China's Foreign Investment Sectors, Retail Sales, Audi's Biggest Market, Luxury Hotels and more
HIGHLIGHTS FROM CHINA
About ARC China
ARC China is a Shanghai-based investment manager focused on investments in consumption-driven, entrepreneur-owned small and medium sized enterprises in China's Tier II and Tier III regions. ARC China maintains a team of investment and due diligence professionals with headquarters in Shanghai and offices in key Tier II and Tier III cities throughout China.
ARC China's investment strategy centers on value-oriented, activist, and exit-driven equity investments within a diversified portfolio of high-growth businesses in these regions. ARC China's strategy and investment focus is aligned with both major macroeconomic and demographic trends within China and with the Chinese government's strategy of shifting the economy towards domestic consumption and increased growth in the interior and still developing coastal regions of the country.
Boosting Consumption is China's Top Priority for 2012
Expanding China's domestic consumption will be a priority of the government's economic work in 2012. During December's annual Central Economic Work Conference, China's highest government officials agreed that the country will be committed to expanding domestic consumption and improving people's livelihood while trying to stabilize exports this year.
Commerce Minister Chen Deming said fresh steps will be taken to stimulate consumption and to get consumers to spend more, trying to unleash domestic demand as a new growth engine. This is an important indication of how China is shifting gears in response to the latest global economic woes this time around. In 2008, the focus was on launching a massive fiscal stimulus.
The ministry of commerce has drafted a proposal to continue stimulus programs in the coming years. Over the next few months, more than 10 central government departments including the National Development and Reform Commission and Ministry of Finance are expected to make additional proposals and discuss how to introduce concrete measures.
The ministry will advance the building of a modern logistics system and boost consumption in rural areas following a successful marketing project launched in 2005. The project was using subsidies to attract urban-based supermarkets and chain stores to rural areas and improve the rural consumption environment. It is expected that 2012 will see the quality of shops and stores in thousands of rural villages on the upswing in terms of quality. Measures will be taken to hasten the development of modern rural business and promote the building of business and trading centers in villages and towns, as well as border areas.
Some of those plans will include subsidies for consumers in affordable housing to buy appliances and automobiles, while other new measures will include pursuing policies to develop the transport and storage industry so as to improve the distribution and retail network nationwide. The goal is to make commercial centers offering daily services within less than a 15 minute walk in large and medium-sized cities.
Expanding individuals' consumption of services also falls into the ministry's task of expanding domestic consumption. Retail sales are expected to maintain an annual increase of 15 percent during the 12th Five Year Plan (2011-2015) and reach 32 trillion yuan (US$5.08 trillion) by 2015. This year's total retail sales estimates, including rural areas, are expected to reach a year-on-year increase of 14 percent.
Beijing is researching a series of new measures to boost spending on energy-saving products, tourism, and online shopping and to encourage personal service industries such as catering, laundering, bathing, and home appliance repair service in communities.
Adam Roseman
Founder & Managing Partner
ARC China
CHINA GENERAL
Economy to Remain Beacon and Engine in 2012
China's economy will not break. Instead, it will sustain its robust vitality and remain a beacon of hope and an engine of growth for the still fragile world economy in 2012.
Some Western analysts, including Nobel Laureate Paul Krugman, who is known not only for his economic insights but for his harsh judgment on China's economy, recently warned of a possible crash of the Chinese economy in the near future.
They claimed that slowing growth and declining stock and commodity prices were signals that the country's property bubble was set to burst.
Such warnings, however, are simply far-fetched and do not reflect the reality of China's economy.
At the nadir of the 2008 financial crisis, China was among the first countries to bounce back. In 2009, China reached a growth rate of 8.7 percent, outperforming not only developed countries, whose economies dropped 3.2 percent, but also emerging ones, which enjoyed an average growth of 2.4 percent.
China's economic growth, though on a slower track recently, is still expected to reach 9 percent in 2011, contrasting starkly with the anemic growth in Europe and the United States.
Those who warned of China's impending economic collapse also underestimated the Chinese government's capacities to avert financial risks.
China has in its arsenal a powerful and flexible tool of macroeconomic regulation which allows the country to take effective measures to avoid risks in the property sector.
At the moment, the world is still subject to hydra-headed threats: Europe's debt crisis lingers, the U.S. stimulus-fueled recovery is petering out and economic activities in emerging economies have slowed.
Against such a backdrop, China will remain a lighthouse in the rough sea of global economic growth, providing more exports and investment opportunities for other countries and helping boost regional cooperation.
Just as Chinese President Hu Jintao said in his New Year's address, China will speed up economic restructuring, maintain the sound momentum of economic growth and help accomplish common development.
In line with this spirit, China is set to continue with its economic overhaul, wean its economy from the heavy dependence on exports and unleash more domestic demand.
The consumption-driven Chinese economy, with its 1.3 billion population, will create an astronomical domestic market for products and services from all corners of the world, supporting jobs and uplifting economies both at home and abroad.
The unfolding economic restructuring in China will also further cement its role as a global export market, helping other countries lift their sagging exports and cushioning the impact of dwindling demand from the West.
