Required Report - public distribution

**Date:** 6/21/2004

**GAIN Report Number:** CH4606

CH4605

**China, Peoples Republic of**

**Food Processing Ingredients Sector**

**Food Processing**

**2004**

**Approved by:**

![](media/image1.wmf)Keith Schneller

**Prepared by:**

Julie Zhu (LiZhi) and Shalni Chandwani

**Report Highlights:**

The food processing industry is developing rapidly in China. Strong
economic growth combined with higher disposable incomes means increased
demand for high quality processed food by Chinese consumers. This report
briefly discusses opportunities for US exporters of high-quality
processed food products and ingredients.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Guangzhou \[CH3\]

\[CH\]

# Section I: Market Summary.................................................................Page 3 of 18

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# Section II: China's Meat Industry.........................................................Page 7 of 18

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# Section III: China's Cereal Industry.......................................................Page 9 of 18

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# Section IV: Fruit and Nuts .................................................................Page 11 of 18

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# Section V: Factors to Consider...........................................................Page 14 of 18

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# Section VI: Roadmap for Market Entry................................................Page 16 of 18

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# Section VII: Best Product Prospects..............................................................Page 18

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# Section VIII: Key Contacts and Further Information......................................Page 18 

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#  Section I: Market Summary

Over the past half century, China has transformed into one of the
world's fastest growing economies. With a population of 1.3 billion,
China is the most populated country in the world. China is also the
world's third largest country by area, covering 9.6 million square
kilometers.

The People's Republic of China was founded in 1949. In 1979 China began
its 'open-door' policy, which encouraged foreign investment and trade.
In the past 25 years, China's average GDP growth rate exceeded 8% and
reached 9.1% in 2003. Together with rapid economic growth, the standard
of living has improved as well. The urban per capita disposable income
has been on the rise, with a growth rate of 9% in 2003, and for rural
areas, the average growth rate of per capita net income was 4.3% that
same year.

China is the 10^th^ largest trading nation in the world. Its share in
world trade is now around 2%, while its share in the incremental
increase of global trade has been close to 20% in recent years. A market
driven industry combined with China's membership in the World Trade
Organization may provide for more mergers and consolidation in order to
attain greater profits and efficiencies in the next few years.

Rapid economic growth combined with higher disposable income means
stronger demand for high quality processed food by Chinese consumers. To
meet this demand, China's food processing industry also continues to
grow at double-digit rates in excess of 10%. Experts predict that the
Chinese food processing industry will surely have a bright future
because currently only about one-quarter of China' food production is
processed compared to about 80 percent in more developed countries.
Consumption of processed food products in China is extremely low but is
increasing at a rapid rate.

During the past year there have been a number of deaths related to
unsafe or "fake" food products including imitation infant formula and
tainted liquor. These cases have lowered many Chinese consumers'
confidence in the safety of the food supply in China. As a result,
consumers are more willing to pay for well-known local and imported
brands. Imported products and those branded products produced by foreign
joint-ventures tend to have a better reputation for higher quality and
food safety.

Many foreign companies are taking advantage of the increased demand for
high quality processed food products and will benefit by the reforms
being implemented by the WTO accession. Currently, the food industry
sector is unable to advance further until all of its sub-sectors reach a
more sophisticated level of manufacturing and produce products of higher
quality. Only then will it be able to enter the worldwide market as a
key player.

This industry consists of the food-processing sector, the
food-manufacturing sector and the beverage sector. The food-processing
sector includes rice milling, flour milling, oil refining, sugar
refining, slaughtering, salt processing, feed processing, and aquatic
product processing. The food-manufacturing sector is composed of
pastries and confections, dairy products, canned foods, fermented
products, and condiments. The beverage sector involves the making of
alcoholic beverages (i.e. distilled spirits, beer and wine), soft drinks
and tea.

Figure 1: China\'s Food Industry Structure, 2001

![](media/image2.wmf)

######### Figure 2: China's Food Industry Structure, 2002

![](media/image3.wmf)

Source: China Statistical Yearbook, 2002, 2003

According to the table above, the number of food-processing and
food-manufacturing enterprises increased from 2001 -- 2002, whereas the
enterprises in the beverage sector slightly decreased. Although revenues
increased in all three areas, within the beverage sector, the vanishing
enterprises allowed for a much lower revenue increase compared to the
other two sectors. Compared to the industry's total revenue growth the
beverage sector also lagged behind. The food-manufacturing sector leads
the food industry in both number of enterprises and revenue growth.

