IN THIS ISSUE : I. Existing Regulations on Foreign Investment in the Commercial Sector 1 II. Highlights of The Measures 2 III. IV. Development Trends of Foreign Players after the Implementation of The Measures 6 Views of Chinese Policy Makers towards The Measures 7 Appendix 1 : Appendix 2 : Administrative Measures on Foreign Investment in Commercial Areas (Full Text) 13 9 China s New Measures on Foreign Investment in the Commercial Sector On 9 April 2004, the Ministry of Commerce of the PRC (MOC) promulgated The Administrative Measures on Foreign Investment in Commercial Areas (, hereafter referred to as The Measures ). Starting from 1 June 2004, The Measures will replace The Measures Concerning Pilot Projects for Commercial Enterprises with Foreign Investment (, hereafter referred to as The Pilot Projects ) implemented in 1999. The Measures will put an end to the practice of pilot projects in the commercial sector in China. The Measures incorporates China s World Trade Organization (WTO) commitments, the Mainland / Hong Kong Closer Economic Partnership Arrangement and the Mainland / Macau Closer Economic Partnership Arrangement. The Measures phases out most of the existing restrictions on foreign investment in the commercial sector, covering four business areas: wholesale, retail, commissioned agency and franchise. I. Existing Regulations on Foreign Investment in the Commercial Sector 13/F, LiFung Centre 2 On Ping Street Shatin, Hong Kong Tel: (852) 2635 5563 Fax: (852) 2635 1598 E-mail: lfdc@hk.lfdis.com Before the promulgation of The Measures, there are two regulations specifically governing foreign investment in the commercial sector in China. 1. State Council 1992 Document No.82 Six cities and five Special Economic Zones (SEZs) started to open to the establishment of Sino-foreign Joint Ventures (JVs) retail outlets. 1
2. Measures Concerning Pilot Projects for Commercial Enterprises with Foreign Investment (June 1999) The pilot projects have been extended to all municipalities, capital cities of all provinces and autonomous regions, independent planning cities with provincial status and the Special Economic Zones (SEZs). Requirements Wholesale Retail Average annual revenue US$2.5b US$2b (Average of previous 3 years) Total asset of foreign investor US$300m US$200m Registered capital of JV RMB 80m RMB 50m Foreign shareholder proportion 49% 49% to 65% (Note 1) Import Value 30% of sales of JV 30% of sales of JV Pilot cities 4 Municipalities 4 Municipalities, capital cities of all provinces & autonomous regions, independent planning cities with provincial status, 5 SEZs Note 1: Except for convenience stores and specialty stores: Chinese partner of the Joint Venture (JV) chain stores having 3 branches or more should have over 51% of the total shares. Foreign partner can have a controlling share if (1) the JV has a good track record; (2) the foreign partner sources substantially from the mainland; (3) the foreign partner can increase exports through its international sales network; and (4) this is approved by the State Council. For convenience stores and specialty stores: Capital share of the foreign partner of the JV should not exceed 65%. II. Highlights of The Measures The Measures opens up China s commercial sector to foreign enterprises in many areas. Some of the liberalization will come into effect on the enforcement date (1 June 2004) while some of them will be effective from 11 December 2004, the date that China has promised in its WTO commitments to open by a large extent its commercial sector to the world. 1. Allowing Wholly Foreign-Owned Commercial Enterprises Wholesale Retail Requirement Current Starting from Current Starting from Arrangement 11 Dec 04 Arrangement 11 Dec 04 Foreign Capital Share 49% 100% 49% to 65% 100% (refer to Note 1 above) (Note 2) Note 2: It is stipulated in Article 18 of The Measures that the foreign investors are restricted to have at most 49% of the share capital if they (1) have over 30 stores in the Chinese Mainland and (2) distribute commodities such as books, newspapers, magazines, automobiles (the restriction on automobile will be lifted on 11 December 2006), pharmaceuticals, pesticides, agricultural films, processed oils, grains, vegetable oils, sugar and cotton which are of different brands and sourced from multiple suppliers. 2
2. Lifting the Geographical Restrictions Wholesale Retail Requirement Current Starting from Current Arrangement Starting from Arrangement 1 Jun 04 11 Dec 04 Geographical 4 municipalities None 4 Municipalities, capital cities of all None Restriction provinces & autonomous regions, independent planning cities with provincial status, 5 SEZs It should be noted that a foreign investor could open new store in a city only if the store location and its retail format comply with the commercial development plan of the city in which it is located. On 24 January 2003, the State Economic and Trade Commission (SETC, the then Ministry of Commerce) issued a circular requiring all provincial-level and municipal governments to draw up detailed plans for commercial development in their respective cities or regions. This was already the third circular that the SETC had issued since 2001 for the project of formulating a national commercial development plan. The 2003 circular required all the provincial-level and municipal governments to submit their plans by the end of 2004. Otherwise, they would not be allowed to submit any application of new foreign-invested project in the commercial sector to the MOC. The commercial development plan aims at solving the irregularities in the commercial sector and promoting a more orderly business environment. When designing the commercial development plan, the city s overall development, population distribution, consumption demand, transportation systems and environmental requirements should all be taken into consideration. It is hoped that such plan will put an end to the problems that some local governments, without considering the overall urban development plans, allow investors to choose their business locations and reserve the best retail space for foreign investors. 