10 Trends Highlight CHINA_2010-2011

8/3/2019 10 Trends Highlight CHINA_2010-2011

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Event organizer

The Expert Committee of the China General Chamber of Commerce

Report publications production

Li & Fung Research Centre, Member of Li & Fung Group

Authors

Francesca Lim and Carol Ma (Li & Fung Research Centre)

Administrator

Yu Di (Secretariat of the Expert Committee of the China General Chamber of Commerce)

For more information

Secretariat of the Expert Committee of the China General Chamber of Commerce

25 Yuetan North Street, Beijing, China Postcode: 100834

Phone : (010) 6606 2250 Fax: (010) 6606 2250

Email : [email protected] http://www.chinabt.net

Li & Fung Research Centre

11/F, LiFung Tower, 868 Cheung Sha Wan On Ping Road, Kowloon, Hong Kong

Phone : (852) 2300 2470 Fax: (852) 2635 1598Email : [email protected] http://www.lifunggroup.com/

What do Experts Say?

Ten Highlights of Chinas

Commercial Sector, 2010 2011


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Ten Highlights of Chinas Commercial Sector, 2010 2011

Li & Fung Research CentreSecretariat of the Expert Committee ofChina General Chamber of Commerce

1

Foreword

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with relatively solid economic fundamentals and huge government inspired measures to boost

domestic consumption, Chinas economy has demonstrated strong resilience. In particular, Chinas

consumer market has captured the attention of many with its impressive growth in the post crisis era.


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2010 2011

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Contents

Foreword ............................................................................................................................................1

Contents ........................................................................................................................................... 2

Chapter 1 Introduction ........................................................................................................................3

Chapter 2 Executive Summary ...........................................................................................................7

Chapter 3 Implications for Foreign Investors ...................................................................................10

Chapter 4 Ten Highlights of Chinas Commercial Sector, 2010 2011 ................................................ 13

1. With growing government attention, the growth model of Chinas retail and ................................ 13

distribution sector is set to change in the 12th Five Year Plan period

2. Domestic consumption sets to grow strongly in 2011 real retail sales ......................................... 15

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3. Online retailing continues to register stunning growth growing .................................................... 18

popularity of bricks and clicks model, online retailing platform

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and the rise of group purchase websites are important trends to watch

4. Silver market sets to become a new growth point in domestic consumption ................................ 21

5. Going green is catching retailers real attention efforts begin to bear fruits ...................................23

6. Meat and vegetable traceability system to be in full swing amid increasing ..................................25

food safety awareness

7. Retailers accelerate format revamps and innovation to cater to ....................................................27

increasingly diverse customer needs

8. Expansion of railway networks sets to transform the commercial and retail landscape .................29

9. Commercial property market sees strong investment the development of ...................................32

commercial streets has won attention

10. Retail and distribution enterprises face ever increasing costs there are .......................................34

growing calls for the Chinese government to help lower the costs of doing business


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3

Chapter 1 Introduction

Selection of the Ten Highlights of Chinas Commercial Sector 2010 2011

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voting and formal, in depth panel discussions. This year, views of over 160 top tier experts were

collected.

This event is organized by the Expert Committee of the China General Chamber of Commerce

(ECCGCC !"#$%&'()*+,-' ), a prestigious association comprising government

officials, scholars, consultants, commentators, industry association representatives and top

management of commercial enterprises in China.

Li & Fung Research Centre is proud to publish this report together with the Secretariat of the

ECCGCC by amalgamating the best intellectual talent in China, we believe this report will shed some

light on the key development trends of Chinas commercial sector.

About the Organizations

The China General Chamber of Commerce

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Founded in 1994, the China General Chamber of Commerce (CGCC) is a quasi government

association endorsed by the State Council. The CGCC has around 70,000 members, encompassing

enterprises from retail, distribution, services and tourism sectors, local commercial chambers, national

professional associations, intermediary organizations and individuals.