+---------------------+---------+----------+------------+------------+
| Table 2:            | Total   | Total    | Total      | Total      |
| Distribution of     | No. of  | No. of   | Revenues   | Revenues   |
| Food Industry by    | Ente    | Ent      | 2001       | 2002       |
| Sub-Sectors         | rprises | erprises |            |            |
|                     |         |          | 706.97 (in | 821.62 (in |
|                     | 2001    | 2002     | billions)  | billions)  |
|                     |         |          |            |            |
|                     | 18,251  | 18,315   |            |            |
+---------------------+---------+----------+------------+------------+
|                     |         |          |            |            |
+---------------------+---------+----------+------------+------------+
| Food Processing     | 56.90   | 56.90%   | 54.10%     | 55%        |
+---------------------+---------+----------+------------+------------+
| Food Manufacturing  | 25.00   | 25.20%   | 21.50%     | 22.20%     |
+---------------------+---------+----------+------------+------------+
| Beverage            | 18.10%  | 17.90%   | 24.40%     | 22.80%     |
+---------------------+---------+----------+------------+------------+

Source: China Statistical Yearbook, 2002, 2003

# Retail Sales

In 2001 the total retail sales volume of food, beverage and catering
businesses reached 542.57 billion RMB. This accounted for 14.4% of the
total retail sales volume of all consumer goods. In 2002, it increased
to 629.96 billion RMB, raising it to 15.4% of the total retail sales of
all consumer goods.

  ----------------------------------- ----------- ------------- -----------
  Table 3: Retail Sales of Food,      2001        2002          \% Change
  Beverage & Catering (in billions                              
  RMB)                                                          

                                                                 

  Food                                91.74       104.22        13.60%

  Beverage                            13.94       16.51         18.40%

  Catering                            436.89      509.23        16.60%

  Total                               542.57      629.96        16.10%
  ----------------------------------- ----------- ------------- -----------

Source: China Statistical Yearbook, 2002, 2003

The total retail sales of food, beverage and catering, at 16.1% between
2001 and 2002 is almost double that of the annual growth rate of retail
sales of all consumer goods during the same period which was 8.8%. The
beverage sector had an even higher growth rate of 18.4%. The total
retail sales of food, beverage, and catering business each accounted for
76.7% of the food industry's revenue, respectively in 2001 and 2002.

Table 4 shows that the estimated total amount of money Chinese families
spent on food in 2001 was RMB 1,629 billion (U.S. \$197.1 billion). In
2002, this number increased by 11.9% to RMB 1,823 billion (U.S. \$220.6
billion). Combined with the food consumption in hotels, restaurants and
various organizations one can see that China's food market is enormous.

  --------------------- ------------------- ------------------- ----------------
  Table 4: Food         Estimated Total     Average Food        Total Food
  Expenditure of        Population in       Expenditure in      Expenditure in
  Chinese Families, in  2001/2002 (in       2001/2002 per       2001/2202 (in
  RMB                   millions)           capita              billions)

                                                                 

  Urban Families        480.64/502.12       2,014.02/2,271.84   968/1,141

  Rural Families        765.63/782.41       830.72/872.39       661/683

  Total                 1,246.27/1,284.53   2,844.74/3,144.23   1,629/1,824
  --------------------- ------------------- ------------------- ----------------

Source: China Statistical Yearbook, 2002, 2003

  ------------------------ ----------------- ------------------- ---------------
  Table 5: Food            Disposable Income Food Expenditure    Increase in
  Expenditure & Disposable 2001/2002         2001/2002           Disposable
  Income in China, in RMB                                        Income/Food
                                                                 Expenditure

                                                                  

  Urban                    6,859.6/7,702.8   2,014.02/2,271.84   12.3%/12.8%

  Rural                    2,366.4/2,475.6   830.72/872.39       4.6%/5.0%
  ------------------------ ----------------- ------------------- ---------------

Source: China Statistical Yearbook, 2002, 2003

Urban areas along the coast continue to lead the rest of the country in
per capita spending, both overall and for food expenditures in
particular. In 2002, the national per capita income was RMB 6030 (U.S.
\$730), whereas income levels in Shanghai, Shenzen and Guangzhou all
exceeded RMB 10,000 (U.S. \$1200). However, urban income levels vary
widely, and many young, middle-class Chinese earn \$7,000 to \$10,000 a
year. Chinese have traditionally spent a large percentage of their
income on food -- and the cosmopolitan aspirations of young
professionals predispose them to spend a growing amount on foreign
products.

