Required Report - Public distribution

**Date:** 6/18/2008

**GAIN Report Number:** CH8609

CH8609

**China, Peoples Republic of**

**Food Processing Ingredients Sector**

**Food Processing**

**2008**

**Approved by:**

![](media/image1.wmf)Joani Dong, Director

U.S. Agricultural Trade Office Guangzhou

**Prepared by:**

Evid Liu, Susan Zhang, Angie Han

**Report Highlights:**

China\'s food industry continues to grow rapidly. In 2006, some 26,000
food enterprises earning more than US\$ 625,000 annual gross industrial
sales increased 27.3 percent from the previous year to US\$ 265.3
billion. Affluent coastal regions remain food processing centers while
less developed regions have quickly developed their food processing
sectors. High prices and food safety are key concerns for both industry
and consumers. Despite substantial domestic production of many
agricultural and food ingredients, China offers ample opportunities to
the US, especially for soybeans, seafood, poultry products and meat,
dried fruit and nuts, dairy ingredients, potato products, baking
ingredients and food additives. Competition stems from both domestic
producers and foreign competitors. Understanding the market and
cultivating a reliable relationship with Chinese partners are crucial
for U.S. exporters to succeed.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Guangzhou ATO \[CH3\]

\[CH\]

# Table of Contents

[Table of Contents 2](#table-of-contents)

[Executive Summary 4](#executive-summary)

[I. Market Review 5](#i.-market-review)

[1.1 Food Industry in China 5](#food-industry-in-china)

[1.2 Sector Size and Growth 6](#sector-size-and-growth)

[1.3 Prices and Food Safety - Key Concerns for Food Industry
8](#prices-and-food-safety---key-concerns-for-food-industry)

[1.3.1 Prices 8](#prices)

[1.3.2 Food Safety 9](#food-safety)

[1.4 Kosher Certification in China 11](#kosher-certification-in-china)

[1.5 Regional Development of Food Industry
11](#regional-development-of-food-industry)

[1.5.1 South China 11](#south-china)

[1.5.2 East China 13](#east-china)

[1.5.3 North China 14](#north-china)

[1.6 Analysis of Product Categories 15](#analysis-of-product-categories)

[1.6.1 Oils and Fats 15](#oils-and-fats)

[1.6.2 Dairy Products 16](#dairy-products)

[1.6.3 Meat 18](#meat)

[1.6.4 Bakery 18](#bakery)

[1.6.5 Baby Food 19](#baby-food)

[1.6.6 Beverage 20](#beverage)

[1.6.7 Dried Fruit and Nuts 21](#dried-fruit-and-nuts)

[1.6.8 Confectionary 22](#confectionary)

[1.6.9 Seafood 23](#seafood)

[1.6.10 Ice Cream 24](#ice-cream)

[1.6.11 Quick Frozen Products 24](#quick-frozen-products)

[1.7 Market Opportunities and Challenges
26](#market-opportunities-and-challenges)

[1.8 Outlook for the Food Processing Industry in China
27](#outlook-for-the-food-processing-industry-in-china)

[II. Roadmap for Market Entry 29](#ii.-roadmap-for-market-entry)

[2.1 Entry Strategy 29](#entry-strategy)

[2.2 Distribution 29](#distribution)

[2.2.1 Distribution pattern 29](#distribution-pattern)

[2.2.2 Cold Chain 30](#cold-chain)

[2.2.3 Potential of Air Freight 31](#potential-of-air-freight)

[2.3 Company Profile 31](#company-profile)

[2.4 Sector Trends 34](#sector-trends)

[III. Market Competition 35](#iii.-market-competition)

[3.1 Domestic Competition 35](#domestic-competition)

[3.2 Competition of Imports - 2007 38](#competition-of-imports---2007)

[3.2.1 Soybeans (HS Code: 1201) 38](#soybeans-hs-code-1201)

[3.2.2 Fish and Seafood (HS Code: 03) 39](#fish-and-seafood-hs-code-03)

[3.2.3 Meat (HS Code: 02) 40](#meat-hs-code-02)

[3.2.4 Edible Fruit and Nuts (HS Code: 08)
41](#edible-fruit-and-nuts-hs-code-08)

[3.2.5 Dairy Products (HS Code: 04) 42](#dairy-products-hs-code-04)

[3.2.6 Preserved Food (HS Code: 20) 43](#preserved-food-hs-code-20)

[3.2.7 Cereal (HS Code: 10) 44](#cereal-hs-code-10)

[3.2.8 Fats and Oils (HS Code: 15) 45](#fats-and-oils-hs-code-15)

[3.2.9 Vegetables (HS Code: 07) 46](#vegetables-hs-code-07)

[3.2.10 Preparations of Flour (HS Code: 1901)
47](#preparations-of-flour-hs-code-1901)

[IV. Best Product Prospects 48](#iv.-best-product-prospects)

[V. Further Reference 48](#v.-further-reference)

[VI. Post Contact Information 49](#vi.-post-contact-information)

[Appendix 1. Distribution Channel Members
50](#appendix-1.-distribution-channel-members)

[Appendix 2. Import Documentation 51](#appendix-2.-import-documentation)

[Appendix 3. Good Prospects for Ingredients in China
52](#appendix-3.-good-prospects-for-ingredients-in-china)

# 

# Executive Summary

This annual report examines the China market for food processing
ingredients in CY 2007. It reviews the country's food industry and
sectors as well as regional development; analyzes various product
categories, opportunities and challenges for U.S. exports in this
market; and discusses the entry road map and related distribution
issues. The report also explores competition from both domestic and
imported food ingredients and recommends best product prospects.

The strong economy in China spur fast growth in the food processing
industry, especially in grain and oil processing, meat processing, and
dairy product manufacturing which had over 20 percent annual increases.
Latest available statistics show that the country in CY 2006 had 26,326
food enterprises whose annual sales exceeded US\$ 625,000, and that the
total annual sales by these companies rose 27.3 percent to US\$ 265.3
billion. Affluent coastal regions have long been the food processing
centers in the country while less developed regions, such as Fujian,
Guangxi, Henan and Inner Mongolia have quickly developed industrial food
processing sectors. Surging prices and food safety were key concerns for
both industry and consumers.

Fast urbanization, increasing disposable income and expenditure on food,
changing life style and diet shape the industry's development in this
fragmented market. Food consumption varies from region to region, making
the country a cluster of many regional markets rather than a single
market. Some sectors, including bakery, dairy products and baby food,
grow faster than average due to fast paced lifestyles, more protein in
the diet and improved quality-of-life. Large wealthy cities lead
consumption trends.

The fast growing market in China provides ample opportunities but also
challenges to U.S. ingredients suppliers. China as a large producer of
many food and agricultural products, imports a large volume of various
food as ingredients to meet the domestic demand. The US is a large
supplier for China of high quality soybeans, poultry and meat products,
seafood, fruit and nuts, dairy ingredients, grains and prepared or
processed ingredients. Best product prospects for US exporters are
soybeans, seafood, poultry products and meat, dried fruit and nuts,
dairy ingredients, potato products, baking ingredients and food
additives. Competition stems from both domestic producers and foreign
competitors. For U.S. exporters to succeed, they must understand the
market and engage in a reliable relationship with Chinese partners.

# I. Market Review

## 1.1 Food Industry in China

China's strong economy boosts the food processing industry. Latest
official statistics[^1] show that in CY 2006, total industrial output by
food enterprises above the designated size[^2] grew 24 percent from the
previous year to US\$ 265.3 billion (RMB 2,158.7 billion). Primary food
processing, food manufacturing with more value added, and beverage
manufacturing all have trended upwards in recent years （Table 1.1）.
Steady growth is foreseeable, given the growing economy and increasing
disposable income by growing middle and upper class of consumers.

About 60 percent of the industry's output comes from primary processing
with limited value added, though the share of food and beverage
manufacturing which generates higher value grows. Grain and oil
processing, meat processing and dairy product manufacturing are top
earners with over 20 percent annual increases.

  ----------------- ------------ --------------- ------------ --------------- ------------ ----------------- ------------ -------------------
  **Table 1.1 Above                                                                                                       
  Designated Size                                                                                                         
  Food Enterprises                                                                                                        
  in China\***                                                                                                            

                    **2003**                     **2004**                     **2005**                       **2006**     

                    **Number**   **\*\*Sales**   **Number**   **\*\*Sales**   **Number**   **\*\*\*Sales**   **Number**   **\*\*\*\*Sales**

  **Food            11,192       70,495.5        12,244       94,108.1        14,575       126,420.6         16,356       158,684.6
  Processors**                                                                                                            

  **Food            4,636        26,124.8        4,950        32,397.1        5,553        44,704.3          6,056        57,524.0
  Manufacturers**                                                                                                         

  **Beverage        3,194        25,508.8        3,332        29,332.7        3,519        37,259.5          3,914        49,059.4
  Manufacturers**                                                                                                         

  **Total**         **19,022**   **122,129.2**   **20,526**   **155,837.8**   **23,647**   **208,384.4**     **26,326**   **265,268.0**

  **Y/Y Growth %**  3.9          23.4            7.9          27.6            15.2         33.7              11.3         27.3

  \* The table only                                                                                                       
  includes those                                                                                                          
  enterprises that                                                                                                        
  realized annual                                                                                                         
  sales over RMB 5                                                                                                        
  million in the                                                                                                          
  reported years                                                                                                          

  \*\* in 1,000,000                                                                                                       
  US\$. 1 USD = 8.3                                                                                                       
  RMB                                                                                                                     

  \*\*\* in                                                                                                               
  1,000,000 US\$, 1                                                                                                       
  USD = 8.2 RMB                                                                                                           

  \*\*\*\*in                                                                                                              
  1,000,000 US\$, 1                                                                                                       
  USD = 8.0 RMB                                                                                                           

  *Data sources:                                                                                                          
  China Statistical                                                                                                       
  Year Books 2003                                                                                                         
  -2007*                                                                                                                  
  ----------------- ------------ --------------- ------------ --------------- ------------ ----------------- ------------ -------------------

While coastal affluent regions surrounding Guangzhou, Shanghai and
Beijing have long been the food processing centers in the country, while
less developed regions, such as Fujian, Guangxi, Henan and Inner
Mongolia, have quickly developed industrial food processing sectors in
the past few years.

The food industry in China is fragmented, and consists of mostly small
enterprises. Among the 448,000 food processors and manufacturers in the
country, only 26,000 companies exceeded annual sales over US\$ 625,000
(RMB 5 million), collectively holding over 70 percent share of the
market[^3]. This group of larger-sized companies enjoys higher levels of
productivity and profitability due to advanced management, facilities
and market share.

Due to its large population, China as the second largest economy in the
world, feeds the largest food consumer group in the world. The largest
consumption in terms of volume includes edible oils and fats, alcohol
and spirits, aquatic products, grains, non-alcohol beverage, meat
products, diary products and condiments. In addition to its substantial
domestic production, China has to import various types of food in large
volumes to meet domestic demand. Food expenditure accounts for a
significant portion of household income, about one-third an average
urban family and almost half a rural one.

China is a sizable exporter of aquatic products, vegetables, canned
food, juice, grain and cereal products, condiments and poultry products
to Japan, US, EU and South East Asian countries, mainly due to
inexpensive labor cost.

Only 30 percent of food in China is processed, compared to about 60-80
percent in western countries. While most consumers still prefer to buy
fresh foods, the market for processed foods is growing, especially in
urban areas where higher concentrations of wealth and busier lifestyles
have led many to look for more convenient alternatives.

Food quality and safety have drawn unprecedented concerns in the past
year. Enormous media exposure of substandard food products and excessive
residues, consumers' loss of confidence, as well as condemnation from
foreign countries created a crisis of confidence for "Made-in-China"
products. To save the country's reputation and reinstate consumer
confidence, the central and local governments executed a series of
"rectifying campaigns" to govern the food industry. Consequently,
consumers have gained increasing awareness of food quality and safety,
which spells opportunities for high quality food
products.![](media/image2.jpeg){width="2.7597222222222224in"
height="2.022222222222222in"}

Demands for healthy choices, convenience, well-being and growing
preference among the younger population towards western styles of food
open the door to high quality imported ingredients. Recent food
poisoning incidents have also awakened consumer concern over food
quality and safety, and many now look towards food products that are
packaged with big-name brands they feel they can trust. In many urban
areas, 40 percent of food is processed which shows promising growth.
Furthermore, China's inexpensive labor makes it a profitable center for
export-oriented production.

Globally surging food and fuel prices significantly impact the food
industry. Almost all food products, including cooking oil, rice, baked
goods and ice cream, are retailed at much higher prices than a year ago.
Record breaking fuel prices have increased the cost of transport and
manufacturing. Despite the strong Chinese currency, the price surge
prohibits imports of many commodities including soybean, wheat and whey
from the US.

## 1.2 Sector Size and Growth

The food industry in China is comprised of a large number of companies
from very small family run workshops to global corporations. Most
companies are small scale, characterizing the very fragmented nature of
the industry. In 2006, China had in total 446,000 food enterprises,
among which only 26,000 or 5.8 percent of the total food enterprises,
exceeded a designated level of annual sales of US\$ 625,000 (RMB 5
million). However, this group of larger size companies accounted for 72
percent of the market share (Table 1.2), especially in the rural and
less developed regions. Overall, the group of large size enterprises
outperforms the small size companies, due to the economies of scale,
better product quality, and advanced operation and management.

Chinese official statistics categorize industrial food production as:

-   food processing, including primary activities such as rice milling,
    flour milling, oil refining, sugar refining, slaughtering, salt
    processing, feed processing, and aquatic product processing;

-   food manufacturing, consisting of packaged food, pastries and
    confections, dairy products, canned foods, fermented products, and
    condiments;

-   and beverage manufacturing, as in production of alcoholic beverages
    (i.e., distilled spirits, beer and wine), soft drinks and tea.

+---------------------------------+-----------+-----------+-----------+
| **Table 1.2 Food Industry in    |           |           |           |
| China**                         |           |           |           |
+---------------------------------+-----------+-----------+-----------+
|                                 | **Number  | **% of    | **Market  |
|                                 | of        | total     | share     |
|                                 | ente      | ente      | (%)**     |
|                                 | rprises** | rprises** |           |
+---------------------------------+-----------+-----------+-----------+
| **Above designated size\***     | 26,000    | 5.8       | 72.0      |
+---------------------------------+-----------+-----------+-----------+
| **Under designated size of more | 69,000    | 15.4      | 18.7      |
| than 10 employees**             |           |           |           |
+---------------------------------+-----------+-----------+-----------+
| **Fewer than 10 employees**     | 353,000   | 78.8      | 9.3       |
+---------------------------------+-----------+-----------+-----------+
| **Total**                       | **        | **100.0** | **100.0** |
|                                 | 448,000** |           |           |
+---------------------------------+-----------+-----------+-----------+
| \*Designated size: annual sales |           |           |           |
| of US\$ 625,000 (RMB 5 million) |           |           |           |
|                                 |           |           |           |
| Data source: *Status Quo of     |           |           |           |
| China\'s Food Quality and       |           |           |           |
| Safety White Paper*, State      |           |           |           |
| Council of China, 2007          |           |           |           |
+---------------------------------+-----------+-----------+-----------+

All these categories have had steady growth, thanks to increasing
expenditure on food and urbanization. In 2006[^4] , the group of the
above designated sized companies in the industry recorded sales growth
of 25.5 percent in primary food processing, 28.7 percent in food
manufacturing and 31.7 percent on beverage manufacturing. Primary
processing of food, accounting for almost 60 percent of sales revenue,
is the largest contributor to the industry while food and beverage
manufacturing, which have more sophisticated operations and generate
higher value, gradually increase respective share in the industry. Such
change in the composition is mostly driven by more consumers who are
developing more sophisticated demands in terms of food quality, product
varieties, convenience, nutrition and well being.

## 1.3 Prices and Food Safety - Key Concerns for Food Industry

### 1.3.1 Prices

Price surges of many commodities have become a hot topic in the Chinese
food processing industry. Record-breaking increases on crude oil prices
have placed pressure on transportation and energy costs, and worse still
are the skyrocketing prices of commodities including soybean, corn and
wheat due to global short supply and strong demand which has beefed up
prices of many raw materials for food processing and manufacturing.
Pork, oilseeds, wheat, and dairy products saw the greatest price
increases this past year. Global surging prices have limited China's
imports of food commodities.

Price fluctuations have greatly impacted trade. Take a look at the
following:

[Wheat]{.underline}

Since 2006, globally high wheat prices resulted from greater demand plus
short supply, rising fuel and freight prices have prevented Chinese
millers from using imported wheat to make high quality flour. China
Customs' statistics show that in CY 2007, China's wheat imports (mostly
*Durum* from Canada and Australia, and, *Hard Red Winter*, *Hard Red
Spring* and *Dark Northern Spring* from the US) dropped over 85 percent
in volume terms to only 83,424 MT from the previous year. Despite
domestic flour price increases, the milling industry's profit margins
have been squeezed as wheat prices far outpaces price increases for
flour. Out of cost concerns, millers are shifting from imported wheat to
domestic Chinese wheat of which the quality has been gradually improved.
To secure the supply to domestic demand and lower increasing food
prices, the central government has withdrawn the tax rebate on Chinese
exported wheat products (regardless of origin), and instead, implemented
a 20-25 percent tax on Chinese exports of wheat and wheat flour products
effective January 2008.

[Tree Nuts]{.underline}

In 2007, dropping prices due to high production and depreciating U.S.
dollar dramatically boosted China's imports of nuts from the US,
including pistachios (mostly *Kerman*), almonds (mostly *Carmel* and
*Nonpareil*), walnuts, hazelnuts (mostly *Barcelona* and *Ennis*) and
pecans (mostly *Western Schley* and *Stuard*). Statistics from *China
Customs* showed that in CY 2007, imports of U.S. pistachios reached
8,728 metric tons, 80 percent up from the previous year. Imports of
in-shell almond rose 43 percent to 935 tons, shelled almond up 47
percent to 965 tons, in-shell walnuts up 97 percent to 1,991 tons and
in-shell hazelnuts up 1.4 times to 1,156 tons.

