Welcome to our China Wine Market Briefs, a new section created by Vino Joy News to bring to you the latest and essential readings on what’s happening in Chinese wine industry reported in Chinese and English language press.
Market Watch
International travel restrictions to mainland China will be in place until October. The latest announcement from China’s Ministry of Aviation says the restrictions on international travels in and out of China imposed in late March will be in place until October. This means domestic and international airlines can only operate one international flight per week, greatly limiting entries to mainland China. International wine fairs such as ProWine China in Shangahi and Vinexpo Shanghai, both scheduled for November, will be able to dodge a bullet for now.
The profitability of Chinese wineries once again is thrown into the media limelight after a Ningxia winery, Chateau Yuange, is delisted from National Equities Exchange and Quotations (NEEQ), also known as China’s “new third board”, after owing over RMB 8.4 million (US$1.18 million) in debt. This is a problem that confronts many Chinese wineries of various scales. As we previously wrote out of 13 listed Chinese wineries, only three reported profit gains in their 2018 financial reports. Weilong, China’s third largest winery and biggest organic winery, has close to RMB 200 million (US$28.1 million) worth of stocks frozen due to its controlling shareholder Wang Zhenhai’s debt dispute with lenders. CITIC Guoan Wine, which owns Niya in Xinjiang, has RMB 300 million (US$42.1 million) worth of stocks frozen and faces what Sina Finance calls inevitable delisting from stock board. Grace Vineyard, a leading family-owned winery in China distributed by ASC Fine Wines, reported a profit loss of 46% in Q1 this year. The reports of crushing debts and loans underlined the severe cash flow issue with many Chinese wineries that eventually came to find that their grand grape ambition did not cash into reality or profits. Chinese language media Beijing Business Today wrote that for many wineries that good sales is just a gloss over the fact that many of their wines are used as collateral for loans and never entered market circulation.
Wine merchants in Wuhan, epicenter of China’s virus outbreak, says only 10-20% sales recovered. Chinese language drinks trade publication WBO interviewed wine and spirits merchants in Wuhan in central China and found that even though lockdown in Wuhan was lifted on April 8, up till now sales only recovered for about 10-20%. Merchants expect the loss to continue until September. Stocks that are meant for Chinese New Year in January are still not depleted, merchants said. Wineries who are banking on China’s wine market to come back with vengeance after virus outbreak might have to adjust their expectations.
Cross-border e-commerce trading for fine wine got greenlighted in Xiamen. The first batch of premium fine wines imported under the cross-border e-commerce scheme has been cleared by customs in Xiamen, a wealthy coastal city in Fujian province. China introduced cross-border e-commerce trading a few years ago and increased per order limit and annual spend limit in 2018 to encourage direct sourcing with reduced taxes. Under normal trading, imported wines without Free Trade Agreement would be subject to 46.9% of taxes, but under cross-border e-commerce trading arrangement, taxes would be lowered to 21%. Per order purchase is limited to RMB 5000 (US$700), and annual spend is limited to RMB 26,000 (US$3650). The country just added another 46 designated cities and areas as pilot zones for cross-border e-commerce trading in another effort to boost imports and promote consumption.
Cautionary Tale
OurHours (全时), an ambitious convenience store launched in 2011 to combine wine sales with grocery shopping, has gone bust. May 20 was the last day of operation for all of its stores in China’s capital Beijing. It branched out into eight different cities and in 2017 the company announced its ambition to open stores in 100 different cities. Three years later, the company completely went under. This news announced through the company’s official WeChat account came just a year after it was sold to Shan Hai Lan Tu, a Chinese wine importing and distributing company for RMB 300 million (US$42.1 million) at the time. The store was mainly selling wines in Shan Hai Lan Tu’s portfolio and its own self-branded French AOP wines from Bordeaux and Rhone. The closure of OurHours will also raise questions on the fate of the wine importing company, Shan Hai Lan Tu. With China’s wine consumption already slowing down last year due to trade war and weak economy, in the first five months of 2019, over 2,000 bottled wine importers in China folded business, as we previously reported. Now with coronavirus pandemic, the figures will most likely increase.
People on the Move
Castle Li, the former head of state-owned COFCO Wine & Wine, apparently has taken on a new post as chairman of Baoyun Liquor to sell Baijiu, the fiery Chinese spirit. Li, as we previously reported, was dismissed from COFCO over ‘discipline violation’ in 2019, one of the most shocking personnel reshuffles seen in China’s wine market last year. COFCO is China’s biggest foodstuff company and COFCO Wine & Wine is the wine and spirits importing arm of the conglomerate.
Outlook
China for the first time did not set a GDP growth target for 2020 at the country’s most important political event, the annual “two sessions”, on Friday, as the country faces the most severe economic downturn in four decades. This is a sign that shows the difficulties for the country to restart its economy amid coronavirus pandemic. Li Keqiang, the Chinese premier who delivered the work report on Friday, noted that the government refrained from setting a GDP target not because of domestic conditions but because foreign markets were so uncertain. One of the biggest uncertainties is the China-US relations, now worsened over coronavirus pandemic. Wineries who are planning for investment and sales target for China should realistically assess the situation and expect slow growth given that consumption sentiment will likely drop amid weakening economy and rising global anti-China sentiment over coronavirus.
Meanwhile, across the border, tensions between Chinese central government and Hong Kong are reignited after Beijing proposed a new national security law for the special administrative region. This prompted on Sunday the largest protest seen in months since the start of the coronavirus this year, and will undoubtedly be the start of many to come for a city that just came off from nearly a year of social unrests. What’s more worrying is that it might prompt the US to revoke the special economic and trading status given to Hong Kong if the Trump administration believe the “One Country, Two Systems” promise is broken. The 1992 Hong Kong Relations Act guarantees the US to treat Hong Kong differently from mainland China for matters concerning trade exports and economic relations. The US State Department is set to review Hong Kong’s special status by the end of this month. If the US decides to revoke Hong Kong’s privileges, Hong Kong will likely expedite its fall as a financial hub, and will be subject to the same tariffs US levied on mainland China. For wine trade in Hong Kong, would this mean that American wine exports to Hong Kong will be subject to over 110% taxes? Another thing to think about is if Hong Kong’s special trade privileges with the US are revoked, how would Hong Kong compare with mainland cities such as Shanghai or Shenzhen? This is something that wine merchants and wineries should give an extra thought.