Last year, young professionals spent about 40% of their disposable
income on food. A growing percentage of that amount was spent on
imported products, such as meat, dairy products, fresh fruit and
confectionary items. Many young professionals spend a sizable portion of
their income dining out, increasingly at western or chain restaurants
that use imported products such as U.S. beef, poultry, potato products
or wine. For example, Pizza Hut, which uses American potato products and
cheese, usually has long lines of eager customers and has become a
popular birthday party destination for children in affluent cities in
China.

Between 2001 and 2002, the disposable income of urban families rose
12.3% and 4.6% for rural families. The urban families spent 12.8% more
on food expenditures, while the rural families spent 5% more. With
continuing urbanization in China, more residents in the rural areas will
migrate to urban areas allowing for more money to be spent on food.
Also, with the improvement of living standards of Chinese people, the
consumption of processed food and beverages will continue to grow.

# Section II. China's Meat Industry

In the past five years, China has been one of the world's largest
producers of agricultural products such as cereals, meat, cotton lint,
in-shell peanuts, rapeseed and fruit. The production of the
above-mentioned products continues to rise, while many basic cereals are
being displaced by more profitable fruits and vegetables. The output of
meat grew from 57.2 MMT in 1998 to 65.9 MMT in 2002, a growth rate of
15.1%. However, according to industry insiders, ready-to-eat meat
products are less than 10% of the total production. With the
increasingly fast paced life of the Chinese people, the demand for
processed, ready-to-eat meat products will increase. In the 1990s,
Hormel from the USA set up two JV processing factories in Beijing and
Shanghai in order to meet the growing demands of Chinese consumers for
processed meat products. Big domestic processors such as Shuanghui Group
in Henan, whose daily meat processing capacity reaches 1,500 MT, and
Yurun Rood Group in the Jiangsu Province are expanding their meat
processing capabilities in order to increase their market share.

  ---------------------------------------- --------------- ---------------
  Table 6: China\'s Output of              Livestock       Seafood
  Livestock/Seafood Products (MMT)                         

                                                            

  1998                                     57.24           39.07

  1999                                     58.21           41.22

  2000                                     61.25           42.79

  2001                                     63.34           43.81

  2002                                     65.87           45.65
  ---------------------------------------- --------------- ---------------

> Source: China Statistical Yearbook, 2002, 2003

### Figure 3: China's Output of Livestock/Seafood Products

![](media/image4.wmf)

With the improvement of China's living standards, meat products play an
increasingly important role in the life of Chinese consumers. The per
capita annual meat purchases in China increased from 23.87 KG in 1998 to
32.62 KG in 2002, a growth rate of 36.6%, while the level in the
Guangdong province grew from 36.22 KG to 54.12 KG during the same
period, a growth rate of 49.4%.

The statistics in Table 7 show that the per capita meat purchases in
Guangdong Province has been much higher than the national average. The
reason for this is that the Guangdong people have a higher disposable
income than people in most other parts of China. More disposable income
also allows the Guangdong people to satisfy their desire to increase
purchases of more seafood products. The national average consumption of
seafood in 2002 was 35.6 KG, while in Guangdong Province it was 80.3 KG.

In Southern China, in Guangdong and Guangxi Provinces, pork consumption
still ranks first among meat consumption, while in Northern China, due
to lower disposable income levels, consumption habits and religious
concerns, people tend to eat more beef and mutton products.

  --------------------------------- -------- ----------- --------- --------
  Table 7: Guangdong Urban          Pork     Beef &      Poultry   Total
  Household Per Capita Annual Meat           Mutton                
  Purchases vs. China\'s National                                  
  Average (KG)                                                     

                                                                    

  Guangdong Urban Household 1998    20.05    2.2         13.97     36.22

  China\'s Average Household 1998   15.88    3.34        4.65      23.87

  Guangdong Urban Household 1999    20.2     2           15        37.2

  China\'s Average Household 1999   16.91    3.09        4.29      24.29

  Guangdong Urban Household 2000    19.56    2.08        15.91     37.55

  China\'s Average Household 2000   16.73    3.33        5.44      25.5

  Guangdong Urban Household 2001    19.4     2.1         15.6      37.1

  China\'s Average Household 2001   15.95    3.17        5.3       24.42

  Guangdong Urban Household 2002    28.8     3           17.64     49.44

  China\'s Average Household 2002   20.28    3           9.24      32.52
  --------------------------------- -------- ----------- --------- --------

Source: Guangdong Statistical Yearbook, China Statistical Yearbook,
2002, 2003

China is also the world's largest producer of cultured aquatic products.
The total output of aquatic products increased from 39.1 MMT in 1998 to
45.6 MMT in 2002, a total increase of 16.6%, whereas production of
cultured aquatic products grew from 21.8 MMT in 1998 to 29 MMT in 2002,
a growth of 33%. China produces nearly two-thirds of the world's
cultured aquatic products. The main products are farm raised carp,
tilapia and shrimp.