3. Eliminating the Restrictions on the Number of Stores Starting from 1 June 2004, there will not be any limit on the number of stores opened by foreign investors in the commercial sector. 4. Liberalizing the Franchise Operation As stipulated in Article 6 of The Pilot Projects in 1999, the branch stores of the jointly-operated commercial enterprises must be directly invested in, and operated by the foreign and Chinese investors jointly and cannot be franchised. However, some of the foreign investors are in fact doing franchise in the mainland by getting around the regulations. Most of the de facto franchise operations are conducted in the following ways: (1) The PRC regulations allow manufacturers to establish sales outlets throughout the mainland to sell their self-produced goods. This also applies to foreign investors with manufacturing facilities in China. In order to do franchise, some of the foreign investors set up factories in China, and then sign contracts with local retailers, which require the latter to procure from them, and the latter will be allowed to establish sales outlets which carry the brand names specified by the manufacturers. 3
(2) The foreign enterprises grant cross-border licensing of the brand to domestic companies which engage in retail operations in China. The licensing does not go with a franchising contract, but with 3 other separate contracts: (i) (ii) Trademark of goods or services allowing the local de facto franchisees to use the brand name of the de facto franchisors; Consultancy contract governing the de facto franchisees in areas such as store locations, products, pricing, promotions, POS system, stock and inventory, guarantee sales, sales data, product delivery, staff training, and compliance, etc.; (iii) Supply of goods specifying the types and quantities of goods to be supplied by the de facto franchisors to the de facto franchisees. but have not been released yet since they have been rejected by the State Council and will be subject to further amendments. It is expected that the new regulations will be promulgated later this year. The two drafted regulations are The Rules of the Administration of Commercial Franchise Operations ( ) and The Trial rules of the Administration of Franchise Operations for Foreign Invested Commercial Enterprises ( ). The Rules of the Administration of Commercial Franchise Operations allows foreign enterprises and foreigninvested enterprises (FIEs) to engage in franchise business after obtaining approvals from the State Council. To be a franchisor, the foreign enterprise or the foreign-invested enterprise should have at least two directly-owned stores or model stores ( ) operated by its subsidiary or holding company. Starting from 1 June 2004, foreign-invested commercial enterprises will be allowed to engage in franchise operation. They will have to abide by a set of franchise laws and regulations. It is said that 2 rules governing franchise operation in China have already been drafted The Trial Rules of the Administration of Franchise Operations for Foreign-invested Commercial Enterprises states that for a FIE to conduct franchise business in China, it should have at least two profit-making stores with more than one year s operation in China. 5. Lowering the Thresholds of Market Entry Wholesale Retail Current Starting from Current Starting from Thresholds of entry Arrangement 1 Jun 04 Arrangement 1 Jun 04 Average annual revenue (Average of previous 3 years) US$2.5 billion None US$2 billion None Total asset of foreign investor US$300 million None US$200 million None Registered Capital RMB 80million RMB 0.5 million RMB 50 million RMB 0.8 million (Note 3) (Note 3) 4
Note 3: It is stipulated in The Measures that the minimum registered capital of a foreign-invested enterprise shall comply with The Company Law of the PRC and the laws governing foreign investments in China. According to The Company Law, the minimum registered capital of a foreign-invested commercial enterprise engaging in wholesale and retail businesses shall be RMB0.5 million and RMB0.3 million respectively. 