Meanwhile, with China being a genuine friend and partner of its neighbors and dedicated to regional cooperation and common development, the benefits of a prosperous China extend far beyond China's borders.
At the 14th summit between China and the Association of Southeast Asian Nations in November, Chinese Premier Wen Jiabao outlined a six-point proposal to facilitate China-ASEAN practical cooperation.
Chinese leaders have also conveyed a firm commitment to reducing trade barriers and fostering regional integration in the Asia-Pacific region.
These commitments mean that regional cooperation will grow stronger, deeper and broader in 2012 between China and its neighboring countries.
Peering ahead into 2012, obstacles litter the path to growth. However, China will continue working together with the rest of the world to tackle economic challenges and provide powerful impetus for the world economy.
China to Open More Sectors to Foreign Investors
China will open more sectors to foreign investors, encouraging investment in strategic emerging industries, the central government said.
The National Development and Reform Commission and the Ministry of Commerce jointly issued a new guideline to encourage more foreign investment into energy-saving and environmentally-friendly technologies, new-generation information technology, biotechnology, high-end equipment manufacturing, alternative energy, advanced materials, and alternative-fuel cars.
China will cut down restrictions on foreign investment by allowing them to invest in more sectors while lifting caps on the proportion of foreign capital in some sectors, according to the new guideline.
Meanwhile, the government will continue to welcome foreign investors to high-end manufacturing and modern service industries. It also encourages them to invest in recycling industries.
However, the government will withdraw support for foreign capital in auto manufacturing because of the need of the healthy development of domestic auto making.
It will neither support foreign investment in the sectors of polycrystalline silicon and coal chemical due to concerns of industrial overcapacity and repeated construction, according to the guideline.
In light of regional development gaps, the government will roll out a fine-tuned policy for the central and western regions in the future.
In the first 11 months of 2011, China attracted US$103.77 billion of foreign direct investment, up 13.15 percent from a year earlier.
During the same period, the country approved the establishment of 25,086 foreign-invested companies, up 3.23 percent year on year.
Local Governments Clear Up Almost Half of RMB531 Billion Debt Irregularities
China's audit office said local governments have cleared up almost half of the 531 billion yuan (US$84 billion) of debt on their books that an investigation found to have irregularities.
Local governments and the companies they set up to borrow money have so far resolved 259 billion yuan of their bad debt with measures including land sales and the offer of new collateral, according to data released on the National Audit Office's website.
Premier Wen Jiabao pledged last year to clean up surging debt by local governments after an audit office investigation found they had amassed 10.7 trillion yuan of debt by the end of 2010. Shares of Chinese banks have slumped on concern some of the debt will sour as economic growth slows, leaving them saddled with bad loans.
Local governments have taken responsibility for repaying debts, set up reserve funds, improved the stock of debt, and "actively corrected violations" the audit office said.
Barred since 1994 from issuing bonds and directly obtaining bank loans, local authorities formed more than 6,500 financing vehicles to fund the construction of roads, sewage plants and subways, according to audit office figures. The central government allowed Shanghai, Shenzhen, Zhejiang, and Guangdong last year to issue bonds independently in a trial program to help them access cheaper funding.
The audit office's report said its investigation found instances of funds being obtained improperly or diverted to the capital and property markets.
A total of 35.1 billion yuan was invested in the capital markets, real estate, or in energy intensive projects, the office said. Of that figure, 14 billion yuan has been rectified through measures including the use of local governments' own money, it said.
In addition, 23 billion yuan out of 73.2 billion yuan of debt obtained by the local governments' financing vehicles through the unauthorized use of assets as collateral has been cleared up by means including increased land sales and the provision of other collateral, the office said.
Five commercial banks were found to have been involved in lending to "irregular" projects and the misappropriation of loans totaling 58 billion yuan, the audit office said, without identifying the lenders.
Seven provincial governments have drawn up or improved rules to manage the debts of financing vehicles without specifying which authorities.
CHINA CONSUMER ECONOMY
China Retail Sales May Grow 15 Percent Year on Year Through 2015
China's retail sales may grow 15 percent annually through 2015 and top 32 trillion yuan (US$5 trillion) in 2015, the Ministry of Commerce said.
The ministry said in its guideline for the country's 12th Five Year Plan that it will accelerate the construction of infrastructure for commerce and promote the use of e-commerce, franchising, online business, and online shopping as well as modern logistics to boost the revenue of goods trading substantially.
It expects the revenue of e-commerce to expand at 30 percent annually, while the government will endeavor to improve logistics to facilitate e-business.
"The efficiency of commerce will be raised substantially, while the costs will be reduced," the ministry said.
The ministry will also encourage the development of third-party logistics companies and urge small- and medium-sized companies to merge their supply networks with large firms.
In the first 11 months of last year, China's retail sales expanded 17 percent on an annual basis to 16.3 trillion yuan.
China's Market Potential Lures Foreign Businesses
When a British businessman said in the 1840s, "if we could only persuade every person in China to lengthen his shirt-tail by a foot, we could keep the mills of Lancashire working round the clock," he saw the potential of Chinese consumers, but didn't foresee the emergence of a new ideology – "Made for China-ism."