  -------------------------- -------------- ------------- ----------------
  Table 8: Output of         Seawater       Freshwater    Total Aquatic
  China\'s Aquatic Products  Cultured       Cultured      Products
  (MMT)                                                   

                                                           

  1998                       8.6            13.2          39.1

  1999                       9.7            14.2          41.2

  2000                       10.6           15.1          42.8

  2001                       11.3           15.9          43.8

  2002                       12.1           16.9          45.6
  -------------------------- -------------- ------------- ----------------

Source: China Statistical Yearbook, 2002, 2003 Total includes Sea/Fresh
Water Catch.

# Section III. China's Cereal Industry

# 

According to China Customs figures, in 2003 the entire Chinese market
imported 424,180 MT of wheat, 29.84% less than the previous year. China
also exported 2,237,480 MT of wheat, a 225.39% increase from 2002.
China's net export of wheat was 1,813,300 MT. The United States, Canada
and Australia are still the main players in the Chinese market. Cereal
production has been falling in recent years due to poor weather
conditions and more liberal production policies that favor more
high-value crops such as fruits and vegetables. The Chinese government
has already contracted for more than two million tons of high quality
wheat imports through the end of this calendar year. The attached chart
shows China's wheat import/export figures since 1995.

# 

  ----------------- ------------------------------- -------------------------------
  Table 9: China\'s                                 
  Wheat                                             
  Imports/Exports                                   

                    Wheat Imports (MT)              Wheat Exports (MT)

  1995              11,585,580                      16,188

  1996              8,245,961                       0

  1997              1,860,612                       709

  1998              1,489,403                       6,020

  1999              448,121                         204

  2000              880,000                         2,500

  2001              690,050                         450,000

  2002              604,570                         687,620

  2003              424,180                         2,237,480
  ----------------- ------------------------------- -------------------------------

#  Source: Chinese Customs Statistics

#########  Figure 4: China's Wheat Imports/Exports

# ![](media/image5.wmf)

There are 55 flourmills, which together have a daily processing capacity
greater than 1000 MT, located in Guangdong province. However, the
biggest 6 players in the region dominate almost half of the production.
These big players not only provide their products to local consumers,
but also export their flour to the surrounding area, mainly Hong Kong,
Macao and Southeast Asia. The Hong Kong and Macao markets are the key
import markets for high quality wheat flour from China, while the
Southeast Asia countries consume lower end products.

The wheat processing capacity has already reached 480,000 MT per year in
Guangdong province, but the actual products being processed only
amounted to 250,000 MT last year. Hence, many mills are not operating at
full capacity.

The Chinese government adjusted the export commodities' tax rebate rate
last October. The tax refund rate for wheat flour exports was raised
from 5% to 13%, while the rebate for wheat was lowered from 13% to 9%.
The flourmills are very excited about the decision and said the new
regulation will encourage their exports and increase their profit
efficiency.

Wheat imports are still dominated by the market's biggest player --
COFCO, which receives almost 90% of the yearly import quota. Most of the
joint venture mills and privately owned mills only get several thousand
tons of quotas each year. To get a better price from the exporter and
eliminate the negative impact caused by high freight rates, those mills
started to pool together their quotas to make joint purchases. Last
year, eight flour mills worked together and brought in more than 100,000
MT of U.S. wheat. Recently, about 200 joint ventures and privately owned
mills received 905,000 MT of import quotas from the State Development
and Reform Commission for 2004. With the approval of the next year's
quota, we anticipate the mills will continue to make joint purchases in
the future.

Most of the imported wheat will be used for blending with other
varieties of local wheat for specific gluten and protein content. For
example, higher quality bread flour will utilize imported hard wheat
with a protein content of around 13% to 14.5%, while biscuit flour may
utilize imported soft wheat flour with a protein content of around 7-9%.
For instant noodles, imported wheat with proteins between 11.5% and
12.5% would be most appropriate. With increasing incomes and demand for
higher quality food products, the usage of imported wheat will continue
to grow.

