Member Article

China has traditionally restricted foreign investment in the retail and wholesale sectors with the aim of nurturing strong domestic players before their foreign counterparts would be let into the country. However, in order to become a member of the World Trade Organisation, China has committed itself to gradually opening up its distribution sector to foreign investment. The "Measures for the Administration of Foreign Investment in the Commercial Sector" (the “Measures”), effective from 1 June 2004, are part of this effort to give foreign investors increased access to this sector. The Measures go hand in hand with other policy changes which have given foreign investors greater access to foreign trade rights. This leaflet discusses the key provisions of the Measures. Commercial FIEs The Measures permit foreign investors to engage in four forms of distribution activities: • commission agents' services • wholesaling • retailing • franchising A foreign investor is required to establish a commercial enterprise with foreign investment (“commercial FIE”) if it wishes to engage in these distribution activities. The investors in such commercial FIEs can be foreign companies, enterprises or other economic organisations as well as foreign individuals. Foreign investors are free to establish a commercial FIE in partnership with a Chinese counterpart in a joint venture or on their own in a wholly foreign-owned enterprise. However, not all commercial FIEs may be wholly owned by a foreign investor. A commercial FIE with more than 30 outlets dealing in specified products of various brands that are sourced from multiple suppliers needs to take the form of a joint venture in which the maximum share of the foreign investor is limited to 49%. The specified products are books, magazines, motor vehicles, newspapers, pharmaceuticals, pesticides, mulching films, chemical fertilizer, processed oil, grain, vegetable oil, sugar, cotton, etc. This restriction will be removed from 11 December 2006. Conditions The foreign investor is required to have a good reputation and to be law-abiding. The Measures encourage investment by foreign investors with strong finances, advanced commercial experience and marketing technology and a wide international distribution network. If a commercial FIE engages in wholesale as its principal business its minimum registered capital must be RMB500,000 (about US$60,500). If it engages in retail as its principal business its minimum registered capital must be RMB300,000 (about US$36,300). The investment must also comply with the minimum debt to equity (registered capital) ratios imposed under PRC law unless it deals in agricultural by-products and agricultural production materials. The business term should normally not be longer than 30 years but may be as long as 40 years in the central and western regions of China. Permitted Business Activities A retail commercial FIE may engage in the following business activities: • commodity retailing • commodity import for its own account • sourcing of domestic products for export and • other relevant ancillary activities. A wholesale commercial FIE may engage in the following business activities: • commodity wholesale • commission agents’ services (except for auctions) • commodity import-export • other relevant ancillary activities. A commercial FIE may engage simultaneously in one or more of the business activities set forth above and may authorise third parties to open franchise shops. The Measures contain no detailed guidelines regarding the operation of franchising business. Such guidelines will be contained in new regulations on franchising which have yet to be published. Range of Products A commercial FIE must specify the range of products it distributes in the business scope of its corporate establishment documents. A commercial FIE is only permitted to deal in those types of products listed in its business scope. The import and distribution of certain categories of products in China are subject to various forms of state control. If the products in which a commercial FIE deals are products subject to special State regulations or are import-export products which are subject to quota or licensing control, the commercial FIE must comply with the relevant licensing requirements. Establishment of Shops Commercial FIEs may set up shops (outlets) on condition that their establishment complies with regulations regarding urban development and urban commercial development. An already established commercial FIE may only set up a shop if it has passed the annual inspection and has paid up its registered capital in full. Establishment Procedure The Ministry of Commerce (“MOFCOM”) is the principal approval authority for commercial FIEs and their shops. An application for the establishment of a commercial FIE must be submitted to the provincial level department in charge of commerce in the proposed investment location (“provincial commerce authority”). After preliminary examination, the provincial commerce authority must forward the application to MOFCOM within one month. MOFCOM then has three further months to decide whether or not to approve the application. In certain situations, the provincial commerce authority is authorised to examine and approve the establishment of commercial FIEs and their shops. The establishment of a wholly foreign-owned commercial FIE must always be approved by MOFCOM although its shops may be approved by a provincial commerce authority provided certain conditions are satisfied. Special Provisions Regarding Hong Kong and Macau Service Suppliers Qualified Hong Kong and Macau service suppliers (collectively referred to as “SAR suppliers”) are granted greater access to the distribution sector than other service suppliers under the provisions of the Closer Economic Partnership Arrangements which Mainland China has concluded with Hong Kong and Macau. SAR suppliers are permitted to establish wholly-owned car retailers without any restrictions. Hong Kong service suppliers are also not subject to the prohibition on wholly owning commercial FIEs which retail books, newspapers, magazines, pharmaceutical products, pesticides, mulching films and processed oil or provide wholesale trade services and commission agents’ services in respect of books, newspapers, magazines, pharmaceutical products, pesticides and mulching films. Conclusion The Measures have significantly expanded the distribution rights of foreign investors in China and are sure to herald a major investment boom in this sector.