as along Shengli Road (勝利路) and Zhongshan Road, and in the area adjacent to Bayi Square. As competition intensifies, some giant retailers in the central district are moving towards the district communities to find new

Commercial pedestrian street and sublet shops A commercial pedestrian street is especially reserved for pedestrians; vehicular traffic is banned. There are two types of pedestrian streets: one is dedicated to pedestrians for the entire day, while the other observes a fixed schedule, allotting certain hours for exclusive use by pedestrians. During the time allotted, vehicles other than delivery trucks, garbage trucks and fire engines are not allowed access. In some cities, fixed-route public buses are also allowed. Streets dedicated to pedestrians in the commercial districts are known as commercial pedestrian streets. Along these streets are numerous shops and entertainment and recreation facilities. The major mode of operation of sublet shops is that a developer divides the entire area of its retail space into smaller shops and sells them to investors in a form similar to selling shareholdings. The roles of inviting tenants, managing and operating these shops remain centralised in the hands of the developer or a designated third party. Regular fixed rental incomes are then paid to the investors. Retailers acquire operating rights in those shops via tenancy agreements. Statistics show that more than 60% of the major branded chain stores are developing their businesses by sub-leasing their retail space.


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room for development. For example, Nanchang Department Store has set up a number of branches in different districts of the city proper. Thailand’s Yichu Lotus and France’s Carrefour are also sprouting in the residential communities, while Walmart is planning to establish its second and third branch stores in different districts of the city proper. People in the industry predicted that Nanchang would have more than ten community hypermarkets in the next few years.

With the influx of large-scale community shops, the existing traditional community

shops are being endangered. Currently, the development of community shops in Nanchang is disorderly, their geographic distribution unreasonable, the quality of their products defective, and their marketing strategies and operating methods outdated. These community hypermarkets will surely affect these small-scale and less professional shops, displacing some of them from the market. People in the industry suggested that in face of heated competition, community shops should take advantage of their flexibility and pay close attention to the residents’ needs, providing them with sincere service to avoid being displaced from the market.

Large-scale Community Shops A large-scale community shop is a new mode of retail operation that is positioned between a convenience store and a hypermarket. As its name implies, these stores are set up in residential areas, serving residents in the community. The operating area of a large-scale community shop is usually between 500-3,000 square metres, larger than the 100-square-metre operating area of convenience stores but smaller than the above-3,000-square-metre space occupied by supermarkets and hypermarkets. Large-scale community shops are able to provide shoppers with the expediency matching those of convenience stores as well as an extensive range of products to meet the consumers’ demand for one-stop shopping service that is characteristic of hypermarkets.


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Convention and Exhibition Economy Promoting the Development of Changsha’s Retail Market

With an increasing number of national and local conventions and exhibitions being held

in Changsha, and the completion of a number of professional exhibition venues, the convention and exhibition industry in Changsha is booming, playing an important role in promoting the city’s economy and accelerating the development of Changsha’s retail industry. The convention and exhibition economy started to prosper in Changsha in 2003. The turnover of convention and exhibition centres exceeded Rmb30 billion in 2003, leading to a retail consumption of more than Rmb4 billion. In 2004, the convention and exhibition economy in Changsha continued to develop steadily. According to Changsha’s statistics, the convention and exhibition economy spurred the city’s retail sales growth by 10-12%. Convention and exhibition industry develops into substantial scale

Since 1995, the development of convention and exhibition economy in Changsha has

shown significant improvement in terms of scale and facilities offered. In 2004, more than 150 conventions and exhibitions were held in Changsha, which was 5 times more than in 1995. The number of the professional exhibition venues increased from one to four, including the newly-built Hunan International Convention and Exhibition Centre, which is the biggest exhibition venue in central China. The area of exhibition venues in Changsha has expanded from less than 10,000 square metres to currently 200,000 square metres. On September 5, 2002, the Hunan Convention and Exhibition Association was set up in Changsha, marking the city’s achievement in regulating the development of the convention and exhibition industry. After years of cultivation, the convention and exhibition industry is developing rapidly towards creating brand names and taking up big events, hosting a number of influential branded conventions and exhibitions for the industries of automobile, agriculture, sugar and wine, medicine and medical apparatus, as well as the renowned Golden Eagle Television and Arts Festival (金鷹電視藝術節).


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To further strengthen its convention and exhibition economy, in 2003, the Changsha

Municipal Government has set up a steering committee under the leadership of the mayor to take charge of convention-related work. An affiliated office under the committee was assigned to guide the convention and exhibition economy towards healthy development. In June 2003, the municipal government issued a set of “Suggestions on Accelerating the Development of Convention and Exhibition Industry in Changsha”, which laid down the important principles for Changsha’s medium- to long-term development of its convention and exhibition industry. According to the “Suggestions”, Changsha’s convention and exhibition economy aims to achieve “4 tens” in the next 5-10 years: to rank among the top ten cities in hosting conventions and exhibitions, to create ten convention and exhibition brand names, convention and exhibition to become one of the ten biggest industries in Changsha, and to cultivate ten major convention and exhibition enterprises. In the near future, Changsha will focus on developing the following events: fireworks expo, automobile expo, agricultural expo, Golden Eagle festival, housing fair, children commodities expo, etc., while fostering conventions and exhibitions on mechanical engineering, bio-pharmaceuticals, and garments and cuisines with distinct Hunan characteristics.

Hunan International Convention and Exhibition Centre Invested and built by Hunan Broadcasting and Filming Group (湖南廣播影視集團) at Golden Eagle Film and Television Cultural City (金鷹影視文化城), Hunan International Convention and Exhibition Centre is a high-tech intelligent and modern professional exhibition venue and mega-sized indoor public activity centre, the scale of which is the largest in Hunan and even central China. The total construction area is 120,000 square metres, with an exhibition area of 50,000 square metres that can hold 2,000 international standard-sized booths. Currently the biggest indoor cultural square in China, the multi-functional room can accommodate more than 20,000 people, and is a suitable venue for hosting conventions, ceremonies, cultural and arts shows, film shows, sporting games, and various large-scale activities.


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Development still needs to be enhanced

Although the convention and exhibition industry in Changsha has undergone rapid

development in recent years, it remains in the infant stage when compared with that of major cities such as Beijing, Shanghai, Guangzhou and Shenzhen. The rapid pace of development also bred problems such as duplicated exhibitions, operations that are dispersed and small in scale, lacking characteristic features, with too simplistic functions, weak influence, lack of market order, shortage of relevant professionals, inadequate profits, and declining service quality. The most severe of these problems are lack of market order and serious replications. It has once happened that two construction materials expo were simultaneously held in two different venues, which not only divert exhibitors and visitors and wasted resources, but also failed to fully exhibit the professional standards of the convention and exhibition industry.

To address these problems, the convention and exhibition industry in Changsha should

set up a brand name for its convention and exhibition industry according to the direction of its economic development. Taking the Agricultural Expo as an example, given its status as a major agricultural province, Hunan has succeeded in hosting six sessions of the Agricultural Expo, which has grown to become a renowned exhibition in Hunan and is being promoted in the whole country. For the first time in 2002, the Agricultural Expo adopted some international content, setting up some international booths to attract overseas exhibitors. At the same time, the functions of the Expo have extended from simple exhibition of products to demonstration and promotion of new agricultural technologies and equipments as well as providing a venue for discussions on investment, allowing the event to exert considerable influence countrywide.