The distribution system in developed areas is also undergoing changes.
Sales of bakery products via supermarkets/chain bakery stores have
increased, while the number of small artisanal bakeries has decreased.
People living in cities tend to purchase bakery products with known
brand names out of concern for food safety.

With the anticipated lower cereals production and smaller planted area,
and increasing demand from consumers, we expect wheat imports to
continue growing in the coming years.

**Section IV. Fruit and Nuts**

## Fruit and Vegetable Processing

In 2003, the total sales revenue of the fruits and vegetable processing
industry amounted to around US\$ 3.02 billion (RMB 25 billion), an
increase of 30 percent over last year's sales.

Fresh fruits produced in China are mainly consumed fresh. Since
technology for processing is fairly primitive in China, only about 5
percent of the fruit is processed into canned or preserved products.

Imported fresh fruit are seldom used to make canned fruit. They are
usually sold at a much higher price and consumed fresh by Chinese
consumers. Some of the imported fresh fruit is also used as food
ingredients in cooking, such as cherries on cakes.

Meanwhile, imported dried fruits such as prunes and raisins are usually
purchased by Chinese consumers as snack foods. Chinese restaurants would
also incorporate dried fruits as an ingredient to prepare either cakes
or Chinese dishes. Dried fruits and nuts are commonly imported in bulk
and then packaged and labeled locally.

## Dried Nuts Processing

More than 90 percent of the tree nuts in China are imported from foreign
countries, usually in bulk, and then processed and packed by food
processors. The most popular items are pistachios, almonds, Macadamia
nuts, hazelnuts and pecan. Most of these products are processed and then
packed into smaller bags to be distributed to the retailers.

Packaging plays a very critical role in the consumer's purchasing
decision. Chinese consumers like to buy attractively designed packages.
Many food processors realize the significance of this and strive to
provide a more creative design on their products.

The imported dried nuts are mainly consumed as snacks. Some of them are
simply processed with salt while others may be preserved with more
ingredients, such as sugar, honey and even spicy items. The California
Almond Board has been very active in China and is responsible for a
growing trend for some restaurants to use almonds as an ingredient in
preparing Chinese cuisine, or adding almond flakes into cake mixes to
prepare birthday cakes.

## Market Entry Advice to US Food Companies

Among raw materials and food ingredients, imported food products account
for an increasingly large percentage of ingredients for the food
processing industry. Products with the most potential include tree nuts,
dried fruits, livestock and livestock products, poultry products,
seafood and cereals. As the urban population demands higher quality and
more variety of products, ingredients that enhance nutrition and
appearance of products will be in great demand.

More and more foreign companies are entering the food processing sector
because it is expected to flourish as China's tariffs becoming lower.
With much more advanced technology and stricter safety control, foreign
companies enjoy a solid reputation for high quality products.

Depending on the respective products, foreign countries undertake
different marketing strategies to promote a particular product which
include menu promotions, in-store promotions, trade show participation
and training seminars.

American companies are facing serious challenges from both domestic
manufacturers and foreign-invested enterprises. Although the US
currently enjoys a leading role in the imported food market, other
competing countries are striving to create a strong presence. As for
local processors, they are trying hard to upgrade their processing
facilities with state-of-the-art imported equipment from outside China.
Eventually, they will produce better quality food products and become
more competitive, especially with their low labor cost advantage.

To become more competitive, US food producers and/or processors should
try to improve the quality of their food products, adjust the tastes of
their products to meet the preferences of Chinese consumers, design
attractive packaging and also develop strong business relationships with
their Chinese trade contacts.

After its accession to the WTO, China is obligated to lower its tariffs
on imported products (see Table 1). The average tariffs on agricultural
products will decrease anywhere from 22% to 17.5%, while American
products will benefit from a decrease of 14.5%. Although the Chinese
government is trying to follow the WTO requirements, there are still
many areas that don't have specific laws guiding the proper
implementation at the moment. In order to be successful, American
producers and processors interested in entering this dynamic market
should be prepared to learn how to better understand Chinese consumers,
follow up with the regulations implemented by the Chinese government,
and approach this market with realistic expectations by being patient
with market development activities.