Commissioned by the Chinese Government, the CGCC consists of 14 committees, working on

areas such as retailing, wholesaling, public relations and industry analyses etc. it also supervises

40 national associations, and over 30 newspapers and magazines published both inside and outside

China.

The Expert Committee of the China General Chamber of Commerce

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The Expert Committee of the China General Chamber of Commerce (ECCGCC), a sub division of

the CGCC, comprises over 160 prominent experts from various government departments, research

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State Council, the National Development and Reform Commission, the Renmin University, the Tsing

Hua University, and the Chinese Academy of Social Sciences, etc.


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2010 2011

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The ECCGCC serves as a platform for the experts to exchange ideas on the development of

commercial enterprises and the distribution sector.

Li & Fung Group

./01

The Li & Fung Group is a Hong Kong based multinational company with three distinct core

businesses: sourcing, distribution, and retailing. Founded in Guangzhou in 1906, the Li & Fung Group

achieved an annual turnover of around US$16.0 billion in 2009. Today, the Li & Fung Group operates

in some 40 economies worldwide and employs over 33,000 people. One of its core competencies is

Supply Chain Management (SCM).

Li & Fung Research Centre./23!4

Li & Fung Research Centre is the research institute of the Li & Fung Group. It serves as a knowledge

bank on China's economy, industries, logistics and distribution sector, with its research scope

covering the whole spectrum of the entire supply chain, from ideas, production, distribution, retailing to

consumers. It also offers research analyses and consulting services to colleagues and clients.

The Centre has been actively promoting the application of SCM. The Centre published the book The

Orchestrator of Global Supply Chain Management (Second Edition) in 2009, which is regarded as

a very useful reference among businessmen and academia in China. The Centre also supported the

launch of100 Years of Li & Fungand Competing in a Flat Worldin China.


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5

Expert Panel Members

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of Commerce

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Chen Liping, Professor, Faculty of Management, Capital University of Economics and Business

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Fan Shiyu, Chief Editor, China Business Herald News

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Fu Longcheng, Director General of Research Unit, China General Chamber of Commerce

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Hong Tao, Professor, Beijing Technology and Business University

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Huang Guoxiong, Professor, School of Business, Remin University of China

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Liu Haifei, Senior Economist, China Research Institute of Business Economics

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Liu Jianhu, Vice Secretary General, China General Chamber of Commerce

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billion yuan. It is estimated that the online retailing market size would exceed 500 billion yuan in 2010,

accounting for around 3% of the total retail sales of consumer goods in China. Going forward, it is

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The rise of online retailing has brought exciting changes to the retail and commercial landscape in

China. In particular, our experts point out three major trends to watch in 2011.

Three important trends to watch in 2011

1. Growing popularity of the bricks and clicks model

Traditional retailers in China are feeling the pressure to respond to the ever growing online

retailing market an increasing number of them have now embarked on a bricks and clicks

strategy to extend consumer reach. According to the China Chain Store and Franchise

Association, 31 out of the Top 100 retailers (Top 100s) in 2009 have launched their own business

to consumers (B2C) online retailing platforms, compared to only 7 out of the Top 100s in 2008.

Examples include Tesco, Suning ( ), Wangfujing Department Stores ( ) and

the Liqun Group (. ).

Indeed, the presence of physical stores gives many traditional retailers an edge over their pure

clicks counterparts. For instance, Meiyijia ( ), a convenience store chain operator in

Dongguan, illustrates the efforts by traditional retailers to integrate e tail with existing physical

stores Meiyija launched its virtual shopping mall which greatly enriches the merchandiseportfolio of the company (previously limited by store space) meanwhile, its network of over 2,000

physical stores in 13 cities in Guangdong has facilitated home deliveries as well as customer in

store pick ups.