6. Delegating Authority to Provinciallevel Governments To set up foreign-invested commercial enterprises and to open stores, foreign investors have to submit all the required documents to the provincial-level government departments administering commercial affairs (hereafter referred to as the provincial-level governments ). The provincial-level governments will examine the documents and then pass them to the MOC for approval. If the following conditions are fulfilled, the MOC could authorizes the respective provincial-level governments to carry out the examination and approval procedure: (1) The distribution channels do not involve television, telephone, mail, internet and vending machine; (2) If the size per store is below 3,000m 2 : the number of such stores operated by the foreign investor does not exceed 3 in the province and 30 in the whole Chinese Mainland; (3) If the size per store is below 300m 2 : the number of such stores operated by the foreign investor does not exceed 30 in the province and 300 in the whole Chinese Mainland; According to the present approval procedure, all applications have to be approved by the central government. The Measures now simplifies and speeds up the approval procedure. Besides, it enables the central government to regulate and control the market better. In the past, many foreign retailers in China first entered the Chinese market by gaining preferential treatment from local governments ahead of China s WTO commitments, and bypassing the central government. For example, in 2002, 300 foreign retailers opened stores in China while only 56 of them had got the official approvals from the central government. Many local governments were eager to make deals with the foreign retail giants on their own for they welcomed the prestige, tax revenue, buying power and employment the foreign companies would bring to the localities. There have been a lot of such circumvention activities in the sector. It is very difficult for the central government to closely monitor the local governments and to keep track of these circumvention activities. Therefore, the present approval procedures do not work very well in regulating the sector By delegating part of the authority to the local government and simplifying the approval procedures, the central government hopes that it will end these circumvention activities, and the sector will develop in a more orderly fashion. Finally, though it is stated in The Measures that the foreign investors are required to obtain the approval from the provincial-level governments and the MOC only, some experts envisage that the applications of the foreign investors will also have to go through the government departments at county or city levels beforehand, depending on their scale of operations. (4) The commodities distributed by the foreign investor do not include books, newspapers, periodicals, pharmaceuticals, automobiles, salts, tobaccos, pesticides, mulching films, processed oils, grains, vegetable oils, sugar and cotton. 5
7. Abolishing the Limit on Import Value Wholesale Retail Requirement Current Starting from Current Starting from Arrangement 1 Jun 04 Arrangement 1 Jun 04 Import Value 30% of sales of JV None 30% of sales of JV None 8. A Committed Timetable of the Approval Process The MOC has committed a timetable of the approval process. It is stated in The Measures that upon receiving all the required documents, the provincial-level governments have to examine the documents and then pass them to the MOC within one month. Then the MOC is required to make decisions within 3 months and give explanations in case of disapproval. 9. Highlighting the Role of Industry Associations In China, the industry associations act as quasigovernment organizations. In China s commercial sector, the most prestigious association is the China General Chamber of Commerce. It is expected that such industry associations will play an increasingly important role in regulating the market. III. Development Trends of Foreign Players after the Implementation of The Measures 1. More Rapid Growth With fewer restrictions, the foreign players are expected to expand with an even faster rate in China. 2. Holding a National, instead of a Local Expansion Perspective The Measures removes the geographical restrictions on foreign players starting from 11 December 2004 and simplifies the procedures of applying for expansion in multiple provinces. It is predicted that the foreign investors, instead of focusing on certain cities or provinces only, will now hold a national expansion perspective in mapping their strategies. 3. Expanding to the Inland Regions Coastal regions have been the most popular investment locations for foreign enterprises. After the elimination of the geographical restrictions, it is expected that more and more foreign investors will switch to the inland regions, where the markets are relatively unexplored and the competition is less severe. 4. Expanding to other Distribution Channels Currently, over 80% of the large foreign retailers in China are operating supermarkets and hypermarkets. It is anticipated that a large number of foreign enterprises operating other distribution channels will enter the Chinese markets. Some of the popular channels may be specialty stores selling cosmetics or clothing, and professional stores selling electronic appliances, pharmaceutical or sport wears. 6