[Dairy Products]{.underline}

In recent years, prices for dairy products have fluctuated, and there
have been other factors that affected trading from and into China.
Despite low domestic milk production, high prices in overseas markets
drove China's dairy exports in CY 2007 to record high levels -135,000
tons (mostly milk and powdered milk) in volume terms, a 80 percent leap.
However, import volumes (mostly whey and powder milk) dramatically
dropped, 9 percent on whey imports to 168,000 tons, and 27 percent on
powdered milk to 99,000 tons. EU's dairy production quota and
elimination of subsidies on dairy exports together with the weakening
U.S. dollar have made U.S. products more price competitive in this
market. Short supply from Australia due to the drought in past years has
also cultivated increasing interest in sourcing U.S. dairy ingredients.

![](media/image3.wmf){width="4.013888888888889in"
height="4.701388888888889in"}As a result of surging commodity prices,
retail prices of food recorded significant increases. China's National
Bureau of Statistics recorded a 4.8 percent increase on Consumer Price
Index (CPI) in 2007, tripling the 1.5 percent increase in the previous
year. Food prices rose at a much faster pace, overall a 12.3 percent
increase from the previous year. Meat products (including pork, poultry
and beef), oils and fats, as well as eggs increased the most,
respectively 31.7, 26.7 and 22.9 percents up from CY 2006 (Figure 1).
Prices for pork, for example, even had a much steeper surge. Despite the
government's many control measures to ease inflation, the CPI still
recorded a 8 percent increase in the first quarter of 2008.

Due to fluctuating prices, imports might be overvalued by customs and
therefore subject to overly high import duties and Value Added Tax
(VAT), and, in turn, restrict imports through official channels. In such
case, it is crucial to present customs with solid convincing
documentation, e.g., market price information, contracts, invoices, Bill
of Lading (B/L), and payment evidence for revaluation. （*Refer to GAIN
Report CH 8025 for more information on prices in China.*）

### 1.3.2 Food Safety

Tremendous media exposure of chronic food safety problems in China in
the last few years stimulated a great deal of concern from the
government, the industry and consumers. To prevent reoccurrence, the
central and regional governments imposed substantial measures, from
legislation to regulation enforcement, to rectify the industry. The
central government also decided to strengthen and streamline
inter-agency coordination and create a more effective food safety
monitoring system. Last August, the country launched an ongoing
nationwide product safety inspection campaign to reinforce inspection
and safety enforcement in food processing, manufacturing and
distribution. In addition, the national government actively fosters
global cooperation to improve and ensure food safety.

**Food Safety Administration**

Food safety monitoring in China involves a number of governmental
agencies at both the national and local level, including the *Ministry
of Health* (MOH), the *Ministry of Agriculture* (MOA), the *General
Administration of Quality Supervision, Inspection and Quarantine*
(AQSIQ) as well as several other ministries and government agencies. No
single agency is responsible for all food safety regulations and
enforcement, and the distinctions between different responsibilities
(lawmaking, supervision, and enforcement) can be confusing. The basic
difference between organizations as they relate to imported agricultural
products is the following:

-   MOH sets standards on food and products having to do with food and
    ingredients.  For example it sets maximum residue levels MRL's for
    food additives, processing aids, contaminants, and pathogens (with
    the exception of pesticides which is done by MOA).  This year the
    former *Chinese State Food and Drug Administration* (SFDA) disbanded
    and its overall food safety coordination role was returned to MOH.

-   MOA sets standards for primary agricultural inputs and outputs.  For
    example, they regulate animal feed, products of biotechnology (such
    as seed or yeast), and agricultural chemicals (including herbicides
    and pesticides).  Critical MOA functions include the registration of
    new animal feeds and issuance of biosafety certificates for products
    containing biotech contents.  Products can be regulated by either
    MOA or MOH depending on the level of processing or its stage of
    production.  Deproteinized whey, for example, used as food is
    subject to MOH standards while its feed grade equivalent is subject
    to MOA regulation and standards.

-   AQSIQ is strictly empowered to make sure that imported products
    conform to Chinese or equivalent standards and that imports meet the
    conditions of any bilateral trade protocols, which it generally
    negotiates with input from the Chinese domestic regulatory agencies.
     Thus, CIQ inspectors are tasked with protecting the animal, plant,
    and human health and safety of China.

The State Council approved the first draft of the Food Safety Law of
P.R. China in October 2007 and the final draft is currently open for
public comment. Once effective, the new law will replace the current
Food Hygiene Law issued in 1995. The new law's basic aim is to clarify
regulatory responsibility and place rule-making squarely on a scientific
basis.  In other words, the law is an attempt to increase the use of a
risk based approach in the development of food safety standards for
domestic products and imports.  It addresses regulation, surveillance
and enforcement throughout the production and marketing chain.  In
particular, the law will focus on food processing, distribution and
sales. 

**Tightened Inspection on Imports**

The Entry and Exit Inspection and Quarantine Bureaus of China (CIQs) at
ports of entry-AQSIQ's regional subsidiaries-have redoubled effects to
check documentation of imported foods (including food ingredients), food
additives, containers and packing materials. An import permit, for
example, is required for some commodities, though not consistently.
Thus, when asked, regular importers who did not hold such a document had
shipments retained. To eliminate such inconveniences, exporters should
keep close contact with the Chinese partner (importers, import agencies
and declaration agencies) to have a clear understanding of import
requirements as well as the up-to-date *de facto* practice.

Food importers have seen increasing hold-ups of cargo and slow shipment
clearance at the ports of entry across the country due to tightening
inspection. AQSIQ publicized 168 cases for January 2007 of imported food
and cosmetics that failed to meet China's import requirement. The number
of cases in question for March of the same year rose to 358, and to 436
in May. Shipment clearance takes much longer than before. In Guangdong,
for instance, it used to take only one day for the shipment to pass
inspection and customs clearances at the port of entry. Since tightened
scrutiny, it takes four or five working days to clear cargo, a
significant lag.

**Lag in Current Standards**

Some existing Chinese standards run against the practice of food
processing in developed countries, hampering imports of certain
products. Take frozen concentrated grape juice as an example. China's
national Hygienic Standard of Concentrated Fruit and Vegetable Juice for
Food Industry (GB 17325 -- 2005) sets the minimum acceptance level for
yeast in juice of less than 20 colony forming units per milliliter
(cfu/ml). Concentrated grape juice making in many major producing
countries where the cold chain system is well-established employs a
freezing process that keeps the juice as fresh as possible. It is
difficult for concentrated grape juice made using the freezing process
to meet the limit set in the current standard, as the process does not
involve heat treatment to kill microorganisms. A similar conflict also
exists for other products, such as sulfur dioxide in golden raisins or
protein content for deproteinized whey for food usage. Such standards
are likely to amount to a trade barrier that prevents related products
from entering the China market.

## 1.4 Kosher Certification in China

The Chinese food industry is beginning to obtain kosher certification.
Key kosher certificates, including *Circle U*, *Circle K* and *Star-K*,
have limited presence in the industry, and there is almost no awareness
of kosher certificates among Chinese consumers. Food or ingredients
producers in China are certified because its major overseas clients
require it. A constraint for kosher certification in China is limited
awareness and understanding of kosher certification. Despite the large
number of food enterprises in China, only 300+ companies have the
*Circle U* kosher certification and 100+ for the *Circle K*
certification. Most certified companies produce fruit and vegetable
based products. No meat and dairy products are certified in the country
due to difficulties to audit raw input. Since kosher certification in
the US is a given with most major brand products, Chinese producers have
to follow suit. Such certification adds product value and expands the
customer base to include those that believe it further ensures a safe
and healthy product.

## 1.5 Regional Development of Food Industry

China's food processing industry is intensively located in the most
developed affluent regions along the coast, including Guangdong,
Shanghai, Jiangsu, Zhejiang, Shandong, Beijing and surrounding areas.
Some less developed provinces, such as Fujian, Guangxi, Henan, Inner
Mongolia, as well as Liaoning, have quickly developed commercial food
processing industry of large operations, taking advantage of easy access
to large volumes of locally produced raw materials and low land and
labor costs.

### 1.5.1 South China

South China, particularly Guangdong province, as the most industrial and
urbanized region in the country, houses numerous well-established food
companies. The food industry there enjoys a high reputation nationally
for its good product quality, high productivity and innovation on
technology and products.

South China processes a large volume of rice, wheat flour and other
staple, cooking oils, beverage, poultry, seafood, dairy products, baked
goods, dried and preserved fruit, nuts and confectionaries to serve both
the domestic and export market. (*See Table 1.3 for details of food
enterprises in the region.*)

  --------------- ------------------------------- --------------- ---------------------
  **Table 1.3                                                     
  Food Processing                                                 
  Industry in                                                     
  South China by                                                  
  Province                                                        
  2006**\*                                                        

                                                  **Number of     **Annual Sales**\*\*
                                                  Enterprises**   (million US\$)

  **Guangdong**   Food Processors                 761             10,521.4

                  Food Manufacturers              627             5,934.0

                  Beverage Manufacturers          203             4,491.5

                  **Total**                       **1,591**       **20,946.9**

  **Fujian**      Food Processors                 N/A             5,586.9

                  Food Manufacturers              N/A             2,533.3

                  Beverage Manufacturers          N/A             1,595.8

                  **Total**                       **N/A**         **9,715.9**

  **Hunan**       Food Processors                 589             4,311.0

                  Food Manufacturers              237             2,070.3

                  Beverage Manufacturers          152             875.5

                  **Total**                       **978**         **7,256.8**

  **Guangxi**     Food Processors                 354             5,784.5

                  Food Manufacturers              113             434.9

                  Beverage Manufacturers          96              789.9

                  **Total**                       **563**         **7,009.3**

  **Hainan**      Food Processors                 127             933.0

                  Food Manufacturers              37              348.0

                  Beverage Manufacturers          35              399.4

                  **Total**                       **199**         **1,680.3**

  **Regional                                      **3,331**       **46,609.2**
  Total** \*\*\*                                                  

  \* latest                                                       
  available data,                                                 
  including only                                                  
  those                                                           
  enterprises                                                     
  that realized                                                   
  annual sales                                                    
  over US\$                                                       
  625,000 (RMB 5                                                  
  million) in                                                     
  CY2006                                                          

  \*\* US\$ 1 =                                                   
  RMB 8.0                                                         

  \*\*\* Regional                                                 
  total of                                                        
  enterprises                                                     
  number exclude                                                  
  Fujian province                                                 
  due to                                                          
  available data                                                  

  Data sources:                                                   
  *Statistical                                                    
  Year Books                                                      
  2007* of                                                        
  reported                                                        
  provinces and                                                   
  cities                                                          
  --------------- ------------------------------- --------------- ---------------------

Geographically, food processing operations in South China heavily center
in Guangdong, especially in the Pearl River Delta area covering
Guangzhou, Shenzhen, Dongguan, Foshan, Zhongshan, Jiangmen and Zhuhai.
In addition, Shantou and Chaozhou in Guangdong, and Jinjiang in Fujian,
as well as Lipu in Guangxi are also nationally well-known processing
hubs for preserved fruit, candies, snack food, formulated milk powder,
cereals and seafood processing, serving both domestic and export market.

South China is a large consumption base for high quality food. This
region comprises two of China's four most developed cities, i.e.,
Guangzhou and Shenzhen, as well as many wealthy emerging secondary
cities including Dongguan, Foshan, Zhuhai, Zhongshan, Jiangmen and
Shantou in Guangdong province, Xiamen and Fuzhou in Fujian province, as
well as Nanning and Guilin in Guangxi province, where there is huge
demand for high quality food products by a wealthy population. Third
tier cities and rural areas in south China, especially in Guangdong and
Fujian, have a relatively higher level of development and income,
compared to those in the inland region, and residents there will
gradually become consumers for high quality food products.

Wealthy southern Chinese consumers are big fans of a wide range of good
quality food products for daily consumption as well as gifting, as food
has been an important part in the regional subculture. Many common food,
even fruit and vegetables, meat, beans and nuts are well perceived by
southern consumers of certain particular health benefits, which has been
widely used by food manufacturers in new product development and
promotion.

### 1.5.2 East China

The food processing industry is a fast growing sector in the economy of
Shanghai and the entire Yangtze River Delta Economic Zone (YRDEZ),
thanks to the region's affluence, huge population, sound industry
infrastructure, and easy access to seaports. The total value of the food
processing industry in the YRDEZ was US\$ 297 million (RMB 2.4 billion)
in 2006, the latest full year available data (*See table 1.4 for details
in respective regions*). The numerous food processors in Shanghai,
Kunshan (Jiangsu Province), Suzhou (Jiangsu Province) and Hangzhou
(Zhejiang Province) can be a good opportunities to U.S. food ingredient
exporters.

**1.4 Food Processing Industry in YRDEZ by City and Province, 2006**

+---------+----------+-------+----------+-------+----------+-------+
| *       | **Number | **    | **Number | **    | **Number | **    |
| *Cities | of Food  | Gross | of Food  | Gross | of       | Gross |
| and     | Proc     | out   | M'fac    | Out   | Beverage | Out   |
| Prov    | essors** | put** | turers** | put** | M'fac    | put** |
| inces** |          |       |          |       | turers** |       |
|         |          | (mi   |          | (mi   |          | (mi   |
|         |          | llion |          | llion |          | llion |
|         |          | US\$) |          | US\$) |          | US\$) |
+---------+----------+-------+----------+-------+----------+-------+
| **Sha   | 179      | 1,    | 273      | 2,    | 62       | 1,    |
| nghai** |          | 879.3 |          | 728.1 |          | 317.3 |
+---------+----------+-------+----------+-------+----------+-------+
| **Ji    | 983      | 8,    | 300      | 2,    | 193      | 2,    |
| angsu** |          | 830.0 |          | 419.5 |          | 926.8 |
+---------+----------+-------+----------+-------+----------+-------+
| **Zhe   | 776      | 5,    | 322      | 2,    | 276      | 2,    |
| jiang** |          | 057.3 |          | 077.9 |          | 483.8 |
+---------+----------+-------+----------+-------+----------+-------+
| **      | *        | **    | **895**  | *     | **531**  | *     |
| Total** | *1,938** | 15,76 |          | *7,22 |          | *6,72 |
|         |          | 6,6** |          | 5.5** |          | 7.8** |
+---------+----------+-------+----------+-------+----------+-------+

Data Source: *Shanghai, Jiangsu and Zhejiang Statistical Year Books
2007*

Note: "Food processors" in the Chinese yearbook refer to preliminary
processing agricultural products into food, and "food manufacturers"
refer to more in-depth processed food manufacturing.

Shanghainese spent 36 percent of their disposable income on food in
2006. A growing percentage of that amount was spent on imported products
as well as products with imported ingredients, such as dairy products,
snack foods, tree nut products and confectionary items. Consumers are
willing to pay premium prices for branded products with more variety and
higher quality, and they are more receptive to new flavors from overseas
countries. Additionally, Shanghainese spend a sizable portion of their
income dining out, increasingly at western or chain restaurants that use
imported products such as U.S. poultry, pork, seafood and potato
products. Chain pizza restaurants such as *Pizza Hut* and *Papa John's*
which use American potato products and cheeses, for example, are
increasingly popular among the younger generation.

With the fast rise in incomes, a healthy lifestyle concept is building
among the affluent urban residents in the YRDEZ, and because of that, a
new demand for convenient, healthy, low-fat and fortified food products
is expected to grow. Major events including the approaching 2010 World
Expo to be held in Shanghai will create additional growth opportunities
for HRI and retail players.

### 1.5.3 North China

North China is home to a significant portion of China's food processing
industry with more than 13,117 food processors located in the Special
Municipalities of Beijing, Tianjin, and Henan, Liaoning and Shandong
Provinces. More than 65 percent of these are classified as agricultural
product processors and the remainder as food and beverage manufacturers.
Henan, Liaoning and Shandong Provinces have the highest concentration of
processors, primarily seafood, meat, poultry, dairy and grain as well as
the production and bottling of beer. In the value-added food processing
sector, Japanese and Korean operations are dominant in Shandong and
several other Northeast China Provinces.

**Table 1.5 North China Food Processing Industry at a Glance (2006\*)**

While China's logistical and cold chain systems improve,
underdevelopment of these basic systems continue to impede the region's
food industries. Distribution channels and cold chain facilities are
somewhat less efficient in North China compared to East and South China.
For many food products requiring cold chain facilities, the cost of food
and agricultural inputs can increase as much as 2-3 times from the port
of entry to final inland destination. This is due to long transportation
distances, poor handling and inadequate refrigeration systems. However,
expanded warehouse capacity, and improving importer and local agent
networks in North China should eventually enable distributors to keep
key items in stock despite current long transoceanic lead time and other
inefficiencies.

Rapidly changing and increasingly modern, fast paced lifestyles,
especially for affluent urban residents, means consumers often prefer to
purchase value-added products in supermarkets or hypermarket formats.
And, many consumers are migrating from price to quality, meaning
value-added products are very much on the rise. Portion control,
ready-to-cook, ready-to-eat and drink, ready-to-go meals including meat,
seafood, dairy and starch based foods such as noodles, instant rice, and
pizza that require minimal preparation effort and time are increasingly
being positioned to meet changing consumer needs. Easy to prepare, high
quality, nutritious and products generally perceived as safe continue to
grow in popularity.

