Japan was, arguably, the birthplace of functional foods. Now China is rapidly developing into a lucrative market. Despite some regulatory issues, says Dene Yeaman, the time is right to gain access into dynamic China.
There are few reliable statistics on the size and scale of the functional foods market in China. Part of the problem is one of definitions. Functional foods, dietary supplements and health products in general are often grouped as Traditional Chinese Medicines (TCMs) or Chinese Herbal Products (CHPs), categories that are potentially much broader than "functional foods," including, for example, items that elsewhere would be considered medicines.
Last year, The People's Daily, the official newspaper of communist China, reported that the value of China's health food market was about US$6.2 billion in 2000. Although reports and studies reveal varying market values (possibly as a result of what is and is not included), experts agree that the Chinese market for quality functional foods will continue to grow at an exponential rate over the next five years, consistent with rising incomes in China's urban areas.
There is an increasing awareness among officials from the State Drug Administration (SDA), China's equivalent of the US Food and Drug Administration, and the Chinese Ministry of Public Health (MPH), that the lack of detailed quality controls in China's domestic functional foods market is impeding industry development. In October, Ren Dequan, deputy director of the SDA, commented that the traditional use of functional foods and CHPs in Chinese culture was stunting the growth of these markets. The rich tradition of using functional foods in China to improve well-being and the use of CHPs for pharmaceutical and other purposes constricts the scope of possible growth for the Chinese functional foods market—particularly the lucrative export market—without, that is, further regulatory and industry reform.
Growing awareness of these issues at official and industry levels opens a window of opportunity for foreign manufacturers to develop new or more effective functional foods products in China through joint ventures with Chinese parties. It is also an opportune time for foreign exporters to establish brands before Chinese domestic competitors catch up.
The Chinese government has targeted certain cities as TCM and health food "centres of excellence." For example, last year the Shanghai government announced funding of US$14.5 million over two years for TCM and functional foods research, plus the construction of a research centre. Although not the only Chinese city to establish functional foods and TCMs as key industries, Shanghai is diligent in its efforts to attract venture capital and other private investments. The Chinese central government is also providing significant funding. China's recent admittance to the WTO is forcing competitive reforms on Chinese companies, and foreign producers and exporters will need to move quickly to seize opportunities.
Playing By The Rules
According to the Administrative Regulations on Health Food Products (the "Health Food Regulations") issued by the MPH and in effect since 1996, functional foods are those that have specified health protection functions. More particularly, functional foods are those that:
- are targeted at a specific group of persons;
- regulate the organic functions of the human body; and
- are not used or advertised as "medicines" to cure diseases.
The MPH will accept and approve applications for certification of health foods only if such foods are found, following scientific testing of their components, to possess at least one of 22 MPH-approved functions. Functionality, rather than the physical form of food, is the major criterion by which to distinguish functional foods from other ordinary foods and medicines. Medicines, in particular, are subject to a much stricter licensing and import regime and are subject to the jurisdiction of the SDA, rather than the MPH.
The New Rules
General requirements for testing functionality are set forth in the Health Food Regulations, though specific procedures are not detailed. At present, the 22 approved functions are:
- regulating immunity;
- regulating blood fat;
- regulating blood sugar;
- delaying ageing;
- improving memory;
- improving vision;
- promoting lead discharge;
- soothing the throat;
- regulating blood pressure;
- improving sleep;
- promoting lactation;
- resisting mutation;
- resisting fatigue;
- resisting anoxia;
- resisting radiation;
- reducing weight;
- promoting growth and development;
- improving osteoporosis;
- improving nutritional anaemia;
- helping protect the liver against chemical damage;
- improving physical appearance (removing acne/removing chloasma/improving skin moisture and oil); and
- improving the function of the gastrointestinal tract (regulating germ community/promoting digestion/relieving constipation/helping protect gastric mucosa).
Functional foods may not be sold or otherwise described as having functional or health-giving properties without first being certified by the MPH. Article 6 of the Health Food Regulations details the application documents required to be submitted to the MPH. Once a product has been certified, a Health Food Approval Certificate will be issued in respect to that product, together with an approval number. A producer, Chinese importer or the producer's Chinese agent may apply for the Approval Certificate, but a foreign distributor, retailer or exporter may not be eligible to do so. Significantly, an Approval Certificate is transferable and may therefore be assigned by the holder in the course of a corporate reorganisation upon the sale of a product line or, for example, upon sale of a business.
Import And Licensing Rules
Under Article 12 of the Health Food Regulations, before importing functional foods into China, the importer or its agent must apply to the MPH for an Approval Certificate for Importation of Health Food Products (the "Import Certificate"). After the importer or its agent has obtained an Import Certificate, the PRC State Administration for Quality Supervision—Inspection and Quarantine, will, upon request, inspect the imported products. Once the inspection is satisfactorily completed, an inspection report will be issued. Upon importation of functional or other food products, the relevant Customs authority will release the imported products after the Import Certificate and inspection reports are produced. With the Import Certificate and the inspection report complete, and after satisfying labelling requirements, the importer or its agent may then sell the imported products in the Chinese market.
All food products imported into China, including functional foods, are subject to examination and approval procedures. While labelling requirements are set forth in the Regulations on the Labelling of Functional Foods ("Labelling Regulations") issued by the MPH, sample labels themselves must be approved by the State Administration for Quality Supervision—Inspection and Quarantine, before the product is imported into China.
The Labelling Regulations require, among other things, that labels contain certain information in Chinese, including the following mandatory items:
- Name of the functional food
- MPH 'functional food logo' and the approval document number for the specified functional food
- Net content and solids content
- Active ingredients
- Functional uses
- Persons for whom the functional food is suitable
- Directions for use
- Manufacture date and guarantee period
- Directions for preservation
- Product standard numbers
- Name and address of the manufacturer and the import agent
- Country of manufacture
- Special labelling content (if so required)
In addition to these regulatory issues, foreign manufacturers face a range of other difficulties. These include import licensing requirements, labelling requirements as discussed above, tariffs, customs duties and Value-Added Tax (VAT). Establishing an appropriate Chinese-language brand strategy and securing intellectual-property protection are important considerations for many companies, particularly those that are entering the Chinese market with a long-term strategy. Notwithstanding all these regulations, there are significant opportunities for exporters right now. Because this window of opportunity may be temporary, as domestic competition increases and Chinese industry reforms, the time to act is now.
Dene Yeaman, Senior Associate
Sidley Austin Brown & Wood
Tel: +86 21 5306 2866
E-mail: [email protected]