The State Statistical Bureau has fore-cast fashion sales will continue to grow annually at around 20 per cent until the end of the century. Fashion imports to China had grown at an average rate of 67 per cent and were worth US$1.04bn in 1996. Surveys of consumer attitudes in Shanghai showed that consumers had a high opinion of foreign brands, the majority rating them as 'good' or 'very 'good'. However, price remained the most important purchasing criteria, with most consumers expecting to pay no more than US$125 for a women's suit and US$250 for a men's suit. Young people under 24 have a high brand awareness, are quickest to follow new trends and spend the highest proportion of their incomes on clothing. The 25-34-year-old group also has high brand awareness and more purchasing power, so they spend more overall. Those over 35 do not follow trends and tend to spend more on their families. The market for children's wear. is growing rapidly.
Consumers generally are becoming more sophisticated and more interested in higher quality products. International labels and designs coming from abroad are considered status symbols, reflectingpersonal prosperity.
China has a flourishing fashion press, with eight important fashion magazines. The two largest are Fashion, with a circulation of 100,000 and Trendy, founded last year and already selling 80,000 copies. Newspapers covering fashion include China Textile, a technical journal for the industry, specialist papers such as China Fashion Weekly, probably the most established selling 300,000, Fashion Times, published in Beijing to present market innovations, and Shanghai Fashion Times. They are supported by features in consumer papers such as Shop-ping Guide and the general press such as the one page a week on fashion in Beijing Youth Daily. There are very few television programmes covering fashion news, one being Fashion Galaxy, a fashion report of 15 minutes a week on a Guangzhou broadcasting station.
Distribution outlets Several strategies are open to foreign companies wanting to enter the Chinese fashion market. Direct export to China has to overcome the obstacle of high tariffs, which would make average sales prices two to three times FOB prices. This makes processing with imported designs and fabrics in China more competitive, though initially a large proportion of the product may have to be sold outside China. For distribution, the number and range of outlets is increasing rapidly and a specialist retail network is emerging, including licensed branch shops, verticals, shops-in-shops and the big department stores. Shanghai is playing an increasingly important role as a fashion and exhibition capital.
my 20 per cent of China's trade is 1 containerised compared with a world average of almost 50 per cent ?but China is fast catching up and more container handling facilities will be required. These are two findings from a study by .Deutsche Morgan Grenfell's Hong Kong office.
Despite being the leading port in China, the report adds, Shanghai's container traffic has only limited potential for future growth. It seems destined to become a 'spoke' rather than a 'hub' port on global services. Nearby Ningbo in Zhejiang province, although much smaller, has the natural deep-water conditions to receive the largest international ships and has the potential to become the principal transhipment port in the region. Container ports in Shenzhen are developing very quickly and, while currently competing with each other, are well-placed to rival Hong Kong.
Shanghai is the biggest container port in China, handling well over three times the volume of its next rival Qingdao in Shandong province. Container traffic has recently been growing at 20 per cent a year to reach 1.97m TEU in 1996, or 55 per cent of the port's total throughput. Most of this volume is handled at special terminals
concentrated near the mouth of the Huangpu River. Currently, the port authorities are developing new berths on the Yangtze ?one at Waigaoqiao, formerly a dry bulk port, and the other a planned new terminal at Wuhaogou which will in-crease capacity by 60 per cent.
However, the port authorities expect the growth rate in container traffic to slow down in the near future. An estimated 65 per cent of dry bulk cargo is suitable for containerisation and, as Shanghai approaches that proportion, the growth rate will decline to the rate of expansion in China's economy. In addition, the report considers that the restricted depth of water in the port will prevent the largest international vessels from calling there, dashing the hopes of the State Council to develop Shanghai into a major deep-water transhipment port.
A superb natural harbour, Ningbo has been designated by the State Council as one of China's four domestic transhipment ports. The approach depth of Ningbo port is 17.5 metres at its shallowest and berths are 15 metres deep ?there-fore it is able to accommodate the largest vessels. The port has good road connections and its rail facilities are being improved. Container throughput is only one-tenth that of Shanghai, the port's current strength being in dry bulk and oil. Ningbo's Beilun terminal handles imports of coal, and even iron ore for the Baoshan steel works at Shanghai is unloaded here and sent on by smaller vessels. Baoshan is currently developing a deep-water terminal on Majishan island in the Yangtze estuary, which will take away part of that traffic.
Ningbo port is planning to expand oil and liquid natural gas traffic and, at Beilun, to expand coal traffic and more than double container handling capacity, with the intention of increasing through-put by five times to reach im TEU by 2000. The port authorities see Ningbo as lacking Shanghai's economic clout and being Iess convenient for onward transport. The report says Ningbo's plans are unambitious given its natural advantages. It argues that more aggressive marketing would bring more shippers to the port.
Shenzhen's container ports fall into two groups ?the Yantian International Container Terminal in the east of the zone and Shekou and Kaifeng Container Terminals in the west, on the Pearl River delta. Yantian is the larger, its annual through-put of 353,000 TEU in 1996 being more than double the 1995 figure. It is expanding its facilities to more than double its capacity by the end of next year and the site has space for further expansion. The majority shareholder is Hong Kong's Hutchison International Terminals, whose proprietary terminal management system, employed at Yantian, may ac-count for the impression of efficiency at the port. Yantian's charges, though the highest in Shenzhen, are still little more than half those of Hong Kong, and it is well placed to attract shippers from the SAR.