5. A Wave of Take-over of Local Enterprises by Foreign Enterprises It is foreseeable that many foreign enterprises will take over local enterprises as part of their strategic expansion. IV. Views of Chinese Policy Makers towards the Measures 1. Considerations of the Chinese Policy Makers (1) Killing the Local Retailers? China s booming retail market is currently facing great challenges from overseas players. It is expected that the competition will become even fiercer after the implementation of The Measures. A report from Mckinsey & Company predicts that over half of China s retail markets will eventually be controlled by three to five multinational retail giants. It is still too early to say if this is true or not, but it does worry many local retailers that the entry of foreign retail giants will force the less competitive local retailers out of the market and largely push down the retail prices. Some experts are more optimistic and they envisage that foreign retailers will not dominate China s retail market. Since China is a vast country characterized by regional and urban-rural disparities, foreign retailers can at most dominate some cities and regions. It is true that most of the foreign enterprises have only been focusing on the large- and medium-sized cities and have not been able to meet the needs of the people in the small cities and the countryside due to the lack of local knowledge and the logistics difficulties. Retailing is an industry closely related to local culture, in which domestic businesses still have distinctive advantages. On the other hand, the underdevelopment of logistics is one of the major hurdles that make foreign retail giants hesitate to pursue nation-wide businesses in China. At present, none of the retailers is able to have a nation-wide expansion and most of them are focusing on regional expansion. (2) Foreign Wholesalers Out-Competing Local Players Wholesale business in China is still strictly restricted for foreign players. The wholesale market is dominated by the State-Owned Enterprises (SOEs), which have suffered huge losses for 6 consecutive years. Their management and technology lag behind the foreign players. The scales of operation of other domestic wholesalers are relatively small and their service coverage is limited, which restraint them from achieving economy of scale, especially in advancing the information technology. Compared with local wholesalers, foreign wholesales are generally far more competitive. With the elimination of the restrictions on foreign wholesalers, it is very likely that the less competitive local wholesalers will be forced out of the market and the market share of the local wholesalers will be taken away. Besides, some experts worry that if the foreign wholesalers continues to expand and capture more and more market share throughout the nation, the wholesale channels would be controlled by foreign enterprises, and the stable supply of important consumer goods and raw materials will be threatened. (3) More difficult for Local Manufactures to Build their Own Brands Most of the retail giants source the majority of their merchandises in China. As they expand rapidly, some experts worry that they will gain significant control over the distribution channels and thus the manufacturing industry in China. In extreme cases, China manufacturers could only perform the Original Equipment Manufacturing (OEM) functions for foreign retailers. They would be forced to sell their merchandises at very low prices to the foreign retailers and then the foreign retailers would 7
sell them at a much higher mark-up, earning most of the profits. Moreover, it would be very hard for Chinese manufacturers to upgrade to Original Design Manufacturing (ODM), not to mention Original Brand Manufacturing (OBM), as the foreign retailers have already built up strong brand names worldwide. By sticking their brands on the Chinese-made products, foreign retailers could sell them easily even at much higher prices. It will then be very difficult, and requires a lot of resources for local manufacturers to develop their own brands. (4) Promoting the Development of the Commercial Sector China s commercial sector is rather undeveloped compared with other countries. The entry of the foreign players will help to upgrade the local enterprises. First, foreign enterprises bring with them advanced management concepts, sales and marketing experiences and service-oriented business approach to China. Second, the competition in China will become more intense. To survive and grow, local enterprises are forced to innovate and make progress. The development of the commercial sector is critical to the country s economic development. Advancement of the commercial sector will also help to stimulate consumer demand and enhance consumption. 2. Chinese Government is Determined to Open the Commercial Sector There are a lot of arguments on the trade off of opening China s commercial sector. Many experts worry that the foreign players will out-compete the local players and will eventually control the distribution channels in China. However, in the present situation, China has no alternative but to participate in the global competition. If China continues to keep its door closed, it will never be able to catch up with the global trends. The Measures proves the determination of the Chinese government in opening up its commercial sector and fulfilling its WTO commitments. We can therefore envisage that there will be a lot of business opportunities for foreign investors engaging in distribution business in China. (5) Attracting Capital Investment and Promoting Infrastructure Development The opening of the commercial sector will attract foreign investors to set up stores, warehouses, logistics and distribution centers, and other facilities. The influx of foreign investment will boost the infrastructure development in China. 8
