Since very recently, the retail sector in China was an impermeable one, allowing almost no entries from overseas. The trend is being reversed with increasing activities in mergers and acquisitions ("M&A"), consolidating new and emerging retail trading businesses. Retailers have realized that the future lies in linking each other gives a cutting-edge advantage on achieving buying power over suppliers; besides, the global trend goes in the same direction. Consolidating markets which were previously scattered in bits and pieces has resulted in the creation of several investment opportunities: whether for multinationals or local corporate and private investors.

Investors cannot help relishing at new opportunities that are created as the need for capital increases with the growing rush to acquire strategic locations for the purpose of establishing national business outlets. The operational framework is now more relaxed, providing multinationals with an unequal breathing space in their manoeuvres. Still, those who came in during those tight regulations face delicate issues in their quest to integrate or acquire Chinese businesses. New comers, on their side, can choose to directly acquire existing retail businesses or set up their own local sales network. Let us give a serious look at those retails businesses where M&A activities are most lively and see how this fact is benefiting potential investors.

Retail revolution

China is today an indisputable economic power on the world market thanks to unprecedented economic reshuffling of its internal business environment through elimination of heavy regulations. The retail and distribution sectors were the last ones in this re-engineering process since China's economic policy has long been focused on developing its export-oriented manufacturing sector. It was only in the mid-90s that the government decided to give a push to the retail and distribution markets. The strategy was clear: to implement measures by gradually liberalizing the local retail market to foreigners so as to allow Chinese operators sufficient time to prepare themselves for the global competition. The result was an unbelievable economic growth for the past 20 years turning the country into an outstanding economic force on the global market. During that process, the Chinese society has witnessed the transformation of its middle class society into an urban consumer society whose demands are becoming more and more sophisticated.

The new changing socio-economic environment did not affect only the urban population. Rural inhabitants showed their willingness to get a piece of the cake by moving massively to urban areas and this in turn boosted the retail business industry through an increased consumer base. The rural markets, on the other side, were naturally reduced to an insignificant proportion. The attractiveness of the Chinese market lies in its size and inequalities that resulted from a one-sided migration, i.e., from rural to urban areas.

Before its admission to the World Trade Organisation, inward foreign investment was a process full of obstacles, deliberately slowing down the growth rates of foreign investors. Most trade barriers and tight regulations have been eliminated leaving traders with a less hostile business environment to perform in. For example, foreign traders no longer have to establish joint ventures with Chinese companies to set up business in China, they can now do so through wholly-owned foreign enterprises (WOFEs). Thus, foreign traders now find themselves in a reassuring and comfortable environment, visibly impacting on the business growth. They are entering China not only via their own retail outlets but also through M&A, taking over existing businesses. The Ministry of Commerce (Mofcom), which has authority to monitor small and medium-sized foreign owned retail business, further alleviated the hardships by empowering local provincial Mofcom bodies as from 1 March 2006.

China now hosts more than 35 of 50 the top retailers of the world. Contractual foreign direct investment (FDI) was evaluated at US$1.9bn for the year 2005, with more than 1000 foreign-own retail and wholesale projects approved by Mofcom. Astonishingly these represent only 2.6% of the total retail market sales in 2004. Foreign-retail businesses stand only at 17 among the top 100 Chinese ones. Only Carrefour of France has been able to enter the top ten list of retailers.

It is undeniable that local retailers are still maintaining their supremacy in China due to government's support. Mofcom has even agreed to provide financial support to 20 top retailers in 2004, among which is Shanghai Bailian (Group) Co, the top retail business with declared revenues of Rmb72.1 (US$8.9bn) in 2005. Chinese government is well aware that its local businesses have to keep themselves on the watch, with the gradual entrance of foreign players on their ground. They need to match the new standards of foreign investors who provide innovation, sophistication and modernity as complements to their products base. Chinese have definitely understood the trick, and are now increasingly facing the emergence of original business ventures having potential to expand overseas using government's supports. However, there is a strong feeling that the Government is favoring more state-owned or previously state-owned companies, but the fastest growths are clearly visible within domestic private sector where M & A keeps it attractiveness as an interesting tool.