Chapter 25 Trade and Distribution
The legal framework governing foreign investment in distribution has taken shape. The legal instruments under the framework consist mainly of CEPA (effective as of the beginning of 2004), the revised Foreign Trade Law (promulgated on April 6), Measures for the Administration on Foreign Investment in the Commercial Sector (promulgated and implemented on April 16 and June 1 respectively) and the Measures for Registration for the Record of Foreign Trade Operators (issued on June 25).
As the largest economic center as well as the busiest commercial center in China, Shanghai enjoys a leading position in absorbing foreign investment. Priority has been given to the development of modern services industry by the municipality. In order to narrow the gap between local distribution and international distribution, Shanghai started from early 1990s to liberalize the commercial sector. Following the entry of China into the WTO, sweeping efforts have been made to phase-in the opening of commercial sector to the outside world. In compliance with the commitments, China removed some of the restrictions on market access. As a result, there has been a quick inflow of foreign capital to China, in particular, to Shanghai. Along with capital come advanced business notions, means of distribution, and marketing skills. Foreign investment has pushed forward the evolution of the modern distribution services. The sales volume of chain stores accounts for 34% of the total sales of social consumption goods, much higher than the national average, which is only 8%. At the same time, thanks to foreign competition, there has been an obvious rise in the awareness and level of services among domestic commercial enterprises, which has greatly benefited the consumers. The progress in the distribution sector has boosted the development of the manufacturing and created growth point in export. Every year some of the multinational retail groups purchase a huge quantity of commodities for export.
Measures for the Administration on Foreign Investment in the Commercial Sector promulgated by the Ministry of Commerce in April marks an important step taken by China to implement its WTO commitments. Starting from June 1, 2004, foreign investors may apply for the establishment of joint equity or cooperative commercial enterprises. Starting from December 11, wholly foreign-owned enterprises are allowed. At the same time, for the existing foreign-invested enterprises operating in sectors other than the commercial sector, if they wish to shift to the commercial sector, they can do so through proper application for a change in business scope according to relevant laws.
The Measures supersede the previous ones in the following ways. First, the Measures serve as a milestone for the formal opening of the commercial sector, allowing foreign investors to establish enterprises in the commercial sector and engage themselves in such business activities as commission agency, retailing, wholesaling, and franchising; second, geographical restriction is eliminated; third, the requirements are more liberal not only for foreign investors regarding ownership but also for the proposed foreign commercial enterprise with regard to business scale and registered capital. According to the previous measures, foreign investors engaged in retail business were required to have an annual turnover of USD2 billion in the first three consecutive years and the registered capital of the proposed commercial enterprises shall be no less than RMB50 million. However, the new Measures do not contain such restrictive requirements as mentioned above; 4. According to the new Measures, competent government bodies at the provincial level are authorized to examine and approve the proposed foreign commercial enterprises which are either small in scale, limited in the number of chain stores or use trademarks and business names owned by Chinese-funded enterprises of Chinese natural persons.
Where a foreign-funded retail commercial enterprise opens stores in regions under the jurisdiction of Shanghai, and meets the following conditions and its business scope does not involve the sales through televisions, telephone, mail order, internet or automats, the competent commercial department in Shanghai shall examine and approve the application within its power of examination and approval. (1) The business area of a single store does not exceed 3,000 square meters, the number of stores does not exceed three, and the total number of stores in the same class opened by the foreign investor in China through foreign-funded commercial enterprises does not exceed 30; (2) The business area of a single store does not exceed 300 square meters, the number of stores does not exceed 30, and the total number of stores in the same class opened by the foreign investor in China through foreign-funded commercial enterprises does not exceed 300.
Applications subject to the examination and approval of the Ministry of Commerce include: (1) retail stores that fail to meet the above conditions; (2) FIEs that are going to be engaged in wholesale business.
Implications of the new Measures on foreign investment are expected to unfold in the following aspects:
Commercial retailing: Shanghai tends to be the major gateway for foreign retail enterprises to the Chinese market as the city enjoys favorable commercial atmosphere as well as a sound market environment. The focus of foreign investment will be in supermarkets (including distribution centers) and specialty shops. With easier access to the Chinese market, many foreign retailers wish to take advantage of this new opportunity. Some specialized retail companies have expressed their desire to set up supermarkets in China. As geographic restriction is lifted, foreign investors are eyeing mainly at the Yangtze River Delta Region for the deployment of business locations. Shanghai will become the ideal distribution center for their retail chains. With regard to specialty shops, expensive foreign brands have shown their interest to run their own specialty shops in Shanghai. More concrete moves are to be taken by those brands after December 11.
Trading (wholesaling): The new Measures set the minimum registered capital requirement at RMB500,000 with no restriction on investors regarding their qualifications. Commercial wholesalers are granted not only foreign trade rights but also domestic trade distribution rights. Therefore, a large number of trading companies will be the largest beneficiaries of the Measures. According to the Measures, existing FIEs which have been engaged in manufacturing may expand into the commercial sector by going through the prescribed application process.
Franchising: Before the implementation of the Measures, franchising is restricted for foreign investors. However, the removal of the restriction has drawn considerable attention from famous international brands. It can be expected that franchising will be a strong magnet for foreign investment in the commercial sector.
From January to November 2004, 3 foreign-invested commercial enterprises were examined and approved by Shanghai and 10 applications were submitted to and approved by the Ministry of Commerce. On the whole, there has been fairly steady development of the distribution sector in Shanghai. However, there are also some issues of concern. For one thing, among the newly-approved FIEs, most of the foreign investors come from the top 500 companies in the world, posing great threat to local commercial enterprises. Therefore, domestic enterprises will have to enhance their overall capacities in order to compete with their foreign rivals. Secondly, as foreign investors focus on comprehensive or special supermarkets, this will tilt the balance of the market in favor of these FIEs as they enjoy apparent advantages in capital, technology, and management. In response, reform on the circulation sector shall be intensified in Shanghai to sharpen the overall competitive edge of local enterprises in the sector and to cultivate large enterprise groups with their own brands and intellectual property rights. According to the Business Development Plan of Shanghai, efforts shall be made to ensure the orderly inflow of foreign capital, enhance management, protect fair competition, check monopoly, and standardize administration regarding market access. At the same time, the Plan attaches great importance to the capacity building of trade associations in the industry with the hope that the associations will be able to serve and supervise the industry based on standardized rules, safeguard the interests of their members, in particular, the SMEs, and promote the healthy growth of the commercial distribution sector in Shanghai.
According to Annex 2 of the Schedule of Concession for Trade in Services signed by China, distribution services consist mainly of the following business activities, namely, commission agency, wholesaling, retailing, and franchising. According to China¡¯s commitments, upon accession, foreign investors are allowed to establish joint venture commission agency, wholesaling and retailing companies engaged in the import, wholesale and retail of commodities excluding tobacco and related products, edible salt, books, newspapers and journals, medicine, pesticide, agricultural film, fertilizer, crude oil, refined oil. Within three years after accession, restrictions shall be phased out regarding the quantity and business locations of the joint venture, ownership and forms of business. With five years after accession, restrictions shall be phased out regarding business scope except the wholesale and retail of tobacco and the wholesale of edible oil.