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Appendix 2: Administrative Measures on Foreign Investment in Commercial Areas (Full Text)* (hereafter referred to as The Measures ) Promulgated by the Ministry of Commerce of the People s Republic of China on 16 April 2004, and effective from 1 June 2004. Article 1 The Measures is formulated in accordance with the relevant laws and regulations such as The Law of the People s Republic of China on Sino-Foreign Equity Joint Ventures, the Law of People s Republic of China on Sino- Foreign Cooperative Joint Ventures, The Law of the Peopl s Republic of China on Wholly Foreign-Owned Enterprises and The Company Law, etc., in order to further open up to the outside world and to consummate the development of market circulation system. Article 2 The Measures applies to foreign companies, enterprises and other economic units or natural person (hereafter collectively referred to as the foreign investors ) establishing foreign-invested commercial enterprises and conducting business within the Chinese Mainland. Article 3 For the purpose of The Measures, the term foreigninvested commercial enterprises shall mean foreigninvested enterprises engaging in the following business: (1) Commissioned agency: Services of selling other parties merchandises or other relevant auxiliary services, provided through charging expenses on a contractual basis, by the sales agents, dealers or auctioneers of the merchandises, or other wholesalers; (2) Wholesale: Services of merchandise sales or other relevant auxiliary services providing for retailers and users such as industrial entities, commercial entities and organizations, or other wholesalers; (3) Retail: Services of selling merchandises for the consumption of individuals or organizations, and other relevant auxiliary services, provided in fixed business sites or through television, telephone, mail order, internet and vending machine; (4) Franchise: To obtain remunerations or royalty fees by entering into contracts authorizing other parties to use their trademarks, trade names and business models, etc.. Foreign companies, enterprises and other economics units or natural person shall establish foreign-invested commercial enterprises in the Chinese Mainland in order to engage in the business set forth in items (1), (2), (3) and (4) of this article. Article 4 Foreign-invested commercial enterprises shall abide by the laws, regulations and rules of the People s Republic of China. Their legitimate business activities and lawful rights and interests are protected by Chinese laws. Article 5 The government departments administering the commercial sector will supervise and manage the foreign investment in the commercial areas and the business activities of the foreign-invested commercial enterprises according to law. 13
Article 6 The foreign investors of the foreign-invested enterprises shall have good reputation, and have not violated the Chinese law, regulations and related rules. The State encourages the establishment of foreign-invested commercial enterprises by foreign investors which have relatively strong economic power, advanced experience in commercial operations and management, advanced marketing techniques, and extensive international sales networks. Article 7 A foreign-invested commercial enterprise shall meet the following conditions: (1) its minimum registered capital shall comply with The Company Law of the People s Republic of China; (2) it shall comply with the relevant laws and regulations on the registered capital and total investment amount of foreign-invested enterprises; (3) the term of operation of a foreign-invested commercial enterprise shall not exceed 30 years, or not exceed 40 years in the Central and Western Regions. (i) (ii) Participating in the annual joint inspection on foreign-invested enterprises on schedule, and passing the joint inspection; Having fully paid-up the registered capital of the enterprise. Article 9 Foreign-invested commercial enterprises could engage in the following business after approval: (1) For foreign-invested commercial enterprises engaging in the retail business: (i) (ii) commodities retailing; import business of commodities dealt in by themselves; (iii) business of procuring and exporting domestic products; (iv) provision of other relevant ancillary services. (2) For foreign-invested commercial enterprises engaging in the wholesale business: Article 8 A foreign-invested enterprise shall meet the following conditions for opening stores: (i) (ii) commodities wholesaling; commissioned agency (except auction); (1) If it applies for the establishment of a commercial enterprise and the opening of stores simultaneously, it shall comply with the development plan and the commercial development plan of the city; (2) A foreign-invested commercial enterprise which is approved to be established, that wish to apply for opening new stores shall fulfill the requirement set forth in item (1) and meet the following conditions: (iii) import and export business of commodities; (iv) provision of other relevant ancillary services. Foreign-invested commercial enterprises are permitted to authorize other parties to open stores through franchising. Upon approval, a foreign-invested commercial enterprise may engage in one or several selling businesses set forth above. The kinds of commodities dealt in should 14