Consumers in the North China region often prefer food products that are
starch based. Local trade resources estimate that 1 out of every 3.5
packages of instant noodles, and 5 out of 10 of packages of ham sausages
produced in China are made in Henan Province. The largest meat and
poultry processor, Henan *Shineway Group* (*Shuanghui*), and *Sanquan*
the leading producer of frozen dumplings are both located in Henan.
Also, there are a variety of other food processors and ingredient
suppliers located in this important province known for its flour based
foods including organic and soybean flour.

Challenges facing North China food processers are the relatively large
number of obsolete manufacturing facilities and technologies employed as
well as lack of investment and lack of experienced technical management.
In the past, cold chain and logistical systems evolved to meet the
demands of mostly frozen cold storage only. However, current market
demand for chilled and increasingly environmentally controlled
capacities makes many of the facilities described above mostly out of
date. Thus, optimization of capital, technology, and technical
management are critical to development of reliable cold chain and cost
efficient capacities beyond warehousing and refrigerated trucks. With
the above said, cold chain and distribution systems continue to evolve
and improve with good investment and trade opportunities in this sector.
This is particularly true in a number of China's Emerging City Markets,
many located in North China, characterized by double-digit GDP growth
rates, emerging middle classes, and rising disposable incomes. (*See
GAIN CH7403 for more information about Emerging City Markets in China.*)

## 1.6 Analysis of Product Categories

### 1.6.1 Oils and Fats

China is a large processor of edible oils, with bulk raw materials such
as soybeans produced in northeast China, rapeseed from middle and down
stream areas of the Yangtze River, peanuts from Shandong and Henan,
sunflower seeds from Jilin, Xinjiang and Inner Mongolia, and cottonseed
from Xinjiang, Shandong and Hebei provinces. According *China's Food &
Oil Information Center*, total consumption of edible oils in 2007
reached 18.5 million metric tons, and small packaged refined edible oil
sales is growing at an annual rate of 25 percent in China.

Driven by rapid commercialization of its meat and feed industries and
strong growth in food consumption overall, China\'s soybean meal and
soybean oil consumption have been rising at double digit annual rates
since 1999. Many large oil crushing plants were built along the east
coast of China, including Dalian of Liaoning Province, Tanggu of
Tianjin, Rizhao of Shandong Province, Zhangjiagang of Jiangsu Province,
Dongguan of Guangdong Province, and Fangchenggang of Guangxi Province,
aiming to take advantage of the easy transportation combined with port
facilities and extensive network of railways and highways. There are 47
oil crushing plants, each with a daily crushing capacity of over 1,000
metric tons along China's coast, forming 80 percent of the total
crushing capacity in China, with an annual processing capacity of 60
million metric tons. Among them, *Donghai Food & Oil Co.* located at
Zhangjiagang in Jiangsu Province, is the world's largest oil crushing
plant, with a daily crushing capacity of 14,000 metric tons of soya.

China is the largest export market for U.S. soybeans with over 435
million bushels (11.8 million metric tons) exported during the most
recent marketing year, which was 40 percent of all soybean exports from
U.S. All imported soybeans are crushed into soybean meal and oil - the
meal for animal feed and the oil for cooking.

The import quota for edible oil products will be waived by the Chinese
government in 2008; with this action, the import of edible oil is
expected to grow, and palm oil will be the leading product driving the
growth. Meanwhile, influenced by domestic soybean production and pricing
on the international market, imports of GMO soybeans for oil crushing
will be difficult to predict.

> Distribution of edible oil in the China market has two major patterns:
> direct sales are more common in first-tier cities including Beijing
> and Shanghai, where the population is huge and retail outlets are well
> developed, whereas in second-tier and third-tier cities the oil
> products reach consumers via distribution channels, such as Wenzhou in
> Zhejiang Province. In large second-tier cities such as Wuhan in Hubei
> Province, where there are many hypermarkets, direct sales and
> distribution are combined to save costs and ensure efficiency.
>
> With increasing disposal incomes in urban areas, more health-conscious
> consumers tend to eat "healthier" oils such as tea oil, olive and corn
> oil. These niche markets, though very small, have enjoyed good margins
> and fast growth.

### 1.6.2 Dairy Products

![](media/image4.wmf){width="2.3673611111111112in"
height="1.7756944444444445in"}

Consumption of fluid milk remains at high levels in big cities. Milk
powder is losing significance in the dairy consumption market, with only
fortified products targeting infants and senior citizens continuing to
grow. As the per capita annual consumption of cheese is 48.5 lbs in
Europe and 32.5 lbs in the US, while in China the rate is only 0.5
ounce, it is estimated that cheese, with high added value, is the next
"growth point" in the domestic dairy market. With the Olympic Games
being held in China this year, it is widely predicated that cheese
consumption will see dramatic growth in 2008.Yogurt continues to grow at
a comparatively high rate thanks to its diversified flavors and
perceived health benefit.

![](media/image5.wmf){width="1.0597222222222222in"
height="2.109027777777778in"}

Functional milk products are on the rise with growing demand for health
and wellness products. Some of these new products include high calcium,
collagen, fiber and vitamin E enhanced milk as well as low fat, and
cereal fortified milk positioned as beauty products catering to an
emerging niche market targeted at women and children. In cooperation
with its strategic partner *Danone, Mengniu* introduced probiotic
ingredients in its mulberry and pomelo flavored milk products in 2007.

Local manufacturers lead the dairy sector in China with Inner *Mongolia
Mengniu Milk Industry (Group) Co. Ltd (Mengniu)* topping the list. The
company has a wide dairy product portfolio including ice cream and
yogurt. In 2007, *Mengniu* invested \$162million (RMB 1.2 billion) in
the new high-tech production base, the largest in the world, in Hohhot.
With 22 production lines and a daily production capacity of 2,000 tons
*Mengniu* is by far the largest. *Yili Industrial Group* owns more than
130 subsidiary companies and branches including ice-cream, and other
dairy products. The *Yili Company* is the official dairy sponsor for the
2008 Beijing Olympic Games.

Another strong domestic player is the Shijiazhuang *Sanlu Group* which
specializes in infant formula and baby milk products. In cooperation
with *Fonterra, Sanlu* developed a first-class dairy operation in
Tangshan in Hebei Province. The company imported 5,000 top quality dairy
cows from New Zealand as well as used *Fonterra*'s research and
development expertise to produce high quality raw milk to produce milk
powder and baby milk formula in China.

+-----+--------------------------------------+------------+-----------+
| *   |                                      |            |           |
| *Ta |                                      |            |           |
| ble |                                      |            |           |
| 1.6 |                                      |            |           |
| Top |                                      |            |           |
| 10  |                                      |            |           |
| Da  |                                      |            |           |
| iry |                                      |            |           |
| Com |                                      |            |           |
| pan |                                      |            |           |
| ies |                                      |            |           |
| in  |                                      |            |           |
| 200 |                                      |            |           |
| 6** |                                      |            |           |
+-----+--------------------------------------+------------+-----------+
| **  | **Company**                          | **         | **Retail  |
| Ran |                                      | Location** | Value**   |
| k** |                                      |            |           |
|     |                                      |            | (Million  |
|     |                                      |            | US\$ )    |
+-----+--------------------------------------+------------+-----------+
| 1   | **Inner Mongolia Mengniu Milk        | Inner      | 2,614     |
|     | Industry (Group) Co., Ltd**          | Mongolia   |           |
+-----+--------------------------------------+------------+-----------+
| 2   | **Inner Mongolia Yili Industrial     | Inner      | 2,298     |
|     | Group Co., Ltd**                     | Mongolia   |           |
+-----+--------------------------------------+------------+-----------+
| 3   | **Shijiazhuang Sanlu Group**         | Hebei      | 1,279     |
+-----+--------------------------------------+------------+-----------+
| 4   | **Bright Dairy & Food Co. Ltd**      | Shanghai   | 976       |
+-----+--------------------------------------+------------+-----------+
| 5   | **Danone Group**                     | Multiple   | 923       |
|     |                                      | locations  |           |
+-----+--------------------------------------+------------+-----------+
| 6   | **Nestle SA**                        | Multiple   | 342       |
|     |                                      | locations  |           |
+-----+--------------------------------------+------------+-----------+
| 7   | **Hunan Taizinai Group**             | Hunan      | 271       |
+-----+--------------------------------------+------------+-----------+
| 8   | **Sichuan New Hope Agribusiness Co., | Sichuan    | 264       |
|     | Ltd**                                |            |           |
+-----+--------------------------------------+------------+-----------+
| 9   | **Xuzhou VV Food & Beverage Co.,     | Jiangsu    | 193       |
|     | Ltd**                                |            |           |
+-----+--------------------------------------+------------+-----------+
| 10  | **Beijing San Yuan Foods Co., Ltd**  | Beijing    | 174       |
+-----+--------------------------------------+------------+-----------+

*Source: Euromonitor International 2008*

International dairy product players increasingly take a larger role in
the market. The *Danone* *Group* is ranked number five in fluid milk
beverage products with a market share by value of nearly 5 percent
followed by *Nestle* with over 2 percent. *Nestle* has also been active
in powdered milk product development with its *Nestle Hi-Fiber* and
*Hi-Calcium Milk*.

With rising raw milk prices and fierce competition among the dairy
giants, including *Yili* and *Mengniu* from Inner Mongolia, *Sanlu* from
Shijiazhuang, and *Bright Dairy* from Shanghai, breakthroughs in sales
are difficult to achieve. Generally speaking, greater market potential
for liquid milk, yogurt and powdered milk lies in second-tier cities and
rural areas. Restricted by lower income levels and yet-to-improve cold
chain distribution channels, however, real growth will be difficult to
achieve in the short term in these two market segments. Therefore 2008
will see a relatively steady overall dairy market.

Insufficient domestic milk supply, mostly used for fresh or UHT milk,
has created opportunities for imports of dairy ingredients including
whey, powder milk, lactose, cheese and butter as ingredients to make ice
cream, milk drink, infant formula, chocolates and baked products. The
US, as a globally dominant supplier of whey and other dairy ingredients
is more competitive than EU, Oceania and South America in terms of
prices and available supply to serve the China market. Long-term upward
price trends constrain exports to China, though the weakening dollar
takes off the edge. Current Chinese standards exclude imports of
deproteinized whey for food use. High end niches including de-lactose
products, functional and energy products as well as those for
performance enhancing, disease recovery are of best prospectus.

*(Please refer to GAIN 8605 for more details of the high value dairy
ingredients market in China.)*

### 1.6.3 Meat

China's meat processing industry which includes fresh, frozen, canned,
preserved and chilled meat products is highly fragmented. *Henan
Shineway,* located in Henan Province, enjoys a nearly 20 percent market
share for canned, preserved meat, and meat products as well as an 8
percent chilled processed meat market share, making it the largest meat
company in China. Other major players include *Yurun,* located in
Jiangsu Province and the *People's Food Holding Ltd*, headquartered in
Shandong Province. Competition among these three rivals is intense in
most first-tier cities, whereas regional players dominate regional
markets. Given recent meat supply shortfalls, and rising domestic meat
prices combined with an appreciating Yuan versus the U.S. dollar,
domestic meat processors seeking meat and meat product imports.
Traditional low value pork product imports are no longer able to satisfy
the domestic needs of China's expanding meat processing industry.

### 1.6.4 Bakery

The baking business is booming in wealthy regions, especially in large
cities such as Guangzhou, Shenzhen and Shanghai. Improving income levels
drive consumers to become more lifestyle focused, and the faster pace of
life is making ready-to-eat and prepared foods more accepted. The
lucrative business has attracted both foreign and domestic bakery
operators. Western style baked items, including breads, cakes, pastries
and desserts, are becoming very popular daily items.

Mooncakes, Chinese delicacies enjoyed by families in the Mid-Autumn
festival season in mid- to late September and the following National
holidays, have become the biggest revenue generators during a year for
bakeries in China. Sales for mooncakes robustly increase as families,
friends and associates seek out ever more generous gifts during this
important festive season. Record sales in CY 2006 of US\$ 1.4 billion
plus growing hunger for trendy new style mooncakes with innovative
fillings mean there's a niche market for U.S. ingredients. However, the
chief challenges are price and ingredient awareness. They need to be
combined to maximize taste and profit. (*Refer to GAIN CH7624 for more
details on the China mooncake
market*.)![](media/image6.jpeg){width="2.161111111111111in"
height="2.9125in"}

Though traditional Chinese pastries such as moon cakes still dominate,
consumers are becoming more sophisticated and demanding for greater
varieties and quality of bakery products. Premium bakery chains continue
playing a leading role in distribution, product innovation with fierce
competition. Regional bakery chains are the most influential operators
in respective territories, and there is no national chain yet.

While veteran chain stores such as *Marco Polo* in Shanghai, *Maxim's
Group* and *Queens Cake* *Shops* in Guangzhou, enjoy consumer loyalty,
thanks to their consistently high product quality, upscale newcomers
like *Bread Talk, Yamazaki* and even *Starbucks Coffee* and *Circle K
Convenient Stores* are trying to gain market share by introducing
innovative flavors, interesting product names, on-site baking, and
eye-catching store images.

China is one of the most promising potential markets for U.S. bakery
ingredient exporters. Making products with high quality ingredients is a
way that high-end bakeries use to differentiate themselves from
competitors, and thus create substantial demand for high quality
ingredients. A wide range of imported bakery ingredients, including
dried fruits, almonds, hazelnuts, raisins, butter and cheese are
frequently incorporated in bakery goods by high-end bakeries, aiming to
enhance nutrition and improve appearance with the consequence of
bringing the products higher margins. Compared to U.S. exporters, EU
counterparts more aggressively promote their ingredients and have taken
a leading position in the market.

### 1.6.5 Baby Food

Infant formula milk powder, dried baby food (rice powders etc.) and
prepared baby food (packaged foods in cans and jars) constitute the
major baby food market. The spread of retail outlets, improved cold
chain and distribution systems, and increased ownership of refrigerators
per household are contributing to the growing consumption of more
diversified baby food products. In 2007, sales of baby food reached 3
billion US\$ (RMB 23 billion), up 28 percent from the previous year[^5].
Baby foods market in China has grown 153 percent since 2002, and the
sales are expected to grow at over 20 percent annually in the next five
years.

Approximately 20 million babies are born in China every year. Statistics
show that the population of infants from newborn to 4 years old is 80
million. The family plan imposed by the Chinese government, allowing
most Chinese families to have only one child or face stiff fines,
ensures that more care and attention are lavished on those children.

With increased disposable incomes, young Chinese couples demand safer
and better quality baby foods, with less sensitivity to price. This
leads to strong growth of the overall market for baby foods. Newcomers,
both domestic and overseas companies, continually enter the market,
pushing the demand with many new and increasingly sophisticated products
for babies.

Spending per child is on the rise, as consumers are able to afford
higher quality and more expensive products. In Shanghai, for example,
the value of baby food sales reached nearly US\$181 million (RMB1.5
billion) in 2004, with spending per child at US\$ 12.55 (RMB 104.2), an
increase of 63 percent since 1998.

Increasingly, working mothers influence the baby food industry.
Statistics show that nearly 80 percent of all working women are mothers
in China, of newborn to 16 year old children. Working mothers help
maintain household incomes at higher levels, but they have less time to
prepare fresh food. All these factors create opportunities for packaged
baby foods. What's more, the institutional market for baby food products
is growing, as nurseries and childcare institutions are mushrooming, and
those with better training programs and better food and care always
attract busy working parents.

**Table 1.7** Market size of different sectors of baby foods, 2006-2007

  ------------------------ ------------------ ----------------- ------------
  **Sectors**              **2006 (million    **2007 (million   **Growth**
                           US\$)**            US\$)**           (%)

  **Infant Formula Milk    1,980.6            2,539.5           28.2
  Powder**                                                      

  **Prepared Baby Food**   28.9               36.9              27.7

  **Dried Baby Food**      268.1              328.6             22.6

  **Total**                **2,277.7**        **2,905.0**       **27.5**
  ------------------------ ------------------ ----------------- ------------

*Data Source: Euromonitor*

Infant formula milk powder represented 87.4 percent of the total market
value in China in 2007, the fastest growing product category. Although
breastfeeding has been actively promoted by the government and health
authorities, working mothers having to return to work after their
maternity leave (normally 90-120 days, even up to 170 days) in urban
areas are hence no longer able to breastfeed their babies. Thus, infant
formula milk powder becomes the best alternative. In addition, strong
advertising campaigns by the infant formula giants such as *Nestle*
advertise that the added nutrients, minerals and vitamins in their
products help babies' brain and eye development. Foreign brands such as
*Nestle, Wyeth, Similac Advance, Ausnutria, Dumex, Anmum, Meadjohnson,
Primavita, Ausmeadow,* and *Good Health* share 80-90 percent of this
market, while *Yili* from Inner Mongolia and *Wandashan* from
Heilongjiang are the biggest domestic brands.

Dried meals and canned foods for baby growing, with flavored rice
powders the most significant part of the dried meals category, and mixed
vegetables, fruit, fish and meat are developing into much more
diversified flavors. *Heinz* and *Nestle* entered the China market in
the 1980's and since then have built up high awareness among their
target consumers. The domestic brand *Beingmate* created in early
1990's, together with *Nestle* and *Heinz,* hold more than 50 percent
market share. Imported products such as *Gerber'*s baby food, dominate
the high end market and have cultivated their own loyal consumers.
Attracted by huge potential, newcomers such as *Eastwes* and *CEVO* have
entered into this market of fierce competition.

Post estimates that the baby food market will continue its fast growth,
with rising incomes and receptiveness of China's younger generation to
more sophisticated products. Thanks to the perceived status of the only
child in the family, the baby food market is much less price sensitive,
especially in affluent areas. Brand awareness, which is the guarantee of
quality and safety, is key.