Agricultural Expo The China-Hunan (International) Agricultural Expo, which is organised by Hunan’s Provincial People’s Government, has been held for six years from 1999 to 2004. The expo has gained a reputation for its extensive scale, variety of exhibit items, volume of transactions, high turnout of visitors, and wide-ranging influence. In fact, it has become the most well-known expo brand in Hunan. Through the Agricultural Expo, many agricultural enterprises in Hunan, such as Ming Yuan Bee (明園蜂業), Yi Qing Yuan (怡清源) and Zheng Hong Hai Yuan (正虹海原), have grown big and famous, selling their products outside Hunan and even in the international market. In the future, the Agricultural Expo will focus on inviting investors and famous brands from Pan-PRD, hoping to upgrade the expo from a provincial event to a regional event, then to a national event and eventually to an international event.


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In addition, the development of convention and exhibition industry in Changsha is still of relatively low standard. To achieve further enhancement, Changsha needs to actively cooperate with some famous international exhibition companies and establish close relationship with some reputable international associations, to usher in more international exhibitions, professional road shows and international brand name exhibitions. During the process, Changsha will not only enhance the quality level of its own exhibitions and learn about advanced organisation and management experience, but will also have the chance to host some “imported goods exhibitions” and “export products exhibitions”. By adopting all these measures, Changsha will surely be able to excel in organising exhibition events.

Thirdly, the development of convention and exhibition economy needs the support of

the government. The government should gradually refrain from direct involvement in the organisation of conventions and exhibitions. Instead, the government can formulate pertinent policies on the industry’s development, monitor the organisation and development of convention and exhibition events, and create a good environment for the industry players. The association of conventions and exhibitions industry should also research into the development direction of the industry, and assist the local government and member enterprises to draft the medium- and long-term development plans for the industry. In addition, the association can help member enterprises enhance the standard and quality of its service. The nurturing of professionals for the industry should also be incorporated in the plan, to enhance the quality and competency of the industry practitioners. Generation of enormous economic benefits

Within only a few years’ time, the development of Changsha’s convention and exhibition economy has come a long way. There are now a variety of exhibitions, discussion forums, trading fairs, including the annual Agricultural Expo, as well as the National Sugar and Wine Trading Fair, which Changsha has been hosting for three years. The convention and exhibition economy not only generates economic benefits, but also speeds up the city’s development and provides numerous job opportunities. With effects spilled over to a wide array of sectors, including transportation, tourism, advertisement, construction and decoration, inspection at border, customs, restaurants, communication, and commercial services, the convention and exhibition economy not only cultivates new industries, but also directly and indirectly promotes the development of related industries, particularly the retail sector.

As conventions and exhibitions attract substantial crowds of attendees, they can bolster

the development of the retail market. The National Sugar and Wine Trading Fair that Changsha held for the second time in 1998, for example, attracted a total of more than 4,000 exhibitors and 100,000 attendees, generating enormous consumption needs. This not only brought attractive profits to industries such as hotel and restaurants, but also boosted the retail turnover of Changsha to the country’s top ranking in that year. In 2002, Changsha hosted


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the National Sugar and Wine Trading Fair for the third time, attracting more than 6,000 domestic and overseas exhibitors and 160,000 attendees, achieving a turnover of Rmb31 billion and generating Rmb2 billion of consumption in Changsha.

Apart from promoting consumption, the convention and exhibition economy can foster

the development of the exhibited products. The three sessions of National Sugar and Wine Trading Fair not only generated enormous consumption, but also accelerated the development of food processing, snacks and Hunan’s characteristic foodstuff. Leveraging on the National Sugar and Wine Trading Fair, many enterprises have enhanced the reputation of their products. For instance, the brand of Lameizi (辣妹子) manufactured by Hunan’s Dongting Foodstuff Co. Ltd. (洞庭食品有限公司) received substantial orders after being promoted at the National Sugar and Wine Trading Fair in 1998. In addition, Lameizi earned the title of China’s Famous Brand in 2002. As another example, the Baisuiren Vinegar (百歲人醋) produced by Changsha Mawangdui Farm Produce Co., Ltd. (長沙馬王堆蔬菜集團) was also well-received at the National Sugar and Wine Trading Fair and the Kunming Commodity Trading Fair in 2002, which facilitated the brand’s entrance into the markets of other provinces and Southeast Asia. In these two trading fairs alone, the brand was able to achieve a transaction volume of Rmb4 million. Leveraging on the National Sugar and Wine Trading Fair, Hunan’s ready-to-eat food manufacturers witnessed the legendary transformation of small-scale production into large industries. Manufacturers of ready-to-eat food sprouted, generating an annual turnover of nearly Rmb1 billion and exceeding Zhejiang and Guangdong within a few years’ time.


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The Development Potential of Hainan’s Retail Sector Awaits Exploration Hainan’s Provincial Government used to put a lot of emphasis on the development of its

retail sector, regarding it a main component of the services sector and providing it with strong support. In a set of “Guidelines for Hainan’s Economic and Social Development in the Tenth Five-Year Plan Period”, the government of Hainan announced plans to recast and improve the commercial and trade industries. Furthermore, the government released a set of “Suggestions on the Acceleration of its Services Industries Development”, drawing up a comprehensive plan for the development of its retail sector. The government is committed to actively introduce well-known domestic and overseas enterprises into the province’s commercial and catering industries, as well as advanced management skills to promote new modes of operation such as chain stores and logistics distribution. All these will facilitate the improvement of its traditional mode of commerce. On December 14, 2004, the authorities of Hainan’s commercial bureau announced the creation of a comprehensive program in 2005 on drawing up a layout of the province’s commercial network, and drafting a set of “Guidelines on the Development of Hainan’s Commercial Goods Market”. By the end of 2005, some key cities and counties, such as Haikou, Sanya, Qionghai and Zhanzhou will complete the layout of their commercial networks. The other cities and counties will complete their layout in 2006. The development of the retail sector in the past 15 years

Since Hainan was set up as a province in 1988, the development of its retail sector has

gone through three phases: 1. The first phase took place from 1989 to 1993. During this period, Haikou set up three

shops from scratch; they included the Friendship Shop, Duty-free Shop and Shida Shop (施達店). These shops were known as the “Old Three”.

2. After 1994, along with the opening of more shops, including Hainan’s First Department

Store, Lepusheng Shop (樂普生店), Shengsheng Department Store (生生百貨), which were known as the “New Three”, the development of Hainan’s retail sector entered the second phase. During this period, the new business concept and mode of operation of the “New Three” exerted significant influence on the “Old Three”.

3. In 1999, the “Old three” retreated from the market. The retail sector in Hainan entered

the third phase. A number of new shops were opened; they included Shouli (首力), Golden Century (金世紀), Pearl (明珠), International Trade Grandbuy (國貿廣百), New World (新天地 ), etc. However, amidst market competition, a few small- and medium-scale shops including Shouli, New World, etc. were later knocked out of the market. The “New three” survived the competition in different form.


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After 15 years of development, Hainan’s retail sales volume rose from only Rmb1.939 billion in 1987 to Rmb19.164 billion in 2003. The retail market is now consisted of a variety of economic components, with different modes of operation and different sales channels.

