China Country Overview for Retail Business
February 2013
Retail opportunity Assessment Overview China is one of the most lucrative and rapidly-growing retail markets across the globe. Considered among the world’s fastest growing economies, China offers a range of opportunities for foreign retail investors. High populations, above-average economic growth, greater integration with the world economy, and increasing domestic and foreign investment have fueled the demand within the retail space of China. Moreover, factors like urbanization, growing middle class and creation of wealth have also added to the growth. Over the past decade, the retail industry in China has witnessed a robust increase in sales, and the trend is forecast to continue in the near future. Though it has various real estate laws, China offers a wide range of investorfriendly regulatory reforms. Availability of cheap and skilled workforce also helps in shaping the retail industry of the country. But the recent hike in labor cost across board has raised doubts over China being a cheap hub. This research paper documents in brief some of the macroeconomic, regulatory and business aspects of ‘Retailing in China’.
Macroeconomic Environment
GDP 14.2% 9.6%
4.8%
10.4% 9.2%
9.2%
5.9%
7.8%
8.2%
8.5%
8.5%
8.5%
8.5%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
5.4% 3.3% -0.7%
3.49
4.52
4.99
5.93
7.30
8.25
9.04
9.93
10.93
12.02
13.21
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: IMF
GDP (USD Tn)
GDP Growth Rate (%)
Inflation (%)
China is the world’s second largest economy, and has emerged as a major global economic and trade power since the introduction of economic reforms in 1979. The country is estimated to have a GDP of USD 8.25 Tn as of 2012, which is forecast to reach USD 13.21 Tn by 2017 – at an average growth rate of c. 9.9% (at current prices). As of 2012, the Industrial sector accounted for 46.6% of the total GDP contribution, followed by the Services sector with 43.7% and Agricultural sector with the remaining 9.7%. The per capita GDP in 2012 was USD 6,094.0 and is projected to grow to USD 9,528.2 by 2017, at a CAGR of 9.4%. Inflation in China is comparatively on the lower side as compared to other developing nations across the globe. The country’s inflation stood at 3.0% in 2012, down from 5.4% in 2011. The People's Bank of China (PBOC – China’s central bank) has been able to keep the value of Yuan stable, and thus reduce inflationary pressures, on the back of the monetary policies implemented during 3Q 2011. In the coming years too, the inflation is projected to remain relatively stable at 3.0%. With a strong macroeconomic environment, many economic forecasters including the International Monetary Fund (IMF) project that China will surpass the US to become the largest economy by 2016.
Population
0.5%
0.5%
1,321
1,328
2007
2008
1,335
1,341
1,354
1,347
1,360
1,367
1,373
1,380
1,387
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
0.5%
2009
2010
2011
2012
2013
2014
2015
2016
2017
Population (Mn)
Source: IMF
Population Growth (%)
China is the most populated country on the earth with an estimated base of 1,354 Mn people as of 2012, and growing at 0.5% annually. Approximately 51.8% of the population resides in the urban areas of the country as of 2012, which is projected to increase at an average rate of 2.3% till 2015 (source: CIA). By 2025, the urbanization rate is projected to reach c. 66%, thus increasing the urban population base to c. 930 Mn. Overall increase in population till 2017 is projected to be relatively stable at an average annual rate of c. 0.5%. The slow growth is due to China’s strict population-control policy, which restricts urban families from having more than one child. China is a relatively young country, with a median age of 35.9 years. According to the 2012 estimates, 17.4% of the population falls in the age bracket of 0-14 years, while 73.5% falls in the age bracket of 15-64 years. Only 9.1% people make the older generation of 65 years and above (Source: CIA). About 13.4% of the China’s population was considered poor (population below poverty line) in 2011 (Source: CIA).
Unemployment
4.0%
2007 Source: IMF
4.2%
4.3%
2008
2009
4.1%
4.1%
4.1%
4.1%
4.1%
4.1%
4.1%
4.1%
2010
2011
2012
2013
2014
2015
2016
2017
Unemployment Rate (%)
China offers a cheap and substantial labor pool of 795.4 Mn people, of which over 750 Mn are literate (people who can read and write) as of 2011. The country is also rising as the world's largest supplier of college-educated workers. By 2030, China is expected to alone account for c. 30% of the world's new college-educated workers. Around 36.7% of the country’s workforce is engaged in agriculture, followed by the services sector, which accounts for nearly 34.6% of the total workforce. China’s labor participation rate among persons aged 15 years and above is as high as 80.2% for men, and 67.9% for women. The unemployment rate in China stood low at 4.1% in 2012. At an overall level, China’s unemployment rate is relatively on the lower side as compared to other developing nations like Brazil (6.0%) and India (9.9%).
Business Environment Market 23.3%
5,550
21.6%
16.8% 15.5% 1,417
2007
1,723
2008
Source: National Bureau of Statistics
2,878 2,455
1,991
2009
2010
17.3%
2011
Retail Sales (USD Bn)
3,290
14.3%
2012
2015
Retail Growth (%)
China’s is the second largest retail market globally after the US. Till the early 1990s, the country’s retail space was dominated by large department stores, mostly owned and operated by the state-owned enterprises. But over the past two decades, the Chinese retail market has been undergoing a transformation, moving away from traditional department stores to large-scale integrated shopping malls, which can accommodate more foreign and smaller format retailers. As of 2012, the organized retail contributed c. 20% to the total retail sales. Despite the global financial crisis, China’s retail industry has significantly grown over the last five years. According to China’s National Bureau of Statistics, the country’s retail industry is estimated at USD 3.29 Tn in 2012 and is forecast to grow to USD 5.55 Tn in 2015, at a CAGR of 19.0%. By 2016, China is expected to surpass the US to become the world’s largest retail market. This significant growth will be on the back of overall economic growth and urbanization, and will induce international retailers to capitalize on the country’s growing middle and upper class population.
