In the second instalment of our China report, Far Eastern correspondent Robin Lynam investigates the complex world of the Chinese wine market and its potential for foreign and domestic investment.

The production and consumption of wine is not exactly new to China. It is possible that grapes were being fermented in the country before the beginning of the T'ang Dynasty in AD 618, by which time it is a matter of record that wine was already being imported in significant quantities from Central Asia.

Official discouragement however marginalised it until very recently. Grapes, it was reasoned, took up large areas of arable land that could be put to better use feeding a vast and hungry population. To this day the majority of Chinese vines bear table grapes, although optimistic novice winemakers are increasingly prone to trying to use them for more interesting purposes.

Although heavy duties have tended to discourage imports, the last five years have seen expensive imported wines becoming popular for reasons of status. With the traditional tipple cognac widely viewed as passe, Bordeaux has taken its place in the bars, nightclubs and karaoke lounges and is - bizarrely - often drunk in much the same way, mixed with soft drinks.

With the undertaking China has given to cut tariffs in exchange for World Trade Organisation membership, the time is ripe for other countries and regions to claim their slices of the cake. Duty is set to drop from 65% to 14% by 2004.

Preferential treatment, however, is likely to continue to be given to companies who are willing to do something to benefit China's own wine industry. Companies who have for some time been active in the country, building the all important "guanxi" - networks of relationships and accumulation of favours owed - have a well earned head start. This is not an easy country in which to do business.

One overwhelming problem of course is the sheer size of the market to be addressed. There are over a billion people, spread out over one of the world's largest land masses with a still developing infrastructure that militates heavily against the effective promotion or distribution of goods on a national basis. Another is that most people have no idea what wine really is.

The first serious attempts to establish a grape wine industry in China were made in the 19th century. The most notable one was in 1892 by an official named Zhang Bi Shi who set up a winery at Yantai - now once again a wine making area - employing the Austrian consul as his winemaker.

Most of these ventures floundered, and the 1949 revolution put the whole business on hold until the late seventies when foreign concerns were encouraged to invest in China through joint venture companies under the late Deng Xiaoping's "Open Door" policy. The first three businesses to take advantage of this opportunity remain the most successful.

Remy Martin established the first joint venture winery in 1979 to make wines under the now well-established Dynasty label. The brand has flourished, and the company now also makes China's first respectable sparkling wine, Imperial Court. Like many of its competitors however it relies to a certain extent on grapes grown outside the country.

A number of companies that label their wines "Chinese" use imported must, while others import the wines ready made in tankers and merely bottle them in China. The second foreign-managed concern to be set up in the country however has always eschewed this practice.

The Huadong winery dates back to an attempt in 1986 by an English entrepreneur, the late Michael Parry, to establish a chateau style winery, near Qingdao in Shandong Province, to produce quality wines. Sadly the venture quickly ran into trouble due to typhoon damage and the knock on effects of the stockmarket crash of 1987. Parry was obliged to declare bankruptcy and died not long afterwards.

His vision has its legacy however. The winery was acquired by Hiram Walker and is now managed by Parry's partner, Gabriel Tam, for Allied Domecq. Today, with the assistance of Australian winemakers, the company makes Riesling, Chardonnay, Gamay and Cabernet Sauvignon, wines that are without a doubt the best in the country. A significant proportion of production is exported and sold, mostly in Chinese restaurants, overseas.

Pernod Ricard was the next multinational to go into the Middle Kingdom and its Dragon Seal wines, made at the Beijing Friendship Winery since 1987, are widely available in hotels and upmarket restaurants in the major Chinese cities. These have improved steadily in quality over the years and, like those of Huadong, have won a number of medals at wine shows.

These wineries have established the precedents for a number of other competitive joint ventures including the Italian Marco Polo Winery and Seagram's Summer Palace, both of which are enjoying some success in the domestic market.

Chinese imitators of the joint venture operations also now abound, having grown from a mere handful five years ago to more than 300. As a result China is expected to produce around 300,000 tonnes of wine this year, but the methods used by many of the wineries not managed by overseas concerns, to say the least, leave something to be desired.

