TICKY FULLERTON, PRESENTER: China has developed a big taste for wine, with production there now exceeding Australia.

Improved living standards have led to the increase in demand and opened up a massive market.

The local winemakers are now geared up to supply huge quantities, the Australian exporters of premium brands are still looking for a real piece of the action.

China correspondent Stephen McDonell reports.

STEPHEN MCDONNELL, REPORTER: China's restaurants were once dominated by beer and the local white spirit, Baijiu. But these days you are increasingly likely to see people drinking wine here. More than two decades of exposure to the outside world have changed people's tastes, and increased living standards have made wine more affordable.

BAI ZHISHENG, CHAIRMAN, DYNASTY (TRANSLATION): At the beginning of the 1980s we produced around 30,000 bottles of wine a year. By the end of last year, we were producing six million bottles annually.

STEPHEN MCDONNELL: Dynasty is one of China's major wine companies and it's cashing in on this country's ever increasing appreciation of its product.

The company has its own vineyards, an enormous factory complex and is listing on the Hong Kong stock exchange. But while it's doubled production over the last 10 years Dynasty now finds it's being challenged by international high quality competitors.

BAI ZHISHENG (TRANSLATION): Loads of foreign wines have swamped China. What does this mean? It means people's living standards have improved and that people have a deeper understanding of wine.

STEPHEN MCDONNELL: Yet Bai Zhisheng says he welcomes the presence of imported wine on the tables of China, that foreign companies will sell more and this will force up the quality of local wine, expanding the market overall.

BAI ZHISHENG (TRANSLATION): I think it's an opportunity. I use the term 'dancing with the wolf'. If we can't beat the wolf to death, we will dance with the wolf.

STEPHEN MCDONNELL: And this is what the wolf looks like.

Matt Bahen is deputy general manager for Australian importers and distributors, the Wine Republic. He's a familiar face flogging Australian wine in Beijing.

MATT BAHEN, DEPUTY GENERAL MANAGER, WINE REPUBLIC: This is our third year, first year was about $500,000 in sales, the second year a bit over $1 million and this year we will just beat $2 million, and we're hoping to continue that 100 per cent more growth over the next few years.

STEPHEN MCDONNELL: He says exceptional locally produced wine is still two decades away, giving Australian companies major opportunities here.

MATT BAHEN: More and more people have been introduced to wine every day. More and more people are continuing their love of wine. More and more people are buying more than they did buy yesterday.

STEPHEN MCDONNELL: Australian wine is also being imported in bulk to go into Chinese blends. Dynasty gets wine from the Hunter Valley in New South Wales, but the company says the high Australian dollar is hurting this trade.

BAI ZHISHENG (TRANSLATION): China has signed tariff-free agreements with Chile and other countries. Australia should do the same. If it doesn't we'll gradually import less Australian wine because your exchange rate is too high.

STEPHEN MCDONNELL: Matt Bahen says this shouldn't matter too much, because in his view Australia needs to shift away from bulk wine sales anyway.

MATT BAHEN: As a very dry continent we can't really afford to be high yielding, irrigating, producing stuff that's just basically filling up containers. We need to be producing stuff that people pay a premium for.

At the end of the day there's a lot of money here in China at the moment. So if we can continue to excite them about our best wines we'll make some money out of here.

STEPHEN MCDONNELL: In China, prestige is very important and this can have an impact on the wine that's bought. In line with local tradition, people like to shout their friends or clients a bottle of plonk.

While this used to be Chinese wine, now for many, all the better if it's imported wine like Australian wine. Of course the other upside is that Australian wine doesn't taste too bad either.

In reality Australian wine producers have only scratched the surface here. Some 90 per cent of wine consumed in China is still said to be from local brands, meaning there's plenty more room for expansion.