China puts foreign duty-free investment on hold

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The country's monopoly operator will continue to dominate after China reaffirms duty-free's position as a "specialised retail business"

International travel retailers looking to enter the Chinese market will be dismayed by reports that the government did not promise to open the sector to overseas companies during its negotiations to join the World Trade Organization (WTO). The stance was confirmed this week by the government-backed China Daily newspaper.

In response to suggestions that the state-run monopoly China Duty Free Group (CDFG) should co-operate with foreign companies to learn from their business models, the paper said that the duty-free business was regarded by many WTO members as a specialised retail business and should therefore be run as a monopoly, said Zhang Hanlin, a professor at the University of International Business and Economics in Beijing.

China's 153 duty-free shops should expand and improve their management and efficiency, but they should not be eager to seek overseas partners to share their profits with them, added Zhang.

?Under WTO the duty-free business has not really been discussed,? King Power managing director Antares Cheng told DFNI. King Power is a joint-venture partner with CDFG in China Power Duty Free Group. ?They have to take time to open up the market. It must be step by step and nothing is decided yet. CDFG is very still strong in duty free.? Cheng conceded that ?under the spirit of WTO? China's duty-free market might gradually open up.

The China Daily quoted CDFG general manager Gai Zhixin as saying the group was undergoing its most wide-ranging reform since it was set up in 1984, to forge a closer relationship with the tourism industry.

The retailer recently merged with China International Travel Service, the state tourism company. But Gai admitted that as China lowers its import tariffs in line with WTO agreements, the group would risk losing some of its customers.  ?We will improve our services,? Gai pledged, promising several new duty-free shops in downtown areas to ensure ?all places frequented by foreigners are covered?.

The first of these will be in Qingdao and Xiamen, but he gave no timetable for opening. CDFG has existing downtown stores in Shanghai, Dalian and Beijing.

CDFG has defended the poor performance of its Shanghai downtown store since opening in November 2001. ?About 95% of our customers are Japanese, and SARS and bird flu had an impact on their shopping habits,? Wu Yun, an official at the store, told the China Daily. Sales fell by 50% last year to $3m.

Sales of duty-free products in China were worth $300m in 2002, according to Gai. He withheld the 2003 figures, saying the business had been heavily affected by SARS.