To woo consumers, from KFC's crispy Youtiao, a traditional Chinese snack for breakfast, Hermes' China brand Shangxia to BMW's China-only limited version of the M3 Tiger, more and more foreign firms have launched new products or brands custom-made for China.
Others, such as the Italy-based sunglass giant Luxottica Group, established their design hubs in China.
Even Apple changed its traditional line of "Designed in California, Made in China" to "Designed in California, Made for China" on the giveaway T-shirts when it opened a new store in Shanghai.
"This Made-for-China phenomenon is just one of the many sub-trends spawned by the macro trend of economic and consumption power shifting toward emerging markets," according to a report by the trend research company Trendwatching.com.
With consumers in the eurozone and the United States laid up indefinitely, the world is turning to China to take up the slack.
Calling China the "last untapped market on Earth" with unparalleled potential, Lu Haiqing, corporate affairs senior vice president of Tesco China said, "any wise and rational enterprise will have no choice but to come to China -- no matter if they like it or not." Entering the Chinese market in 2004, the UK-based grocery and general merchandising retailer now owns more than 100 outlets.
"More than 4 million Chinese customers shop at Tesco China every week and the trend of trade-up is obvious," Lu said.
Tesco is not alone. For Franz Collection Inc., a renowned porcelain designer and producer headquartered in downtown San Francisco, the change has been proven a success.
Besides a production base supplying porcelain products tattooed with "Made in China," China is growing into Franz's major market.
"This year's sales on the Chinese mainland, which has more than 100 stores, equal the aggregated earnings from 6,000-plus stores overseas," said Liu Chongli, sales manager of a Franz branch in Jingdezhen, the dubbed ceramic capital in Jiangxi province.
Liu said the company this year announced a set of porcelain vases specially designed for Chinese consumers, which featured parts of a traditional Chinese ink painting of "Dwelling in the Fuchun Mountains."
China's emerging buying power is an inevitable result of rising incomes, said Liu Yuhui, a researcher with the Chinese Academy of Social Sciences, a government think tank.
Policymakers agreed at December's Central Economic Work Conference that the country will "increase the proportion of the middle class" in 2012. Analysts believe the move is vital to transforming the country from the world's factory into a land of shoppers.
China's consumer spending has been on the rise for years. Retail sales rose 17 percent year-on-year to 16.35 trillion yuan (US$2.6 trillion) in the first 11 months of 2011. The figure was more than four times as much as that for the whole year of 2001.
The country has vowed to restructure its national economy by weaning off its reliance on exports and boosting domestic demand. President Hu Jintao expects the country's retail sales to grow by more than 15 percent annually in the next five years and hit 32 trillion yuan by 2015.
Also by 2015, China is expected to overtake Japan as the world's largest luxury market, according to research released in March by McKinsey & Company, a global consulting firm. But the World Luxury Association forecast the replacement would happen in 2012.
The scale of the Chinese market and its seemingly resilient growth paint an optimistic picture for foreign businesses. However, cashing in on the market is not easy.
"The Chinese market is vast and unique. It's so special that merely dumping an existing management scheme, which succeeds elsewhere, is doomed to fail here," Lu said, adding that the country deserves a solution dedicated to it.
Besides the cultural and economic diversities between the West and China, there are regional variances with the country, Lu said. "It's a big challenge for us."
China has 31 provincial regions, 656 cities, 56 ethnic groups, and more than 80 spoken languages on the mainland. Meanwhile, there are enormous disparities in the areas of income, education, and lifestyle between different regions.
According to Lu, all Tesco's China outlets are now scattered in the eastern half of the country. High costs of land transports, lack of sophisticated logistics, and relatively lower income levels are the main factors that hold back the retail giant from expanding its network in China's western regions.
China Consumer Confidence Rises as Fears about Economy Fade
Chinese consumer confidence rebounded in December from November's near-record low as households became acclimatized to a slower pace of economic growth.
The headline China Consumer Sentiment Index and all seven sub-indexes rose in December 2011, the research company said, but remained below levels seen at the end of 2010 and early 2011, before the domestic economic slowdown and prior to Europe's simmering debt problems morphing into a full-blown crisis at the end of summer.
The total index measuring consumer confidence rose to 89.0 in December from 86.7 the previous month (which was just shy of September's record low of 86.5). The index measuring current confidence rose to 91.4 from 87.3 in November and 89.2 in October, while that measuring future expectations rose to 87.7 from 86.3 in November but remained below October's 88.3.
The results show that the first panic-driven stage in consumers' attitude toward the slowdown has passed and they have become more "sober-minded," INTAGE said in its accompanying report.
Comments accompanying the survey also suggested that Chinese households are adjusting to a slower pace of economic activity.
"It looks like the economy is still developing, but isn't as stable," said a middle-income respondent surnamed Gu from Shanghai.
Indexes measuring current and expected conditions for personal finances saw more pronounced increases last month than those measuring business conditions.
The China Consumer Sentiment Survey was designed in association with Dr. Richard Curtin, Research Professor and Director of the Consumer Sentiment Surveys at the Institute of Social Research, University of Michigan.