Having said that, traditional retailers going bricks and clicks is not without its challenges

pricing is one of the most prominent ones. Bricks and clicks retailers are advised to pay extra

2 According to iResearch, scale of online retailing market is the sum of customer to customer (C2C) and business to consumer(B2C) transaction value. Scale of C2C online retailing market is calculated by the total value of purchases, including that on

the B2C arm of C2C platforms. Scale of B2C online retailing market has excluded download payments of digital products, air$02@&$).#+"50"'055#'(,4&"$#)&-B02&)#()#*&55#()#+1A0")(5&)#+1#Z=/#'5($1+-4#+'&-($+-)9#


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channels cannibalizing sales of their physical stores and potential conflict of interests with

existing distributors and franchisees. To address the issues, for instance, retailers can launch

exclusive labels or product offerings for online sales. Indeed, some retailers such as Uniqlo have

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online channel only for clearance sales.

2. Online retailing platform operators investing in own logistics and fulfillment

facilities

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obstacles facing online retailing platform operators. Most products are delivered to designated

locations requested by customers by courier or mail. But shipment delays and payment collectionstill bother many online retailing giants. Indeed, the logistics flow of online retailing platform

operators is complicated as they often have to handle a much larger number of SKUs (stock

keeping units) at a time this poses extra challenges on warehousing, sorting, picking and

packing, etc.

Although Chinas third partly logistics industry has been developing fast in recent years, service

level of China domestic logistics services providers still varies a lot and substantial monitoring

is needed on the other hand, services of international standard logistics service providers are

too expensive for many. As a result, in addition to outsourcing and partnership with logistics

service providers, some established online platform operators have chosen to handle logistics

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reputation. For instance, 360 Buy (h# ) reportedly handles around 70% of shipment in

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2010 2011

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3. Group purchase websites grasp widespread attention

Another important development is the rapid increase in the number of group purchase ( tuangou)

websites in China. According to iResearch, there were 1,008 group purchase websites in China

as of September 2010, covering a wide range of merchandise and service categories such as

books, apparel, audiovisual products, home electronics, catering, automobiles and air tickets, etc.

The growth in the number of group purchase websites in China is staggering. In fact, there were

only 21 group purchase websites in China in March 2010. By the end of September of 2010, the

transaction value of group purchase websites in China reached 1.2 billion yuan.

Some prominent group purchase websites include tuanmei ( ), nuomi ( ), lashou (

), and meituan ( ). The group purchase websites connect thousands of online users

to sign up together to buy the same products to get a bulk discount. If a certain number of peoplesign up for the offer, the deal becomes available to all. But if a predetermined minimum is not

met, no one gets the deal that day.

In fact, China has a long tradition of group purchase and Chinese consumers are no strangers

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bargain offered by group purchase websites is a big magnet.

Despite the rapid growth, the development of group purchase websites in China is immature.

The China International Electronic Commerce Center (CIECC) under the Ministry of Commerce

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businesses in 2010, with the aim to protect customers interests. Out of the more than 300

applications by group purchase websites, however, less than 10% of the websites got credit

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4. Silver market sets to become a new growth point in domestic consumption

Today, China is one of the worlds rapidly aging3 societies. By the end of 2009, there were 167.14

million people aged 60 or above in China, accounting for 12.5% of China's total population. It is

forecasted that by the end of the 12th Five Year Plan, the elderly population will reach 200 million,

accounting for 15% of the total population.

Given its sheer size and increasing dynamism, the elderly group is becoming an increasingly important

market force. The silver market (i.e. the market for the elderly) is set to become a new growth point in

domestic consumption in the coming years.

Development of silver market: a global phenomenon

In fact, population aging is taking place in most countries of the world the trend of aging is

accelerating as baby boomers enter their old age. Over 700 million people worldwide were over

60 years of age in 2009, accounting for 11% of the worlds total population by 2050, the number is

expected to rise to 2 billion, or 22% of worlds total population. The rise of elderly consumers has

received widespread recognition in many countries. For instance, statistics suggested that the elders

account for 47% of discretionary spending power in the US. Across the world, elderly consumers are a

growingly important force to be reckoned with. China is no exception.

Silver market in China: a vast market full of huge opportunities

The growth in Chinas elderly population also offers huge potential for the silver market. The Chinese

elderly population is an increasingly important consumer segment. According to the China National

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expected to rise to 4.3 trillion yuan by 2020, making it one of the fastest growing segments.