### 1.6.6 Beverage

China has become the largest brewer in the world. Beer is the most
popular alcohol beverage across China, outperforming the conventional
Chinese liquor. In North China where China's top four beer brands' are
headquartered, beer production is among the most significant processing
industry. Key brewing ingredients including hops and malt are in great
demand, due to limited domestic supply, and brewers pay high prices for
imports mostly from Germany, France, Australia and the U.S. As beer
demand continues increasing, demand for brewing ingredients will also
increase.

According to *Euromonitor, China Resources Breweries Ltd. (CR
Breweries)* which owns the *Snow Beer* brand, occupies the number one
position in terms of national market share at 15.8 percent, followed by
*Tsingtao* with 13.9 percent, and *Yanjing* at 10.5 percent as well as
*Harbin Beer* with a 4.4 percent national market share. Based in
Beijing, *CR Breweries* is a joint venture between the *China Resources
Enterprise* and the *SABMiller Group* (world's second largest brewer).
*Snow Beer* is one of the 30 leading beer brands under *CR Breweries*.
US global beer giant *Anheuser-Busch,* owns a significant share of
*Tsingtao Beer* (27%) and *Harbin Beer* outright. These new investments
in beer have benefitted China's beer producers as growing affluence in
China drives expanding beer consumption. Based in Beijing, *Yanjing
Beer* remains one of the only brewers in China not teamed up with an
international partner or arrangement. Yanjing Beer occupies a whopping
50 percent market share in North China, and something on the order of
greater than 90% of the Beijing market, as well as operating the single
largest beer manufacturing facility in Asia.

Promising demand for fruit juice and juice drink are quickly emerging in
urban areas. In general customers aren't yet fully aware of 100 percent
juice which holds a small niche market due to its relatively high prices
and consumers' limited awareness. Starting from a small base,
fruit juices and juice drinks are of promising sales potential in
supermarket and hypermarket, as health-concerned consumers are shifting
their preference from carbonates to juice beverage, including pure
juice, juice drinks, nectars with pulp and fiber; NFCs (not from
concentrate). The increasing demand of juice products is creating
opportunities for both imported juice products as well as the juice
concentrate, due to the limited domestic supply. (*Please refer to GAIN
8603 for more details on the juice market in China.*)

### 1.6.7 Dried Fruit and Nuts

Chinese consumers have long been big fans of dried fruit and nuts,
especially because of health attributes. Most dried fruit and nuts are
eaten as snacks, though these as food ingredients are gradually
increasing in the bakery, confectionary and food service sectors. Though
there are no official statistics on dried fruit and nuts consumption in
China, industry sources indicate a nationwide steady increase, based on
increasing new food varieties with dried, preserved fruit and nuts as
ingredients.

![](media/image7.jpeg){width="1.9854166666666666in"
height="2.946527777777778in"}

Domestic peanuts accounts for the largest share of nut consumption,
while pistachios and almonds are the most popular imported nuts. Chinese
consumers enjoy cracking the shells so many nut snacks, especially less
expensive ones, are in-shell. Nuts of good quality at high prices are
sold in wealthy coastal areas, whereas less expensive nuts are more
popular in less developed areas.

Most dried fruit and nuts are consumed as snacks. In recent years, an
increasing niche has emerged in the fast growing bakery and
confectionary sector, which features dried fruit and nuts as ingredients
in various forms to make a wide range of products from cakes and breads
to candies and biscuits. Due to limited knowledge of U.S. dried fruit
and nuts and their applications, technical assistance and product
recipes are helpful in promoting the nuts ingredients to the high end
bakeries and confectionary makers.

Price is sensitive and critical for nuts and dried fruit consumption in
China. Products from the US are often more expensive than those from
China or other countries, which prohibits consumption of U.S. products
by both the end consumers as well as the food manufacturers. Some
manufacturers or bakeries for cost concerns substitute ingredients, for
example, almonds, in their product recipe with less expensive
ingredients such as peanuts. Educating Chinese buyers about the value
that the U.S. nuts add to final products, is a way to convince Chinese
buyers and users to use high quality U.S. ingredients instead of less
expensive ingredients of inferior quality. The import volume versus
price of almonds in 2007 clearly illustrates the price sensitiveness in
China market.

Severe IPR infringement is still a threat for U.S. dried fruit and nuts
products in China. In general, the high quality of U.S. dried fruit and
nuts are well perceived by Chinese consumers. However, end consumers
lack the knowledge to distinguish the U.S. products from those
originated from other countries. This has created substantial
opportunities for counterfeits which claim to be U.S. but indeed made of
ingredients from another country.

Counterfeits together with consumers' limited knowledge about U.S.
products can badly damage the U.S. industry in the long run. Take
pistachios as an example: For the past five years or longer, bleached
pistachios from Iran have taken over the leading share from non-bleached
but more expensive U.S. counterparts in China, simply because of price.

(*Refer to GAIN CH 7071 and 7081 for more market information on dried
fruit and nuts in China.*)

### 1.6.8 Confectionary

The confectionary sector in CY 2007 grew 7 percent in sales to US\$ 5.4
billion (RMB 41 billion) from the previous year[^6]. Sugar confectionary
accounts for most of the confectionary products with moderate growth,
and chocolate products had a much faster growth from a comparably small
base.

Sugar confectionary is moving to maturity. Pastilles, gums, jellies and
chews continue to increase despite slower growth in other categories.
Unit selling prices remains stable despite increasing cost of raw
materials. New product development is a strategy to compete in the
market. So is focus on the real fruit juice content as it adds
nutrition.

![](media/image8.jpeg){width="2.9in" height="1.948611111111111in"}

Chocolate tends to be eaten more frequently by children and females.
Chocolate in big cities such as Beijing, Shanghai and Guangzhou sell
well. Sales in second and third tier cities will witness dramatic
growth. Many not only buy chocolates for their own consumption but also
for gift giving which strongly drives demand.

Milk chocolate is still the most popular flavor among Chinese consumers.
Dark chocolate with high percentage of cocoa is mostly purchased by
sophisticated customers in China and tends to gain more market share
with those conscious about product quality and functional benefits.
Sugar free chocolate will be another favorite food product to avoid
diabetes.

China's existing standards for candy product manufacturing are not clear
and do not match international standards. There are a lot of
discrepancies about category classifications and sub-categories. The
various inspection methods applied in different cities also led to
different results. The industry calls for update and revision on the
current standards.

### 1.6.9 Seafood

China is the world's largest seafood processor, thanks to low labor cost
and economies of scale. It is also the largest farmed fish grower in the
world. Farmed fish production exceeds the wild catch. China also tops
the seafood exports ranking in the world. China is also the largest
producer and exporter in the world of tilapia and shrimp, most of which
is produced and processed in Guangdong province in South China.
Domestically produced and imported seafood is filleted, de-boned and
fried or frozen and turned into a growing varieties of value-added
products for exports to many countries, including US, Japan, EU and
Russia.

Shandong and Liaoning provinces in North China process the most seafood
in the country, followed by Guangdong and Fujian in South China, and
Zhejiang in East China. Processed seafood is mainly for export. Many
processed items such as eels, shrimps, prawns, yellow croaker, tuna,
scallops and tilapia were exported to Japan, Korea, Australia, Russia,
Canada and United States. In 2007, China imported \$2.4 billion of
fishery products from the US, 13 percent share of China's total seafood
imports, with estimates as high as 85 percent of these products used for
processing and re-export.

Seafood processing is one of North China's major food processing
industries which is mostly concentrated along the coastal cities of the
Bohai and Yellow Seas, especially in Shandong and Liaoning provinces.
Based on Post participation in past China Fisheries Expos held in
Qingdao and Dalian, a growing seafood processing industry in North China
continues to evolve with Qingdao the major destination for such
processing. However, only 4-5 years ago Dalian held the top ranking and
still ranks number two in China.

South China leads the production and processing of eel, white shrimp
(also called prawn) and tilapia. Fujian is the largest processor of eel
in China, with packaged exports valued at \$.7 billion, mostly to Japan
and a limited amount to Asian communities in the States and Canada.
Japan used to be the location for eel processing. For cost concerns, the
processing had later been moved to Taiwan before it was eventually
relocated to China. White shrimp is mostly farmed in Guangdong, Hainan
and Guangxi provinces, and tilapia mostly comes from Guangdong, Fujian,
Guangxi and Hainan.

Food safety became a hot issue for Chinese seafood industry in 2007.
Reportedly significant amounts of carcinogens and contaminants were
found in several species of farm-raised fish and shellfish in China. In
June 2007, U.S. Food and Drug Administration (FDA) issued an import
alert, though not an outright ban, on farm-raised catfish, basa, shrimp,
dace and eel from China, because of numerous cases of contamination with
drugs and unsafe food additives. According to FDA, certain Chinese
aquaculture products exported into the United States contained illegal
substances that are not permitted in seafood sold in the United States,
such as unapproved veterinary drugs. Many Chinese exporters were
concerned about future seafood exports to the U.S. market. Despite such
legitimate issues with certain Chinese seafood products, they only
accounted for a small fraction of China's seafood export.

Chinese seafood exporters are challenged by anti-dumping tariffs ranging
from zero to over 100 percent on their exports to the US. Since imposing
the tariff, Chinese shrimp exporters have lost significant business.

Coastal provinces in China have higher seafood consumption than those in
the inland. Additional supply resulted from the restricted export to US
has lowered the shrimp prices in domestic market which in turn boosted
the domestic sales. Surging pork prices also stimulates the seafood
demand.

### 1.6.10 Ice Cream

Ice cream sales in 2007 increased 10 percent to US\$ 4.6 billion. Ice
cream is becoming more of a snack or dessert rather than consumed only
in summer. Sales prices in 2007 rose because of the increasing prices of
dairy ingredients, sugar as well as oils and fats. Rich and milky types
of products are generally preferred. Consumers prefer flavor over health
and wellness. High-end ice cream may be used as a mean to feature a
variety of good quality dairy ingredients, dried fruit and nuts.

### 1.6.11 Quick Frozen Products

Thanks to the improvement of cold chain infrastructures and increased
ownership of refrigerator per household, as well as higher family
incomes and decreased time to cook among middle-class consumers in urban
areas, the quick frozen products sector in China has grown at an average
rate of over 20 percent since early 2000s. Increasing affluent
consumers, especially urban residents, purchase frozen foods for
convenience and access to a variety of products. Ninety percent of
frozen food products are consumed by families, via distribution in the
retail sector. Distribution channels to the HRI sector have not yet been
developed. Most consumers are working mothers and single white-collars
in first and second tier cities.

According to *China Institute of Food Science and Technology*, there are
3,000 quick frozen food product manufacturers in China in 2007, making
dumplings, buns, pancakes, glutinous rice dumplings and other frozen
desserts. Famous brands are *Synear, Sanquan, Longfeng, Haibawang,
Taixiang, Jiayuan,* and *Haodangjia.* Manufacturers are mainly located
in north China, especially Henan province. The top six manufacturers
held nearly 60 percent share of the market in 2007. In Henan, the top
base of quick frozen foods production, over 80 percent of the
manufacturers were phased out of market during 2000-2006, owing to
fierce competition. However, the winning 10 manufacturers occupied
around 40 percent of the China quick frozen product market in 2006.

The promising industry has seen an investment fever in recent years.
Large-scale meat processors including *Shineway, Jinluo, Yurun,
Zhongpin* have set up subsidiaries specializing in quick frozen food
products. Some dairy giants in China also joined the competition aiming
to share a piece of the ever growing "cake". Frozen dumplings produced
by Mengniu, the second largest dairy giant in China have been
distributed throughout the country.

Local firms have made considerable efforts to attract investment and
expand fast. Some successfully export their products to overseas markets
such as Japan, Korea and even the United States. Some are listed at the
stock market. In 2006, *Henan Synear*, the frozen food industry's top
performer based in Zhengzhou, Henan province was successfully listed on
the *Singapore Stock Exchange*, and in 2007, *Sanquan*, another famous
brand also based in Henan, got listed on the *Shenzhen Stock Exchange*.
The *2008 Olympics* even has an official dumpling supplier -- *Synear*.
With annual production of over 300,000 tons, *Synear* has become the
market leader, respectively capturing a 19 percent and 20 percent share
in the categories of frozen desserts and other frozen foods products.
![](media/image9.jpeg){width="2.620138888888889in"
height="1.7145833333333333in"}

Encouraged by the promising prospect of the market, international food
firms including *Katokichi* from Japan, and *General Mills* from the US
came to China to set up their joint ventures or wholly-owned companies.
In 2006, *General Mills* invested US\$ 13 million in Shanghai to produce
frozen dumplings and wonton, targeting the upper market. *Wanchai
Ferry*, the famous brand owned by *General Mills*, has dominated the
high-end market and racked up sales of US\$ 18 million in 2006,
accounting for 33 percent of the market in Shanghai and over 50 percent
in Guangzhou.

While bringing challenges, foreign manufacturers have expanded the
frozen food product range by adding new varieties such as frozen pizzas
and fries to the traditional best sellers of dumplings, sticky rice
cakes, buns and frozen beef/pork/fish/shrimp balls. Though only taking a
small share in the market, these new products are gaining popularity
among young Chinese consumers.

The industry also faces challenges. Key issues include distribution
problems arising from less efficient logistics system, underdeveloped
cold chain infrastructure, fragmented market segments, food safety
concerns generated from food poisoning scandals, and rising cost of both
raw materials (edible oil, flour, pork) and operations (listing charges
at retail outlet). In good news for consumers but adding cost for
struggling manufacturers that intend to survive at the low end of the
market, the Chinese government has required since 2007 that all frozen
food products must be packaged, which has driven all unpackaged frozen
dumplings from retailers.

Consolidation is taking place in the industry. While small companies are
forced to shut down, bigger competitors including *Synear*, *Sanquan*
and *Wanchai Ferry* are rapidly growing. With the continuing
urbanization and increasing affluence of Chinese consumers, Post
believes that there is immense room for growth in the coming years for
the emerging quick frozen food sector in China.

## 1.7 Market Opportunities and Challenges

  -----------------------------------------------------------------------
  **Opportunities**                   **Challenges**
  ----------------------------------- -----------------------------------
  China is the world's largest food   Fragmented markets in a
  market of large number of middle    geographically large nation with
  class with increasing disposable    underdeveloped logistics and
  incomes. It is also a large         infrastructure as well as cold
  processor of many food categories   chain system. Most live in less
  to supply both domestic and export  developed rural areas.
  markets. China's economy is large   
  enough to survive setbacks that     
  hurt others.                        

  Fast growing food industry,         Underdeveloped cold chain and lack
  together with the retail and HRI    of expertise in food storage and
  sectors, create great potential for distribution hamper distribution
  food ingredients.                   and storage of temperature
                                      sensitive and perishable products.

  Upscale food makers eagerly look    Increasing competition among
  for high quality ingredients that   ingredients from various origin
  add value to their products.        

  Food is an essential part of        Consumer preference varies widely
  Chinese culture and social life.    from region to region. In general
                                      awareness of many U.S. food
                                      ingredients and its application is
                                      low.

  A large number of emerging city     Food processing, retail and HRI
  markets out of primary first tier   sector as well as distribution
  cities offer tremendous             channels in less developed area lag
  opportunities for further growth.   far behind those in the affluent
                                      coastal region, which hamper
                                      further penetration.

  Rapidly weakening dollar makes U.S. Increasing commodity prices and
  products more competitive in this   logistics costs offset depreciation
  price sensitive market.             of the U.S. dollar.

  WTO entry leads to lower tariffs    Increased access for imports has
  and import barriers, market and     resulted in greater competition
  legal reform, and increased access  from other exporting countries. TBT
  for distributors.                   and SPS issues impact trade.

  Cost advantage makes China a good   Workers need substantial training.
  base for value-added processing.    Operation cost significantly
                                      increases due to the increasing
                                      cost on labor, fuel, transportation
                                      and raw materials.

  Fast development of ports in        Logistics and distribution channel
  various parts of China provides     in newly developed area still lag.
  more entries for products entering  
  China                               

  Increasing concerns about food      Tightening inspection and
  safety and health creates more      conflicting standards forms
  opportunities for high quality      barriers for imports.
  ingredients                         

  Many U.S. products and brands, such Infringement of intellectual
  as California pistachios,           property rights remains a serious
  *Budweiser, Coca- Cola, M&Ms,       concern in China.
  Snickers, Campbell's, Heinz,        
  Wrigley's, and Pringles* have good  
  reputation in China.                

  Leading food makers are more likely Competitors targeting a lower end
  to use imported ingredients to      segment may use less expensive
  develop new products.               ingredients as substitute

  Upcoming major international events Promotional expenses could be
  including 2008 Olympic Games in     expensive during the event. Also
  Beijing, 2010 World Expo in         the influence of the event will
  Shanghai and 2010 Asia Games in     fade once finished.
  Guangzhou provide ample             
  opportunities to promote food       
  products.                           

  Chinese consumers spend more than   Chinese consumers are
  one- third of their disposable      price-sensitive: imported products
  income on food and beverages.       have difficulty competing with
  Higher living standards, health     domestic substitutes on price.
  education drive consumers to demand 
  better quality, more variety in new 
  diets.                              

  Urbanization and changes in living  Basic agricultural production is
  styles favor consumption of more    not well integrated with commercial
  processed food.                     food processing sector.

  High-income earners favor products  Consumers have limited awareness
  that can improve the quality of     and knowledge of new products.
  life, and willing to pay premier    Limited availability of high-end
  price                               products makes it less accessible.

  Imported goods are generally        Imports are regarded as expensive.
  regarded as high in quality.        Price-sensitive consumers are less
                                      willing to buy imported products
                                      without knowing the value.
  -----------------------------------------------------------------------

## 1.8 Outlook for the Food Processing Industry in China

Despite setbacks from food safety scandals and surging prices, Post sees
healthy development in China's food processing sector. Steady economic
growth, growing number of consumers with increasing disposable income,
strong demand food of good quality, nutrition and diversity from, as
well as change of life style and food consumption patterns jointly pull
the growth of the food industry in China.