The index is based on a monthly survey of at least 1,000 Chinese households via stratified random sampling in 30 representative cities across East, Middle, and West China using the same methodology as is used by the University of Michigan.
Chinese Spend on Luxury Goods
Chinese shoppers spent more on luxury products abroad during the 2011 holiday season, despite the current world economic downturn.
And they are buying more tax-free goods than shoppers from any other country, China Daily learned from Global Blue, the largest tax-refund and shopping services provider in the world.
In the financial year ending in November, Chinese shoppers spent US$2.15 trillion on tax-free products, a 56 percent increase from the same period a year before, according to Global Blue.
"This is a dramatic increase, driven by China's growing prosperity and its appreciating currency," said Manelik Sfez, vice-president of global marketing at the Switzerland-based company.
Global Blue said Chinese shoppers took part in 21 percent of the tax-free sales made so far in the world this year. In that regard, that put them ahead of Russian shoppers, who accounted for 15 percent of such sales, and of Japanese, US, and Indonesian shoppers, who each accounted for 4 percent.
Meanwhile, the value of November retail sales in Britain increased only by 0.7 percent above what it had been in the same month a year ago. In November 2010, the comparable increase was 2.8 percent and it was 4.1 percent in November 2009, according to statistics from the British Retail Consortium.
Helen Dickinson, head of retail at the accountancy firm KPMG, said the retailing business in Britain is becoming weaker.
Even so, Chinese shoppers helped to raise the December post-tax annual profits at the London department store Harvey Nichols by 32 percent above what they had been a year before, the company said.
Its neighboring department store, Harrods, meanwhile brought in more than 1 billion GBP (US$1.6 billion) in sales in 2011. Its pre-tax profits rose by 39 percent to hit 108 million GBP.
To accommodate Chinese shoppers, Selfridges, a luxury department store in London's Oxford Circus, began accepting payments from China UnionPay cards this past year.
Britain's smaller cities are also experiencing an influx of Chinese shoppers. To take advantage of that trend, Manchester's Selfridges stores began giving their staff Mandarin lessons in October.
The work is paying off. Chinese customers are coming much more frequently to the stores - their numbers have increased by 62 percent this year - and are spending 1,000 GBP on average in a single trip. The average for other customers is 70 GBP.
Recognizing the purchasing power of the Chinese, Angela Ahrendts, CEO of the fashion brand Burberry, has come to speak of the "Traveling Luxury Consumer."
Such customers are among the most important for the company.
"When Chinese consumers travel, they spend six times more than when they stay at home," Ahrendts was quoted as saying by the Financial Times. "Saying 'I bought this in London' adds further cachet."
Sfez agreed. "It is much more romantic and powerful to buy products of a luxury brand from its country of origin," he said. "That explains why duty free shops in airports don't perform as well."
"I prefer shopping for luxurious products in European cities like London, Paris and Milan - mostly for bags, watches and shoes, which are much cheaper and come with more options than you can find with the same items in China," said Shen Jie, who lives in Wenzhou, a city in Zhejiang province.
Shen said she usually spends about 300,000 yuan (US$47,000) on luxurious items each time she goes shopping abroad.
And European retailers have good reason to think they will see more shoppers like Shen, since Chinese shoppers are going to that region in larger and larger droves. The British Tourist Authority VisitBritain predicts that in 2014, the number of Chinese tourists coming to Britain will be 117 percent higher than it was in 2008.
Even so, Global Blue said Paris remains the most popular destination for Chinese travelers. It is the site of 15 percent of the luxury purchases Chinese shoppers make abroad; following it are London, the site of 10 percent of such purchases, and Milan and Berlin, each the site of 2 percent.
Some observers say that Chinese shoppers in recent years have become increasingly attracted to products with Chinese roots.
Still, Sfez said his team's data show these brands draw only a small percentage of luxury purchases.
"Luxury comes from history and continuity," Sfez said. "So Chinese luxury labels still have a long way to go."
Luxury Hotels Target Chinese Customers
The beginning of the recovery for China's hotel market began in 2010 and in 2011 demand increased further for rooms.
Hotel executives still believe that China is a safe haven for luxury hotels, despite the occupancy rate for 2011 hovering at around 60 percent.
"We haven't felt the crisis that they are experiencing in the US and Europe," said Charlie Dang, general manager of Northern China for Starwood Hotels & Resorts Worldwide Inc, owner of nine hotel chains including the St. Regis, Sheraton, Westin, and W brands.
"The domestic economy is still very strong. Generally the second- and third-tier cities are growing rapidly and that helps our business."
The American company opened 40 hotels on the mainland in the last five years. It currently has 92 hotels in operation and another 90 in the pipeline.
The Crowne Plaza Hotel, owned by InterContinental Hotels Group Plc, in the third-tier city of Dandong in Northeast China's Liaoning province, reported an occupancy rate of 80 percent during the summer season and 60 percent during the winter.
"These are very good results for us," said the hotel's public relations manager, Ren Shixuan.