Despite growing demand from the burgeoning Chinese elderly market, the provision of elderly

related products and services is inadequate. The needs and demand of the elders, by and large, are

often unmet. According to a survey conducted by the China National Committee on Age, 90% of the

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this group, to succeed in the market, providers and retailers of goods and services must have in depth

knowledge of the elders, in order to be able to offer customized products and services offerings.

Indeed, there are shifts in consumers tastes and preferences due to aging. Elders in general have a

greater spending on services than products. With deteriorating physical and health conditions, they

demand more healthcare and medical services, social and recreational facilities, etc. Moreover, the

increasing number of empty nest families also means greater demand for a comprehensive range

of eldercare services. As most elders tend to shop in local residential communities, both developers

of residential communities as well as retailers play a key role in building a caring community for the

elders.

Property developers, when planning and designing the residential communities, should integrate

the strategies for developing an all embracing elderly community into their master plans. Retailers and providers, on the other hand, could consider expanding the functions and services

for elders, such as helping the elders to buy daily necessities, providing delivery services,

conducting regular home visits, etc.

The ultimate aim is to offer a friendly, local mix of products and services that could satisfy the needs of

the silver generation, and to enable them to lead a healthy and respectful life.

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The vast Chinese silver market not only provides huge opportunities for retailers and providers of

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In China, the one child policy has given rise to a unique 4 2 1 family structure (a typical family

consists of 4 grandparents, 2 parents and a child), which makes the country facing the future of

having a smaller young generation to support a rapidly aging population. Moreover, eldercare in

China is increasingly outsourced, which calls for rising demand for elderly caregivers. In China, some

100 million of people were aged 65 or above in 2009. If one caregiver is able to look after 10 elders,

around 10 million caregivers are needed to provide adequate eldercare support yet, currently thereare only around 220,000 elderly caregivers in the country. Hence, the expanding aging population,

coupled with increasing needs for healthcare services, will create abundant employment opportunities

for the country.

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services that are able to meet the diverse needs of the elders can help boost consumption, contribute

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respect and love to the elders.


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5. Going green is catching retailers real attention efforts begin to bear fruits

Going green has caught retailers real attention in recent years. Foreign retailers in China have long

been more proactive in launching green initiatives, and domestic retailers are stepping up efforts. We

are happy to see that retailers green initiatives are beginning to bear fruits and we believe the trend to

go green will continue in the next few years.

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by 50% by 2010.

Retailers pushing forward green retail supply chains

Retailers efforts to go green do not stop at the level of store operations. Some foreign retailers take

a holistic approach to sustainability and strive to push forward green retail supply chains. Tesco and

Wal Mart are among the biggest retailers requiring their suppliers to go green, by asking them to

provide greener products or reduce packaging, etc. Tesco has collaborated with over 250 suppliers

on more than 3,600 packaging reduction initiatives in 2009. And Wal Mart announced the carbon

exposure program early in 2007 to build a green retail supply chain 30 of its suppliers participated

in a pilot program in September 2007 to keep track of their carbon emission Wal Mart hoped that

eventually more than 68,000 suppliers would take part in the program and disclose information about

their green house gas emissions.

Retailers green initiatives begin to bear fruits

Retailers efforts to go green have yielded initial success. The Ministry of Commerce (MOFCOM)

launched a 3 year Energy Conservation Campaign in Retail Industry4 in 2007 to encourage large

retailers in 10 pilot cities to take the lead in energy conservation. According to the survey results

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retailers that joined the project campaign, participation in different green initiatives is:


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And according to China Chain Store and Franchise Association, electricity consumption of Chinas Top

100 retailers dropped by 16% yoy in 2009, equivalent to a reduction of 1.63 million tones of carbon

dioxide emission.

But there is still room for improvement

Despite the encouraging news, there is still room for improvement. According to the survey results

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the green projects. 45.3% of retailers invested less than 0.5 million yuan 26.7% of them invested 0.5

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Domestic retailers in China are behind their foreign counterparts to go green. They tend to adopt a

wait and see attitude towards going green, due to poorer environmental awareness as well as being

short of capital.