Scale of the market remains too small to attract foreign retailers

Although Hainan’s retail market has undergone 15 years of development, it has not been

able to attract one giant foreign retailer despite the fact that it was one of the earliest region opened up to foreign retailers. In 1992, China started opening up its retail sector to foreign retailers. The pilot-testing grounds included the six cities of Beijing, Shanghai, Tianjin, Guangzhou, Dalian, and Qingdao, as well as the five special economic zones of Shenzhen, Xiamen, Shantou, Zhuhai and Hainan. Since 1992, Hainan’s commercial bureau has been striving to attract foreign retailers, and has received a number of study teams of foreign retailers. Some cities and counties of Hainan also strived to attract foreign retailers. The government of Hainan and some local estate developers have even led a team to pay visits to the giant foreign retailers. However, now that China has fully opened up the retail sector, Hainan still has no foreign retailer in place. The retailers in Hong Kong and Taiwan are not interested at Hainan, either. There is no Taiwan retailer in Hainan so far. As for Hong Kong retailers, their attempts to enter Hainan started only after the implementation of CEPA via the setting up of Hong Kong City.

2003 Retail Sales of the Eight Pan-PRD Provinces/Region

Retail Sales Value (Rmb100 mn)

Population (10,000)

Per Capita Retail Consumption(Rmb)

Fujian 1,740 3488 4,898 Jiangxi 923 4254 2,170 Hunan 1,816 6663 2,725 Hainan 192 811 2,367 Guangxi 858 4857 1,767 Yunnan 783 4376 1,789 Guizhou 459 3870 1,186 Sichuan 2,091 8700 2,403 Guangdong 5,606 7954 7,048 Pan-PRD 14,468 44,973 3,217 National 45,842 129,227 3,547

Source: China Statistical Yearbook The main reason that the retail sector in Hainan is unattractive is its small market size.

Hainan has a population of only 8.1 million. The province’s per capita retail consumption in 2003 was Rmb2,367, which was Rmb1,180 below the national average and equivalent to less than one-fifth of the average in Beijing, ranking the 19th place in China. More importantly, total retail sales of consumer goods in Hainan amount to only about Rmb20 billion, which is


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the lowest among the nine provinces/region of the Pan-PRD, and ranks only higher than Qinghai and Tibet among the 31 provinces/regions/municipal cities of China. The highest annual turnover of the retailers in Hainan is only Rmb400 million. Hainan hopes that with the introduction of foreign retailers, local retailers will learn better modes of operation and management methods and boost the overall standards of the local retail industry. However, to foreign retailers, which are already achieving billions and even tens of billions of Renminbi sales in China, Hainan’s market size may be too small to be attractive.

The saturation of Hainan’s retail market is another reason for the shunning of foreign retailers. Currently, there are 120,000 commercial spots in Hainan, which means there are 15 commercial spots for every 1,000 people. This figure is higher than China’s average at 12 per 1,000 people. Many of the commercial spots are in Haikou, which makes the per capita number of commercial spots in this city remarkably higher than the international standard. Before Haikou expanded its administrative span, the per capita number of commercial spots was over 1.3 square metres, which significantly exceeded the national average. In 2003, after Haikou expanded its administrative span, which resulted in a large increase in the city’s population, the per capita number of commercial spots declined to 0.5 square metre, reaching a relatively reasonable level. Owing to the saturation of the market, the retail business in Hainan is getting tough and retailers are seeing their profit margins cut.

Development potential of Hainan’s retail market is gradually emerging

However, from the perspective of the retail business, though there are numerous

commercial spots in Haikou, where Hainan’s retail business concentrates, these shops are generally small and dispersed. In fact, there are only a handful of hypermarkets and modern

Expansion of Haikou’s Administrative Span On September 16, 2002, the State Council granted Haikou the permission to realign its administrative regions, combining the cities of Haikou and Qiongshan into one city, revoking the Xiuying (秀英) , Xinhua (新華) and Zhendong (振東) districts of the original Haikou and Qiongshan (瓊山) cities, and setting up the new districts of Xiuying, Longhua (龍華), Qiongshan and Meilan (美蘭) in the new Haikou city. The realignment came into effect on January 1, 2003. After this, Haikou’s geographic area was substantially enlarged, its population increased from 800,000 to more than 1.5 million, and its land area increased by ten times from 236.4 square kilometres to 2,365 square metres. The new Haikou city accounts for 40% of Hainan’s GDP, 50% of the provinces’ financial income, 60% of its utilised foreign investment, 55% of its fixed capital investment and about 70% of its external trade.


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department stores in the city. Moreover, there is not even one commercial pedestrian street in Haikou. Every year, nearly 10 million tourists go to Sanya directly via the Haikou airport, and return straight back home after the tour. If there were some more one-stop service shopping centres in the city to offer services in tourism, leisure and shopping and attract these tourists to stay for another night, this would bring along great business opportunities for the retail sector of Haikou. From this perspective, the retail sector in Hainan actually has much potential.

According to the government’s plan, Hainan will pay more attention to constructing its consumer retail market and developing new modes of retail operation. The development of giant shopping malls in Haikou and Sanya will be accelerated, together with some specialty supermarkets. More emphasis will be attached to the development of speciality giant supermarkets of home electric appliance, foodstuff, construction materials, home furniture, etc. Through operating chain stores, the retail sector should speed up the development of convenience stores and community stores to establish a retail network that conveniently provides services for the residents. The wholesale patterns of new commodities for daily use and industrial consumer goods should be explored, particularly some standard patterns of wholesaling industrial consumer goods, such as the development of general distribution and general agency. The emerging development of consumer retail and automobile markets should also be promoted. In addition, the construction of a market for agricultural production materials should be highlighted, too, particularly the construction of specialised wholesale markets and distribution systems in Haikou, Sanya, Qionghai, Zhanzhou, etc.

Currently, some big domestic retailers are starting to invest on giant retail projects in

Hainan. In July 2003, Guangbai Shareholdings (廣百股份) and Hainan’s Jiahua Real Estate Company (嘉華房地產公司) jointly developed a 12,000-square-metre shopping mall in Jiahua (嘉華) community, Jinmao District (金貿區), Haikou, to manufacture branded products in Hainan. In addition, in April 2004, the Causeway Bay Plaza Group (銅鑼灣百貨集團) of Shenzhen signed a framework agreement with Huanrui Property Co. Ltd. (環瑞置業有限公司) of Hainan to jointly operate the “Hainan First Mall” (海南第一MALL), and planned to set up its first major flagship store in the “Hainan First Mall”. It will become the first giant retailer outside Hainan that wholly-leases the retail area and operates by itself in Hainan.


37


38


39

III. TRENDS & UPDATES ON THE FOUR SOUTH-EASTERN PROVINCES/REGION

Economic Development Trends of Fujian in 2004 ----------------------- 40

Fujian Strives to Develop the Non-State Economy ---------------------- 42

Economic Development Trends of Jiangxi in 2004 ------------------------ 44

Individually-owned Businesses and Private Enterprises Promote Jiangxi’s Development ------------------------------------------------------- 46

Economic Development Trends of Hunan in 2004 ---------------------- 48

Changsha Introduced Measures to Speed Up Customs Clearing ------ 50

Economic Development Trends of Hainan in 2004 --------------------- 52

Hainan Steps up Investment into Key Sectors ------------------------------ 54

Memorabilia of Pan-PRD Regional Cooperation --------------------------- 57


40

Economic Development Trends of Fujian in 2004 On January 24, 2005, Fujian held the Third Meeting of the Tenth Fujian Provincial

People's Congress, nominating Mr. Lu Zhangong, Secretary of the Fujian Provincial Committee of the Communist Party of China, as the Director of the Standing Committee of the Tenth Fujian Provincial People's Congress and Mr. Huang Xiaojing, Deputy Secretary of the Fujian Provincial Committee of the Communist Party of China, and Acting Governor of Fujian, as the Governor of Fujian province.1 At the same time, the Congress announced the preliminary assessment on the economic development of Fujian in 2004. Favourable growth was broadly-based

Driven by investments in transportation infrastructure, spurring economic development at the county-level, and accelerating clustering of industries, Fujian’s gross domestic product (GDP) is estimated to reach Rmb605.3 billion in 2004, 12.1% higher than 2003 in real terms.

