The Maturing Tastes of China’s Wine Industry

May 9, 2014 Posted by China Briefing Reading Time: 4 minutes

SHANGHAI — Last month the Shanghai Wine Experience took place over two days at the Hyatt on the Bund, offering a chance for industry professionals and amateur wine lovers alike to taste some 7,500 wines on offer. For some years the world has watched China’s position in global wine sales increase by leaps and bounds to this year become the world’s fifth-largest wine market overall and top consumer of red wine. Most recently, the industry has emerged from setbacks with a more mature consumer base and newly available opportunities for foreign investment.

Domestic producers still occupy more than half of the total market—including Changyu Pioneer Wine (a subsidiary of state-owned China National Cereals, Oils, and Foodstuffs), Great Wall Wine and Dynasty Wine—and with good reason too, as Chinese wines have been scoring points in tasting competitions and increasing their market focus in mid- and high-price wines. China is expected to become the world’s largest wine producing nation within the next five years.

Meanwhile, wine imports into China have risen sevenfold over the last 6 years and their share of the market has increased to 19 percent. Almost one in five bottles of wine consumed in China is now imported. Illustrating this trend, U.S. exports of wine to China were close to 23 million bottles in 2013, up from practically none a decade previous.

French wines perform particularly well in the Chinese market, where sales totaled US$1.15 billion in 2013 and accounted for nearly half of all wine imports. With China already the largest export market for French wine, imports were recently further bolstered by China’s agreeing to drop an anti-dumping suit against EU winemakers.

The reputation of French wines is such that they have spawned a notorious counterfeiting industry—in fact, the problem is so serious that the Chinese government recently signed a “declaration of intent” with France to take action against the sale of fake wine and spirits on the Chinese market.

Not all wine in China is purchased for its gustatory virtues either—wine has also found its place in the Chinese investment environment. A recent trend has Chinese investors acquiring foreign vineyards, including two high-profile acquisitions of Bordeaux properties, and using them to sell wine for export to China.

In a second type of investment, several private funds have been set up to purchase vintage wines as investment vehicles, promising high investment returns (similar to the case with fine arts, as profiled recently by China Briefing). And so far they have struggled to keep up with investor demand.

The good times seemed to have come to an end, however, with government austerity and anti-corruption measures announced in an eight-point plan in December, 2012 and aimed squarely at curbing the excesses of Party banquets, including free-flowing wine and spirits. This has since been blamed for underperforming sales of wine and spirits, both domestic and imported.

Australia has been particularly eager to regain the lost ground after experiencing a 12 percent decline in sales of wine in China against the previous fiscal year. However, it is difficult to assess how much of the decline is truly attributable to the crackdown versus a natural cooling of consumption growth from its breakneck speed of 143.3 percent between 2008-2012 to an estimated 33.8 percent from 2013-2017.

Signs for optimism are found in the gradual maturity of the market base, as Chinese consumer habits move in the direction of higher-priced wines—the country is now the world’s second-largest consumer of wine price US$10 or higher. Meanwhile, sales in the category of expensive wines more than quadrupled between 2008-2012 and are expected to grow a further 60 percent by 2017.

Industry analysts note that while red wine typically drives growth in newly-established wine markets, maturing tastes gradually favor the introduction of more white, rosé and sparkling varieties. This should create room for additional market growth well into the future of China’s wine industry, which currently is almost entirely concentrated in red wine (90 percent of consumption).

The launch of the Shanghai Free Trade Zone (FTZ) in September last year offered yet another boon to the wine industry in China. The Zone allows for high-priced wines to be brought into China and sold on auction with no duty or customs clearance required as long as the product stays within the Zone’s four bonded areas.

In some cases, the actual transaction may take place in Hong Kong because of an agreement allowing for the duty-free importation of wine into anywhere in mainland China from Hong Kong, under certain conditions. This avoids the otherwise high cost of importing wine into China, which normally includes a 14 percent customs tariff, 17 percent value-added tax and 10 percent consumption tax.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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