Go green initiatives will win stronger government support

Going forward, we believe that retailers go green efforts will receive stronger government support.

Indeed, the Chinese government has paid increasing attention to sustainable developments in

recent years. The promulgation of the Administrative Measures for the Paid Use of Plastic Bags

at Merchandise Retailing Places (#ATU6 ) by the MOFCOM,

the State Development and Reform Commission, and the State Administration for Industry and

Commerce in 2008 to reduce the use of plastic bags is a case in point. It is expected the government

departments will join hands together to launch similar environmental measures and policies in thefuture. Meanwhile, the Chinese government will spend more resources on green initiatives, such as

setting standards on energy conservation for retail operators of different formats and offering training

to retailers.

4 The Ministry of Commerce has issued a circular to promote energy saving in the retail industry in 2007. It encouraged

supermarkets, department stores and professional stores in 10 pilot cities with operating area of over 10,000 sq. m, to takethe lead in energy conservation and emission reduction. It is hoped that retailers can reduce energy use per 10,000 yuan

sales revenue by 20% in 2010. The pilot cities include: Beijing, Tianjin, Shanghai, Chongqing, Taiyuan, Shengyang, Qingdao,Wuhan, Guangzhou and Xian.


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6. Meat and vegetable traceability system to be in full swing amid increasing food

safety awareness

There are growing concerns for food safety and product quality in China, especially after a series of

food scandals such as the melamine in milk and gutter oil problems. In an attempt to address the

food safety issues, the Chinese government has speeded up its efforts to build a better regulatory

environment.

The new Food Safety Law was approved in February 2009, providing a legal basis for the government

to strengthen food safety control and supervision. Moreover, a Food Safety Commission was also

established to guide and coordinate the splitting food safety responsibilities of various government

departments and agencies. Besides, a food traceability system has also been introduced to allow

consumers to trace and follow the food path through all stages of production, processing anddistribution.

Pilot scheme for food traceability system

In September 2010, the Ministry of Commerce and the Ministry of Finance co launched a pilot

scheme on a traceability system for meat and vegetables. The system has adopted various advanced

information technologies including barcode, Integrated Circuit (IC), Central Processing Unit (CPU)

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shared along the whole supply chain. Information of all the food products, at various stages of the

supply chain, can be accessed via the Internet. The system also facilitates inventory control and helps

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At present, the system has been rolled out in 10 pilot cities including Shanghai, Ningbo, Qingdao and

Kunming. It will gradually be pushed forward to 36 cities nationwide in the coming three years.

Major highlights of the pilot scheme

Listed below are some major highlights of the traceability system for meat and vegetables.

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the traceability system

Under this pilot scheme, meat and vegetables are included in the traceability system as they

are the most popular food items consumed by Chinese households. In China, it is estimated

that meat and vegetables account for 50 70% of the total expense of non staple foodstuffs of a

typical household. Moreover, many food safety and quality problems are associated with meat

and vegetables. Therefore, it is of prime importance to include these two food categories in the

traceability system.


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2010 2011

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The quality of meat and vegetables products in China has long been a great concern.

Rudimentary food production and distribution is regarded as the core problem of the foodindustry small scale of production and non mechanized production are commonplace in China.

Despite increasing efforts to modernize farming practices, the production methods of many

farms and abattoirs remain fairly backward. For example, around 90 95% of vegetables in

China are produced by individual households of which, more than 87% are unbranded and sold

to wholesale markets without any packaging. The situation is similar in the meat processing

industry. Over 60% of hogs are raised by individuals and 90% are unpackaged with no brands. As

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7. Retailers accelerate format revamps and innovation to cater to increasingly

diverse customer needs

Competition in Chinas retail market has become growingly intense in the past few years. Eyeing the

lucrative opportunities, foreign retailers have been rushing into China likes bees to honey domestic

retailers too have also accelerated their expansion. Facing head to head competition, retailers are

seeking different ways to win the hearts of Chinese consumers. The focus of retailers is gradually

shifting from scale expansion to operational excellence in recent years, format revamps and

innovation have particularly captured the attention of many.