With a number of food product scares related to China over the past
several years, consumers continue to seek food and beverage products
perceived as safe and of high quality. Often imports or products
containing imported food products or ingredients are perceived by
consumers as higher or superior quality to local ones.

The 2008 Olympic Games in Beijing represents a significant opportunity
for the food service and food processing industries given strict food
safety standards being implemented, and more importantly enforced. This
development will no doubt have both short and long term ramifications.
Domestic processors are in a strong position with other county suppliers
for a variety of products including frozen French fries, dairy, meat and
seafood products as well as food ingredients.

The upcoming Beijing *Olympic Games* has generated tremendous
expectation from the food industry. The event, long before its
commencement, has become an exciting theme for many large domestic and
foreign food companies who aim to aggressively further increase their
market share and to extend the product lines by grasping the nationwide
passion on this unprecedented event in the country. Many food
advertisements emphasize the linkage between the products and the Games,
sports and athletes.

In addition, the event provides a great opportunity with challenges for
Chinese food industry to move forward in many aspects such as quality
control, logistics and cold chain operation, food safety and hygiene and
product versatility which will have longer term impact even after the
event.

Despite fading enthusiasm after the event, the *Olympic Games* greatly
influence the food industry in China. Other upcoming international
events including the *2010 World Expo* in Shanghai as well as the *2010
Asia Game* in Guangzhou will similarly further push the food processing
industry to a higher level in the similar way.

Since the Year 2000, China's food processing industry has grown at
double digits annually. The country's *11th Five Year Plan* covering the
period, 2006-2011, has encouraged and set the stage for food processing
industry's development. According to the *Plan*, the food processing
industry will focus on:

-   food safety as a top priority;

-   meeting the growing demand for healthy and nutritionally sound food
    and beverage products;

-   meat processing and cold chain logistics and facilities
    improvements;

-   convenience and variety of food will increase and expand; and

-   advanced technologies in the food processing industry will be
    encouraged.

The plan defines these key sectors:

-   Grain processing

-   Edible oil processing

-   Fruit and vegetable processing

-   Meat processing

-   Fishery and seafood processing

-   Dairy processing

-   Beverage production

# II. Roadmap for Market Entry

## 2.1 Entry Strategy

> Market knowledge and relationship with local partners are crucial to
> succeed in the diverse and fragmented China market. New entrants must
> conduct comprehensive market research to thoroughly understand the
> market and potential for their products, based on which entry
> strategies are formulated. Visiting in person is important to develop
> good business relationship with Chinese partners and clients.
>
> Despite the huge potential in China, lack of understanding of the
> market has resulted in failure by many foreign companies. U.S.
> exporters should consult the Agricultural Trade Offices (ATOs) in
> Guangzhou, Shanghai, Beijing, Chengdu and the soon to open ATO in
> Shenyang for a better understanding of the respective regional markets
> in China. (*Refer to Section VII at the end of this report for ATO
> contact information.*)
>
> Many Chinese traders and ingredients users don't know about U.S.
> ingredients and application. Exporters should educate potential
> clients with product knowledge and closely work with clients to
> promote ingredients and develop recipes of final products.
>
> Exporters often find it advantageous to work with Chinese distributors
> who have well established distribution channels, rather than spending
> tremendous resources to establish their own channels. To work with
> such distributors, exporters can quickly enter the market with limited
> financial and personnel resources via the distributor's established
> channel. Reputed distributors with their in-house technician team,
> constantly providing end users with value-added technical assistance
> will greatly help the sales of products in long term.

## 2.2 Distribution 

### 2.2.1 Distribution pattern

> Coastal affluent regions in China, including Guangdong, Shanghai,
> Jiangsu, Zhejiang, Shandong and Beijing, accommodate most of the food
> enterprises in the country. These regions are also the key markets for
> processed food consumption, due to their well-developed economy, large
> population and high disposable income.
>
> Some less developed provinces, such as Fujian and Guangxi in south
> China, Henan, Inner Mongolia and Liaoning in northern China, have
> quickly developed food processing sectors and established distribution
> network across the country.
>
> The development of transportation and distribution channel widely
> varies from region to region. Infrastructure and transportation system
> are well developed in coastal area of southern, eastern and part of
> the northern China, but lag far behind in the inland region in
> central, western, and most of the northern part of the country. The
> catastrophic earthquake in May 2008 badly damaged the infrastructure
> in Sichuan province which serves as the transportation hub for the
> southwestern China.
>
> Most imported food ingredients enter into China via main seaports
> along the coast, namely Guangzhou, Shenzhen, Xiamen in southern China,
> Shanghai in eastern China, Qingdao, Dalian and Tianjin in northern
> China. For years, ports in southern China have served as the main
> entry for imports of many food products, especially poultry, fruit and
> nuts, cereals, soybeans and dairy products. South China also serves as
> a distribution hub for imports of many food ingredients to the reset
> of the country (*Refer to GAIN CH7609 Bustling Ports in South China
> for more details*). As a result of the rapid development of port
> facilities in Shanghai, Qingdao, Dalian and Tianjin, significant
> increases of imports via these ports have been recorded.
>
> Distribution networks of imported products typically consist of
> traders/importers, logistics providers, customer clearance agent,
> distributors and wholesalers. The chart below (Figure 2) illustrates
> the flow of products across the distribution channel, and appendix 1
> and 2 elicit the parties involved in the distribution as well as the
> required documentation.

### 2.2.2 Cold Chain

> The underdeveloped cold chain in China cripples distribution of food
> products that need temperature control. In developed countries such as
> the United States, Japan and European countries, over 80 percent of
> perishable food products such as meat, fruits, vegetable and dairy
> products are transported in refrigeration, but only 15 percent in
> China with most concentrating in primary large cities. Lack of
> technical know-how, less efficient equipments and well-trained staff
> working along the cold chain have led to high spoilage of food
> products. Food industry in the country has initiated efforts to
> encourage cold chain development and improvement. Despite relatively
> well-developed cold chain system in first tier cities, it will take
> another 5-10 years to establish such systems in secondary and third
> tier cities where the large population of emerging middle class will
> generate substantial demand for high quality food.

### 2.2.3 Potential of Air Freight

> Many have thought about taking advantage of the empty cargo space of
> back-haul airplanes to deliver U.S. food and agricultural products to
> China. Though air cargo bound for China is growing, food and
> agricultural products only make up a fraction. The potential of air
> freighted food products is determined by demand in the market which
> currently lies on the high-end niche.
>
> Air cargo industry believes that in the next 15 years, mainland China
> will have the fastest growth of airborne cargo in the world at an
> average annual growth rate of over 10 percent, compared to 6 percent
> for the world. In the next couple of years, high value products
> including electronics, medicine and pharmaceutical materials, luxury
> fashions and jewelry will comprise the bulk of the cargo while food
> and agricultural products will only account for a limited share. The
> expensive air freight limits the amount of food and agricultural
> products that is air-shipped. High value bioactive food ingredients
> and perishable fruit may be potential sources of airborne food cargo
> from the US.

## 2.3 Company Profile

Again, the food processing industry in China is fragmented. Leading
companies hold a relatively small share in the market, and the rest is
divided by numerous small companies. Table 2.1 illustrates that top 20
packaged food manufacturers together hold only 27.9 percent of the
retail market share. Top players in the market gradually increase their
share, partially due to economies of scale and better performance by top
companies.

Table 2.2 lists the top two companies in respective sectors. Although
the top two companies in each sector may account for over 50 percent of
the market, there are usually many other enterprises in the sector that
hold part share, which together account for a significant percentage of
the market. As the industry is further broken down into smaller
sub-sectors, clear leaders prevail in some cases, but not all.

###### 

###### Table 2.1 Package Food Top 20 Players by Market Share (2002-2006\*)

  ------------------------------------------ ---------- ---------- ---------- ---------- ----------
  Retail Value RSP - %                       **2002**   **2003**   **2004**   **2005**   **2006**

  Inner Mongolia Mengniu Milk Industry       0.6        1.3        2.1        2.9        3.9
  (Group) Co., Ltd.                                                                      

  Inner Mongolia Yili Industrial Group Co.,  1.4        2.0        2.5        3.0        3.5
  Ltd.                                                                                   

  Kuok Oils & Grains Pte. Ltd.               1.2        1.8        2.0        2.2        2.5

  Ting Hsin International Group              2.3        2.5        2.5        2.5        2.4

  Shineway Group                             1.5        1.4        1.5        1.8        2

  Shijiazhuang Sanlu Group                   1.1        1.3        1.5        1.7        1.7

  Danone, Groupe                             1.5        1.6        1.6        1.6        1.6

  Hebei Hua Long Food Co., Ltd.              0.7        0.9        1.0        1.1        1.3

  Nestlé SA                                  1.3        1.3        1.4        1.2        1.2

  Bright Dairy & Food Co., Ltd.              \-         1.3        1.3        1.2        1.2

  Uni-President Enterprises Corp             1.1        1.1        1.0        1.0        1.0

  Want Want Group                            0.8        0.8        0.8        0.8        0.9

  Wrigley Jr Co, William                     0.4        0.6        0.8        0.8        0.8

  China National Cereals, Oils & Foodstuffs  0.4        0.6        0.7        0.8        0.7
  Imp & Exp Corp (COFCO)                                                                 

  People\'s Food Holding Ltd.                0.6        0.6        0.6        0.6        0.6

  Shandong Luhua Group Co., Ltd.             \-         0.5        0.4        0.5        0.6

  Shanghai Liangyou Group Co., Ltd.          0.1        0.3        0.4        0.4        0.5

  Baixiang Food Group                        0.5        0.5        0.5        0.5        0.5

  Guangdong Strong (Group) Co., Ltd.         0.4        0.4        0.5        0.5        0.5

  Foshan Haitian Flavouring & Food Ltd.      0.3        0.4        0.5        0.5        0.5

  **Total**                                  **16.2**   **21.2**   **23.6**   **25.6**   **27.9**
  ------------------------------------------ ---------- ---------- ---------- ---------- ----------

*\* Latest available full year data*

*Source: Euromonitor International*

**Table 2.2 Processed Food Retail Sub-Sector Market Share** (%)

  ---------------------------------------- ---------- ---------- ---------- ---------- ------------
                                           **2002**   **2003**   **2004**   **2005**   **2006\***

  **Baby food**                                                                         

  Royal Numico NV                          0.7        0.7        0.6        0.3        12.0

  Bristol-Myers Squibb Co.                 11.1       11.2       11.4       12.1       11.4

  **Bakery products**                                                                   

  Kraft Foods Inc.                         2.4        2.5        2.5        2.6        2.6

  Artal Group, Belgium                     2.0        2.0        2.1        2.2        2.3

  **Canned/preserved food**                                                             

  Shineway Group                           10.7       11.4       12.7       15.2       16.1

  People\'s Food Holding Ltd.              4.9        4.4        4.9        5.4        5.7

  **Chilled processed food**                                                            

  Shineway Group                           2.7        2.8        3.3        5.6        7.3

  China Yurun Food Industry Group Co.,     0.8        0.9        1.9        2.3        3.2
  Ltd.                                                                                 

  **Confectionery**                                                                     

  Wrigley Jr Co., William                  4.4        6.6        8.6        9.5        9.7

  Perfetti Van Melle Group                 3.4        3.5        3.6        3.8        4.2

  **Dairy products**                                                                    

  Inner Mongolia Mengniu Milk Industry     3.7        7.3        10.7       13.2       16.8
  (Group) Co., Ltd.                                                                    

  Inner Mongolia Yili Industrial Group     7.8        10.4       12.4       13.7       14.8
  Co., Ltd.                                                                            

  **Dried processed food**                                                              

  Ting Hsin International Group            19.6       21.1       21.0       21.0       20.5

  Hebei Hua Long Food Co., Ltd.            7.6        8.8        10.5       11.6       13.1

  **Noodles**                                                                           

  Ting Hsin International Group            23.0       24.9       24.9       24.8       24.2

  Hebei Hua Long Food Co., Ltd.            8.7        10.0       12.1       13.3       15.1

  **Oils and fats**                                                                     

  Kuok Oils & Grains Pte. Ltd.             30.9       38.5       38.7       40.2       40.2

  China National Cereals, Oils &           8.3        10.3       10.8       12.3       10.0
  Foodstuffs Imp. & Exp. Corporation                                                   
  (COFCO)                                                                              

  **Pasta**                                                                             

  Dongguan Humen Ri Long Food Factory      15.0       15.3       14.3       14.0       14.0

  Zhuhai Yat Hing Food Ltd.                10.5       10.7       9.4        9.2        9.2

  **Ready meals**                                                                       

  Danone, Groupe                           18.9       18.5       17.6       16.7       16.3

  Xiamen Yinlu Food Co., Ltd.              16.4       16.6       16.2       15.6       16.0

  **Sauces, dressings and condiments**                                                  

  Foshan Haitian Flavouring & Food Ltd.    4.2        5.2        7.1        7.7        8.0

  Lee Kum Kee Co., Ltd.                    2.8        3.2        3.6        4.0        5.1

  **Sweet and savoury snacks**                                                          

  Want Want Group                          6.7        7.5        7.1        7.9        8.4

  Guangdong Strong (Group) Co., Ltd.       5.5        5.7        6.1        6.8        6.8

  **Soup**                                                                              

  Unilever Group                           33.0       33.2       34.0       33.5       33.3

  McCormick & Co., Inc.                    12.0       12.0       12.4       12.6       12.8

  **Spreads**                                                                           

  Wang\'s Bee Garden Co., Ltd.             6.9        8.2        11.5       15.1       15.6

  QP Corp.                                 4.9        4.8        4.9        5.1        5.3
  ---------------------------------------- ---------- ---------- ---------- ---------- ------------

\* Latest full year data available

*Source: Euromonitor Market Database*

## 2.4 Sector Trends

Foreign investments continue to grow in the food industry, especially in
food manufacturing and beverage manufacturing which require more
sophisticated operation and technical know-how. In CY 2006, foreign
funded food business in China recorded annual sales of US\$ 85.9
billion, a 28 percent increase from the previous year (Table 2.5).
Compared to the domestic enterprises, foreign funded companies in
general perform better due to the advantages in technology, management,
quality of input and final product as well as the sales and marketing.
Foreign funded enterprises are the market leaders in many sectors,
including baby food, bakery products, confectionary, dried processed
food, oils and fats, noodle and pasta. Most of the large international
food manufacturers including *Danone, Cadbury, Cargill, Hormell, Purdue,
Nestle, Kraft, Pilsbury, Yum!, Campbell's, Kellogs, Smithfield,
McCormick,* and *Heinz*, have well established their operation in China
to have a cut of this huge market. Table 2.5 shows the growth of foreign
funded food enterprises in China.

  ------------------------ -------------- ----------- ---------- -------------- ---------------- ----------
  **Table 2.5 Foreign                                                                            
  Funded Food Industry (                                                                         
  as of 2006\*)**                                                                                

                           **Enterprise                          **Sales                         
                           Number**                              Revenue**                       
                                                                 (billion                        
                                                                 US\$**)**                       

                           **2005**       **2006**    **Y/Y      **2005\*\***   **2006\*\*\***   **Y/Y
                                                      increase                                   increase
                                                      %**                                        %**

  **Food Processing**      2,130          2,321       9.0        37.5           45.1             20.3

  **Manufacture of Foods** 1,259          1,385       10.0       16.8           22.7             35.0

  **Manufacture of         569            649         14.1       12.9           18.2             41.1
  Beverages**                                                                                    

  **Total**                **3,958**      **4,355**   **10.0**   **67.1**       **85.9**         **28.0**

  \* Latest full year data                                                                       
  available                                                                                      

  \*\*US\$ 1=RMB 8.2                                                                             

  \*\*\* US\$ 1 = RMB 8.0                                                                        

  Source: *China                                                                                 
  Statistical Yearbook                                                                           
  2006*                                                                                          
  ------------------------ -------------- ----------- ---------- -------------- ---------------- ----------

# III. Market Competition

## 3.1 Domestic Competition

China itself is a large producer of a wide range of food commodities,
from grain, oilseeds, fruit to meat, poultry and aquatic products. (*See
Table 3.1 for the output of main food commodities in China.*) CY 2007
recorded moderate growth in the output of most agricultural products in
China, with exception of pork and rapeseeds.

The need to import food products still exists, given the gap between the
comparatively short domestic production, great domestic demand and
surging food prices resulting from rising incomes and living standards,
population growth, shrinking arable land, recent catastrophic disasters
and trade liberalization.

To meet domestic demand, China imports in large volume a wide range of
food products, including grain and cereal, oilseeds, fruit and nuts,
meat, poultry products, seafood, and dairy products. Surging domestic
food and feed prices, reduced production of pork, and constant demand of
good quality food by the growing middle and upper class, altogether
reinforce the need for imports of certain food products. To secure the
supply for domestic demand, the Chinese government has recently
initiated a series of actions to restrict exports and encourage imports.

**[Grain]{.underline}**

Overall consumption of grains is slightly declining as consumers shift
from carbohydrates to more protein in their diet. However, demand for
high quality grains, including wheat and rice, is moderately increasing,
as wealthy consumers favor diverse high quality food products such as
baked goods, biscuits and noodles. China, as the largest brewer in the
world, has to import substantial barley to back inadequate domestic
production. The country retains a long term self-sufficiency strategy
for food grain, e.g., wheat, rice and corn. To ease inflationary
pressures and secure the domestic supply, the government has tightened
its control on grain export. Globally surging prices of wheat and rice
make the imported commodities less competitive than those domestic ones.