Crowne Plaza is still the only international luxury hotel in the port city. It sits in a new development area overlooking the Yalu River that marks the border between China and the Democratic People's Republic of Korea. InterContinental believed when the hotel was built in time for the Beijing Olympics, that there was scope to accommodate businessmen from the two countries. There was also potential to expand beyond first- and second-tier cities.
"Our business grew 15-20 percent last year. This year, we're expecting something like 10-15 percent growth, so we're pretty optimistic about the future," Ren said.
"Our current clientele is 60 percent tourists, here primarily for leisure. We're really surprised by this figure. It's really good for the hotel, because it means that we don't have to rely so heavily on business travelers and won't be hugely affected by any economic downturn," she said.
Hotel operators also continued to strengthen their foothold in China in 2011 despite the competitive market. InterContinental, the largest international hotel company in Greater China, has 162 hotels in operation and 143 under development.
Demand has mainly stemmed from the increasingly wealthy domestic market. China had 960,000 individuals with a personal wealth of 10 million yuan ($1.5 million) or more in 2010, up by 85,000 individuals or 9.7 percent year-on-year, according to the Hurun Report, China's version of the Forbes rich list.
Dang said his hotels do not rely so much on international business anymore, but rather more on the domestic market, which makes up 60 percent of the company's business across 22 hotels in Northern China.
"Chinese customers used to be like 15-18 percent. Now it is 60 percent Chinese, so that's where you see the power of Chinese customers growing," said Dang.
"The economic development of China makes it an attractive hotel development market as more hotel rooms are needed," said Konstanze Auernheimer, director of marketing and analysis at STR Global, a consulting and research group that has tracked hotel occupancy levels in China.
Beijing's occupancy levels for the year hit 69 percent compared to Shanghai's 56 percent, according to STR Global.
"Shanghai is a much tougher market right now because of the Expo and 11,000 extra rooms. All the hotels there are feeling a drop compared to the Expo year," Dang said.
Market prospects for existing international five-star hotels in the capital are looking up as there won't be a surge in the number of hotel rooms, according to Dang.
"I believe next year we'll experience a peak in occupancy rates. Beijing, generally being a tourism city because of the Great Wall and the Forbidden City, helps the volume as well. Plus the government is pushing very hard for more visitors. They've just opened a convention center so that will help us as well," said the Malaysian manager, who has been in his current role since the Olympics when occupancy rates hovered around 75 to 80 percent.
Beijing is where most millionaires live, according to the Hurun Report released in April. In 2010, 17.7 percent of China's luxury customers or 170,000 millionaires lived in Beijing, compared to 157,000 in Guangdong province (16.4 percent) and 132,000 in Shanghai (13.8 percent).
"The long-term prospects are good for luxury and other hotels," Auernheimer said.
The proliferation of international luxury hotels across China is also said to be part of a key marketing tool, used to develop brand recognition and loyalty among Chinese travelers for when they travel overseas. China soared toward new tourism records with more than 50 million outbound travelers in the first nine months of this year, according to the China Tourism Academy.
International hotel operators hope the strong confidence they have shown in the Chinese market will reward them in other parts of the world where they operate.
Investors with Extremely Good Taste
When Wang Hai decided to turn his garage, where he parked his BMW and Mercedes Benz, into a wine cellar a few months ago, the trader expected his "new investment and hobby" would be a topic of conversation among his friends, many of them executives with small export firms.
It was only afterwards that the 46-year-old businessman discovered that his million-yuan investment was actually nothing new in Yiwu, a small town in Zhejiang province.
"Comparing collections of fancy cars and big houses is no longer in vogue here. The new trend is wine," said Wang, whose prize possession, among hundreds of bottles, is a Chateau Lafite Rothschild 1965, typically 40,000 yuan ($6,320) to 50,000 yuan a bottle.
As the stock market is fluctuating and real estate policy tightening, the wine market has become the new playground either as investment, hobby, or both for business people from the opulent Yangtze River Delta and possibly nationally.
Wang recalled that there are approximately 50 people in their "wine buddy circle" in Yiwu. They discuss different types of wine, information about where to buy a certain wine, and meanwhile, sip their collection.
"We spend, on average, 100,000 yuan annually on wine but some collectors spend that in a month. Like last year, a friend of mine booked 61 bottles of red wine in three months, each of them priced over 10,000 yuan and produced by 61 different French vineyards," Wang told China Daily.
Although there are no statistics showing how many people actually have a wine cellar, Li Peixu, who helps people like Wang at a wine counseling company based in Hangzhou, capital of Zhejiang province, sees wine collections growing in popularity.
"Cellars, or more generally, a private wine collection, will be an increasing trend among wealthy Chinese people," Li said.
Li's company provides services such as wine selection, tasting, cellar design and decorating. Every month Li receives dozens of people like Wang from all over Zhejiang, and from neighboring provinces, who want to collect.
"We have helped one of our clients in Yiwu turn a 90-square-meter underground car park into a fully-equipped cellar with temperature and humidity controls. It cost more than a million yuan just for decoration," Li said.
Li added that most of his clients are very "rational" and "sophisticated."
"They are usually widely traveled and care about the taste and history of the wine," he said.
To meet surging demand from the domestic market, many foreign wine dealers have shifted their focus to China, widely tipped to be the next world number one market.