Fujian’s Real GDP Growth

0

5

10

15

20

25

1994 1996 1998 2000 2002 2004*

Yoy Growth (%)

* Preliminary estimates by Fujian Government

Source: Fujian Provincial Bureau of Statistics

The fundamental development of the agricultural sector strengthened further. Value-added of the primary industries increased 4.5%, with the output of grains increasing by 233,000 tons, reversing the declining trend of the past 6 years. The per capita net income of the rural households increased to Rmb4,089. In the development of industries, as the pressure imposed by tight supply of coal, electricity and oil eased, Fujian’s industrial sector resumed relatively faster growth. For the entire year of 2004, industrial gross output reached Rmb880 billion, an increase of 20.1%; value-added industrial output rose 15% to Rmb253.8 billion, an increase of 15% from 2003. Apart from growth in exports, the neighbouring areas also had higher demand for Fujian products, resulting in a 1 For details on the two officials, please refer to “Secretary of the Fujian Provincial Committee of the Communist Party of

China Appointed” in Part I of the 3rd Monthly Report of this consultancy study.


41

sales/production ratio of above 98%. The province’s three pillar industries, electronic information, machinery, and petrochemicals experienced rapid growth, and their output accounted for 47.2% of the total output of industrial enterprises above designated size. Meanwhile, Fujian is the world’s largest manufacturing base of kinescope, the world’s second largest manufacturing base of coloured cathode ray tube (CRT) monitor, and the world’s fourth largest manufacturing base of liquid crystal display (LCD) monitors, bulk of these products are manufactured for exports. Benefiting from the continuous development of the economy and the improvement in the residents’ standard of living, the services sector also experienced substantial growth. In 2004, the value-added output of the tertiary industries reached Rmb232.5 billion, which was Rmb27.844 billion higher than the previous year. Within the tertiary sector, communication, property development and tourism industries were most active. The communications industry recorded a turnover of Rmb19.269 billion (up 10.65%), while the tourism sector recorded a turnover of Rmb55.074 billion (up 42.2%). Investment and foreign trade continue to perform well

In addition, driven by projects implemented by the provincial government, fixed asset investment also experienced significant growth. The province’s total fixed asset investment rose from Rmb150.8 billion in 2003 to Rmb189.9 billion in 2004. According to the trade statistics based on the source and destination of products, Fujian’s export revenue rose 30.2% in 2004 to Rmb30.57 billion. Revenues generated from the export of mechanical, electrical and high-tech products all increased by more than 40%. Moreover, traditional export items of textile and clothing also grew by close to 40%. Driven by the fostering of closer cooperation between Fujian and Hong Kong, as well as the strengthening of ties between Fujian and Macao, foreign investment reached Rmb5.32 billion in 2004, a 6.6% rise from 2003. 2005 growth target set at 9.5%

As 2005 is an important year for speeding up the construction of the Economic Zone on

the West Coast of the Taiwan Strait and to fully achieve the targets set in the “Tenth 5-year Plan”, Fujian has set the following targets for speeding up economic and social development: a 9.5% or above growth in GDP, overall fixed asset investment growth of 16%, export growth of 16% and a utilised foreign direct investment (FDI) level matching that of 2004.


42

Fujian Strives to Develop the Non-State Economy

In 2005, Fujian will strive to develop its non-state economy and small- and medium-sized enterprises (SMEs), establishing a comprehensive and supportive service system to promote the development of non-state enterprises and further improve their investment environment. Non-state investment increasing

The non-state economy in Fijian has traditionally taken the lead in China. In 2003, the average registered capital of the individually-owned stores was Rmb44,900, ranking the highest in the Mainland. The average registered capital of private enterprises was Rmb1.505 million, which was the fourth highest in the Mainland. The average investment of private enterprises was Rmb151,700, the fifth highest in the Mainland. By September 2004, the number of private enterprises in Fujian has reached 106,326. It is anticipated that non-state investment in the whole year will expand further to exceed Rmb80 billion, a growth pace of more than 27% over the previous year. The proportion of non-state investment to total investment in Fujian is expected to rise from 43% in 2004 to around 45% this year.

Non-state enterprises have well fuelled the economic development in Fujian, which is

most obviously demonstrated by the expansion of its export market. Since the Chinese government further lowered the threshold for setting up foreign trade enterprises and lowered the requirement on the registered capital of enterprises running import and export business on September 1, 2003, a large number of SMEs have taken part in foreign trade business. By October last year, the number of the non-state enterprises eligible to conduct import and export business in Fujian has reached 2,391, which was 1,040 more than the same time in the previous year. Their trading amount from January to October 2004 reached US$5.667 billion, an increase of 92.24% over the same period of the previous year; among which exports amounted to US$4.243 billion, up 90.52%, and imports amounted to US$1.424 billion, up 97.55%. Optimising the investment environment

To spur the growth of the non-state economy, the Fujian government has indicated that

it will further streamline the regulations on non-state capital investment, abolishing the unreasonable restrictions and regulations. It will also launch a series of projects to encourage and guide the non-state sector to invest into the construction of the province.

1. Deepen market reform of municipal utilities industries for perfecting the

commercialisation policies. Create an environment that is conducive to fair competition for the non-state sector. Implement a fair and indiscriminating regulatory, policy and market environment for the non-state economy.


43

2. Lower the threshold of market entry for non-state enterprises. Encourage and support non-state capital to participate in the areas of infrastructural development, monopolised industries, public projects, and other industries and fields not restricted by the law. For projects that are currently under monopolistic control or require central planning, the government will actively pilot-test the franchising mode and open the projects to public tender. In projects invested by the government, methods of assessing tender proposals and setting the minimum bids will be gradually standardised.

3. Promote the establishment of a comprehensive system for serving non-state enterprises in

the areas of credit guarantee, staff training, market development, external liaison and cooperation. Establishment of service platforms will be sped up, with an emphasis on developing guaranteed financing, enterprise credit and entrepreneurial training for non-state enterprises as well as SMEs.

4. Encourage non-state enterprises to mingle more with leading enterprises with brand

names, enter into their manufacturing processes and establish a stable working relationship with them.

Promoting the non-state economy and fostering sustainable development

The current trend of Fujian’s state sector is to retreat from competition in general industries, taking part only in the development of mega-sized enterprises. As the growth in utilised foreign investment has been slow, with only a 6.6% rise in FDI to US$5.32 billion expected for 2004, Fujian’s sustainable development can only proceed with increased participation of non-state capital. More importantly, the Fujian government hopes that by promoting non-state economy it would be able to take a bigger step towards constructing the Economic Zone on the West Coast of the Taiwan Strait. With the involvement of non-state enterprises, the government can enhance the commercial and trade interchange with the other members of this economic zone, spurring its industrial development and economic prosperity.

In addition, in order to encourage the non-state SMEs to extend their businesses beyond

the province, the Provincial Government will also strengthen the commercial and trade ties between Fujian and Hong Kong, and seriously organise and implement the cooperative agreements between the two sides. A model project of cooperation between Fujian and Hong Kong will be launched soon, promoting the exchange and cooperation between the two sides in the areas of high-technology, management knowledge of enterprises’ senior management, etc. These measures will be helpful not only for local enterprises in their exploration of overseas market opportunities, but will also enable Hong Kong businesses to tap the Mainland market through cooperating with their counterparts in Fujian. In the process, Hong Kong businesses will also gain better understanding of the roles they can play in the ongoing reforms of Fujian’s industries, e.g. financing non-state enterprises’ ventures and providing professional training services for the SMEs in the province.