be stipulated in the section relating to the foreign-invested enterprise s business scope in the contract and the articles of association. Article 10 The procedure for the establishment of, and the opening of stores by a foreign-invested commercial enterprise is set forth below: (1) One-off declaration and approval of the project proposal, feasibility study report and the establishment of a foreign-invested commercial enterprise. (2) Except separately required in item (3) and item (4) of this article, an investor who plans to establish a foreign-invested commercial enterprise, and an established foreign-invested commercial enterprise who applies for opening stores shall submit the prescribed application documents set forth in article 12 and article 13 of The Measures individually to the provincial-level government department administering commercial affairs of the location in which the foreign-invested commercial enterprise is registered. The provincial-level government department administering commercial affairs shall carry out a preliminary examination on the submitted documents, and then pass the application to the Ministry of Commerce of the PRC within 1 month of the date on which all application documents are received. The Ministry of Commerce of the PRC shall decide whether to grant approval or not within 3 months of the date on which all the specified application documents to be submitted are received. The Ministry of Commerce of the PRC shall grant Approval Certificate for a Foreign Investment Enterprise to the approved enterprises. Reasons for disapproval will be given to the enterprises which are not granted with approval. The Ministry of Commerce of the PRC could authorize the provincial-level government departments administering commercial affairs to examine and approve the said application in accordance with The Measures. (3) In the event that a foreign-invested commercial enterprise engaging in retail business applies for opening store in the provincial-level administrative region in which the enterprise is located: If it fulfils the conditions set forth below and its business does not involve selling through television, telephone, mail order, internet and vending machine and commodities set forth in article 17 and article 18 of The Measures, the respective provincial-level government department administering commercial affairs could, within its authority, examine and approve such application, and submit the application to the Ministry of Commerce of the PRC to keep record. (i) (ii) If the size per store is below 3,000m 2 : the number of such store operated by the foreign investor does not exceed 3 in the province and 30 in the whole Chinese Mainland; If the size per store is below 300m 2 : the number of such store operated by the foreign investor does not exceed 30 in the province and 300 in the whole Chinese Mainland. (4) The owner of the trademark and trade name of a Sino-foreign Joint Venture or Sino-foreign Cooperative Joint Venture shall be the domesticowned enterprise or Chinese natural person. In the event that a foreign-invested commercial enterprise, with its shareholders include Chinese investors and its scope of business does not involve commodities set forth in article 17 and article 18 of The Measures, applies for its establishment and opening stores, the provincial-level government department administering commercial affairs of the location in which the enterprise is located shall, within its 15
authority, examine and approve such application. For a foreign-invested commercial enterprise to open store outside the province in which the enterprise is located, it shall have to consult the provincial-level government department administering commercial affairs of the location in which the new store is located. Without the authorization from the Ministry of Commerce of the PRC, the provincial-level government departments administering commercial affairs could not delegate the authority stipulated in items (3) and (4) of article 10 by themselves. Article 11 Applicants shall, within one month of the date of receipt of the Approval Certificate for a Foreign Investment Enterprises carry out registration procedures with the administration for industry and commerce in accordance with the relevant State regulations. Article 12 Application for the establishment of a foreign-invested commercial enterprise shall be made by submitting for examination and approval the following documents: (1) an application; (2) a feasibility study report prepared jointly by all the parties to the foreign-invested enterprise; (3) contract and articles of association (only articles of association is required for foreign commercial enterprises) and the supplementary documents; (4) a banker s certificate of creditworthiness, (a photocopy of) the registration certificate and (a photocopy of) the legal representative certificate of each party to the foreign-invested commercial enterprise; in the event that the foreign investor is a natural person, he or she should provide relevant identification documents; (5) annual financial report for the most recent one year of each party to the foreign-invested enterprise, audited by an accounting firm; (6) the appraisal report for the state-owned assets which the Chinese party intends to invest in the Sinoforeign commercial equity joint venture or commercial cooperative joint venture; (7) catalogue of import and export commodities of the foreign-invested commercial enterprise to be established; (8) a name list of the members of the board of directors of the proposed foreign-invested commercial enterprise and the instruments of appointment of the directors appointed by each party to the foreigninvested commercial enterprise; (9) the notice of advance approval of the enterprise name, issued by the government departments administering industry and commerce; (10) (a photocopy of) the identification documents of the land use rights of the proposed store site and (or) (a photocopy of) the lease agreement for the housing, except for opening store with operation area below 3000m 2. (11) statement explaining that the requirements of the city development plan and city commercial development plan are fulfilled, issued by the government department administering commercial affairs in the place where the store is to be established Documents which are not executed by the legal representative shall be accompanied by a power of attorney issued by the legal representative. Article 13 An established foreign-invested enterprise shall submit the following documents when applying for opening store: 16
