Report Highlights:

Elimination of the rice import quota system effective January 1, 2003 has removed entry barriers to the trade, reduced operation costs, and enhanced competition among operators in the local rice trade. Although Thai rice is expected to be the dominate supplier (80% share), the drought in Australia and the new import regime could create opportunities for U.S. rice exporters in the coming months.

Summary

Hong Kong’s rice trade was fully liberalized on January 1, 2003, with the elimination of the rice import quota system after 48 years of implementation. The Rice Control Scheme was introduced in 1955 when rice supply was a major concern of the community. In view of the gradual changes in the demand and supply of rice in Hong Kong, the government reviewed the system and started to take steps to relax trade restrictions since 1997 to enhance market competition. The significant changes over the past few years included : (1) lifting capital and financial requirements, (2) any parties being allowed to register as importers, (3) allowing importers to sell directly to consumers since 2001, (4) eliminating restrictions on import quantity, and (5) reducing the reserve stock level gradually from 45,000 tonnes before 1998 to 13,500 tonnes in 2002.

All these changes have had a combined effect of removing entry barriers and reducing operation costs. It is envisaged that more new players will enter the market and retail prices will be reduced. Retail prices for rice have already dropped around 30%-50% from December 2002 to January 2003. Table 1 shows the latest retail prices at the two leading supermarket chains.

There is an opportunity for high quality and competitively priced US rice to increase its market share after full liberalization of the rice trade, as more new companies can import rice directly and they should be looking for more sources of rice that can help them maintain or even increase competitiveness.

Background

Rice is a staple food for Hong Kong and there is no local production. To guarantee adequate and stable supply of rice, the Hong Kong government imposed an import quota system for rice in 1955. All stockholders ( importers) and wholesalers had to register and fulfill certain capital, financial, and residency requirements. Stockholders were allocated an import quota and were required to import rice in accordance with a schedule. The Hong Kong government required all importers to maintain a reserve stock, which was lowered to 40,000 tonnes in 1998, sufficient for 45 days’ consumption by the population. Restrictions were imposed on stockholders to operate as wholesalers, and vice versa.

Government statistics show that the reliance of Hong Kong people on rice as a staple diet continues to decline sharply. The average annual per capita consumption has lowered from 78 kg in 1975 down to 48 kg in 2000.

Following a review of the rice control system in 1996, the Hong Kong government decided to gradually liberalize the rice trade. It was believed that fair competition would lower retail prices and benefit consumers in the end.

For a fuller account of the history of the rice trade in Hong Kong and the recent development leading to full liberalization, please refer to GAIN Report#HK0004 and the following website:

http://www.tid.gov.hk/textonly/english/import_export/nontextiles/ricetrade.html

Impacts of Liberalization

Being fully liberalized, the rice trade operates in a fairly free market environment. Now the entry barriers are removed. Anyone who intends to import rice into Hong Kong may apply to be registered as an importer at any time. If they wish, they can sell directly to consumers and there is no restriction on import quantity. In the past, a certain profit margin could be secured when the number of importers was limited to about 40 and strict entry barriers prohibited newcomers. The new measures should have some noticeable results.

First, the new market conditions have attracted new players with different backgrounds. 40% of imported rice goes to the retail stores whereas the rest 60% goes to the catering industry With the liberalization of the rice trade, some caterers have decided to import rice directly. According to the government and the Hongkong Rice Importers & Exporters Association, there are currently 78 rice importers (*), of which 36 are new players. Some larger new players include:

1. Parknshop, one of the two largest supermarket chains in Hong Kong
(http://www.hutchison-whampoa.com/eng/retail/retail2a1.htm)

2. Sims Trading, a large food importer/distributor
(http://www.simshk.com/en/profile/about.htm)

3. Dah Chong Hong Ltd, another large food importer/distributor
(http://www.dchfood.com/eng/front.htm)

4. Maxim’s, a restaurant conglomerate owning restaurant and fast food chains
(http://www.dairyfarmgroup.com/dfarm_graphic/operations/maxi.html)

5. Sun Generation, the largest school lunch caterer (around 50% market share)

6. Wellcome Supermarket (considering to register), the other largest supermarket chain
(http://www.dairyfarmgroup.com/dfarm_graphic/operations/well.html)

(*) Please contact our office if you wish to obtain a full list of registered rice importers.