## 

  -------------- ----------- ----------- ----------- ------------ ------ -----------
  Table 10:                                                              
  Tariff Rates                                                           
  on Major                                                               
  Fruits,                                                                
  Vegetable and                                                          
  Dried Nuts                                                             

  Products       Tariff code MFN Rate    MFN Rate    MFN Rate for MFN    
                             for 2001    for 2002    2003         Rate   
                                                                  for    
                                                                  2004   

  Potato         0701.1000   13          13          13                  13

  Tomato         0702.0000   13          13          13                  13

  Cauliflowers   0704.1000   13          11.2        11.2                10
  and Broccoli                                                           

  Lettuce        0705.1100   15          12.4        12.4                10

  Peas           0708.1000   13          13          13                  13

  Beans          0708.2000   13          13          13                  13

  Asparagus      0709.2000   13          13          13                  13

  Sweet corn     0710.4000   13          11.2        11.2                10

  Coconuts       0801.1100   15          13.2        12.6                12

  Cashew nuts    0801.3100   28          24          22                  20

  Almonds,       0802.1100   29          26.4        25.2                24
  In-shell                                                               

  Almonds,       0802.1200   26          18          14                  10
  shelled                                                                

  Hazelnuts      0802.2100   29          27          26                  25

  Walnuts        0802.3100   29          27          26                  25

  Pistachios     0802.5000   30          20          15                  10

  Hawaiian nuts  0802.9049   29          26.4        25.2                24

  Bananas        0803.0000   25          16          13                  10

  Dates          0804.1000   19          15          15                  15

  Figs           0804.2000   30          30          30                  30

  Pineapples     0804.3000   20          15.2        13.6                12

  Avocados       0804.4000   25          25          25                  25

  Guavas         0804.5010   23          19          17                  15

  Mangoes        0804.5020   23          19          17                  15

  Oranges        0805.1000   35          22.6        16.8                11

  Grapefruits    0805.4000   35          23.2        17.6                12

  Lemons         0805.5000   38          22.6        16.8                11

  Grapes         0806.1000   40          23.8        18.4                13

  Watermelons    0807.1100   29          27          26                  25

  Cantaloupes    0807.1920   30          19.2        15.6                12

  Papayas        0807.2000   29          27          26                  25

  Apples         0808.1000   30          18          14                  10

  Ya Pears       0808.2012   27          19.2        15.6                12

  Apricots       0809.1000   29          27          26                  25

  Cherries       0809.2000   26          18          14                  10

  Peaches        0809.3000   26          18          14                  10

  Plums          0809.4000   35          22          16                  10

  Strawberries   0810.1000   30          25.6        24.2                22.7

  Raspberries &  0810.2000   29          27          26                  25
  Blackberries                                                           

  Cranberries    0810.4000   30          30          30                  30

  Kiwifruit      0810.5000   37          30          26.7                23.3

  Durians        0810.6000   28          24          22                  20

  Lychee         0810.9010   42          36          33                  30

  Logan          0810.9030   30          21          18                  15

  Carambola      0810.9060   30          24          22                  20

                                                                         
  -------------- ----------- ----------- ----------- ------------ ------ -----------

\*Minimum rate applied to countries enjoying most favored nation (MFN)
trading status with China. US are among those countries. The effective
minimum rate is tariff rate plus VAT (Value Added Tax). The currently
VAT rate for the majority of the products listed above is 13%.

Sources: PRC Import and Export Tariff Handbooks for 2001, 2002, 2003 and
2004

# Section V. Factors to Consider

# 

# Chinese Consumers Are Increasingly Aware of Food Safety

Chinese consumers are attaching more and more importance to the safety
and quality of their food. Generally speaking, Chinese consumers are
predominantly price sensitive. However, for consumers in the more
affluent urban areas, such as Beijing, Shanghai, Guangzhou and Shenzhen,
safety and quality have become two determining factors when deciding on
which products to buy. They are more willing to pay extra for quality
and safety. Therefore, the central government is implementing the
Fangxinshipin (safety guaranteed foods) policy, under which only foods
from designated processing facilities are allowed for retail sales. Back
in April 2003, China's Ministry of Agriculture released a list of drugs
banned from use in animal feeds and later in September announced the
Administrative Regulations on the Quality and Safety of Aquatic
Products. This regulations launched a nationwide campaign to ensure the
safety of feed for animal use in order to guarantee that meat and
aquatic products are safe for human consumption.

# Imports of Major U.S. Agricultural Products into China

China had over 124,000 enterprises/companies involved in food trading in
2003, with total imports and exports valued at US\$ 85 billion, an
increase of 37.1% over the previous year. Exports were US\$ 43.8 billion
and imports were US\$ 41.3 billion, a growth of 34.6% and 39.9%
respectively. China imported 20 MMT of soybean, mainly from the USA,
Brazil, and Argentina, valued at US\$ 5.4 billion.