Chinese consumers are highly diverse, more sophisticated and discerning

China is a country with many markets vast regional differences, two tier rural and urban marketstructure, and many different consumer segments retailers have to work hard to win the hearts

of consumers with different tastes and budgets. And consumer demand is ever changing. Fuelled

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consumers are nowadays more sophisticated and discerning they are keen to trade up.

To capture the lucrative potential, retailers are seeking ways to differentiate from the rest, such as

introducing new store brands and retail concepts, launching differentiated merchandise assortment

and accelerating format revamps and innovation, to boost store productivity.

Retailers accelerate format revamps and innovation

In particular, retailers in China are accelerating format revamps and innovation to attract customer

footfalls. Many retailers in China are developing a multi format approach in order to cater to the needs

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have been converted into shopping malls to incorporate different elements of shopping experiences

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Chinas leading department store operators, has launched revamping programs since March 2010 to

convert a number of its departments stores into shopping malls. Grocery retailers in China are also

introducing new operating formats such as compact hypermarket, and convenience plus grocery

stores, beyond the standard hypermarket, supermarket and convenience store formats. Wal Mart

China, for instance, announced in December 2010 that it would expand its presence in China with the

launch of a new compact hypermarket targeting low income and rural customers. With simpler designs

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Indeed, retailers are working harder to cater to specific customer demographics. For instance,

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emerged, such as discount department stores, luxury department stores and department stores for

female, etc. New World Department Store, one of Chinas largest foreign department store operators,


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has opened a few stores especially designed for women the department stores target female white

collar workers with good incomes and educational background.

Many retailers are tapping into the potential of high end and luxury market

To ride the wave of consumer trading up, a lot of retailers in China are trying to move up market.

Various retail format operators are tapping into the high end and luxury market segment. For instance,

in the grocery retail market, many players have launched the premium supermarket format, such as

Ol of the China Resources Vanguard () ) and BHG Marketplace of the Beijing Hualian Group

(gh% ). Ol targets high income consumers such as expatriates and high income overseas

returnees, and features imported top grade fresh food and shop in shops including coffee bar, concept

kitchen and wine cellar.

Undoubtedly, Chinas high end and luxury market is growing fast. But our experts offer a note of

caution. Not every retailer can win in the rush to go up market. Chinese consumers are today more

sophisticated and informed as more retailers crowd the market, players that fail to deliver its value

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thorough market research is a must.

Improvement in retail management

As retailers strive to win the competition, we are happy to see that there is continuous improvement

in retail management. Many retailers in China have operated a variety of retail formats for years

however, store management, sales and marketing and merchandise assortment, etc. of different

operating formats are handled by the same management teams. But the picture has been slowly

changing in the past two years, apart from purchasing and logistics, different aspects of operations are

increasingly handled by specialized business units and teams to best address the fast changing needs

of different customer segments.


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8. Expansion of railway networks sets to transform the commercial and retail landscape

Railway transportation witnessed robust development in China

During the 11th Five Year Plan period, we have witnessed significant development of Chinas

transportation system. Railway is one of the most important modes of transportation in China, given its

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Huge efforts have been made by the Chinese government in recent years to speed up the

development of railway. For instance, China plans to construct a national passenger railway network

of eight high speed railway (HSR) 6 routes (see exhibit 1) by 2012. The 13,000 kilometre HSR network

will overtake that of Europe as the worlds largest by then. It is estimated that the length of the network

will reach 18,000 km by 2020.

Exhibit 1: High speed railway network to be built in China by 2012

Four routes linking northern and southern China (56789:(; )

Beijing Shanghai passenger line The line connects two major economic zones in China, the Bohai Rim

and the Yangtze River Delta. It goes through three municipalities and

four provinces: Beijing, Tianjin and Shanghai Hebei, Shandong, Anhui

and Jiangsu.