44

Economic Development Trends of Jiangxi in 2004 At the press release meeting of the Third Session of the Tenth Jiangxi Provincial

People’s Congress, Mr. Peng Daobin, Deputy Director of Jiangxi Provincial Statistics Bureau, provided a preliminary analysis on the economic conditions of Jiangxi in 2004. Secondary industry gaining foothold

Jiangxi’s GDP is estimated to reach Rmb350 billion in 2004, an increase of 13.2% over the previous year, which is the highest growth in the past 11 years. Comparing with 2000, Jiangxi’s GDP has increased by 75%. Among the three sectors, the value-added output of the primary industries totalled RMB71 billion, up 8%, growing at its fastest pace since 1997. Agricultural sector output exceeded Rmb100 billion, also up by 8% and was the highest recorded growth since 1996. It is estimated that the net income of rural residents will increase by Rmb495 in 2004 – a historical increment representing 20.1% growth.

The value-added output of the secondary industries reached Rmb160 billion, an increase

of 19.2%. Growth in value-added output of industrial enterprises above designated scale was 26.1%, its ranking among the Mainland provinces rose from 19th in 2001 to 5th in 2004; while its ranking among the provinces in central China rose from 4th in 2001 to 1st in 2004. Industrial growth was broad-based, with the major industrial products experienced exceptional increases in output. The output of raw coal, for instance, rose by 23.4% to 12.33 million tons, while power generation increased by 6.5% to 32.8 billion kilowatt-hour. The output of chemical fibres increased by 48.6% to 146,000 tons, while cement production rose by 30.6% to 29.76 million tons.

In addition, the value-added output of the tertiary sector was Rmb119 billion, recording

a steady increase of 9%, among which retail sales of consumer goods exceeded Rmb100 billion for the first time, growing by 12.58% to Rmb106 billion. The catering industry and tourist consumption have become the two major highlights of 2004, with the sales of caterers rising by 18.9%, topping most other industries. Overall, the economy’s three-tier industrial structure has adjusted more rapidly, from 25:35:40 in 2000 to 20.3:45.7:34 in 2004.

With the rapid development of secondary industries, investment in fixed assets

continued to rise. However, under the macroeconomic development control policies of the Central Government, its pace of growth is estimated to decline by 17.3 percentage points compared with 2003. Fixed asset investment in the whole province is estimated to rise by 32% to Rmb182 billion, among which investment at city, county and above level is estimated to rise by 36% to Rmb148.8 billion.


45

Foreign investment remained strong

In 2004, utilised FDI in Jiangxi reached US$2.05 billion, an increase of 26.6%. The industrial zones took up 56.1% of this sum. Industrial projects accounted for 73.1% of the total number of projects and 62.8% of the total utilised FDI. It is worth noting that apart from investment from Hong Kong, Macao and Taiwan, investment from the Asian and European countries also experienced a significant increase. Among the various sources of FDI, 12 countries/regions more than doubled their investment in Jiangxi in the year. The fastest rise in FDI came from Hungary, Guinea and Romania, while those from France, Macao, Japan, New Zealand, and the Philippines all exceeded 200% in growth.

Utilised Foreign Direct Investment in Jiangxi

0

5

10

15

20

25

2000 2001 2002 2003 2004*

US$100 mn

* Preliminary estimates by Jiangxi Provincial Bureau of Statistics

Source: Jiangxi Provincial Bureau of Statistics Meanwhile, external trade continued to register strong growth. According to the trade

statistics based on the source and destination of products, imports rose 43.3% while exports surged 84.3%. Of these, private enterprises and foreign-invested enterprises recorded the most significant paces of growth.

Jiangxi has set its objectives for economic and social development for 2005. They include a GDP growth of 11%, fixed asset investment growth of 20%, etc. The main direction is to speed up the development of Jiangxi to take a leading position among the economies in central China.


47

the processes of Jiangxi’s industrialisation. Mr. Huang Zhiquan, Governor of Jiangxi, asked provincial authorities and departments to provide guidance and more room for development to individually-owned businesses and private enterprises by introducing suitable policy support measures. By introducing the appropriate measures, these enterprises will hopefully become a major channel for promoting capital investment and urbanisation of Jiangxi. Moreover, government authorities and departments should create an environment that is conducive to the healthy development of individually-owned businesses and private enterprises by enhancing the overall investment environment. The provincial government will seriously promote the development of individually-owned businesses and private enterprises; it will draft a comprehensive “Guide to Operating Individually-owned Businesses and Private Enterprises” to encourage the development of this sector.

Actively responding to liberalisation

For quite a few years now, Jiangxi’s policies of opening up and liberalising the economy has ushered in numerous benefits. Utilised foreign investment in the province in 2004 was over four times the size of foreign investment utilised four years ago. The pace of growth was the fastest in central China and ranked eighth in the entire country. According to government estimates, the liberalised economy contributes to around 50% of the province’s total fixed asset investment and new job opportunities. The influx of foreign investment introduced more business opportunities into Jiangxi and ushered in new business ideas for local enterprises. These in turn facilitated the expansion of the province’s agricultural sector towards overseas markets. Along with China’s WTO entry, some private entrepreneurs in Jiangxi have stepped up investment to speed up business expansion. It is their objective to be able to enhance their competitiveness to cope with the trend of globalisation.

As the development of private enterprises in Jiangxi is relatively new, the government is

initiating an increasing number of external promotion activities to help local enterprises to develop the overseas market and provide a more convenient platform for them to source business partners. These will help Jiangxi enterprises in further developing their businesses and finding means of sustaining growth. Hong Kong businesses can leverage on these activities to increase business dealings with Jiangxi enterprises and explore wider business opportunities in the Mainland. Moreover, Hong Kong can also use these activities as venues for promoting their business services to the private enterprises of Jiangxi.


48

Economic Development Trends of Hunan in 2004

According to Hunan Provincial Government, the province witnessed in 2004 the most significant progress in reform over the past few years; the economy also grew at one of the highest rates in 2004. Economic growth was fastest in the past eight years

Preliminarily estimates show that the real GDP in Hunan grew by 12% in 2004,

reaching Rmb561.2 billion. This was the most rapid pace of growth in the past eight years, and the per capita GDP reached Rmb9,117 – exceeding the US$1,000 mark.

Hunan’s Real GDP Growth

0

2

4

6

8

10

12

14

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Yoy Growth (%)

Source: Hunan Provincial Bureau of Statistics

The series of administrative measures implemented by Hunan on its agricultural sector

has effectively strengthened the fundamentals of the sector. In 2004, grains resumed positive growth in output, and the farming economy experienced the best year in recent years. Value-added of the primary industries reached Rmb115.6 billion, an increase of 7.4%.

