Retailers Tesco,CRE plan China giant

Britain's biggest retailer, supermarket chain Tesco, said on Friday that it is in exclusive talks over combining its Chinese operations with those of China Resources Enterprise. Tesco said the move was in line with the group's strategy of seeking to profit from fast-growing economies, and comes as China seeks to balance export growth with domestic consumption. Tesco -- the world's third-biggest supermarket group after French rival Carrefour and US retailer Wal-Mart in first place -- said the proposed joint venture would create a business with annual sales of about £10 billion ($15.5 billion, 11.6 billion euros). Hong Kong-listed China Resources Enterprise (CRE) is expected to have an effective stake in the venture of 80 percent and Tesco of 20 percent. "It's a sensible strategic move by Tesco as the company is clearly attempting to adjust its operations in China in a way that allows them a level of presence but less capital expenditure," said Ishaq Siddiqi, an analyst at ETX Capital trading group. "This joint venture in China is also welcome news for Tesco shareholders as it demonstrates the company is committed to its priority to pump more funds in the UK over international business but still maintain a presence in China which allows them to maintain market share among global supermarkets," he told AFP. Tesco's share price rose 0.90 percent to 372.4 pence in reaction to Friday's announcement. London's benchmark FTSE 100 index was up 0.40 percent at 6,555.89 points in early trade. "Noting recent media speculation, Tesco Plc and China Resources Enterprise Limited today announce that they have entered into a memorandum of understanding and are in exclusive talks to combine their Chinese retail operations to form the leading multi-format retailer in China," Tesco said in a statement. The deal would involve CRE combining its CR Vanguard business, which operates 2,986 stores across China and Hong Kong, with Tesco China's 131 stores and shopping mall business. "The intended partnership follows a series of highly successful joint ventures between CRE and other multinational corporations and is consistent with Tesco's stated strategy of focusing on profitable routes to growth in fast-growing but less mature markets," Tesco said in the statement. But Tesco warned that the deal was subject to further work on due diligence and final terms, and there was no certainty that it would be completed. Tesco, which last year suffered its first drop in annual profits for two decades, is battling against poorer sales in its main market Britain. And the company has decided in the past year to shut its failed US division Fresh & Easy and to exit from Japan. Meanwhile in China, the government said on Friday that the country's retail sales, a key indicator for consumer spending, rose 13.2 percent in July compared with the figure for the same month last year. China's growth model has long been based on taking advantage of the country's cheap and abundant labour to manufacture products for export, alongside credit-fuelled domestic investment to develop infrastructure. Now, though, the government says the situation is unsustainable and the growth model should be rebalanced towards consumer demand.