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2010 2011

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Meanwhile, great strides have been made in other railway transportation such as subways, light

rail transit and inter city passenger lines in China. As of September 2010, subways in nine cities

including Beijing, Shanghai and Guangzhou are already in place while those in other 16 cities such as

Chongqing, Hangzhou and Wuhan have commenced construction. This rapid pace of expansion will

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subways.

Lets take Beijing as an example. According to the Beijing government, a total of 30 subways and light

rails with a total length of 1,050 km and 450 railway stations will be built by 2020. By that time, the

railway network density will reach 1.4 km per square kilometer. It could greatly improve accessibility

and enhance mobility as most citizens could reach a nearby railway station within a 10 to 15 minute

walk.

Railway development is transforming the commercial and retail landscape

More importantly, the development of railway transportation will transform the commercial and retail

landscape, giving rise to an emergence of a number of metropolises. Today, as more people choose

to live and work near train stations, the development of commercial clusters in the vicinity of railway

stations is a common phenomenon in many cities. A typical example is Tokyo around 60% of

commercial clusters in the city are located near the subways or light rail stations. And more than 90%

of modern department stores are located within 100 meters from railway stations.

Our experts believe the following trends are likely to prevail in coming years:

Development of railway transportation will transform the landscape of commercial and retail

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business opportunities in the stations or in nearby areas.

With high access ibility, train station s will become popula r places for social activiti es and

gatherings. Coffee shops, tea houses, restaurants, hostels, entertainment facilities, etc. will

cluster around railway stations. Indeed, we have already observed similar trends in some bigcities such as Beijing and Shanghai.

Extensive railway networks will bring opportunities to commercial property developers. We

foresee that huge commercial complexes will be formed around train stations with commercial

activities taking place both on the ground and underground. Since customer flows can be

translated to business opportunities, shopping spaces in the subway will attract more attention

from investors.


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Nonetheless, a major challenge for train operators and commercial developers is to deal with the

security issues associated with railway operation. Our experts suggest relevant authorities to learn

from the successful experiences of other countries in operating and managing railway networks as

well as other railway related commercial activities.

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development of railways and commercial businesses in the periphery areas is set to gain more

attention in near future.


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2010 2011

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9. Commercial property market sees strong investment the developmen t of

commercial streets has won attention

Amid series of tightening measures by the Chinese government to cool down the residential property

market, many property developers in China have turned their eyes to the opportunities in the

commercial property market in the past year. This trend is set to continue in 2011. Strong demand and

the RMB appreciation expectation has, and will continue to, fuel investment in the commercial property

market.

Commercial property market outperformed in 2010

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5.8% yoy respectively. During the same period, the total sales revenue of Chinas real estate market

reached 319 million yuan, up 15.9% yoy sales growth of commercial properties (48.2%) was stronger

than that of residential properties (11.2%).

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Urbanization, government initiatives to stimulate domestic private consumption and rapid expansion

of retail and commercial enterprises in China, etc. have fuelled investment in commercial properties in

China over the past years. And amid series of tightening measures by the Chinese government to cool

down the domestic residential market, many traditional residential property developers in China have

started to diversify their investments into the commercial property sector to achieve a more balanced

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continue in 2011.

Indeed, the commercial property sector seems to be immune to Chinese governments tightening

measures. Many local governments in China have shown support towards investment in the

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Shanghai, for example, has substantially increased its commercial land supply in 2010. According to

Centaline Property Shanghai, the Shanghai government launched 85 commercial land sites with a

total area of 3.8 million sq.m between January and October of 2010 the supply during this period has

exceeded the total of the previous two years.

In fact, a number of well known domestic real estate developers such as China Vanke ( !" )

have already expanded investment in the commercial property market over the past few years. China

Poly Group (!". ) targets to lift its investment in commercial property to a share of 30% of

its portfolio by 2012 China Resources Land ( ) also hopes to see its commercial property

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On the other hand, in view of the climbing rental costs, retailers in China are increasingly eager to

invest in commercial properties as well. Indeed, Chinas consumer market has been the worlds

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retail space, especially those in prime locations.