Industrialisation gathered pace, and its contribution to the economy was evident. The

value-added industrial output of the entire province reached Rmb178.1 billion, accounting for 31.7% of GDP. Of this sum, industrial enterprises above designated size generated Rmb119.8 billion, up 24.1%. Among the top ten industries in terms of output value, the industries of tobacco processing, smelting and pressing of ferrous metals, and production and supply of electricity and heat together generated a value-added output of Rmb83.141 billion, up 25.1% from a year ago and accounting for 69.4% of the total value-added output of enterprises above designated size. A number of emerging industries also experienced rapid development. The pharmaceuticals industry achieved a value-added output of Rmb2.357 billion, while communication equipment, computers and other electronic devices achieved a


49

total value-added output of Rmb1.906 billion. They increased by 26% and 31.8% respectively from a year ago. Overheating of investment came under control

Under the macroeconomic development control policies of the government, overheating

of investment gradually came under control since April 2004. Growth of total fixed asset investment eased from 39.1% in the first quarter to 27.3%, down 11.8 percentage points. Of the industrial segments, growth in investment in iron and steel increased by 24.2% and that in cement rose by 87.9%, down 171.8 and 55 percentage points respectively from a year ago. Among investments at city, county and above level, the largest increases were recorded in the mining of coal and ferrous and non-ferrous metals, which rose by 163.6% to Rmb2.254 billion, and in the industries of smelting of metals, machinery and chemicals, which rose by 48.7% to Rmb41.388 billion. Mining, manufacturing and electricity together achieved an investment of Rmb57.116 billion, up 41.6%. Retail sector expanded while external trade recorded double-digit growth

Retail sales of consumer goods reached Rmb207 billion in 2004. Large-scale chain stores expanded even faster during the year. The number of chain stores above designated size reached 774, 229 more than the previous year. This sum consisted of 506 self-run shops and 268 franchisee shops, additions of 95 and 134 respectively from the previous year. A number of well-known chain stores, such as Gome (國美), YoYo (有有家電) and Suning (蘇寧電器), successively started to operate in Hunan.

External trade grew more rapidly from 20% in 2003 to 44.9% in 2004, exceeding

US$3.1 billion. Besides metals, transportation vehicles, and new and high-technology products, traditional export items such as steel and household ceramic products also maintained strong export growth momentum.


50

Changsha Introduced Measures to Speed Up Customs Clearing

At end-2004, Changsha Customs launched a series of measures to speed up the customs clearing processes, to better cope with the development of Hunan towards becoming an externally-oriented economy.

Express customs clearing system set up

As customs clearing processes need to undergo a total of 13 departments and authorities,

involving customs, commodity inspection, bank, foreign exchange, tax, communication, industry and commerce, foreign economic relation and trade, civil aviation, transportation, railway, and customs broking, the average customs clearing time in Changsha is currently 6.5 days for imports and 1.5 days for exports. These procedures are not only time-consuming but are also costly.

To facilitate enterprises engaging in external trade business and cut down the cost of

customs clearing, Changsha has adopted a number of measures. By early 2004, the “Yangtze River express system of customs clearing”, which Changsha Customs took part in planning, had been extended to include Changsha and Zhuzhou. In 2005, Changsha will strive to have more cities along the reaches of Xiangjiang River (湘江), Zijiang River (資江), Lishui River (澧水江), and Yuanjiang River (沅江) into the system of express customs clearing. By that time, over 90% of the customs traffic will be accommodated by the system of express customs clearing, reducing the steps of customs clearing procedures to declaration, inspection, and clearing. This will reduce the cost and lead-time of customs clearing by one-third and one-fourth respectively.

Allow more enterprises to avail of the system of express customs clearing

By the end of 2004, Changsha Customs has made the system of express customs

clearing available to 16 large-scale enterprises including LG, Philips, Shuguang (曙光), etc. These enterprises are now enjoying services such as advance customs clearing, urgent clearing, warranted inspection and discharge, and on-site inspection and discharge, which markedly reduce the lead-time of customs clearing1. According to the experiences in the first half of 2004, it took only one day on average to clear imported goods and half-day to clear exported goods for enterprises entitled to express customs clearing, shortening the lead-time substantially.

To allow more enterprises enjoy the express customs clearing service, Changsha

Customs is lowering the threshold for enterprises to qualify to enjoy the service from the

1 Express customs clearing services include advanced declaration, internet declaration, on-site inspection and discharge,

express customs transfer, express clearance, warranted inspection and discharge, and internet monitoring of processed goods.


51

previous US$50 million to US$10 million (or enterprises with export revenues of US$5 million). With this relaxation, the number of enterprises qualified to use the express customs clearing service has increased from 16 in 2004 to 35.

After implementing these measures, Changsha hopes to shorten the time for customs

clearing to 4.5 days for import and 1 day for export. Changsha Customs will strengthen cooperation with port customs to reduce the time required for customs clearing.

Apart from the above administrative measures, Changsha Customs also made clear its

intention to strengthen cooperation with the Customs Departments of the nine Pan-PRD constituents, particularly Guangdong and Guangxi, as well as with Hong Kong and Macao, under the system of cooperation laid down in the Pan-PRD Customs Cooperation Alliance. The procedures for customs transfer by railway will be simplified, and the “five-fixed trains”1 from Changsha to Shenzhen and Huangpu will be activated. The cargo loading documentation from Hunan, Hong Kong and Macao will be gradually standardised as a preparation for the commencement of operation of direct through-trains between these destinations. These measures will benefit both the trading and logistics industries of Hong Kong.

The System of Express Customs Clearing in Yangtze River Area To maximise the function of the Yangtze River as a major water way and fuel the development of central and western China, the Customs General Administration of China started implementing the “Plan to Establish a System of Express Customs Clearing in Yangtze River Area” on January 1, 2001. The plan relaxed the restrictions contained in the “Regulations on the Transportation of Customs Transfer Cargo” which imposed that cargo not ready for re-sealing cannot be transferred. This allowed cargo other than those designated by the government (such as vehicle units, waste and old materials and stainless steel), chemicals under regulation, toxic chemicals, and hazardous waste, staple bulk cargo (such as ore sand, coal and food supplies), extra-large machinery equipment, etc. to go through customs transfer in seven customs areas along Yangtze River, including Shanghai, Nanjing, Hefei, Changsha, Wuhan, Nanchang, and Chongqing. Since the implementation of the Plan, customs clearing procedures in these ports involved only one-time declaration, one-time verification, and one-time inspection, speeding up the customs clearance process substantially, allowing enterprises to lower their transfer and storage costs.

1 Refers to fixed destination, route, frequency, schedule and transport price.


52

Economic Development Trends of Hainan in 2004

In the past few years, the mode of economic development in Hainan has undergone gradual change. Hainan continuously worked on improving its environment, upgrading its industries and cultivating its unique and characteristic features. Hainan’s economy sustained the rapid and healthy growth experienced in 2003. Economic growth continued to exceed 10%

According to the preliminary estimates, Hainan achieved a GDP of Rmb79.012 billion in 2004, up 10.4% in real terms from 2003, generally continuing the healthy and robust growth path of 2003. The value-added industrial output of the primary industry grew by 8% and reached Rmb28.73 billion. Planting and horticulture achieved a value-added output of Rmb10.99 billion, a rise of 6.8%. Stockbreeding also grew more rapidly, expanding by 12.5% to Rmb4.79 billion. As for fisheries, the composition and variety of output were increasingly upgraded, achieving an annual output of Rmb7.387 billion, up 10.9%.

The value-added output of secondary industries reached Rmb20.117 billion, up 15.8%. Industrial value-added reached Rmb14.044 billion, an increase of 16.7%. The output of the industrial enterprises above designated size was 18.4% higher and reached Rmb12.346 billion. A number of pillar industries, including petrochemicals, automobile, pharmaceutical, paper, etc. are being upgraded. Of the industries, the performance of nitrogenous fertilizer manufacturing was particularly outstanding, recording an output expansion of 95.5%, while the automobile output rose by 21.7%, and the pharmaceutical output increased by 20.9%.