Second, since importers are allowed to sell directly to retailers or consumers with the different layers of middlemen from importing to retailing reduced, the cost of operation can thus be lowered providing room for the reduction of retail prices of rice. Trade sources estimate that an importer taking the role of an wholesaler as well can save 20% to 30% of the cost. For example, Parknshop, as a registered rice importer, can now import rice directly from exporters whereas in the past, it had to rely on supplies from importers through wholesalers. Such vertical business integration will lower supply cost of rice and consequently may lead to reduction of retail prices.

Third, the lowering of stock reserves will also reduce operation costs correspondingly. Warehouse space is very precious in Hong Kong. According to the trade, the cost of maintaining a reserve stock for 15 days’ consumption or 13,500 tonnes is about HK$24 million (US$3 million) per year, or about HK$3.5 per person of the population. The operation cost would have been much higher if the reserve stock had remained at 45,000 tonnes as before 1998.

In short, the new measures have removed entry barriers to the trade, reduced operation cost and enhanced competition among operators in the rice trade.

Market Assessment

Table 2 shows the imports of rice to Hong Kong during January-October (2000-2002). The table shows that the market is dominated by Thai rice, followed by Australian and Chinese rice. Post have met with members of the Hongkong Rice Importers & Exporters Association to discuss the structure of the local rice market. According to the members, Thai rice is popular in Hong Kong because of its flavor, texture and competitive price. Packs in5kg and 8kg are most popular. Table 3 shows the average prices for rice imports to Hong Kong during 1997-2001. The table confirms that Thai rice is very competitively priced. It is envisaged that Thai rice will continue to dominate the Hong Kong market given its competitiveness in price, flavor and quality.

As regards US rice, the members commented that US rice was rather inconsistent in quality, supply and price; and therefore not many Hong Kong importers brought in US rice. However, import statistics for the first 10 months in 2002 (Table 4) show that price of US rice has been more steady and competitive.

Given Hong Kong’s sluggish economy, market competition is primarily based on price. If the price for US rice can be maintained at this competitive level, there is an opportunity for US rice to gain more market share in Hong Kong, particularly when all importers (be they “old” or “new” players) want to identify more sources of high quality and yet competitively priced rice for them to better compete under the new market situation.

Rice in Hong Kong is considered a "reserved commodity." Under the Reserved Commodities Ordinance, the import and export of “reserved commodities” are subject to licensing control. Reserved commodities include rice. Only local companies which have been registered with the Hong Kong Trade and Industry Department are eligible to apply for import licenses for reserved commodities.

Rice is a staple food for Hong Kong and there is no local production. To guarantee there are sufficient rice supplies, the Hong Kong Government has imposed an import quota system for rice since 1955. Importers have to import an amount according to the allocated quota, with very slight deviations allowed. In essence, the rice quota system has been designed to make sure Hong Kong has adequate supplies to meet local demand. The purpose is not to curb imports and protect local production. Importers are free to import products from any country or source.

Hong Kong Government Lowered Rice Reserve Requirement
In the past, Hong Kong importers were required to maintain a reserve stock of 49,000 tons, which was sufficient for 45 days’ consumption by the local population. The Hong Kong government conducted a review of the Rice Control Scheme in 1999 to map out a long-term plan and timetable to fully liberalize the rice trade.

In view of the reduced reliance of the local population on rice as a staple diet, the Hong Kong government has decided to gradually reduce the required reserve stock level. The reserve stock was first lowered in January 2000 to 40,000 tons. Currently, the reserve stock stands at 13,500 tons, sufficient to provide 15 days consumption for the local population.

