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) 2 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Fujian, Jiangxi, Hunan, Hainan (4th Monthly Report) Table of Contents I. Executive Summary ----------------------------------------------------------------- 5 II. Topical Analysis --------------------------------------------------------------------- 9 “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 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 3 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Fujian, Jiangxi, Hunan, Hainan (4th Monthly Report) Table of Contents (continued) Hainan Steps up Investment into Key Sectors --------------------------- 54 Memorabilia of Pan-PR 4 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Fujian, Jiangxi, Hunan, Hainan (4th Monthly Report) 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 5 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Fujian, Jiangxi, Hunan, Hainan (4th Monthly Report) 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 6 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Fujian, Jiangxi, Hunan, Hainan (4th Monthly Report) 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. 7 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Fujian, Jiangxi, Hunan, Hainan (4th Monthly Report) 8 Socio-Economic-Political