The value-added output of tertiary industries reached Rmb30.165 billion in 2004, up

9.6% from 2003. The services sector of Hainan was supported by increases in residents’ income and tourist consumption. The standard of living of urban and rural residents improved further in 2004. The annual average wage of Hainan workers was Rmb11,715, up 12.6% from a year ago. The per capita disposable income of urban residents was Rmb7,736. Meanwhile, the per capita net income of the rural residents was Rmb2,818. Retail sales of consumer goods reached Rmb21.923 billion. With the more rapid upgrading of residents’ consumption structure, leisure spending on cultural products, communication, tourism, home appliance, etc. rose significantly. Slower growth of fixed asset investment

Hainan invested a total of Rmb32.25 billion in fixed assets in 2004, up 16.7% which was substantially lower than in 2003. Investment on key infrastructure construction projects reached Rmb12.164 billion, accounting for 37.7% of the total fixed assets investment. Four projects were completed and put into use, including Yuehai Railway Channel, Hainan LNG Project Phase III (海氣三期工程), Marriott Hotel at Sanya, and LG Optical Communication.


53

Export and utilisation of foreign investment sped up

In terms of foreign trade, driven by robust agricultural output and diverse expansion of industrial production, Hainan exported US$820 million in 2004, up 26.6% from 2003. Among the major export markets, the ASEAN market recorded the largest increase – more than double over the previous year. In addition, the rise in exports to Hong Kong, Japan and the US also reached double-digit figures. As for foreign direct investment, Hainan received US$643 million in 2004, up 10%. 171 new foreign investment agreements were signed in the year, matching the level of the previous year. The new agreements signed commanded a total foreign investment of US$743 million, a rise of 115% from the previous year.

Hainan’s External Trade

Source: China Customs Statistics

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2000 2001 2002 2003 2004

US$100 mn

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Yoy Growth (%)

Exports (US$100 mn) Yoy Growth (%)

*Classified according to source and destination of goods


54

Hainan Steps up Investment into Key Sectors In 2004, Hainan stepped up its efforts in investment promotion. At events such as the

Hainan Fair and the Pan-PRD Economic and Trade Forum, Hainan was able to attract quite a number of large enterprises to invest into the province. To achieve an even better performance in 2005, it is important for Hainan to be able retain the investment interest of these enterprises which have already committed to invest in the province. The Provincial Committee and Provincial Government of Hainan have thus designated the year of 2005 as a Year to Improve Investment Environment in Hainan. To achieve this objective, Hainan will step up investment in key fields to speed up the improvement in its infrastructural environment for investment.

Investment in key infrastructure

In 2005, Hainan will invest a total of Rmb34 billion in fixed assets, 65.3% of which would be on infrastructure, 3.8% on renewing and renovation, 16.2% on real estate development, and 14.7% will be investment made by urban and rural collective enterprises. The key construction projects in 2005 will include expansion of two airports: Meilan Airport and Phoenix Airport (鳳凰機場); construction of two dams: Dalong Dam (大隆水庫) and Daguang Dam Phase II (大廣壩水庫二期); expansion of two ports: Haikou Port and Basuo Port (八所港); construction of Haikou City Ringed Highway (海口繞城高速公路) and Sanya East-West Highway Link (三亞東西線高速公路); and commencement of the construction of Haikou Power Plant Phase IV. Investment in fostering a new industrial layout

The development concept of the industrialisation in Hainan attaches importance to the development of new industries, at the same time enhancing the weights of capital- and technology-intensive industries such as petroleum refinery, natural gas, optical fibre cables, etc. At the Hainan Economy Work Meeting held on December 22nd, 2004, Mr. Wei Liu Cheng, Governor of Hainan Province, proclaimed full support to the construction of several projects, with an total investment of more than Rmb60 billion, in order to nurture a number of pillar industries that will be competitive enough to support the long-term development of Hainan and accelerate the economic development of Hainan during the period of the “11th Five-Year Plan”. These projects cover the industries of natural gas, petroleum, papermaking, real estate, port, automobile, electricity, etc. In details, there are projects like the 2nd phase of Oriental 1-1 Gas Field (東方 1-1 氣田 ), a 8-million-ton oil refining project, a 1.6-million-ton papermaking project, the 1st Automobile-Hainan Mazda Industry Zone (一氣海馬工業園), etc. 1. Natural gas and related chemical projects. Hainan will speed up the construction of the


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Oriental 1-1 Gas Field Phase II, and activate the development of Ledong Gas Field (樂東氣田), establishing a sturdy base for the development of natural gas and related chemical industries. At the same time, hinging on the development of the Oriental Chemical City, Hainan will form two series of industry chains of chemical fertilizer and methanol, supporting China National Ocean Oil Corp. (CNOOC) to speed up the construction of a project capable of producing an annual output of 600,000 tons of methanol. Also, Hainan will support the Dutch DSM Company and CNOOC to jointly invest in a US$170 million project with annual output of 120,000 tons of melamine. Moreover, another project with an annual output of 1.2 million tons of methanol is also being actively considered.

2. Petroleum processing and petrochemical projects. Hainan will support the large

enterprise groups to invest into oil refining projects, support a project developed by Xingye Polyester (興業聚脂) with an annual output of 160,000 tons of polyester slices, and study into the feasibility of manufacturing downstream petrochemical products such as dimethyl-benzene and pure benzene dimethylate acid, in order to complete the province’s petrochemical industry chain.

3. Paper pulp unification project. Hainan will continue supporting Jinguang Paper

Company (金光紙業) to complete the construction of its exclusive dock, perfect an 11-million-ton paper pulp project, activate a 1.6-million-ton papermaking project of Jinhai (金海) and extend the paper products industry chain.

4. Tourism-related real estate project. Hainan will introduce a number of high-level and

large-scale domestic and overseas companies and enterprise groups to construct a batch of large-scale and deluxe tourism-related real estate projects. Focusing on Haikou, Sanya, and Bo’ao Special Planning Area, these projects will involve high-standard planning and will be constructed in accordance with the requirements of the highest engineering and management standards. Hainan will support CITIC Group to speed up the construction of Bo’ao Special Planning Area with an investment of Rmb10 billion, building it into an important holiday tour site.

5. Port infrastructure project. Hainan will speed up the extended construction of Xiuying

Port Phase II and Basuo Port, as well as the exclusive docks of Yangpu (洋浦) for petroleum and paper pulp. By maximising the utilisation of resources and via the integration of “three ports into one”, Hainan will turn the Macun Port (馬村港) into a hub port. As for the province’s water conservancy infrastructure, Hainan will accelerate the construction of giant key reservoir and network of hydro facilities, in a bid to resolve problems such as water shortage as well as encourage the development of small- and medium-sized hydropower projects.


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6. The “Pharmaceutical Valley” project in Haikou. Hainan is drafting a top-class program for a 1,200-mu Pharmaceutical Valley Project Phase I located in Haikou, and planning the construction of its Phase II, in order to develop it into a competitive pharmaceutical industry cluster in China. As for electric power construction, Hainan will continue heightening the reliability of the power network of Hainan. In addition, some large-sized consortia such as Huaneng and Guodian (國電集團) will be invited to accelerate the construction of electric power projects.

Hainan is concentrating on the development of the projects listed above. Some

projects involve foreign investors, including those from Hong Kong. As the government of Hainan has reiterated that it will encourage and support the development of these projects, Hong Kong investors interested in participating in the Hainan market may explore into the opportunities offered herewith.