The top ten trading partners for China in 2003 were Japan, USA, EU, Hong
Kong, ASEAN, Korea, Taiwan, Russia, Australia and Canada.

Major imported agricultural products from the USA into China include
soybean, tree nuts, fresh fruit and meat and poultry offal.

  ------------------------------------------- ---------------------------
  Table 11: China\'s Top Imports of Consumer  
  Foods, 2002                                 

  Product                                     Value (\$ millions)

                                               

  Poultry                                     426

  Dairy (excluding cheese)                    281

  Fresh Fruit                                 276

  Processed Fruit & Vegetables                260

  Red Meat                                    200

  Wine & Beer                                 76

  Infant Foods                                74

  Snack Foods (excluding nuts)                70

  Tree Nuts                                   67
  ------------------------------------------- ---------------------------

> Source: China Statistical Yearbook, 2002, 2003

China imported 99,886 MT of edible fruits and nuts from the USA in 2003,
a growth of 15.5% from the previous year, and valued at US\$ 78.8
million, a growth of 57.1%. As China's second biggest trading partner,
the USA is the largest supplier of meat and edible meat offal into
China. In 2002, China imported 1,047,774 MT of meat and edible meat
offal products from all over the world, among which 828,784 MT came from
the USA. Guangdong Province in southern China plays an important role in
the distribution of imported meat and edible meat offal products. About
70% of all meat imports enter China through Guangzhou and Shenzhen ports
and are distributed throughout China. In the Northern port cities,
Shanghai handles about 20-25% of the total imports.

U.S. beef and poultry products are currently banned from entering China.
U.S. beef was banned in December 2003 due to the BSE case detected in
Washington State and poultry products were banned in February due to the
discovery of Asian Influenza in a few poultry flocks in the United
States. Both situations are under control and discussions are currently
under way to reopen the market to U.S. beef and poultry.

**Section VI. Road Map for Market Entry**

Since imported food products comprise an increasing percentage of the
food processing industry, it is important to have specialized marketing
strategies to help ensure a place in the industry. Marketing strategies
vary according to the degree of popularity and acceptance that a
particular product enjoys locally. The stories of three product groups
-- almonds, potato products and dairy products --illustrate the
challenges that imported products face in occupying a sizeable position
in the food processing industry. For U.S. products that already have
large sales consumption and focus on ingredient application and
technical training for more specialized usage. For instance, many
high-end joint venture or local bakery chains now use American
ingredients in their specialized products such as cakes and cookies.

In the frozen potato products market, while the U.S. still enjoys 88% of
the market share, increasing domestic competition and lower-cost imports
from New Zealand and the EU have resulted in a 7% drop since 1999. The
U.S. Potato Board has resolved to maintain market dominance and set
quality standards emphasizing product profitability and specification in
its marketing messages. U.S. Potato products can be found at most fast
food restaurants and other quick serve retail food outlets.

While the U.S. trails Australian and New Zealand dairy imports in China,
the U.S.A. Dairy Export Council (USADEC) has capitalized on its
comparitive advantage to fortify the U.S. position in China: they
aggressively market a small selection of dairy products -- whey, lactose
and milk powder -- to achieve market penetration in those product
groups. For instance, to increase awareness of the versatility and cost
benefit of using lactose in food processing, the USADEC conducts
technical seminars and "one-on-one" consultation with large domestic
food processing groups. Education and training regarding ingredient
application has helped hasten the incorporation of American whey
proteins, lactose and milk powder into the local food processing
industry, thereby increasing the demand for imports of those ingredients
from the U.S.

Generally speaking, ordinary Chinese consumers are very price sensitive.
For both sellers and buyers, price is the number one concern when
deciding whether or not to purchase something. The second factor is
quality.

More than 90 percent of the tree nuts and dried fruits in the local
market are imported raw from foreign countries, in bulk, and then are
processed and packed in China. The most popular items include
pistachios, almonds, Macadamia nuts, hazelnut, prunes, raisins and
pecans. Many of these nuts and dried fruits are packed either in
transparent plastic bags or paper cartons for sale, usually in the
supermarkets.