**[Oilseeds]{.underline}**

Total oilseeds production in China grows slightly due to increased
plantings in response to the record high oilseed prices and government
supported programs. Use of Chinese oilseeds, particularly soybean, for
food has been increasing because of growing demand for cooking oil, soy
protein and soy food products. Opportunities arise for imports of edible
oil or oil-bearing crops to satisfy rising demand. Imports in large
volume of soybeans and edible oil in recent years reflect such demand.

**[Poultry]{.underline}**

Poultry meat production in China continued to grow 12 percent to an
estimated 11.5 million tons in CY2007. High pork prices have boosted
sales of poultry meat as consumers substitute expensive pork with
poultry. Increasing expatriate population and the popular western
cuisine have also dramatically beefed up the import of turkey, a
non-traditional poultry product into China.

**[Meat]{.underline}**

China's meat production in CY 2007 and 2008 has been badly hit by higher
input prices, epidemic swine disease, heavy snowstorm in the past
winter, and the recent catastrophic earthquakes in Sichuan provinces.
Despite the slight growth of beef production, FAS Beijing estimated that
China will increase its beef imports by four fold to 30,000 MT in 2008
to meet the strong domestic demand[^7].

Pork production in China is slowly recovering from the deep decline in
2007 caused by blue ear disease. The recent magnitude earthquake in
Sichuan where reportedly 4-5 million heads of swine were immediately
affected by the earthquake will place tension on the country's
rebounding production and in turn on pork prices in the coming months.
Imports of pork remain strong, as a way to supply the strong domestic
market and ease the pressure of surging prices that challenges the
Chinese government.

**[Aquatic products]{.underline}**

Both the growing domestic demand and strong export markets drive the
growth of China's aquatic production at a slow rate. About two-thirds of
China's aquatic production come from both seawater and freshwater farms,
and the remainder comes from aquatic catch. Domestic products hold
increasing market share due to improved quality, available supply and
competitive prices. China is also a large seafood processor, with most
processed products for re-export. It is the largest recipient of the
U.S. seafood export while the US is the second largest recipient of the
processed seafood products from China. Potential for aquatic imports for
domestic consumption lays in the high-end niche as well as the mass
market which requires consistent supply at reasonable prices.

**[Dairy Products]{.underline}**

To improve public nutrition, Chinese government furthers aggressive
encouragement of milk consumption and domestic milk production. Domestic
milk production grows exponentially along with the rising total milk
consumption. However, per capita milk consumption is low, due to the
country's large population and low starting point. The latest food
pagoda launched in January 2008 (equivalent to the U.S. food pyramid)
triples the recommendation of dairy products for individuals over 6
years old to a daily intake of 0.66 lbs (By comparison, the U.S. food
pyramid recommends 1-1.5 lbs a day.). Despite continuously growing milk
production in China, in the next 5-10 years, China will still need
imports of dairy products, e.g., powdered milk, cheese and whey, to meet
its growing demand.

  ----------------- ---------- ---------- ---------- ---------- ------------ -------------
  **Table 3.1                                                                
  Domestic                                                                   
  Agricultural                                                               
  Output in China,                                                           
  Yield of Farm                                                              
  Crops**                                                                    

   (10,000 tons)    **2002**   **2003**   **2004**   **2005**   **2006\***   **Growth %**
                                                                             (2006/2005)

  ** **                                                                       

  **Grain**         45,705.8   43,069.5   46,946.9   48,402.2   49,747.9     2.8

  Cereal            39,798.7   37,428.7   41,157.2   42,776.0   44,237.3     3.4

  Rice              17,453.9   16,065.6   17,908.8   18,058.8   18,257.2     1.1

  Wheat             9,029.0    8,648.8    9,195.2    9,744.5    10,446.7     7.2

  Corn              12,130.8   11,583.0   13,028.7   13,936.5   14,548.2     4.4

                                                                              

  **Oil-bearing     2,897.2    2,811.0    3,065.9    3,077.1    3,059.4      -0.6
  Crops**                                                                    

  Peanuts           1,481.8    1,342.0    1,434.2    1,434.2    1,466.6      2.3

  Rapeseeds         1,055.2    1,142.0    1,318.2    1,305.2    1,264.9      -3.1

  Sesame            89.5       59.3       70.4       62.5       66.5         6.4

                                                                              

  **Fruits**        6,952.0    14,517.4   15,340.9   16,120.1   17,239.9     6.9

  Apples            1,924.1    2,110.2    2,367.5    2,401.1    2,605.9      8.5

  Grapes            447.9      517.6      567.5      579.4      627.1        8.2

  Citrus            1,199.0    1,345.4    1,495.8    1,591.9    1,789.8      12.4

                                                                              

  **Meat**          6,586.5    6,932.9    7,244.8    7,743.1    8,051.4      4.0

  Pork              4,326.6    4,518.6    4,701.6    5,010.6    5,197.2      3.7

  Beef              584.6      630.4      675.9      711.5      750.0        5.4

  Mutton            316.7      357.2      399.3      435.5      469.7        7.9

                                                                              

  **Milk**          1,400.4    1,848.6    2,368.4    2,864.8    3,302.5      15.3

                                                                              

  **Poultry Eggs**  2,462.7    2,606.7    2,723.7    2,879.5    2,945.6      2.3

                                                                              

  **Aquatic         4,564.5    4,704.6    4,901.8    5,107.6    5,290.4      3.6
  Products**                                                                 

  Seawater Products 2,646.3    2,685.8    2,767.8    2,838.3    2,887.7      1.7

  Freshwater        1,918.2    2,018.8    2,134.0    2,269.3    2,402.7      5.9
  Products                                                                   

  \*Latest                                                                   
  available full                                                             
  year data                                                                  

  Source: *China                                                             
  Statistical                                                                
  Yearbooks, 2003-                                                           
  2007*                                                                      
  ----------------- ---------- ---------- ---------- ---------- ------------ -------------

## 3.2 Competition of Imports - 2007

Data in Section 3.2 are sourced from China Customs statistics of imports
in CY2007 retrieved by *Global Trade Atlas System*. Commodities are
categorized by respective HS codes.

### 3.2.1 Soybeans (HS Code: 1201) 

  ------------------------- --------------- ------------- ------------- -------
  [ ]{.underline}           **Imports into  **Y/Y         **U.S.        
                            China** (CY     Growth** (%)  Share** (%)   
                            2007)                                       

  **[1201                                                               
  Soybeans]{.underline}**                                               

  **Value** (1,000,000                                                  
  US\$)                                                                 

  from all countries        11,465.0        53.1          \-\-\-\-\--   

  from the US               4,251.3         56.3          37.1          

                                                                        

  **Volume** (1,000 MT)                                                 

  from all countries        30,818.3        9.0           \-\-\-\-\--   

  from the US               11,634.5        17.7          37.8          

                                                                        

  **Highlight of Main                                                   
  Products**                                                            

  \- Due to strong domestic                                             
  demand, China\'s soybean                                              
  imports reached record                                                
  highs in CY 2007.                                                     

  \- Skyrocketing prices                                                
  pushed the import value                                               
  up 53 percent, despite                                                
  only a 9 percent increase                                             
  in volume.                                                            

  \- All soybeans imported                                              
  to China were yellow soya                                             
  beans (120100).                                                       

  \- Though most of the                                                 
  imported soybeans are                                                 
  used for oil crushing and                                             
  feed use, interest in                                                 
  food use is increasing.                                               

  **Key Exporting                                                       
  Countries**                                                           

  \- The US, Brazil and                                                 
  Argentina are the largest                                             
  soybean suppliers to                                                  
  China.                                                                

  \- The US overtook Brazil                                             
  in CY 2007 as the largest                                             
  soybean exporter to                                                   
  China, holding a 37.8                                                 
  percent market share in                                               
  volume terms.                                                         

  \- Brazil and Argentina                                               
  closely followed the US,                                              
  respectively holding a                                                
  share of 34.3 and 26.6                                                
  percent in volume.                                                    

  **Main Importing Ports                                                
  and Share** (% in volume                                              
  terms)                                                                

  Soybean imports entering                                              
  China through various                                                 
  ports across the country:                                             

  \- North China: Qingdao                                               
  (19.7), Shijiazhuang                                                  
  (5.2), Tianjin (4.4),                                                 
  Dalian (3.8) and                                                      
  Zhengzhou (1.7)                                                       

  \- South China: Huangpu                                               
  (10.0), Nanning (8.3),                                                
  Xiamen (4.7), Zhanjiang                                               
  (3.5), Shenzhen (3.3),                                                
  Fuzhou (2.3) and Jiangmen                                             
  (1.9)                                                                 

  \- East China: Nanjing                                                
  (20.6), Hangzhou (4.2)                                                
  and Ningbo (4.0)                                                      
  ------------------------- --------------- ------------- ------------- -------

### 3.2.2 Fish and Seafood (HS Code: 03) 

  ------------------------ ----------- ---------------- ------------- ------------- -------
  [ ]{.underline}          **Imports                    **Y/Y         **U.S.        
                           into                         Growth** (%)  Share** (%)   
                           China** (CY                                              
                           2007)                                                    

  **[03 Fish and                                                                    
  Seafood]{.underline}**                                                            

  **Value** (million US\$)                                                          

  from all countries                   3,443.0          9.0           \-\-\-\-\--   

  from the US                          461.8            13.6          13.4          

                                                                                    

  **Volume** (1,000 MT)                                                             

  from all countries                   2,319.3          6.5           \-\-\-\-\--   

  from the US                          N/A              N/A           N/A           

                                                                                    

  **Highlight of Main                                                               
  Products**                                                                        

  \- Frozen fish (0303),                                                            
  including cod, salmon,                                                            
  plaice, valued at US\$                                                            
  2.6 billion, accounting                                                           
  for 76.5 percent of the                                                           
  total seafood import                                                              
  value.                                                                            

  \- Other seafood (0307),                                                          
  mostly cuttle fish,                                                               
  squid and sea snails,                                                             
  valued at US\$ 386.8                                                              
  million, a 11.2 percent                                                           
  share of the total                                                                
  seafood imports.                                                                  

  \- Crustaceans (0306),                                                            
  valued at US\$ 299.9                                                              
  million, holding a 8.7                                                            
  percent share of seafood                                                          
  imports.                                                                          

                                                                                    

  **Key Exporting                                                                   
  Countries**                                                                       

  Most of China\'s seafood                                                          
  and fish imports is                                                               
  processed for re-export.                                                          
  A large number of                                                                 
  countries exports to                                                              
  China, with Russia and                                                            
  the US lead in the                                                                
  group.                                                                            

  \- Russia remained the                                                            
  largest seafood exporter                                                          
  to China, holding a 38.8                                                          
  percent share in value.                                                           

  \- The US as the second                                                           
  largest exporter, held a                                                          
  13.4 percent share.                                                               

  \- South Korea, Canada,                                                           
  Norway and Japan                                                                  
  respectively shared 4-6                                                           
  percent of the market.                                                            

  \- The rest of the                                                                
  market is shared by many                                                          
  countries who each only                                                           
  hold a fraction share.                                                            

                                                                                    

  **Main Importing Ports                                                            
  and Share** (% in value                                                           
  terms)                                                                            

  Most seafood is imported                                                          
  into China via Qingdao                                                            
  (58%) and Dalian (23%)                                                            
  for re-export                                                                     
  processing. Shanghai                                                              
  ranks third, handling a                                                           
  small share (4.6%).                                                               
  ------------------------ ----------- ---------------- ------------- ------------- -------

### 3.2.3 Meat (HS Code: 02)

  --------------------- ------------------ ------------ ------------- ---------
  [ ]{.underline}       **Imports into     **Y/Y        **U.S.        
                        China** (CY 2007)  Growth** (%) Share** (%)   

  **[02                                                               
  Meat]{.underline}**                                                 

  **Value** (million                                                  
  US\$)                                                               

  from all countries    1,519.1            121.4        \-\-\-\-\--   

  from the US           764.3              113.7        50.3          

                                                                      

  **Volume** (1,000 MT)                                               

  from all countries    1,340.3            57.6         \-\-\-\-\--   

  from the US           657.7              40.7         49.1          

                                                                      

  **Highlight of Main                                                 
  Products**                                                          

  In CY 2007, short                                                   
  pork supply and the                                                 
  resulting high prices                                               
  in China beefed up                                                  
  imports of all                                                      
  poultry and meat                                                    
  products. A large                                                   
  volume of pork was                                                  
  also imported to                                                    
  offset the shortage                                                 
  and high prices of                                                  
  pork in China. The                                                  
  strong growth was                                                   
  also recorded in the                                                
  imports of beef (258                                                
  percent in volume)                                                  
  and edible animal                                                   
  offal (98 percent in                                                
  volume).                                                            

  \- **Poultry products                                               
  (0207)** mostly                                                     
  chicken paws, wing                                                  
  tips, leg quarters                                                  
  and drum sticks,                                                    
  accounted for 62.2                                                  
  percent in value of                                                 
  China\'s total                                                      
  imports of meat                                                     
  products. Imports of                                                
  poultry products in                                                 
  CY 2007 significantly                                               
  increased 36.6                                                      
  percent in volume                                                   
  term or 104.2 percent                                               
  in value term. Sales                                                
  of U.S. poultry                                                     
  products doubled the                                                
  previous year, mainly                                               
  owing to high prices                                                
  and tight supply,                                                   
  together with high                                                  
  pork prices in China,                                               
  owing to Blue Ear                                                   
  disease which                                                       
  surfaced last April                                                 
  and decimated swine                                                 
  populations.                                                        

  \- **Animal offal                                                   
  (0206)**, accounted                                                 
  for 30 percent of the                                               
  meat import volume in                                               
  CY 2007, up 98                                                      
  percent from the year                                               
  before.                                                             

  \- **Pork (0203)**,                                                 
  accounting for 6.3                                                  
  percent of the total                                                
  meat import volume in                                               
  CY 2007, increased                                                  
  260 percent from the                                                
  previous year.                                                      

  \- **Lamb (0204)**,                                                 
  increased only 26.5                                                 
  percent in volume,                                                  
  the lowest growth in                                                
  the meat category.                                                  

  \- **Beef (0202** and                                               
  **0201)**, sharing a                                                
  fraction of China\'s                                                
  meat imports,                                                       
  recorded a 258                                                      
  percent increase in                                                 
  CY 2007 from the                                                    
  previous year.                                                      
  Australia is the top                                                
  exporter holding more                                               
  than 50 percent of                                                  
  the import market.                                                  
  When the China market                                               
  will be reopened to                                                 
  the U.S. beef remains                                               
  unknown.                                                            

                                                                      

  **Key Exporting                                                     
  Countries**                                                         

  \- US, as the largest                                               
  meat exporter to                                                    
  China, held almost 50                                               
  percent of China\'s                                                 
  meat import in                                                      
  volume.                                                             

  \- The rest of the                                                  
  market is shared by                                                 
  France (sharing a                                                   
  15.5 percent volume                                                 
  of China\'s meat                                                    
  imports), Brazil                                                    
  (12.2%), Argentina                                                  
  (7.6%), Demark                                                      
  (6.3%), Canada                                                      
  (4.1%), New Zealand                                                 
  (2.3%) and Australia                                                
  (1.7%).                                                             

                                                                      

  **Main Importing                                                    
  Ports and Share** (%                                                
  in volume terms)                                                    

  About two-thirds of                                                 
  China\'s meat imports                                               
  enter into the                                                      
  country via South                                                   
  China, mostly                                                       
  Guangzhou and                                                       
  Shenzhen. Shanghai                                                  
  handled 17.8 percent                                                
  of China\'s meat                                                    
  imports in CY 2007.                                                 
  Meanwhile, Dalian,                                                  
  and Tianjin are the                                                 
  largest ports of                                                    
  entry for meat                                                      
  products in northern                                                
  China, respectively                                                 
  handling 8.9 and 4.3                                                
  percent of the                                                      
  country\'s import                                                   
  volume.                                                             
  --------------------- ------------------ ------------ ------------- ---------

### 3.2.4 Edible Fruit and Nuts (HS Code: 08)

  ---------------------- ------------------ ------------ ------------- -----
  [ ]{.underline}        **Imports into     **Y/Y        **U.S.        
                         China** (CY 2007)  Growth** (%) Share** (%)   

  **[08 Edible Fruit and                                               
  Nuts]{.underline}**                                                  

  **Value** (million                                                   
  US\$)                                                                

  from all countries     912.4              23.7         \-\-\-\-\--   

  from the US            114.2              1.5          12.5          

                                                                       

  **Volume** (1,000 MT)                                                

  from all countries     1,394.0            5.6          \-\-\-\-\--   

  from the US            88.4               -17.5        6.3           

                                                                       

  **Highlight of Main                                                  
  Products**                                                           

  This category is                                                     
  highly fragmented, as                                                
  China imports a wide                                                 
  range of fruit and                                                   
  nuts from various                                                    
  countries:                                                           

  Other nuts, including                      (0802)      US\$ 127.6    
  almonds, hazelnuts,                                    million       
  pistachios etc.                                                      

  Bananas, plantains                         (0803)      US\$ 110.6    
                                                         million       

  Grapes and raisin                          (0806)      US\$ 81.0     
                                                         million       

  Frozen fruit and nuts,                     (0811)      US\$ 78.3     
  including strawberry,                                  million       
  raspberry, blackberry,                                               
  etc.                                                                 

  Date, fig, pineapple,                      (0804)      US\$ 70.4     
  etc.                                                   million       

  Other dried fruit,                         (0813)      US\$ 60.3     
  including dried longan                                 million       
  and plums                                                            

  Citrus, fresh or dried                     (0805)      US\$ 54.8     
                                                         million       

  Coco, Brazil nuts,                         (0801)      US\$ 32.5     
  Cashew nuts                                            million       

                                                                       