Research published by International Wine and Spirits Report forecasted that overall Chinese wine consumption will exceed that of Britain to be the world's fifth-largest by 2012.
And by 2016 it is estimated that the consumption market will grow to 250 million cases annually, twice that of 2010.
Christopher Cordier, a wine seller from France, has just been to Shanghai and was "surprised" by the "exciting" industry.
"Basically, the wine market is thriving in all aspects, for pleasure and for investment," said Cordier, whose products range from 60 yuan to 60,000 yuan.
Daily turnover on the Shanghai Wine Exchange, an online platform focusing on red wine in operation since July, has been about 10 million yuan, with Chateau Lafite purchases accounting for 20 to 30 percent.
Wang Jiaqi, business development director at the exchange, believed that there is still ample space for wine investment in the high-end market.
At the end of 2011, there were more than 590,000 people in China with disposable assets of at least 10 million yuan and total assets of 18 trillion yuan, according to a recent study.
If only 0.5 percent of the wealth goes to wine investment, the market will reach 90 billion yuan, far exceeding the annual sales of French Bordeaux wine, which is estimated to be around 30 to 40 billion yuan, Wang said.
And the interest is unlikely to fade, despite a dip in the price growth of Chateau Lafite from 30 to 10 percent in the past eleven months.
Some analysts believe that this is just the market adapting to a new taste.
China Becomes Audi's Biggest Market
German automobile manufacturer Audi announced that it sold a total of 313,036 vehicles in China, including Hong Kong in 2011, representing year-on-year growth of 37 percent.
Audi, a subsidiary company of Volkswagen, said the results showed that China has outstripped its home market to become the company's largest market.
More than 80 percent, or 252,000, of the cars were manufactured in joint factories in Changchun, an industrial city in northeast China, according to the company.
"The numbers have exceeded our expectations again," Peter Schwarzenbauer, Audi's marketing and sales manager said, adding that the high-grade cars have seen outstanding growth in China and the company will continue to push forward with development.
The company also said China has become the largest market for its Q7 and A8L luxury cars, with sales volumes of 19,063 and 12,425, showing year-on-year growth of 70 percent and 153 percent, respectively.
Audi announced last month it plans to build a new factory in Foshan, Guangdong province. The new factory will go into operation in 2013 and roll out 150,000-200,000 new cars for the Chinese market annually.
RECENT CHINA TRANSACTIONS
China Three Gorges Wins Auction for Portugal EDP Stake
China's Three Gorges Corp. won the bidding for the Portuguese government's 21 percent interest in EDP-Energias de Portugal SA (EDP.LB) with an offer of EUR2.69 billion, in the first of a series of sales of state-owned assets under the country's austerity program.
The deal is also the first time a mainland Chinese firm has bought a significant stake in a southern European company and may portend other such moves at a time when cash-strapped European governments from Madrid to Athens have been clamoring for Chinese funding to help them finance gaping budget deficits.
For China, the purchase is important as it gives it access to EDP's market in Brazil, a key emerging power. EDP has a strong position as a power producer there, operating a sizable fleet of hydroelectric plants and supplying more than 2 million customers with energy.
The deal also comes after years in which wealthy Chinese firms have been thwarted in attempts to buy stakes in companies that many countries consider strategic.
Portugal, which traditionally was protective of market-dominant companies like EDP, is only selling its crown jewel assets as part of a EUR78 billion bailout agreement it entered into with the European Union and the International Monetary Fund. Under the terms of the aid, Portugal has committed to cut government spending and its budget deficit.
Besides Three Gorges, which operates the controversial US$23 billion dam of the same name in central China, other bidders in the auction included Germany's E.ON AG (EOAN.XE), Brazil's Centrais Eletricas Brasileiras SA (EBR), and Companhia Energetica de Minas Gerais-CEMIG (CIG).
The deal, which comes at a premium to the EUR2.2 billion the government was expecting, according to a person familiar with the situation, will also provide Three Gorges with sizeable renewable energy assets in the U.S. In Europe, EDP produces and distributes electricity in Portugal, its largest market, and Spain.
Chief Executive Antonio Mexia has said the company wants to grow in existing markets but also expand to new areas.
The company posted a 6 percent rise in net profit to EUR824 million for the first nine months of 2011 helped by growth at its Brazilian and wind energy units, which offset a fall in domestic demand.
EDP's other shareholders include Spain's Iberdrola SA (IBDRY), which holds 6.8 percent, CajAstur with 5 percent, and Portuguese group Jose de Mello with 4.8 percent.
Alibaba Said to Consider Reducing Size of Loan for Possible Yahoo Purchase
Alibaba Group Holding Ltd (ALIBABZ) is considering reducing the size of a loan for a potential Yahoo! Inc. (YHOO) acquisition to around US$3 billion from the original target of US$4 billion in order to use its cash instead, a person familiar with the matter said.
The company is examining a range of funding combinations for various acquisition options related to Yahoo and a final decision on the size and structure of the loan has not been made, the source said. Alibaba has about US$3 billion in cash, another source said, declining to be identified because the details are private.