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Memorabilia of Pan-PRD Cooperation Fujian Cities in Minnan Golden Delta signed tourism cooperation agreement (January 18, 2005) The agreement was signed by the directors of Tourism Bureaus in Xiamen, Quanzhou and Zhangzhou, paving the way for the establishment of a barrier-free tourism economic cooperation zone as soon as possible. Jiangxi Yichun of Jiangxi promotes investment in Shenzhen (December 20, 2004) Yichun introduced more than 80 projects during the investment promotion event, covering quite a number of sectors including industry, agriculture, infrastructure, tourism, and etc. More than 100 merchants from Shenzhen and other PRD areas participated in the event. Ganzhou went to Macao for investment promotion (December 21, 2004) Ganzhou hoped to attract investors from Macao through this meeting, and to introduce Ganzhou to more international investors through the platform of Macao. Jiangxi Science University signed education and culture cooperation agreement with Companhia Vale do Rio Doce University of Brazil (December 27, 2004) For the first time, the two universities cooperated to set up a special academic exchange facility. In addition, a Brazilian Culture Centre established inside Jiangxi Science University would open on March 1, 2005. Foodstuff exhibition and trade fair in Jiangxi (December 31, 2004-January 3, 2005) This fair focused on product exhibition, trade discussion, and science and technological exchange, with the participation of many domestic and overseas retailers such as Walmart from the US and Metro. A.G. from Germany. Hunan 80 enterprises in Hunan attended the investment promotion forum in Korea and Japan (December 15 and 22, 2004) More than 80 enterprises in Hunan specialising in agriculture and non-ferrous metal attended the business attraction meeting, presenting 98 key projects, which involved a number fields including processing of agricultural by-products, non-ferrous metals and trade. US$1 billion in foreign investment was expected from these forums.


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Nine provinces/region First Conference of the Directors of Foreign Affairs of Pan-PRD and Six provinces/region in Central and Southern China (December 22-24, 2004) The directors of foreign affairs of the 9 provinces/region of Pan-PRD, Hubei and Henan signed a “Memorandum of Understanding to Enhance Cooperation on Foreign Affairs in the Nine Provinces/region of Pan-PRD and Related Provinces/region”. The 11 provinces/region would establish a foreign affairs information network based in the foreign affairs office of Guangdong. Each province would have its own website of foreign affairs to speed up the information exchange. At the same time, they would closely cooperate with Hong Kong and Macao to speed up the cooperation between CEPA and the Pan-PRD region. Cooperation agreement on intellectual property rights in Pan-PRD region (December 29, 2004) The intellectual property rights administration authorities in the nine Pan-PRD provinces/region jointly signed an agreement to speed up the cooperation with Sichuan and other provinces, strengthening the force on striking violations on intellectual property rights. High-level seminar on the Economic Development Strategy of Pan PRD and CEPA (January 7-9, 2005) The seminar was held in Jinan University, with the participation of about 80 scholars from Beijing, Shanghai, Guangdong, Hong Kong, Macao, etc. They held an in-depth discussion on topics like the new features and tendency of economic cooperation among Guangdong, Hong Kong and Macao under the CEPA framework, and the economic development in the greater PRD region as well as the Pan-PRD region. Framework agreement on science cooperation in Pan-PRD region (January 8, 2005) The Engineers Association of the nine Pan-PRD provinces/region and Macao and Beijing-Hong Kong Academic Exchange Centre jointly signed a framework agreement on science cooperation in the Pan-PRD region, promising to strengthen the cooperation between the science association and other organisation bodies, and contribute to the promotion of cooperation and development in the Pan-PRD region. Cooperation seminar of Pan-PRD and WTO partners (January 10th, 2005) More than 200 people attended the seminar and guest speakers eagerly discussed the two topics that are to people’s concern: “Hong Kong as the centre of services sector in Pan-PRD region” and “Global trade development and trends in the Pan-PRD region” “9+2” discussed cooperation and development in Sichuan (January 12-13, 2005) 90 representatives from the nine Pan-PRD provinces/region attended the secretary-general meeting and the meeting of directors of Development and Reform Commissions in the Pan-PRD region held in Emei Mountain, to discuss together the strategy


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of cooperation and development in the Pan-PRD region. The meeting introduced the preliminary preparation condition of the Second Seminar Session and Trading Discussion Meeting, and formed the General Work Plan. Drafting of the “Eleventh Five-Year Plan Compendium on Pan-PRD Regional Cooperation” (January 13, 2005) According to the Development and Reform Commission of the Guangdong Province, the Compendium on Pan-PRD Regional Cooperation for the “Eleventh Five-year Plan” and the work plan for key cooperation projects had been completed. The drafting work was planned to go through evaluation and inspection and reported to the concerned state authorities by the end of September this year. Regional logistics alliance is established in Pan-PRD region (January 19, 2005) Representatives from the Hong Kong Productivity Council, Hong Kong Logistics Association, Macao Logistics and Forwarding Association, Shenzhen Logistics Association, Guangzhou Logistics Association, etc. attended the first preparation meeting. All parties reached the common understanding to actively promote regional cooperation, logistics management, and technology exchange, joining hands to nurture the logistics professionals. The formation of the alliance will be signed formally in March 2005; details about its functions and mode of operation will be unveiled at a later date.


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IV. DATA AND TRENDS

Fujian --------------------------------------------------------------------------------- 62

Jiangxi -------------------------------------------------------------------------------- 63

Hunan -------------------------------------------------------------------------------- 64

Hainan ------------------------------------------------------------------------------- 65

Major Economic Indicators of Nine Pan-PRD Provinces/Region (Jan-Dec 2004) --------------------------------------------------------------------- 66

Nine Pan-PRD Provinces/Region: 10-Year Economic Trend (1994-2003) - 67

Nine Pan-PRD Provinces/Region: Statistics at a Glance (2003) -------------- 68


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V. ENGLISH-CHINESE GLOSSARY OF TERMS

1st May (Labour Day) 五一

1st October (National Day) 十一

Carrefour 家樂福

Chain store 連鎖店

Cities separately designated under the State Plan 計劃單列市

Convenience store 便利店

Convention and exhibition economy 會展經濟

Department store 百貨店

Eleventh Five-year Plan 十一．五

Engle Coefficient 恩格爾係數

Enterprises entitled to express customs clearing procedures

適用便捷通關的企業

Farmers market 農貿市場

Five-fixed trains 五定班列

Franchising 特許經營

Hypermarket 大賣場 /大型超市

Individually-owned stores 個體工商戶

Laid-off workers 下崗職工

Leisure spending 休閒消費

Mainland and Hong Kong Closer Economic Partnership Arrangement

內地與香港更緊密經貿關係的

安排


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Metro A.G. 麥德龍

Municipal city 直轄市

Non-state economy 民營經濟

Pan-Pearl River Delta Economic and Trade Forum

泛珠三角 ( 9 + 2 )經貿合作洽談會

Per capita disposable income of urban residents 城鎮居民人均可支配收入

Per capita living expenditure of rural households 農民人均生活消費支出

PriceSmart 普爾斯馬特

Private enterprises 私營企業

Professional shop 專業店

Second-tier city 二線城市

Shopping mall 大型購物中心

Special Economic Zone 經濟特區

Specialty store 專賣店

Supermarket 超市

Tenth Five-year Plan 十．五

Third sector 第三產業

Total retail sales of consumer goods 社會消費品零售額

Urban and rural households 城鄉居民

Walmart 沃爾瑪

Warehouse store 倉儲式商店

World Trade Organisation 世界貿易組織

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