  **Key Exporting                                                      
  Countries**                                                          

  The competition in                                                   
  China is fierce, as                                                  
  many countries export                                                
  to this market.                                                      

  \- Thailand is the                                                   
  largest exporter of                                                  
  fruit and nuts to                                                    
  China, accounting for                                                
  27.5 percent of the                                                  
  value of China\'s                                                    
  imports of this                                                      
  category in CY 2007.                                                 

  \- The US is the                                                     
  second largest                                                       
  exporter to China in                                                 
  this category, holding                                               
  a 12.5 percent share                                                 
  in CY 2007.                                                          

  \- Vietnam and                                                       
  Philippines held a                                                   
  similar share as the                                                 
  US in CY 2007,                                                       
  respectively 12.3 and                                                
  12.1 percent.                                                        

  \- Chile held a 7.1                                                  
  percent share in CY                                                  
  2007, followed by                                                    
  Russia, New Zealand,                                                 
  Iran, Sweden, South                                                  
  Korea, Indonesia,                                                    
  Finland, Peru,                                                       
  Australia and Canada,                                                
  respectively sharing a                                               
  1-4 percent cut.                                                     

  -The US, Russia, Iran                                                
  and South Korea are                                                  
  the main nuts                                                        
  exporters to China,                                                  
  while Thailand, the                                                  
  US, Philippines,                                                     
  Vietnam, Chile, New                                                  
  Zealand, Australia and                                               
  South Africa are the                                                 
  main exporters of                                                    
  fruit.                                                               

                                                                       

  **Main Importing Ports                                               
  and Share** (% in                                                    
  volume terms)                                                        

  \- South China handles                                               
  about two-thirds of                                                  
  China\'s imports of                                                  
  fruit and nuts. Key                                                  
  importing ports in                                                   
  this region include                                                  
  Nanning (23.6%),                                                     
  Guangzhou (18.5%),                                                   
  Haikou (7.6%) and                                                    
  Shenzhen (7.2%).                                                     

  \- Dalian in north                                                   
  China and Shanghai in                                                
  east China are the                                                   
  largest ports of entry                                               
  out of southern China,                                               
  respectively handling                                                
  13.6 and 12.7 of the                                                 
  country\'s import                                                    
  volume in CY2007.                                                    
  ---------------------- ------------------ ------------ ------------- -----

### 3.2.5 Dairy Products (HS Code: 04)

+-----------------+-----------------+------------+------------+------+
| [ ]{.underline} | **Imports into  | **Y/Y      | **U.S.     |      |
|                 | China** (CY     | Growth**   | Share**    |      |
|                 | 2007)           | (%)        | (%)        |      |
+-----------------+-----------------+------------+------------+------+
| **[04 Dairy     |                 |            |            |      |
| Products        |                 |            |            |      |
| ]{.underline}** |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| **Value**       |                 |            |            |      |
| (million US\$)  |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| from all        | 744.6           | 33.4       | \          |      |
| countries       |                 |            | -\-\-\-\-- |      |
+-----------------+-----------------+------------+------------+------+
| from the US     | 106.8           | 26.4       | 14.3       |      |
+-----------------+-----------------+------------+------------+------+
|                 |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| **Volume**      |                 |            |            |      |
| (1,000 MT)      |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| from all        | 298.7           | 14.0       | \          |      |
| countries       |                 |            | -\-\-\-\-- |      |
+-----------------+-----------------+------------+------------+------+
| from the US     | N/A             | N/A        | N/A        |      |
+-----------------+-----------------+------------+------------+------+
|                 |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| **Highlight of  |                 |            |            |      |
| Main Products** |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| China\'s        |                 |            |            |      |
| imports of      |                 |            |            |      |
| dairy products  |                 |            |            |      |
| are mostly      |                 |            |            |      |
| powdered milk   |                 |            |            |      |
| and whey.       |                 |            |            |      |
| Cheese and      |                 |            |            |      |
| butter only     |                 |            |            |      |
| accounts for a  |                 |            |            |      |
| fraction.       |                 |            |            |      |
| Global high     |                 |            |            |      |
| prices and      |                 |            |            |      |
| short supply    |                 |            |            |      |
| lowered the     |                 |            |            |      |
| import volume   |                 |            |            |      |
| of powdered     |                 |            |            |      |
| milk and whey   |                 |            |            |      |
| in CY2007,      |                 |            |            |      |
| though import   |                 |            |            |      |
| value increased |                 |            |            |      |
| significantly.  |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
|                 |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| \-**Powdered    |                 |            |            |      |
| milk (0402)**   |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| Imports fell    |                 |            |            |      |
| 27.2 percent to |                 |            |            |      |
| 99,000 tons in  |                 |            |            |      |
| CY 2007, due to |                 |            |            |      |
| global high     |                 |            |            |      |
| prices and      |                 |            |            |      |
| short supply.   |                 |            |            |      |
| New Zealand was |                 |            |            |      |
| the largest     |                 |            |            |      |
| exporter,       |                 |            |            |      |
| holding a 72.6  |                 |            |            |      |
| percent of      |                 |            |            |      |
| China\'s import |                 |            |            |      |
| volume. The     |                 |            |            |      |
| rest were       |                 |            |            |      |
| shared by       |                 |            |            |      |
| Australia       |                 |            |            |      |
| (12.6%), the US |                 |            |            |      |
| (6.6%), France  |                 |            |            |      |
| (1.8%) and      |                 |            |            |      |
| other           |                 |            |            |      |
| countries.      |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
|                 |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| \-**Whey        |                 |            |            |      |
| (0404)**        |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| Import volume   |                 |            |            |      |
| dropped 9.2     |                 |            |            |      |
| percent to      |                 |            |            |      |
| 168,000 tons in |                 |            |            |      |
| CY 2007, due to |                 |            |            |      |
| global high     |                 |            |            |      |
| prices and      |                 |            |            |      |
| short supply.   |                 |            |            |      |
| The US as the   |                 |            |            |      |
| largest         |                 |            |            |      |
| exporter, held  |                 |            |            |      |
| a 29.7 percent  |                 |            |            |      |
| of China\'s     |                 |            |            |      |
| import volume   |                 |            |            |      |
| in CY 2007.     |                 |            |            |      |
| France closely  |                 |            |            |      |
| followed with a |                 |            |            |      |
| 28.1 percent    |                 |            |            |      |
| share. New      |                 |            |            |      |
| Zealand,        |                 |            |            |      |
| Argentina,      |                 |            |            |      |
| Ireland,        |                 |            |            |      |
| Australia,      |                 |            |            |      |
| Germany, the    |                 |            |            |      |
| Netherlands and |                 |            |            |      |
| Finland         |                 |            |            |      |
| respectively    |                 |            |            |      |
| had a 2.9-7.3   |                 |            |            |      |
| percent share.  |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
|                 |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| \- **Cheese and |                 |            |            |      |
| butter (0405**  |                 |            |            |      |
| and **0406)**   |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| Thanks to the   |                 |            |            |      |
| fast growing    |                 |            |            |      |
| HRI and bakery  |                 |            |            |      |
| sectors in      |                 |            |            |      |
| China, cheese   |                 |            |            |      |
| and butter      |                 |            |            |      |
| gradually gain  |                 |            |            |      |
| popularity in   |                 |            |            |      |
| large cities    |                 |            |            |      |
| from a small    |                 |            |            |      |
| base. Imports   |                 |            |            |      |
| of cheese       |                 |            |            |      |
| increased 33.3  |                 |            |            |      |
| percent to      |                 |            |            |      |
| 13,200 MT in CY |                 |            |            |      |
| 2007, while the |                 |            |            |      |
| imports of      |                 |            |            |      |
| butter grew 9.6 |                 |            |            |      |
| percent to      |                 |            |            |      |
| 14,000 MT. New  |                 |            |            |      |
| Zealand and     |                 |            |            |      |
| Australia are   |                 |            |            |      |
| the largest     |                 |            |            |      |
| exporters,      |                 |            |            |      |
| while the US    |                 |            |            |      |
| and European    |                 |            |            |      |
| countries hold  |                 |            |            |      |
| a fraction in   |                 |            |            |      |
| the market.     |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
|                 |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
| **Main          |                 |            |            |      |
| Importing Ports |                 |            |            |      |
| and Share (% in |                 |            |            |      |
| volume terms)** |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+
|   ------------  |                 |            |            |      |
|   East China:   |                 |            |            |      |
|   Shanghai      |                 |            |            |      |
|   (34.8%) and   |                 |            |            |      |
|   Nanjing       |                 |            |            |      |
|   (1.8%)        |                 |            |            |      |
|                 |                 |            |            |      |
|   North China:  |                 |            |            |      |
|   Tianjin       |                 |            |            |      |
|   (31.8%),      |                 |            |            |      |
|   Dalian        |                 |            |            |      |
|   (4.7%),       |                 |            |            |      |
|   Beijing       |                 |            |            |      |
|   (4.2%) and    |                 |            |            |      |
|   Qingdao       |                 |            |            |      |
|   (4.2%)        |                 |            |            |      |
|                 |                 |            |            |      |
|   South China:  |                 |            |            |      |
|   Huangpu       |                 |            |            |      |
|   (7.0%),       |                 |            |            |      |
|   Gongbei       |                 |            |            |      |
|   (4.7%) and    |                 |            |            |      |
|   Guangzhou     |                 |            |            |      |
|   (1.9%)        |                 |            |            |      |
|   ------------  |                 |            |            |      |
+-----------------+-----------------+------------+------------+------+

### 3.2.6 Preserved Food (HS Code: 20)

  --------------------- ------------------- ------------- ------------- -------
  [ ]{.underline}       **Imports into      **Y/Y         **U.S.        
                        China** (CY 2007)   Growth** (%)  Share** (%)   

  **[20 Preserved                                                       
  Food]{.underline}**                                                   

  **Value** (million                                                    
  US\$)                                                                 

  from all countries    272.9               37.6          \-\-\-\-\--   

  from the US           79.3                30.6          29.1          

                                                                        

  **Volume** (1,000 MT)                                                 

  from all countries    201.3               9.1           \-\-\-\-\--   

  from the US           74.9                11.5          37.2          

                                                                        

  **Highlight of Main                                                   
  Products**                                                            

  \- **Fruit juice                                                      
  (2009)** imports in                                                   
  CY 2007 grew 47.7                                                     
  percent in value to                                                   
  US\$ 146 million,                                                     
  despite only a 6.8                                                    
  percent increase in                                                   
  volume. Main                                                          
  exporting countries                                                   
  are Brazil and                                                        
  Israel, respectively                                                  
  holding 50.3 and 24.5                                                 
  percent share of the                                                  
  volume in CY 2007. US                                                 
  ranked third with a                                                   
  4.4 percent share.                                                    

  \- **Prepared fruit                                                   
  (2008)** Import value                                                 
  grew 30 percent to                                                    
  US\$ 57 million in CY                                                 
  2007. Prepared citrus                                                 
  from the US and                                                       
  Brazil accounted for                                                  
  the majority.                                                         

  \- **Prepared potato                                                  
  (2004)** Import value                                                 
  increased by 22                                                       
  percent to US\$ 54                                                    
  million in CY 2007,                                                   
  despite a 3 percent                                                   
  drop in volume. Most                                                  
  imports were from the                                                 
  US (73 percent of the                                                 
  volume), followed by                                                  
  Canada with 22.3                                                      
  percent share in                                                      
  volume.                                                               

                                                                        

  **Main Importing                                                      
  Ports and Share** (%                                                  
  in volume term)                                                       

  \- Shanghai is the                                                    
  largest importing                                                     
  port in China for                                                     
  preserved food                                                        
  products, accounting                                                  
  for 45 percent of the                                                 
  volume.                                                               

  \- South China:                                                       
  Shenzhen (13.7),                                                      
  Huangpu (5.5), Xiamen                                                 
  (2.7 ) and Guangzhou                                                  
  (1.3)                                                                 

  \- North China:                                                       
  Tianjin (13.0),                                                       
  Beijing (7.3),                                                        
  Qingdao (4.7) and                                                     
  Dalian (2.1)                                                          
  --------------------- ------------------- ------------- ------------- -------

### 3.2.7 Cereal (HS Code: 10)

  ----------------------- ------------------- ------------- ------------- -------
  [ ]{.underline}         **Imports into      **Y/Y         **U.S.        
                          China** (CY 2007)   Growth** (%)  Share** (%)   

  **[10                                                                   
  Cereal]{.underline}**                                                   

  **Value** (million                                                      
  US\$)                                                                   

  from all countries      515.0               -37.3         \-\-\-\-\--   

  from the US             6.2                 -85.7         1.2           

                                                                          

  **Volume** (1,000 MT)                                                   

  from all countries      1,520.5             -57.2         \-\-\-\-\--   

  from the US             20.0                -91.9         1.3           

                                                                          

  **Highlight of Main                                                     
  Products**                                                              

  China\'s imports of                                                     
  cereal in 2007                                                          
  dramatically dropped in                                                 
  CY 2007, due to the                                                     
  globally record high                                                    
  prices. Barley (1003),                                                  
  rice (1006) and wheat                                                   
  (1001) consist of the                                                   
  majority of the cereal                                                  
  imports.                                                                

                                                                          

  \- **Barley (1003)**                                                    

  Barley imports dropped                                                  
  57.5 percent in volume                                                  
  to 913,400 MT in CY                                                     
  2007, at a value of                                                     
  US\$ 266.8 million.                                                     
  Barley is in great                                                      
  demand in China which                                                   
  has become the largest                                                  
  brewery in the world.                                                   
  Majority of the imports                                                 
  was from Australia                                                      
  (54.2% of import value                                                  
  in CY 2007), Canada                                                     
  (36.4%) and France                                                      
  (9.4%).                                                                 

                                                                          

  \- **Rice (1006)**                                                      

  China\'s rice imports                                                   
  in CY 2007 reduced 34.4                                                 
  percent in volume to                                                    
  471,500 MT, while                                                       
  import value dropped                                                    
  24.6 percent to US\$                                                    
  217.5 million. Thailand                                                 
  is the largest rice                                                     
  exporter to China,                                                      
  accounting for 93                                                       
  percent of China\'s                                                     
  rice imports. Vietnam                                                   
  as the second largest                                                   
  exporter held only 5.6                                                  
  percent share in CY                                                     
  2007. About 90 percent                                                  
  of the imported rice                                                    
  was sold to South                                                       
  China, especially                                                       
  Guangdong province for                                                  
  local consumption.                                                      

                                                                          

  \- **Wheat (1001)**                                                     

  China dramatically                                                      
  reduced its wheat                                                       
  imports in CY 2007 due                                                  
  to global high prices.                                                  
  Wheat imports to China                                                  
  dropped 85.7 percent                                                    
  from a year ago to                                                      
  83,400 MT, mostly                                                       
  durum. All the wheat                                                    
  imports entered to                                                      
  Guangdong province for                                                  
  milling via Shenzhen,                                                   
  Huangpu and Guangzhou.                                                  

                                                                          

  \- **Corn (1005)**                                                      

  High prices pushed                                                      
  China\'s corn imports                                                   
  down 46 percent to                                                      
  35,200 MT in CY 2007.                                                   
  Laos, Myanmar and the                                                   
  US were the leading                                                     
  exporters, respectively                                                 
  holding a share of                                                      
  30.9, 24 and 21.2                                                       
  percent in CY 2007.                                                     

                                                                          

  \- **Oats (1004)**                                                      

  Oat imports into China                                                  
  dropped 67.8 percent to                                                 
  5,218 MT in CY 2007.                                                    
  Australia was the                                                       
  monopoly foreign                                                        
  supplier in CY 2007,                                                    
  with all imports                                                        
  entering South China                                                    
  via Shenzhen, Nanning                                                   
  and Huangpu.                                                            
  ----------------------- ------------------- ------------- ------------- -------

### Fats and Oils (HS Code: 15)

  --------------------- ------------------ ---------- ---------- ---------- ------------- ---------
  [ ]{.underline}       **Imports into     **Y/Y                            **U.S.        
                        China** (CY 2007)  Growth**                         Share** (%)   
                                           (%)                                            

  **[15 Fats and                                                                          
  Oils]{.underline}**                                                                     

  **Value** (million                                                                      
  US\$)                                                                                   

  from all countries    7,576.4            93.1                             \-\-\-\-\--   

  from the US           135.0              408.3                            1.8           

                                                                                          

  **Volume** (1,000 MT)                                                                   

  from all countries    10,203.0           24.9                             \-\-\-\-\--   

  from the US           176.6              428.8                            1.7           

                                                                                          

  **Highlight of Main                                                                     
  Products**                                                                              

  Despite global high                                                                     
  prices, China\'s                                                                        
  imports of oils and                                                                     
  fats were                                                                               
  dramatically boosted                                                                    
  by high prices and                                                                      
  strong demand in the                                                                    
  domestic market. Most                                                                   
  of the imports are:                                                                     

                                                      HS Code    Value                    
                                                                 (million                 
                                                                 US\$)                    

  Palm oil                                             (1511)    3,684.8                  

  Soybean oil                                          (1507)    2,145.5                  

  Coconut, palm kernels                                (1513)    403.7                    
  or Babassu oil                                                                          

  Rapeseed, colzo or                                   (1514)    305.1                    
  mustard oil                                                                             

  Animal and vegetable                                 (1516)    297.4                    
  oil and fats,                                                                           
  hydrogenated                                                                            

  Bovine, sheep, goat                                 \(1502\)   243.9                    
  fat                                                                                     

  Margarine                                           \(1517\)   198.8                    

  Other fixed vegetable                                (1515)    103.6                    
  oils and fats                                                                           

  Various seed oil                                     (1512)    49.3                     

  Olive oil                                            (1509)    32.0                     

  Fats and oils - fish                                \(1504\)   31.3                     
  & marine mammal                                                                         