Alibaba and Softbank Corp. are considering acquisition options related to Yahoo, the largest U.S. Internet portal, three other people familiar with the matter said in December. Yahoo owns about 40 percent of Alibaba, the top e-commerce site in China, and 35 percent of Yahoo Japan Corp.
John Spelich, a Hong Kong-based spokesman for Alibaba, declined to comment when asked about a loan.
Credit Suisse Group AG, DBS Bank Ltd., Deutsche Bank AG, and Mizuho Corporate Bank Ltd. are arranging the loan, according to additional sources. The banks are seeking to expand the lead lender group to as many as eight because the size of the loan is too large for the four to underwrite themselves.
More lenders will be sought for the lead arranger group, with a particular focus on attracting Chinese banks, even though the size of the loan may be reduced, one of the sources said.
Shandong Heavy to Buy Ferretti in US$500 Million Deal
Chinese machinery maker Shandong Heavy Industry Group is set to buy a controlling stake in debt-laden Italian yachtmaker Ferretti in a deal worth about US$500 million.
The deal was signed in early January in Jinan, capital of China's eastern Shandong province, the group told Reuters.
"The size of the deal is close to US$500 million," said a source, who asked not be identified as he was not authorized to discuss the deal with the media.
The Chinese government has said it wants companies to acquire top global brands as a short cut to improving their reputations.
Automaker Geely bought Ford Motor Co's Volvo car unit in 2010 and Lenovo Group Ltd purchased International Business Machines Corp's personal computer business in 2004.
Ferretti, which owns the Pershing, Riva, and Ferretti Yachts brands, last year signed a non-binding memorandum of understanding with Shandong Heavy for a joint venture, with the aim of developing a partnership to design and sell motor yachts in greater China and other emerging markets.
Shandong Heavy was planning to evaluate the possibility of making a cash investment in the group, Ferretti said in July.
Shandong Heavy, which makes construction and agricultural machinery, is the ultimate parent company of Hong Kong and Shenzhen-listed diesel engine maker Weichai Power Co Ltd.
The sources declined to disclose exact terms of the deal.
The Financial Times reported in December that Royal Bank of Scotland Plc, Oaktree Capital Management LP, and Strategic Value Partners were among lenders that had agreed to sell their claims to Shandong Heavy.
The deal will see the yachtmaker's debts reduced from EUR685 million to EUR116 million, while it receives EUR180 million in additional funding, the Financial Times reported.
OVERSEAS TRANSACTIONS
Fiat Ups Chrysler Stake in Move Towards Merger
Italy's Fiat SpA (FIA.MI) has raised its stake in Chrysler Group LLC by 5 percent to 58.5 percent, meeting a final target set by the US government as the two groups move closer to creating one of the world's leading auto makers.
Fiat has managed Chrysler since a 2009 bailout deal with the US government. It has paid a total of around US$2 billion for its majority stake and agreed to a number of conditions to be met before a full merger could take place.
Sergio Marchionne, CEO of both groups, has made Fiat one of Europe's top turnaround stories and wants to elevate the company to a global player through Chrysler.
"The acquisition of a further 5 percent of Chrysler is a fundamental step in completion of the integration between our two groups," Marchionne said in a statement.
Chrysler and Fiat said they had formally committed to the US Treasury Department that they would produce the 2013 Dodge Dart sedan at a Chrysler plant in Illinois, the last performance event of three agreed with Washington in 2009.
That commitment, along with proving to the US Environmental Protection Agency that the new Dart can achieve an unadjusted combined fuel economy of 40 miles per gallon, triggered the 5 percent ownership increase. The group had said it would reach the target by the end of 2011.
The remaining 41.5 percent ownership of Chrysler remains with a healthcare trust, called VEBA, affiliated to the United Auto Workers union.
Marchionne told Reuters in December it was possible Chrysler would have an initial public stock offering in 2013 as the UAW seeks to cash out or reduce its shareholdings.
"Fiat already has control of Chrysler so doesn't need to rush, but it is clear integration is inevitable to be able to compete better," a source close to the matter said.
Fiat, burdened by EUR5.8 billion of net industrial debt at the end of September, might find it costly to buy the VEBA stake should the trust decide to sell.
Chrysler has become Fiat's chief source of strength this year, comprising two-thirds of Fiat's third-quarter profit. In December Chrysler's US sales increased by 37 percent on the month and by 26 percent year-on-year.
Marchionne has said his aim is to make the group one of the top five or six automakers in the world. The group is targeting global sales of 6 million units by 2014, a target that many analysts see as overly ambitious.
"Fiat does not have the billions of dollars needed to buy the remaining stake in Chrysler," a Milan-based car analyst said. "And I don't think this is a priority for Fiat now, given it controls two-thirds of the company."
But the analyst added VEBA might be forced to sell its stake sooner or later, putting Fiat in a position to seek a deal.
"VEBA needs to sustain cash costs for its pensioners. It cannot keep its capital immobilized for that long," he said.
In the last year, Fiat increased its share in Chrysler five times. It has achieved all three performance events agreed with the US Treasury.
Chrysler also paid back loans from the US and Canadian governments six years early and exercised options to increase ownership.