The development of commercial streets has particularly drawn much attention

Chinas commercial property market enjoys robust investment. In particular, the development of

commercial streets has caught much attention. According to a preliminary study by China Commercial

Street Committee, there were already over 3,000 commercial streets with a total length of 1,800 km

and a total area of 150 million sq.m in Chinas county level or above cities by 2005. Over the past

few years, the investment boom in commercial streets has been spreading to lower tier cities and

townships. Today, a great number of commercial street development projects are still underway in/%0"(.#)+4+1#*%02%#(-&6(S)0W&3#'-+Y&2$)9#J;-#&T'&-$)#&T'&2$#$%($#$%);''5,#+1#A++-#)'(2+1#

commercial streets will continue to increase in 2011.

In the eyes of many local governments, commercial streets play an integral role in city development.

Many city planners view commercial streets as a showcase of their cities. Not only do commercial

streets help improve city image, they also promote local consumption as shopping convenience is

enhanced.

Commercial street projects are developing fast in China. Nonetheless, our experts suggest that city

planners should take into account the citys overall development, population distribution, consumption

demand and transportation infrastructure to avoid duplicative investment.


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10. Retail and distribution enterprises face ever increasing costs there are growing

calls for the Chinese government to help lower the costs of doing business

In recent years, retail and distribution enterprises in China have faced rising business costs.

Undoubtedly, increasing market competition has driven up overhead costs such as rental and labor

but there are some structural issues behind the high transaction costs facing Chinas retail and

distribution sector which are inherent in the countrys policy framework. Industry players hope that the

government can take steps to help lower the costs of doing business.

Overhead costs on the rise

As retailers home and abroad cast their eyes on China, Chinas retail and distribution enterprises have

faced increasing overhead costs. Labor and rentals, the two major cost components for retail anddistribution enterprises, have continued to climb in the past years. In recent years, the average labor

cost in the wholesale, retail and catering sectors has reportedly been increased by more than 10%

and most enterprises have seen their labor cost jumped by 20 30%.

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are becoming more stringent. For instance, in the past decade, leasing arrangements would

typically last for 5 8 years, and landlords usually adjusted the rental upward by 5% annually today,

leasing agreements are reviewed much more frequently and often there are much stronger upward

adjustments for each renewal. Some retailers have opted for building their own stores to ease upward

pressure on rentals this, however, would tie up working capital of retailers.

Rising logistics costs is another challenge apart from increasing fuel costs, cumbersome toll fees in

China have added to the costs of Chinas retail and distribution enterprises.

Besides, as transactions by credit cards become more popular, retailers in China shoulder the growing

burdens of service fees charged by banks. This is especially true to department store operators.

Comparatively, Chinas retail and distribution enterprises face higher costs of doing

business

Still, there are some structural issues behind the high transaction costs facing Chinas retail and

distribution sector which are inherent in the countrys policy framework. To name just a few, many

industry players have pointed out that they enjoy much fewer, if not none, tax concessions, than

businesses in other industries such as export manufacturing. Not to mention that the problem of

double taxation is fairly common in retail and distribution sector.

On the other hand, commercial enterprises in China also bear higher electricity tariffs than industrial

enterprises.


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2010 2011

Growing calls for the Chinese government to help lower the costs of doing business

Chinas retail and distribution enterprises have urged the Chinese government to help lower the costs

of doing business. Policymakers, on the other hand, growingly recognize that the high costs of doing

business for retail and distribution enterprises in China are unfavorable for the country to nurture a

consumption driven economy. They are taking steps to alleviate the problems.

There are some encouraging signs. The government has taken several steps to reduce the transaction

costs of Chinas retail and distribution sector. For example, trucks transporting agricultural produce

can be exempted from toll fees, starting in December 2010. As China adopts a more pro consumption

development model, we expect more supportive initiatives to come in 2011.

Documents

10 Trends Highlight CHINA_2010-2011