  Peanut oil, no                                       (1508)    14.0                     
  chemical modified                                                                       

                                                                                          

  **Key Exporting                                                                         
  Countries**                                                                             

  Malaysia, Argentina                                                                     
  and Indonesia were                                                                      
  the largest oil                                                                         
  exporter to China,                                                                      
  respectively holding                                                                    
  38.3, 23.2 and 21.1                                                                     
  percent of the import                                                                   
  value in CY 2007. The                                                                   
  rest of the market                                                                      
  was fragmented by a                                                                     
  number of countries,                                                                    
  including Brazil,                                                                       
  Canada, Australia and                                                                   
  the United States.                                                                      

                                                                                          

  **Main Importing                                                                        
  Ports and Share** (%                                                                    
  in volume term)                                                                         

  East China: Nanjing                                                                     
  (30.7%), Shanghai                                                                       
  (7.5%) and Hangzhou                                                                     
  (2.8%)                                                                                  

  North China: Tianjin                                                                    
  (19.8%) and Qingdao                                                                     
  (4.0%)                                                                                  

  South China: Huangpu                                                                    
  (17.0%), Shenzhen                                                                       
  (4.9%), Xiamen (2.7%)                                                                   
  and Nanning (2.2%)                                                                      
  --------------------- ------------------ ---------- ---------- ---------- ------------- ---------

### 3.2.9 Vegetables (HS Code: 07)

  --------------------------- --------------------- ------------- ------------- -----
  [ ]{.underline}             **Imports into        **Y/Y         **U.S.        
                              China** (CY 2007)     Growth** (%)  Share** (%)   

  **[07                                                                         
  Vegetables]{.underline}**                                                     

  **Value** (million US\$)                                                      

  from all countries          801.2                 6.0           \-\-\-\-\--   

  from the US                 24.5                  -0.2          3.1           

                                                                                

  **Volume** (1,000 MT)                                                         

  from all countries          4,974.0               7.4           \-\-\-\-\--   

  from the US                 32.8                  -29.9         0.7           

                                                                                

  **Highlight of Main                                                           
  Products**                                                                    

  \- **Cassava and arrowroot                                                    
  (0714)**, import value up                                                     
  6.5 percent to US\$ 661                                                       
  million in CY2007,                                                            
  accounting for 82.5% of the                                                   
  total vegetable imports.                                                      
  Most of the imports was                                                       
  from Thailand (69%) and                                                       
  Vietnam (27.2%).                                                              

  \- **Dried peas (0713)**,                                                     
  import value up 10 percent                                                    
  to US\$ 108.7 million in CY                                                   
  2007. Canada was the                                                          
  largest supplier holding                                                      
  58.1 percent share,                                                           
  followed by India (24.3%),                                                    
  Myanmar (10.9%) and the US                                                    
  (2.9%).                                                                       

  \- **Frozen vegetables                                                        
  (0710)**, imports up 3.8                                                      
  percent to US\$ 20.7                                                          
  million, accounting for 3.8                                                   
  percent of the total                                                          
  vegetable imports. U.S.                                                       
  dominates this category,                                                      
  supplying 93.7 percent of                                                     
  the total imports of frozen                                                   
  vegetable in CY 2007. Most                                                    
  of the imports entered to                                                     
  the eastern and northern                                                      
  China via Shanghai (41.8%                                                     
  of import value), Qingdao                                                     
  (21.1%), Ningbo (12.7%),                                                      
  Beijing (7.5%) and Dalian                                                     
  (4.1%). Only a small                                                          
  percent of the imports                                                        
  entered to South China, via                                                   
  Huangpu (6.7%) and Xiamen                                                     
  (4.7%).                                                                       
  --------------------------- --------------------- ------------- ------------- -----

### 3.2.10 Preparations of Flour (HS Code: 1901)

  ---------------------- -------------------- ------------- ------------- ------
  [ ]{.underline}        **Imports into       **Y/Y         **U.S.        
                         China** (CY 2007)    Growth** (%)  Share** (%)   

  **[1901 Preparations                                                    
  of                                                                      
  Flour]{.underline}**                                                    

  **Value** (million                                                      
  US\$)                                                                   

  from all countries     355.0                26.0          \-\-\-\-\--   

  from the US            12.7                 0.6           3.6           

                                                                          

  **Volume** (1,000 MT)                                                   

  from all countries     75.0                 8.6           \-\-\-\-\--   

  from the US            6.0                  -13.5         7.9           

                                                                          

  **Highlight of Main                                                     
  Products**                                                              

  Fast growing baking                                                     
  industry in China                                                       
  boosts imports of                                                       
  flour preparations. In                                                  
  CY 2007, most of the                                                    
  imports entered to                                                      
  China via Shanghai                                                      
  (55.8% of the import                                                    
  value) in eastern                                                       
  China, Shenzhen                                                         
  (28.1%) and Huangpu                                                     
  (7.6%) in southern                                                      
  China.                                                                  

                                                                          

  **Key Exporting                                                         
  Countries**                                                             

  Many countries                                                          
  aggressively promote                                                    
  their products to the                                                   
  baking industry in                                                      
  China, including                                                        
  Singapore (accounting                                                   
  for 36.6% of the                                                        
  import value), New                                                      
  Zealand (20.9%),                                                        
  Denmark (11.7%),                                                        
  Ireland (8.2%), the                                                     
  Netherlands (7.6%),                                                     
  Australia (5.2%) and                                                    
  the US (3.6%).                                                          
  ---------------------- -------------------- ------------- ------------- ------

# IV. Best Product Prospects

Best product prospects are:

-   Soybeans

-   Seafood

-   Poultry products

-   Beef

-   Dried Fruit & Nuts

-   Fresh Fruit

-   High Value Dairy Products

-   Grains & Cereal

-   Potato Products

-   Baking Ingredients

-   Food Additives

> *Please refer to Appendix 3 at the end of this report for further
> details.*

# V. Further Reference

> CH7403 03/16/2007 Emerging City Markets: The Next Economic Miracle
>
> CH7071 09/21/2007 Tree Nuts Annual 2007
>
> CH7081 10/30/2007 Dried Fruit Annual 2007
>
> CH7609 05/16/2007 Bustling Ports in South China
>
> CH7610 06/08/2007 South China, Vibrant Gateway for China's Imported
> Fruit
>
> CH7624 10/24/2007 Moon Cake Mania-Golden Opportunities for Chinese
> Baking Sector, But What about U.S. Ingredients?
>
> CH8025 04/21/2008 Increasing Food Prices
>
> CH8603 05/14/2008 South China's Thirst for U.S. Fruit and Vegetable
> Juice Keeps Growing
>
> CH8605 05/30/2008 South China, Where Opportunity Knocks for High Value
> U.S. Dairy Ingredients
>
> CH8904 06/03/2008 Sichuan Earthquake Shakes Up Local Agriculture

# VI. Post Contact Information

> For further information about the China market, please visit our
> website at [www.usdachina.org](http://www.usdachina.org/) or contact
> any of the following USDA offices in China:
>
> **FAS/Office of Agricultural Affairs (OAA), Beijing**
>
> 5-2 Qijiayuan Diplomatic Compound
>
> Jianguomenwai, Beijing, China, 100600
>
> Ph: (8610) 6532-1953
>
> Fax: (8610) 6532-2962
>
> E-mail: <agbeijing@fas.usda.gov>
>
> **Agricultural Trade Office (ATO), Beijing**
>
> Kerry Center, South Tower
>
> 24th Floor Suite #2425
>
> No. 1 Guanghua Lu, Beijing, China 100020
>
> Ph: (8610) 8529-6418
>
> Fx: (8610) 8529-6692
>
> E-mail: <atobeijing@fas.usda.gov>
>
> **IPR Office**
>
> E-mail: <yuanchuan.liang@usda.gov>
>
> **Agricultural Trade Office (ATO), Guangzhou**
>
> 14/F, Office Tower
>
> China Hotel, Guangzhou, China 510015
>
> Ph: (86-20) 8667-7553
>
> Fx: (86-20) 8666-0703
>
> E-mail: <atoguangzhou@fas.usda.gov>
>
> **Agricultural Trade Office (ATO), Shanghai**
>
> Shanghai Center, Suite 331
>
> 1376 Nanjing West Road, Shanghai, China 200040
>
> Ph: (8621) 6279-8622
>
> Fx: (8621) 6279-8336
>
> E-mail: <atoshanghai@fas.usda.gov>
>
> **Agricultural Trade Office (ATO), Chengdu**
>
> 1222 Western Tower\
> No. 19, 4th Section, Renmin Nan Road, Chengdu, China 610041\
> Ph:   (8628) 8526 8668\
> Fx: (8628) 8526 8118\
> E-mail: <atochengdu@fas.usda.gov>
>
> **Animal and Plant Health Inspection Service (APHIS), Beijing**
>
> Room 618, Beijing International Club Office Building
>
> No. 21 Jianguomenwai Avenue, Beijing, China 100020
>
> Ph: (8610) 6532-3212
>
> Fx: (8610) 6532-5813
>
> E-mail: <theresa.booyle@aphis.usda.gov>

# Appendix 1. Distribution Channel Members

**[Traders / Importers]{.underline}**

Traders, often importers, are self-financed, specialized business
organizations or people who have their own sales and distribution
network. They can purchase large quantities of goods directly from
manufacturers / exporters or from another importing company. Imported
goods are sold directly or through an agent to the food processors /
manufacturers with transfer of assets. Some importers are also
processors who own processing and packing facilities. To a large extent,
traders control the demand and the pricing of the goods to the clients.

**[Logistics Providers]{.underline}**

There are many international logistics providers in ports and free trade
zones offering shipping, domestic transportation, customs clearance,
warehousing services.

**[Customs Clearance Agent]{.underline}**

Contracted by importers or logistics provider to handle customs
clearance and import inspection issues with service charge applied.

**[Direct Distribution]{.underline}**

Manufacturers / exporters set up sales outlet and sell products directly
in China rather than through a local business organization or person.
The advantage is that the manufacturers / exporters can meet consumers
face-to-face to learn about market conditions and trends. They can also
reap the benefits of their sales promptly. The drawback is the need to
invest in developing a sales network and the high cost of learning how
to operate in a foreign market. This method should be made easier with
China's revamping of the import-export system.

**[Gray Channel]{.underline}**

The Gray Channel refers to the distribution connection transferring
shipments via Hong Kong to China without going through the official
import channel of customs and import inspection. This channel has
historically been cheaper than official channels as imported goods are
often shipped from Hong Kong outside of official channels to evade
import duty and VAT payments. U.S. exporters should know that this
channel is illegal and discouraged. Goods traded via the gray channel is
risky, due to lack of reliable technical expertise provided by gray
channel operators and the authority's anti-smuggling enforcement.
Non-U.S. products may deliberately "mislabeled" as U.S. products in the
gray channel. Resulting from the lowered import tariff, the gap between
legal channel and gray channel costs is narrowing, and fewer goods enter
South China illegally.

*(Source: GAIN CH7604 Food Processing 2007)*

# Appendix 2. Import Documentation

Exporters must complete the following documentation:

-   Bill of Lading

-   Label Certificate (required for all packaged food products)

-   Invoice

-   Packing list describing item, weight, and packing material

-   Certificate of Origin

-   Sanitary / Phytosanitary Certificates

-   Packing Declaration Form (for packing without wood material)

-   Fumigation Inspection Certificate (for packing with wood material)

Importers are responsible for the following documentation:

-   Import authorization document

-   Customs declaration documents

-   Quarantine Certificates

-   Additional product specific documents

*(Source: GAIN CH7604 Food Processing 2007)*

# Appendix 3. Good Prospects for Ingredients in China

**Soybeans**

China does not have enough supply to meet increasing domestic demand for
soybeans. Shortfalls of domestic oil-bearing seeds for years has
resulted in greater demand for soybean imported from other countries. In
2006, China\'s import of soybeans exceeded 28 million tons at a 6.3
percent rise from the previous year. Meanwhile, soybean exports dropped
to only 395,000 tons by 4.5 percent, a much lower level compared to the
import volume. The productions of high-value product such as soybean
protein, as well as increasing proportion of soybeans in the daily diet
also boost demand. The US is one of the largest soybean exporter to
China, enjoying 34 percent of the market share. The market is in favor
for the US to further extend market share in China.

**Seafood**

China\'s national statistics show a significant increase of seafood in
Chinese\'s daily diet, especially in the more affluent region. The well
developed restaurant sector, especially upscale restaurants, wants for
top-quality food ingredients to better serve discriminating tastes.
Urban dwellers in big cities, especially South China which offers
diverse food options, are crazy about premier seafood. A significant
portion of China's seafood import is consumed by processing plants for
re-export. High quality and uniqueness originating from the growing area
can place U.S. seafood at a very competitive position in the China
market. Local demand for high quality seafood in affluent regions gives
rise to promising prospects for high quality U.S. seafood such as Alaska
seafood.

**Poultry products**

The US and China fit very well in the poultry consumption, as both have
large consumption, but on totally different parts of a chicken. Chinese
love chicken paws, wings or wing tips, and Americans favor the meaty
chicken breast. For years, China has been the largest importer of U.S.
poultry products. In addition, per capita consumption of poultry,
especially in urban area, is also increasing. The demand for U.S.
poultry is very likely to continue and increase, as more Chinese
consumers, especially those in a less developed region, with the
increasing disposable income, are likely to purchase larger quantity of
such affordable food items as chicken paws and wing-tips.

**Beef**

Similarly to seafood, good prospects for beef originate from Chinese
consumers\' pursuit of premier food. China remains closed to U.S. beef,
but demand will be immediate once the market is resumed, as upscale
restaurants and hotels all recognize the superior taste and quality of
U.S. beef. It is advisable for potential exporters to keep a close eye
on the China market.

**Dried Fruit & Nuts**

The versatility of U.S. dried fruit and nuts has a lot to offer affluent
Chinese consumers. The pursuit of leisure, health, convenience in life
has created huge demand for food in various forms, e.g., snacks, baked
products, convenience food etc, into which U.S. dried fruit and nuts can
certainly add value. Furthermore, Chinese has a traditional belief that
some types of food possess specific health attributes. Such belief with
the increasing disposable income has led many to a higher level of
consumption of pricey food items believed to possess certain health
benefit. Many of the U.S. dried fruit and nuts, have been scientifically
proved to contain high levels of certain types of healthy substances,
for example, rich anti-oxidants in blueberry, high vitamin E content in
almond, etc. Educating consumers will certainly differentiate the
product and encourage the consumption.

**Fresh Fruit**

U.S. fruit is popular in China despite higher prices compared to
domestic fruit in season. In addition to consumption for the home,
consumers buy pricey, usually imported fruit as gift to give important
personal or business contacts which has become popular practice,
especially on such occasions as important festivals, or visiting
friends. In spite of relatively high prices, consistent high quality and
uniqueness of U.S. fruits are strong attributes to affluent Chinese
consumers in the highly competitive market. (*Refer to GAIN CH 7610 for
more details*)

**High Value Dairy Products**

The high-value dairy market has very limited presence in China market,
despite the fact that milk consumption has skyrocketed in recent years.
Dairy products, especially high value dairy products, such as cheese,
has very limited presence in the traditional Chinese diet, and as a
result, consumers have little knowledge of these products. However,
there is promising potential for high value dairy products to fit food
consumption pattern that is becoming more diverse and richer in protein,
especially in well-developed areas. Food containing dairy ingredients,
e.g. cheesecake, has started to gain popularity in the big cities.
Increasing number of baked products is entering the food market in
China. The fast growing sectors of bakery and health food manufacturing
deliver high value dairy products to consumers. Increasing potential
consumer's awareness and knowledge of dairy products ignite the demand
for high value dairy products by a larger consumer group. (*Refer to
GAIN CH8605 for more details*)

**Grain & Cereal**

Fast growing food processing sectors and consumers' changing life style
in well-developed areas has provided sound opportunities for high
quality grain and cereal ingredients such as wheat and oats. Food
sectors, e.g., bakery need high quality wheat flour to enhance the their
product quality in terms of texture, content of nutritional substance
and taste. In addition, consumers in well-developed areas favor baked
products and ready-to-eat cereals, especially for breakfast, which
simultaneously offer health benefit and convenience. Opportunities for
high quality grain and cereal ingredients may also arise in developed
area in China where per capita consumption of grain has started to
decline, as health conscious consumers are willing to include less
carbohydrates, but more nutritional dietary fiber and protein which are
richer in U.S. grain and cereal.

**Potato Products**

Despite being the largest potato grower in the world, China annually
imports processed potato products worth multimillions. Processed potato
products, for example, dehydrated potato, has the versatility to be used
as ingredients in food manufacturing, cooking, and baking.

**Baking Ingredients**

Such products are well suited to the fast growing baking sectors which
attempt to differentiate their products against competitors.

**Food Additives**

Additives that enhance the features of processed products, such as
preservatives, emulsifiers, flavorings or colorings, are in good demand,
especially for large or upscale enterprises.

*(Source: GAIN CH7604 Food Processing 2007)*

[^1]: *China Statistical Yearbook 2007*

[^2]: Those enterprises with annual gross industrial output from primary
    business over RMB 5 million, or US\$ 625,000

[^3]: *The Status Quo of China's Food Quality and Safety* by the State
    Council, 2007

[^4]: Latest full year available data. The data include only those
    companies with annual sales of US\$ 625,000 (RMB 5 million) or more.
    Data source from *China Statistical Yearbook 2007*.

[^5]: *Baby Food -- China,* Enromonitor 2007

[^6]: *Sugar Confectionary -- China* and *Chocolate Confectionary --
    China,* Euromonitor, 2007

[^7]: *GAIN CH8014 Livestock and Products Semi Annual*, J. Zhang and E.
    Trachtenberg.