Apart from the widespread use of table grapes for vinification, some producers simply bottle apple juice or diluted grain spirit with artificial colouring, and although these practices flout the law, little effort to enforce the rules is made by the authorities.

"They have some funny habits," says Hong Kong-based wine consultant Chris Baker, ruefully. "They bring in concentrated must to make red. I did once come across a red wine made with white grapes, and please don't ask me how they managed to do that."

These eccentricities notwithstanding, the market for wine in China is growing rapidly - albeit from a modest base - partly because of an official u-turn on the policy of discouraging its consumption.

In recent years the Chinese people have been encouraged to drink fruit rather than grain based alcohol, the grain being more urgently required for food and the spirits made from it increasingly seen as unhealthy. Wine is also now perceived as a "healthy" drink, although the image of French red wine may have been hurt somewhat by the revelation in the middle of a BSE scare that a small amount of it was clarified with cow's blood.

Over the last three years wine consumption in China has been growing at about 30% per year. Imports however have been growing at double that rate. Container loads of cheap table wine has been left for months on end in highly unsuitable storage conditions and by the time it reaches the consumer it probably need that splash of Coke or Sprite to make it palatable.

The same treatment however is meted out - mostly in nightclubs and expensive restaurants - to the elite of Bordeaux wines. Few consumers know that these have to be carefully cellared for years before they can be expected to deliver the experience that justifies the price tag. People drink the labels without reference to the vintages.

Perhaps an inevitable consequence of this tendency to buy on the basis of association of prestige, without a real understanding of the product, has been forgery. Earlier this year Hong Kong customs seized 12,000 bottles fraudulently labelled as Mouton Cadet, but many more appear to have made it through to the Chinese market, and also to airport duty free outlets. The incident is not an isolated one.

"Forgery in China is now a very large industry and some of it has been very clever forgery," says Baker. "The Mouton Cadet one was actually quite smart. It was fake, but the wine wasn't bad. It was a European wine, probably from the south of France but at least it had a profile which was not too far away and a price which was not too much cheaper, so somebody was being quite clever. The labelling and the capsuling at the top were pretty accurate. I saw some of the fakes alongside the real ones and I had great difficulty in telling them apart."

Nevertheless Baker points out that the relentless pushing of wine that is either fake, of poor quality, or good but much too young to drink is hampering the development of a healthy market.

"It's still a prestige market, but of course it's only a very young market. Immense quantities of wine have been shipped in there that are really bottom end, but the Chinese learn quickly. They're not idiots," he warns.

Nevertheless while foreigners in hotels are discovering that Huadong, Dragon Seal and other locally produced wines are a pleasant and much cheaper alternative to heavily marked up imports, the wealthier Chinese in the South and the big cities continue to believe that Bordeaux is best.

Tastes need to be broadened, and some distributors are beginning to make a real effort to educate the market. Hong Kong entrepreneur Johnny Chan has three retail wine and spirit stores in the capital carrying around 700 different labels, with prices starting at around US$9 and going up to US$1,900. He is involved in various seminar and tasting programmes to educate what he sees as a very promising consumer base.

Chan is also developing a wholesale wine distribution system for hotels throughout China and is working to establish the British Wine and Spirits Education Trust Courses in China, not only for the trade but also for wine lovers who want to learn more about the subject.

"I hope to make the wine trade in China transparent," he says, simply.

Trade shows are another device the industry is using to develop the market, although some attendees are doubtful as to their value - particularly to smaller exhibitors.

Several medium sized events have been held in Beijing recently, while the larger Vinexpo-sponsored V & S was held year's ago in Shanghai (it was held this year in Tokyo). Another major exhibition, China Wine 2000 organised by the Hong Kong-based Adsale Exhibition Services will be taking over the Shanghai International Exhibition Centre from November 20 to 24.

The general consensus seems to be that although China is already a significant wine market it needs to develop a wine culture before that market can mature. That means education if the country is to be dissuaded from swigging Claret 'n Coke. The ball is in the industry's court.

Robin Lynam