(1) an application; (2) the contract and articles of association after amendments in the event of amending the contract and articles of association; (3) a feasibility study report on opening store; (4) the resolution of the Board of Directors concerning the opening of store; (5) annual financial report for the most recent one year of the foreign-invested commercial enterprise; (6) (a photocopy of) the enterprise s capital contribution verification report; (7) (a photocopy of) the registration certificate and (a photocopy of) the legal representative certificate of each party to the foreign-invested commercial enterprise; (8) (a photocopy of) the identification documents of the land use rights of the proposed store site and (or) (a photocopy of) the lease agreement for the housing, except for opening store with operation area below 3000m 2. (9) statement explaining that the requirements of the city development plan and city commercial development plan are fulfilled, issued by the government department administering commercial affairs in the place where the store is to be established Documents which are not executed by the legal representative shall be accompanied by a power of attorney issued by the legal representative. Article 14 If a foreign-invested commercial enterprise enters into trademark or trade name license contract, technology transfer contract, management contract and contract for service, etc., such legal documents shall be submitted as supplementary notes of the contract (for foreign commercial enterprises, such legal document shall be submitted as supplementary notes of the articles of association)). Article 15 A foreign-invested commercial enterprise shall obtain the land for commercial use in which it opens store by means of invitation for tender, auction, listing, etc., in accordance with the relevant laws and regulations relating to land administration. Article 16 Foreign-invested commercial enterprises that wish to deal in commodities governed by special State regulations or in import or export commodities subject to quotas and licensing shall carry out examination and approval procedures in accordance with relevant State regulations. Article 17 Foreign-invested commercial enterprises dealing in the following commodities, shall conform to the following requirements, in addition to the requirements stipulated in The Measures: Foreign-invested commercial enterprises dealing in books, newspapers and periodicals shall conform to The Administrative Measures on Foreign-invested Enterprises Engaging in the Distribution of Books, Newspaper and Periodicals. Foreign-invested commercial enterprises that operate gas station for retail sales of processed oils shall possess stable channels of processed oils supply, conform to the gas station construction plan in the localities, have operation facilities complying with the requirements of the existing State standards and the regulations of measurement determination, and conform to the fire services and environmental requirements. The specific 17
implementation measures shall be formulated by the Ministry of Commerce of the PRC separately. Foreign-invested commercial enterprises dealing in pharmaceuticals shall conform to the relevant State administrative rules governing the sales of pharmaceuticals. The specific implementation measures shall be formulated by the Ministry of Commerce of the PRC separately. Foreign-invested commercial enterprises dealing in automobiles shall operate within the approved scope of business. The specific implementation measures shall be formulated by the Ministry of Commerce of the PRC separately. Except separately stipulated in article 18 of The Measures and this article, the establishment of foreigninvested commercial enterprises operating agricultural by-products and agricultural means of production shall not be subjected to restrictions on geographical locations, foreign shareholder proportion and the amount of investment. Foreign-invested commercial enterprises engaging in wholesale business are not allowed to deal in pharmaceuticals, pesticides and agricultural films before 11 December 2004, and chemical fertilizers, processed oils and crude oils before 11 December 2006. Foreign-invested commercial enterprises engaging in retail business are not allowed to deal in pharmaceuticals, pesticides, agricultural films and processed oils before 11 December 2004, and chemical fertilizers before 11 December 2006. Foreign-invested commercial enterprises engaging in wholesale business are not allowed to deal in salt and tobacco. Foreign-invested commercial enterprises engaging in retail business