For the ready-to-cook products sold in the local supermarkets, most raw
elements are of local origins. The more common elements are beef, pork,
chicken, mutton, meatballs, fish balls, seafood and fresh vegetables.
They are cleaned, cut to the preferred size, packed in a white Styrofoam
plate and wrapped with a plastic transparent film for display in the
refrigerated section of the supermarket. Due to the fast pace of urban
life, many Chinese customers welcome these convenient and ready-to-cook
products. The market for ready-to-cook products is promising.

Imported beef, pork, seafood and other imported seasoning ingredients
are available in high-end restaurants such as those in five-star hotels
and JV supermarkets such as Park N Shop and Carrefour. Western style
cuisines and cooking are gaining popularity in big cities all over
China. They create a budding market opportunity for foreign food
products. After the USA announced the first BSE case late December 2003,
US beef products have been banned from entering the Chinese market.
However, before the BSE case in USA, U.S. beef products, especially beef
offal, was very popular in the Chinese market and was facing strong
competition from New Zealand and Canada. U.S. seafood has strong
competition from Norway, Australia and Canada. Beef jerky and pork jerky
are two popular snacks made from local elements. The two best selling
seafood snacks are preserved squid and de-boned eels and are both are
made with local products.

Thailand and Australia are the only two countries that have a
significant share of the imported rice market in China. The two most
popular packages are 5 kilograms per bag for sale in supermarkets and 25
kilogram bags offered in the wholesale markets.

Joint ventures such as Garden, AJC and Donghaitang produce most of the
bakery products sold in the local supermarkets. They buy flour from
domestic mills who buy wheat from the United States, Canada and
Australia to blend with the local varieties.

Foreign fresh fruits are available all year round in China. The
technology for processing fruits is fairly primitive in China. It is
estimated that only 5 percent of the fresh fruits grown in China are
processed into canned or preserved products. The other 95 percent is
consumed raw and fresh. Canned fruits such as peaches, pineapples and
cherries are mainly used for baking. Canned litchis and longan are
exported. Preserved fruits are consumed mainly as snacks.

China manufactures a great variety of milk powder. Imported infant
formula and milk powder used to be very popular among young parents who
want to provide the best for their only child. With the development of
the Chinese dairy industry and the establishment of joint ventured milk
production in China, JV and local products have become the preferred
choice of Chinese young parents because of their lower price and
comparable quality. Worldwide brands such as Mead Johnson, Wyeth,
Nestle, Dumex have joint ventures in China.

Various brands of chocolate are readily available in South China. They
include original imports such as Ferrero Rocher from Italy and Lindt
from Switzerland and also products made in China, such as Hersey in
Shanghai, Nestle in Tianjin, M & M in Beijing, and Montresor in
Zhangjiagang.

## Section VII. Best Products and Prospects

The following foreign food items and ingredients are sold and well
received in the Chinese market: almonds, pistachios, prunes, raisins,
oranges, table grapes, grapefruits, hazelnuts, Macadamia nuts, apples,
cherries, beef, chicken parts, bovine and swine offal, bakery
ingredients, French fries, sweet corn, juices and concentrates,
lobsters, clams, salmon, infant formula milk powder and candies. These
items are especially popular during festival seasons like the Chinese
New Year, the Mid-Autumn Festival, and Christmas.

Developing health food, microwaveable food, instant food, infant food,
food for primary and high school students, and low calorie, low fat, low
saturated fatty acid, low salt, low cholesterol, high fiber and high
calcium for older people are among China's food industry's priorities.

**Section VIII. Summary and Post Contact**

The food industry in China is adjusting to market forces. It is getting
ready for a higher level of development. Its immediate and urgent needs
are finding the resources for upgrading the processing and manufacturing
facilities and importing or building production equipment to meet
consumers' demand for better quality food items and food safety
concerns. Its expansion is contingent on finding new markets within and
beyond its borders. The quality and pricing of the products will
determine if they are able to compete domestically and internationally.
Improvement of the production facilities and equipment will create
demand for imported and better quality food ingredients and raw
materials. They will also require better quality control.

Inquiries about this report can be directed to ATO Guangzhou, Shanghai
and Beijing. The telephone numbers for the three posts are
011-8620-8667-7553, 001-8621-6279-8622 and 011-8610-8529-6418. The fax
numbers are 011-8620-8666-0703, 011-8621-6279-8336 and
011-8610-8529-6692, respectively. Currently ATO/Guangzhou website
www.atoguangzhou.org carries current information on the South China
market. The three posts will incorporate a FAS nationwide website to
provide overall information on the China market in the coming weeks.