Wal-Mart, the world's biggest chain retailing operator signed a contract on September 19 with Yuxi, a city in Yunnan Province for land transfer, where Wal-Mart is to set up a supermarket next year.

On September 15, the retailing conglomerate inked a similar agreement with Taiyuan, capital city of central China's Shanxi Province.

The moves show that Wal-Mart has begun penetration into second-tier cities. Reliable sources say that the US-based giant is currently involved in negotiations with 10 such cities.

However, Wal-Mart is being cautious and has declined to comment on the two contracts.

"Full liberalization of the market will only be realized in three months, so it is not timely for us to say anything about it," said John Xu, director of external affairs for Wal-Mart China.

Other foreign retailers, including France's Carrefour, Metro of the United States and Thailand-based Lotus, are intending to test the waters in the second-tier cities.

Yu Shuhua, vice-director of Zhongshang Commercial Economy Research Center, says that foreign retailers' decisions to expand to second-tier cities was partly based on their studies of first-tier cities, where the commercial market is now tending to saturation after a decade's development.

"Meanwhile, operation costs, involving land and labor, are comparatively low in the second-tier cities," Yu said.

In line with China's commitments to the World Trade Organization, the country will fully liberalize its retail market to foreign investors from December 11. So far, foreign retail enterprises are only allowed to extend their businesses to the municipalities, capital cities of provinces and autonomous regions and special economic zones.

Wang Yao, deputy secretary-general of the China General Chamber of Commerce, says loosening territorial limitations may further stimulate current serious competition in retail markets.

"Foreign retailers will possibly change the face of the sector in China and domestic retailers will be up against more challenges," said Wang.

Statistics from the Ministry of Commerce show that, by the end of June, Carrefour has opened 50 outlets in China, with sales volume amounting to 7.761 billion yuan (US$935.06 million) during the first half of this year, ranking top among foreign retailers in China.

Wal-Mart has set up 39 chain stores in China and its sales volume reached 3.723 billion yuan (US$448.55 million) from January to June.

Wang said that the situation may change, as Carrefour's rapid expansion, to some extent, was based on illegal approval from some local governments, who advanced the market liberalization timetable because of local interest.

"When the territorial restrictions are lifted, foreign retailing operators will compete in a fair arena, hence results are deemed to reflect the retailers' actual strength," Wang said.

But Chinese commercial enterprises are, apparently, not too worried about the new round of competition in second-tier cities.

"We have prepared for several years for the full opening of the market and we have our own advantages in terms of understanding the local market and existing business networks," said Zhang Hongwei, chairman of the board of Orient Home, one of China's leading chains of home furnishing retailers.

(China Daily October 8, 2004)