are not allowed to deal in salt. Article 18 For a foreign investor having opened over 30 stores within the Chinese mainland accumulatively: If it deals in books, newspapers, magazines, automobiles (such restriction will be lifted starting from 11 December 2006), pharmaceuticals, pesticides, agricultural films, chemical fertilizers, processed oils, grains, vegetable oils, sugar and cotton, etc. which are of different brands and sourced from different suppliers, the foreign investors shall have at most 49% of the share capital. Article 19 Foreign-invested commercial enterprises authorizing other parties to open stores by means of franchising, apart from complying with the requirements stipulated in The Measures, they also have to observe other State regulations governing franchise operation. Article 20 Foreign-invested commercial enterprises dealing in auction business shall conform to the relevant laws such as The Auction Law and The Cultural Heritage Law and be approved by the Ministry of Commerce of the PRC. The specific implementation measures shall be formulated separately. Article 21 Starting from 11 December 2004, foreign commercial enterprises are allowed to be established. Article 22 The locations of establishing a foreign-invested commercial enterprise engaging in retail business and opening stores by such enterprise are limited to provincial capitals, the capitals of autonomous regions, municipalities, independent-planning cities with provincial status and Special Economic Zones. Starting from 11 December 2004, all the geographical restrictions shall be lifted. 18
All the geographical restrictions on foreign-invested enterprises engaging in wholesale businesses shall be lifted on the implementation date of The Measures. Article 23 Foreign-invested commercial enterprises investing in commercial areas in the Chinese Mainland shall conform to The Provisional Rules on Foreign-invested Enterprises investing in the Chinese Mainland and shall be handled by reference to The Measures. Article 24 For foreign-invested enterprises, other than foreigninvested commercial enterprise, which are engaging in the business set forth in article 3 of The Measures, they shall conform to the requirements of The Measures, and modify their corresponding business scopes in accordance with the law. Article 25 For investors from the Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan to invest in the establishment of commercial enterprises in other provinces, autonomous cities and municipalities in the Chinese Mainland, they shall be handled by reference to The Measures, except for the following requirements: (1) Starting from 1 January 2004, Hong Kong and Macau service suppliers in the commercial sector are allowed to establish foreign commercial enterprises within the Chinese Mainland. (2) Hong Kong and Macau service suppliers in the commercial sector are allowed to establish retail enterprises in all cities at the prefectural level in the Chinese Mainland, and cities at the county level in Guangdong Province. (3) Starting from 1 January 2004, Hong Kong and Macau service suppliers in the commercial sector are allowed to establish wholly-owned commercial enterprises for retail sales of automobiles in the Chinese Mainland in accordance with the relevant articles in The Measures. However, they are required to have average annual sales value of not lower than US$100 million in the previous 3 years, and asset of not lower than US$10 million in the previous year. The minimum registered capital for establishing a retail commercial enterprise selling automobiles in the Chinese Mainland is RMB 10 million. The minimum registered capital for setting up a retail commercial enterprise selling automobiles in the Central and Western Region is RMB6 million. (4) Hong Kong and Macau permanent residents with Chinese citizenship are allowed to establish, in accordance with the relevant laws, regulations and rules, individually-owned retail stores to engage in retail activities (excluding franchise operation). The operation area of such store shall not exceed 300m 2. (5) The Hong Kong and Macau commercial service suppliers in the commercial sector stipulated in The Measure shall conform to the definition and the relevant requirements of Service Suppliers in The Mainland / Hong Kong Closer Economic Partnership Arrangement and the Mainland / Macau Closer Economic Partnership Arrangement respectively, Article 26 The State encourages the foreign-invested commercial enterprises to join the relevant industry associations in order to enhance self-discipline of enterprises. Article 27 The Ministry of Commerce of the PRC is in charge of interpreting The Measures. 19
Article 28 These regulations shall be implemented from 1 June 2004 Article 29 Measures Concerning Pilot Projects for Commercial Enterprises with Foreign Investment promulgated jointly by the former State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation, shall be repealed on 1 June 2004. * The Ministry of Commerce of the PRC promulgated the Administrative Measures on Foreign Investment in Commercial Areas in Chinese. translated The Measures for readers reference. Copyright 2004. All rights reserved. Though endeavours to ensure the information discussed in this material is accurate and updated, no legal liability can be attached as to the contents hereof. Reproduction or redistribution of this material without s prior written consent is prohibited. 20