"… We chose to invest in Yihaodian because, like Walmart, they are committed to providing outstanding service to their customers, and we are impressed with Yihaodian's strong management team, and solid competence in distribution. Together we will focus on serving an emerging middle class in China. …” >> Neil Ashe, President and CEO, Walmart Global eCommerce
" … China remains one of the largest growth opportunities for the NIKE Brand. We feel very confident that we have the capabilities and commitment to realize that potential…” >> Mark Parker, Chief Executive, Nike
Consumers
108 101
109
104
108 104
108
105
104
Q2 11
Q3 11
110 105
106
Q2 12
Q3 12
108
100
94 89
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q4 11
Q1 12
Q4 12
Consumer Confidence Index
China’s consumer confidence index has consistently been 100 or above over the last four years (except for the first two quarters of 2009), representing an overall optimistic attitude on the part of consumers. The index peaked to 110 in Q1 2012, but also went to a record low of 89 in Q1 2009 during 2009-12, just around the time the global economic crisis started. For the last three quarters, China has been witnessing marginal yet continuous increase in the consumer confidence. As of Q4 2012, consumer confidence was 108 – relatively high as compared to the global average of 91. The survey on consumer confidence suggested that the current increase is attributed to better performance of manufacturing, exports and investments, factors that have resulted in a lift in the consumers’ optimism during the period. Moreover, China’s rural consumers were more optimistic because of the government’s spending and policies such as providing agricultural subsidies, micro-credit loans, and infrastructure investments and so on, which collectively continue to put more cash in the pockets of the rural consumers.
“ …In Q4 [2012], China's economy showed positive signs of a rebound with better than expected data for manufacturing, exports and investment which lifted consumers' optimism for job prospects and personal finances in 2013… While discretionary spending remained restrained across all lifestyle areas in Q4, Chinese consumers became less concerned for the economy… ” >> Yan Xuan, President, Nielsen Greater China , GS&MD
“…Saving is important here - increased consumer spending is as a result of increasing disposable incomes throughout the region, but is not at the expense of investing for the future…"
“…Rising rural incomes should definitely help boost consumption and aid rebalancing. Growth will gear down a bit as rising labor costs diminish investment incentives, but such consumption-led expansion will be more sustainable…” >> Zhang Zhiwei, Chief Economist, Nomura Holdings, Inc.
>> Chris Bonsi, CEO, TNS Greater China
Regulatory Environment FDI In July 1992, the State Council of China permitted foreign investment in retail on a trial basis in Beijing, Shanghai, Tianjin, Guangzhou, Dalian, Qingdao, as well as in the five Special Economic Zones – Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan. However, the foreign investment was restricted to 26% In 2001, China’s accession to the World Trade Organization (WTO) brought in vogue the Accession Protocol under which the opening up of the retail sector was phased over a period of five years till December 2006. The framework of rules, however, was fairly ambiguous – for instance, ‘Commercial Sector Measures’ brought out in April 2004 by the Chinese government restricted the foreign
ownership to 49% for the retail chain with more than 30 stores, while the ‘Accession Protocol’ as well as the ‘2007 FDI Guidance Catalogue’ suggested the same to be 50% Further clarification brought in by the central government via ‘2009 Administrative Measures for Foreign Enterprises or Individuals Establishing Partnership Enterprises in China’ permitted foreign investors or individuals to establish partnership retail enterprises beginning March 2010 China still places some limitations on foreign retailers for certain products. For instance, no FDI is allowed for selling tobacco, and for Audio-visual retail – the FDI is capped at 49% and so on
Real Estate Real estate investment in China lacks transparency and institutional legal framework as compared to the European and the US standards. Foreign investors need to obtain approvals from the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE) to purchase property in China. The property investment limit tends to change depending on the government’s view at a given time. There are additional regulations for moving capital in and out of China for foreign investors Foreign investors can buy a commercial real estate property in China only in the name of a Chinese corporation, either as a Wholly Foreign-Owned Enterprise (WFOE) or through a joint venture with a local partner established for this purpose
Acquisition of property by a foreign investor is subject to various taxes, including stamp duty of 3%, maintenance taxation of 2%, contract tax of 1.5%, and 0.1% stamp duty for a resale property Leasing of commercial retail space is easy as compared to acquiring property to set up retail operations. But due to stiff competition for prime locations and increasing rents, foreign retailers are shifting from leasing to buying land to develop their stores in the Mainland. For instance, office rent in Shanghai and Beijing has increased 12% and 46% yo-y in 2011, respectively A typical lease agreement term ranges from 5-20 years, depending on the store format, and covers various other guidelines that a retailer needs to follow
Labor The Labor Contract Law of the People's Republic of China, came into effect on January 1, 2008, is the primary basis for labor laws in China. National employment laws are drafted by the Ministry of Human Resources and Social Security (‘the MOHRSS’) and the State Council of China All China Federation of Trade Unions (ACFTU) is the sole legal labor union in the Mainland and is controlled by the government. Founded in 1925, ACFTU constitutes 31 regional federations and 10 national industrial unions, which help it protect the legitimate rights and interests of the workers
Recently, the government has taken a step to raise the income of low-paid workers, through its 12th five-year plan (2011-15). The plan targets to increase the minimum wages at c.13% annually, with an introduction of mandatory employer social welfare contributions that will add another 35-40% to payroll costs. This includes contributions to pensions (20% of payroll), unemployment benefits (2%), medical insurance (6%), work injury insurance (1%), maternity insurance (0.8%), and housing entitlements (5-10%)