Business Opportunity in China's Wholesale and Retail Distribution Sector
Pursuant to the commitment China made to the WTO members, the Chinese government promulgated on 16th April 2004 "the Administrative Measures of the Commercial Sectors for Foreign Investments". The Administrative Measures axes the requirement for the qualification of the foreign investor, the amount of minimum registered capital for the foreign invested enterprises, and the restriction on geographic locations, quantity, and percentage of foreign ownership. Within this year, foreign investors will have access to Chinese domestic market in all aspect of wholesale and retail distribution.
1. What is the effective date for the newly promulgated "Administrative Method of the Commercial Sectors for Foreign Investments" ?
The Administrative Measures shall take effect on 1st June 2004. "The Experimental Measures for Foreign Invested Commercial Enterprises" promulgated in June 1999 shall cease to have effect on the same date.
2. What business activities can the foreign invested commercial enterprises be engaged?
The business activities to be engaged by foreign invested commercial enterprises are:
3. What is new in the Administrative Measures about the relaxation on geographical locations, quantity, and foreign share ownership?
In respect of geographic locations, Article 22 of the Administrative Measures provides that foreign invested commercial enterprise engaged in retail distribution should restrict its business activities in the locations of the provincial capitals, the capital of autonomous regions, the municipalities directly administered by the State Council, the municipalities with independent development plans, and the special economic zones before 11th December 2004. All the above-mentioned geographic restrictions will be lifted after 11th December 2004. Hong Kong service suppliers engaged in the retail distribution sectors will be given market access to all prefecture-level cities, and all the county-level cities within the Guangdong province after 1st January 2004. The Administrative Measures provides that with effect from 1st June 2004, all geographic restrictions shall be lifted for foreign invested commercial enterprises engaged in wholesale distribution.
The Administrative Measures removes all existing restrictions imposed on the number of commercial enterprises the foreign investor may set up and the number of branches a foreign invested commercial enterprise may set up throughout the country.
Hong Kong service suppliers are permitted to set up wholly foreign owned commercial enterprises with effect from 1st January 2004. The restrictions of relative foreign ownership shall be removed on 11th December 2004. All foreign investors are permitted to set up wholly foreign owned commercial enterprises after 11th December 2004.
However, the lifting of restriction on foreign ownership shall not apply to those enterprises engaged in the distribution of books, newspapers, magazines, vehicles (whose restriction will be lifted on 11th December 2006), pharmaceutical products, pesticides, mulching films, processed oil, foodstuffs, vegetable oil, sugar, and cotton. A single foreign investor with the number of shops in excess of 30 in the aggregate and engaged in the distribution of the above-mentioned goods, shall not have an ownership exceeding 49% in the foreign invested commercial enterprise.
4. Will the existing foreign invested enterprises be approved to engage in wholesale and retail distribution activities as well?
Yes, existing foreign invested enterprises are permitted to engage in wholesaling and retailing business if they amend their scope of business by submitting the application to do so, in accordance with the provisions of capital contributions as per requirement from the State Administration of Foreign Exchange.
5. What are the provisions governing the scope of businesses for the foreign invested wholesale or retail enterprises?
The Administrative Measures provides that the scope of businesses is as follows: -
| Retail distribution | Wholesale distribution | |
|---|---|---|
| 1 | Merchandise goods retailing | Merchandise goods wholesaling |
| 2 | Imports of merchandise goods on the list of own trading items | Commission agent (except for auctioneering) |
| 3 | Sourcing domestic goods for export | Import and export of merchandise goods |
| 4 | Other related subordinated services | Other related subordinated services |
In contrast, the "Experimental Measures" promulgated in 1999 prohibits foreign invested enterprises engaged in wholesale distribution from buying imported goods not on the list of its own trading items. That is inconsistent with the WTO rules. The Experimental Measures also prohibits the foreign invested enterprises engaged in wholesale distribution from acting as agents for the buying and selling of goods. The Administrative Measures lifts the requirement for local contents regarding the procurement of goods, and allow foreign investors to carry on business as commission agents.
6. Has the Administrative Measures imposed other qualification requirements for the investors?
The Administrative Measures removes the requirement for the amount of average annual sale and the net assets, except for the foreign investors who are engaged in retail distribution of vehicles and products subject to designated trading.
The Chinese government shall announce the administrative measures for the retail distribution of vehicle for foreign investors. However, the new provisions for Closer Economic Partnership Arrangement between Chinese Central Government and Hong Kong government provide that the Hong Kong companies that have already been granted Hong Kong service supplier certificates are exempted from the qualification requirements.
Nature rubber, timber, plywood, wood, acrylic, and steel are products subject to designated trading, as provided in Article 16 of the Administrative Measure. Foreign owned or domestic enterprises that have the right to trade those products should have a minimum registered capital of RMB10 million, and have a track record of engaging in import and export trading for no less than 2 years.
7. What is the requirement for the registered capital of the foreign invested commercial enterprises?
According to the Experimental Measuress promulgated in 1999, the amount of minimum registered capital for foreign invested commercial enterprises is RMB 80 million (for wholesale business) and RMB 50 million (for retail business).
According to Aricle 7 in the Administrative Measures, the amount of minimum registered capital for foreign invested commercial enterprises shall be RMB 0.5 million (for wholesale business) and RMB 0.3 million (for retail business) in accordance with the PRC Companies Law. The new Administrative Measures has given foreign investors national treatment in respect of the amount of minimum registered capital, except for the following business activities: foreign invested enterprises engaged in the wholesale distribution of books, newspapers, and magazines shall have a minimum registered capital of RMB 30 million, foreign invested enterprises engaged in the retail distribution of the same shall have a minimum registered capital RMB 5 million.
8. Is there any timetable on the market access to specified goods?
In respect of time restrictions imposed on market access to certain specified goods that are related to the state economic planning and the livelihood of the Chinese people, the Administrative Measures adheres to the commitment China has made to WTO members.
Foreign invested enterprises engaged in the wholesale distribution shall not deal in pharmaceutical products, pesticides, and mulch films before 11th December 2004, and shall not deal in chemical fertilizers, possessed oil and cruel oil before 11th February 2006. Foreign invested enterprises engaged in the retail distribution shall not deal in pharmaceutical products, pesticides, mulch films, and possessed oil before 11th December 2004, shall not deal in fertilizers before 11th December 2006.
Foreign invested enterprises engaged in wholesale distribution shall not deal in salt and tobacco. Those engaged in retail distribution shall not deal in tobacco.
9. Are there any additional requirements for the distribution of specified goods?
Foreign invested enterprises engaged in the distribution of books, newspapers, and magazines should acquire an "operating license for printed materials" and meet the requirement for the minimum registered capital. Those engaged in the retail distribution of processed oil at gasoline stations and drugs, shall acquire the "operating license for processed oil" and the "operating license for pharmaceutical products" in accordance with the requirements of the administrative rules as promulgated by the State.
10. How do the foreign investors formulate their action plans to enter into the Chinese wholesale and retail market?
As from 1st June 2004, foreign investors are permitted to set up wholesale or retail operations in the form of Sino-foreign equity or cooperative joint venture enterprises. As from 11th December 2004, they have the option to turn those JVs into wholly foreign owned enterprises by buying out the shares of the Chinese party. Those Hong Kong investors who have been granted the certificate of Hong Kong service suppliers can set up wholly foreign owned enterprises starting from 1st June 2004. In addition, foreign investors may accelerate the speed to establish their PRC market presence by acquiring the interest in existing wholesale or retail business in the PRC.
China Tax & Investment Consultants Ltd Copyright 2000-2019. All rights reserved. Notice of Copyright and Disclaimer