Kraft, SodaStream in Branding Deal
Israel's SodaStream International Ltd. partnered with Kraft Foods Inc. to make the US company's branded flavors available with its soda makers, a move that is expected to raise visibility for the brand and the home carbonation segment.
"This is a strategic step forward for SodaStream, as it should increase consumer awareness and credibility for both the brand and the home carbonation category," Oppenheimer analyst Joseph Altobello wrote in a note to clients.
SodaStream shares rose 11 percent to a three-month high of US$41.88, but pared some gains to trade up 5 percent at US$39.64.
Altobello also said this partnership potentially opens other Kraft beverage brands to SodaStream, including Kool-Aid and Capri Sun.
Initially, Kraft will make available brands such as women's diet beverage Crystal Light and lemonade brand Country Time. This will be the first time that Kraft Foods flavors will be available specifically for use in a carbonated beverage.
SodaStream, which sells its soda-making machines, flavors, carbon dioxide refills, and re-usable carbonation bottles around the world, launched in the United States, the world's largest market for carbonated drinks, about a decade ago.
Kraft, the largest North American packaged food maker, and SodaStream plan to launch the products during the second quarter of 2012.
Etihad Airways Becomes Biggest Single Shareholder in Airberlin
Etihad Airways, the national airline of the United Arab Emirates, has agreed to increase its stake in Airberlin, Europe's sixth largest airline, to 29.21 percent, becoming Airberlin's largest single shareholder.
The strategic move, announced today in Berlin by Etihad Airways Chief Executive Officer James Hogan and Airberlin CEO Hartmut Mehdorn, connects the airlines' extensive networks and frequent flyer programs to offer travelers 239 destinations across 77 countries.
"The strategic partnership with Etihad Airways opens up enormous opportunities for the future of our company," Mehdorn said.
"This applies especially to future market development and the realization of synergies. One of the key components of the new partnership is the launch of Airberlin services to Abu Dhabi, which will become our new gateway to Asia and Australia," said Mehdorn.
"The agreement with Etihad Airways will also dramatically improve the global connectivity of our customers in Germany, Switzerland, Austria, and throughout the GCC and Middle East," he said.
James Hogan said the deal was one of the most important in Etihad Airways' history.
"This new partnership expands our network reach, gives us access to 33 million new passengers, and provides us with a real opportunity for global growth. Through Airberlin, we gain immediate access to a broad and complementary European market, with outstanding connectivity options for customers of both airlines," said Hogan.
"Our partnership strategy has been integral to our success over the past eight years, and the returns we have seen from this strategy have confirmed its value. We are always looking for ways to grow and partnerships are a smart way to enhance our ability to compete on the world stage," he said.
"We now have a portfolio of 34 quality airline partners, but this is our first equity investment in another airline. It is a sign of our confidence in Airberlin's management and in the carrier's potential to grow with us," Hogan said.
"We expect such growth will also offer a host of additional employment opportunities, both in Europe and the United Arab Emirates," he said.
Hogan continued, "Etihad Airways and the Airberlin group carry a combined total of more than 40 million passengers a year, operate 233 aircraft, and employ 18,000 people. Together, the companies generate more than US$9 billion in revenues. We estimate each airline could achieve incremental revenues of between EUR35 million and EUR40 million just in the first year, and we believe the partnership has enormous potential to unlock a range of efficiencies."
Under the agreement, Etihad Airways will have two seats on the Board of Directors of the Air Berlin PLC.
The two companies will seek anti-trust immunity, which would allow greater coordination of route networks and of sales and marketing activities. Airberlin and Etihad Airways are committed to creating a joint procurement taskforce to look for cost efficiencies across the two companies, including areas such as fleet procurement and deployment, maintenance, repair and overhaul (MRO), and general procurement.
Etihad Airways' minority stake will consist of 27.03 percent from a new share issue by Airberlin, funded from operational cash flow, and an existing interest of 2.99 percent (pre-dilution), which will amount to a total interest of 29.21 per cent. The new shares will be issued at a price of EUR2.31 per share.
Macquarie declined to reveal terms for the sale of a 9.9 percent stake in Kemble Water, the holding company for the UK utility.
Thames Water, which provides sewerage services to 14 million and water to 8.8 million customers in London and the Thames valley, was sold for an enterprise value of 8 billion GBP (US$12.5 billion) by German utility group RWE in 2006, which included 4.8 billion GBP in cash and 3.2 billion GBP in debt.
The Macquarie-led consortium, which beat three other serious bidders in the 2006 auction including one led by the Qatar Investment Authority, said it remained committed to managing Thames Water as its majority owner.
The deal comes halfway through the second year of a five-year funding settlement for water companies in England and Wales with the industry watchdog Ofwat. It also comes just days after publication of a government White Paper which has been generally interpreted as seeking to protect the attraction of the industry as a safe haven for equity and debt investors.
Thames Water generated turnover of 1.62 billion GBP in the year to March 31, 2011, which it ended with net debts of 6.8 billion GBP.
The sale of the minority stake to the sovereign wealth fund has been made by two Macquarie-controlled funds and a third investor.