Rice Trade Liberalization
The objective of the government is to liberalize rice trade by 2003. To this end, the government has already taken steps by lifting the restriction on cross-ownership of importers and wholesalers and allowing them to engage in both importing and wholesaling of rice if they so wish. This restriction was lifted in January 2001. As a result, the number of importers increased from 40 to 55. Also, the government will remove entry barriers to the rice importing business by eliminating the residency, financial and capital requirements for registration as rice importers. In this connection, the government will invite all interested parties to register as rice importers in July 2002. The government is committed to fully liberalize rice trade by 2003 and details will be announced in 2002.

Various Hong Kong media have reported that the Hong Kong Government (HKG) plans to open up the Hong Kong rice market within 2-3 years by scrapping the existing 45-year old import licensing and quota system.

DOMESTIC CONSUMPTION
Despite the increase in population, Hong Kong’s total annual rice consumption has remained more or less stable at around 330,000 to 350,000 tons since 1975. With a more diverse diet due to improved living standards, per capita rice consumption has declined from 78 kg in 1975 to 48 kg in 1998.

RICE IMPORTS
All the rice consumed in Hong Kong is imported. In 1998, Hong Kong’s primary suppliers were Thailand (76 percent), Australia (20 percent), China (3 percent) and Vietnam (1 percent). Rice imports are sourced according to price, quality and flavor. As a free port, Hong Kong maintains no import duty on rice.

THE EXISTING IMPORT SYSTEM
The present Rice Control Scheme came into operation in 1955 with the objectives of ensuring regular and adequate supplies of rice to consumers, providing a reserve stock for emergency purposes, and cushioning price fluctuations, since rice is a staple food for Hong Kong Chinese. Under the scheme, a limited number of companies are registered as importers and are required to import rice according to a quota system operated by the Trade Department. At present, there are 40 rice importers.

In an effort to introduce more competition and flexibility to importers, and gradually open up the rice trade in Hong Kong, the Trade Department implemented the Optional Quota System in 1997. With this initial loosening of the import quota system, 90 percent of the overall import quota was allocated as a fixed quota to individual importers according to their respective share of import units (A total of 1,000 basic import units are allocated among the importers, with the largest holding 56 units and the smallest holding 8 units). In addition to this fixed quota, importers were then allowed to apply for an optional quota, not to exceed 50 percent of their individual quota. The ceiling of the aggregate optional quota was first set at 30 percent of the overall import quota.

Starting in January 1999, only 70 percent of the overall import quota was allocated as a fixed quota and the amount of optional quota each importer could obtain increased to 100 percent of their individual quota. The optional quota ceiling is now set at 40 percent of the overall import quota.

The Trade Department continues to regard rice as a reserve commodity, requiring importers to maintain minimum reserve stocks proportional to their fixed and optional quota. The overall aggregate reserve stock level to be maintained by all importers is set at 40,000 tons, which is sufficient for about 45 days’ consumption.

Rice wholesalers are also required to register with the Trade Department, so that if needed, the government has a mechanism to prevent undue stock holding, speculation or profiteering at the wholesale level. Currently, 27 rice wholesalers are registered.

MARKET LIBERALIZATION PLANS
Newspapers in Hong Kong have reported that the government plans to open up the Hong Kong rice market within 2-3 years by scrapping the existing import system described above. Reportedly, the new system will allow more importers to apply for an import license and will allow importers to run wholesale businesses as well. The new policy may also reduce the required reserve stock, allowing importers to cut storage costs. Despite all the speculation, the government has declined to comment on details, claiming that it has not yet finalized the plans for opening up the market, and that only a draft plan has been submitted to the Rice Advisory Committee for comment and approval.

Rice is a staple food for 99 percent of the Hong Kong population. With an annual import value of US $180 million, the loosening of import quota administration will definitely attract newcomers. Large supermarkets with numerous retail outlets will naturally explore new opportunities in order to cut costs. Reportedly, Park’N Shop, one of the two major supermarket chains in Hong Kong, has already indicated interest in importing rice directly from overseas suppliers. With more competition on the supply side, rice prices can be expected to drop in the short term following liberalization of quota allocation. However, there is concern that the complete opening of the market eventually may lead to the concentration of the import business in the hands of a few big companies, sending price back toward current levels.