Shekou Container Terminal has been growing slower than Yantian, reaching only 90,000 TEU in 1996. However, this is likely to increase significantly as the port recently won direct calls from Cosco and P&O and a doubling of capacity to 1m TEU is planned. The advantage of low charges has been offset by the difficulties of navigation in the Ma Wan Channel approaching the terminal. Al-though the Chinese coastguard has eased restrictions and lowered pilotage charges, vessels over 250 metres long still have to be piloted in at a charge of US$2,500. However the terminal management ?in which P&O and Swire
At present, however, Shekou's principal competitor for international trade is Kaifeng Container Terminal, just each owns 25 per cent ?is confident of its price-competitiveness against Hong Kong and of its superior efficiency to other Chinese ports. Shekou is also well-placed to substitute for the proposed River Trade Terminal at Tuen Mun in Hong Kong.
Since China opened its doors to foreign investment in 1978, foreign companies have established al-most 300,000 foreign-invested enter-prises (FIEs). Many of these FIEs are now undergoing reorganisations that affect the equity interests of the original investors, writes the international law firm Freshfields.
Until recently, Chinese regulations did not clearly address some of the questions raised by these transactions ?questions such as, can a joint venture with a Chinese partner be turned into a wholly foreign owned enterprise (WFOE) or, indeed, a wholly domestic owned enterprise (WDOE)? Can security be granted over the equity interest in an FIE? -If the Chinese party cannot contribute funds, can the foreign party ever do so in its place?
Against this background of uncertainty, the Ministry of Foreign Trade and Economic Co-operation (Moftec) in May this year issued Several Regulations regarding Modifications to the Equity Interests of Investors in Foreign Invested Enterprises. The regulations' stated aim is to 'promote the healthy development of FIEs, to protect the legal rights of investors from all parties and to safeguard the social economic order'.
What is a modification?
The regulations identify the 'modifications' they cover as any change to the investors in an FIE or any change in the share of the capital contributed by investors. They also give various in-stances of what would cause such a modification. They include a transfer of equity interest between current investors, a transfer of equity by an investor to an affiliated company or a third party, a change in equity that results from adjustment of the registered capital, and a change in equity that results from an investor pledging its eq round the corner on the main channel of the Pearl River estuary. The terminal is an offshoot of Chiwan, a break bulk and container terminal half owned by Chiwan Wharf Holdings and involving no foreign operator. Chiwan and Kaifeng each handled around 50,000 TEU of container traffic in 1996 ?Kaifeng's total increasing from under 10,000 TEU in 1994. Chiwan's bulk cargo uity interest to a creditor and the beneficiary acquiring the equity interest.
The regulations also take into account equity changes that result from dissolutions, mergers or divisions or from the failure of an investor to con-tribute registered capital. All such changes would need to be approved by the original approval authority, unless the change results in the total investment exceeding the limits of the original approval authority or involves the conversion of joint venture into a WFOE in a restricted area.
The regulations take the view that an FIE can be converted into a WFOE without termination and liquidation. They further clarify that a joint venture cannot be converted into a WFOE in industries where sole foreign ownership is prohibited. These areas include the media, domestic commerce, tourism, real estate, automotive industries, and post and telecommunications, as stated in the Industrial Guide-lines Catalogue for Foreign Investment. All such conversions must obtain the approval of Moftec regardless of the amount of total investment.
The regulations expressly allow the conversion of joint ventures into WDOEs. They clearly stipulate that, while foreign investors may sell their entire interest to the Chinese partner, they cannot sell down their interest to an equity level below 25 per cent. The foreign investor cannot hold less than 25 per cent equity because this is the minimum level for the company to be considered a Sino-foreign joint venture.
If the capital demands of a joint venture increase but the Chinese partner can-not meet the demand, the regulations would allow the foreign party to inject the necessary capital, even if the Chinese party's equity interest is diluted. Such changes, however, would be prohibited in industries where foreigners are not al-lowed a dominant or controlling share. At trade is declining and the port is focusing on container business, with expansion of capacity at Kaifeng. Its charges are similar to those of Shekou, but with-out the additional pilotage. The potentially destructive competition between Kaifeng and Shekou might be replaced by co-ordination to ensure that each survives ?Hong Kong being the real rival of the Shenzhen ports.
this point, the options of the parties are to find another Chinese party to put up the capital, to secure a loan or some other means of financing or, as a last resort, dissolve the joint venture.
The relevant kind of security under the Security Law of the PRC is the pledge. The regulations state that investors may pledge their equity interest in FIEs in accordance with the Security Law. But such pledges are subject to restrictions.
For example, investors may not pledge the proportion of equity interest made up by capital contributions which have not yet been made, nor can an investor pledge its equity interest to its own enterprise. Any changes must be made with the consent of all other investors. In addition, the Chinese side will not be able to pledge its interest to a foreign party, if this would result in a violation of the limitations on foreign ownership in the particular industry.
The regulations state that, where an investor does not fulfil his capital contribution obligations under the joint venture contract or articles of association, the investor who has kept the terms of the agreement may unilaterally apply to the approval authorities to alter the equity interests of the de-faulting investor. The clean investor is still required to compensate the breaching party for any capital already paid in, but the regulations do not state how the interest is to be valued. The State Administration of Taxation has also is-sued tentative provisions relating to the tax treatment of FIEs that undergo reorganisations.
Freshfields is an international law firm. Most of its offices throughout Asia, Europe and North America include China specialists. For further de-tails, contact Matthew Cosans through its office in Hong Kong, tel. (852) 2846 3400 or Beijing, tel: (86) 10 6410 6338.