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New Administrative Measures:
Foreign Investment in the Commercial Sector
A new "Administrative Measures on the Investment in the Commercial Field by the Foreign Investors " law was passed by the Ministry of Commerce of the People ' s Republic of China and became effective on June 1, 2004. This action abolished the " Experimental Measures on the Foreign Invested Commercial Enterprises " that had been in effect since June 25, 1999. Enactment of the new regulations will be a significant catalyst for growth of foreign investment in the commercial field and represents a strategic move by the Chinese government in fulfilling its WTO obligations.
The Measures offer significant guidance for foreign investors interested in investing directly in Chinese commercial enterprises. Comparison of the old " Experimental Measures " rule of law, with the new " Administrative Measures " , will give foreign investors a better understanding of the current investment environment in China. Marketing strategies may need to be adjusted accordingly. Following is a brief introduction of key issues of concern in the new law.
The old Experimental Measures did not clearly define various business modes of operation or types, such as " wholesale " and " retail " , which are typical in the foreign investors ' traditional supply chain business structure. In general, the Experimental Measures did not have clear guidelines on foreign investment in China. As a result, business activities desired by foreign investors could only be implemented through the establishment of joint ventures.
Fortunately the new Administrative Measures not only clearly define the concept of " commercial field " , but also enlarges the field of operations substantially. Effective December 11, 2004, with approval, foreign investors can take part in the following business activities via foreign investment enterprises (sino-foreign equity joint ventures, sino-foreign cooperative joint ventures, or wholly owned foreign enterprises):
(1) Commission agency: sales agents, brokers, auctioneers or other wholesalers selling other's goods and providing relevant auxiliary services based on the contract for gaining a commission fee.
(2) Wholesale: selling goods to retailers and industrial, commercial and institutional users or other wholesalers and providing relevant auxiliary services.
(3) Retail: selling goods and providing relevant auxiliary services for consumption by individuals and groups at a fixed place (office, store) or through television, telephone, mail order, Internet or vending machine.
(4) Franchise: authorizing others to use one's own trademark, trade name and business mode by signing a contract for the purpose of receiving compensation or a franchise fee.
The new rules of law have provided foreign investors with a more lenient policy to enter the Chinese market. Only a few individual commercial fields remain to be clarified, but the rest can now be moved into with more confidence. The following three questions and their respective answers will elaborate on the "who, what, and how" involved in taking advantage of these new Administrative Measures.
1. Who are the main party of investors allowed to take part in business entities in China?
The previous Experimental Measures had strict requirements for the main party of a foreign investment. The high-level approval standard restricted medium and small scale investors from entering the commercial field because foreign investors who wanted to set up cooperative joint ventures in retail businesses in China needed to certify that their average annual sales were over two billion USD for the 3 years prior to the application and their asset value was over two hundred million USD one year prior to the application. To set up a cooperative joint venture in a wholesale business in China, average sales needed to be over two and half billion and asset value over 300 million. Furthermore, only foreign companies or enterprises were allowed to invest, not individuals. Likewise under the old rules, the Chinese partner was limited to being a Chinese company or enterprise.
Finally, under the old Experimental Measures, medium and small-scale investors had difficulty getting approval from the government to take part in activities in the commercial field. The approval standard for the cooperative enterprises directed established joint ventures to: (a)comply with the requirements of urban commercial development; (b)be able to introduce advanced marketing and management; (c)promote domestic modernization; (d)drive the exportation of domestic products; (e)produce sound social and economical benefits. In addition, location of the related enterprises was strictly limited to provincial capitals, capitals of the autonomous regions, municipalities directly under the Central Government, cities with economic planning directly supervised by the State Council and special economic zones (referred to as " Experimental Areas ") .
The new Administrative Measures greatly enlarges the scope of permitted foreign investors. Foreign companies, enterprises, other economic organizations and individuals can all take part in business activities in China through establishment of foreign investment enterprises in line with the Company Law of China. Likewise, foreign investors can register the company with Chinese citizens as well as Chinese companies.
For investors dealing with retail business, the new minimum registered capital required of the foreign investment enterprise is five hundred thousand RMB (approximately $37,000 USD) and for investors dealing with wholesale business, the minimum registered capital is five hundred thousand RMB (approximately $61,000 USD). These new basic requirements for registered capital investment are now in line with the regulations of commercial business entry in most countries around the world and comparatively easy for foreign investors to satisfy.
Now, mid size and even small foreign investors are qualified to conduct business operations in China as long as they enjoy relatively good credit and abide by Chinese laws, administrative regulations and relevant rules. For foreign investment enterprises dealing with retail business, location restrictions will be abolished effective December 11, 2004 (location restrictions on wholesale businesses were already abolished June 1, 2003).
It should be noted that the investment of the legally required minimum registered capital alone does not automatically mean a foreign enterprise will be granted approval. In accordance with existing laws and regulations, the Chinese government implements a prepositive administrative approval system. Foreign investors intending to set up enterprises must first complete various legal documents and apply to the appropriate business authorization departments for approval. Only after a certificate of approval for establishing the foreign investment enterprise is issued can the investor(s) apply for the final registration and establishment of the company.
2. What is the scope of goods and what kind of commodities and products can be purchased or sold by foreign investors?
Currently the new rules of law still have certain restrictions on the scope of goods, which is consistent with the step-by-step market opening plans of the Chinese government. Foreign investment commercial enterprises that sell commodities subject to the state specialized regulations, and imported and exported commodities under quota and license management, shall go through certain formalities according to the relevant state regulations. These commodities include: books, newspapers, periodicals, product oil, medicine and automobiles to name a few.
However, entrance to the market of several wholesale and retail products will be delayed. Among these are pesticides, chemical fertilizers, automobiles, crude oil and a few others. Salt and tobacco belong to the category of exceptional products that foreign investors are forbidden to sell and no clear market entrance time has been confirmed. In line with the new rules of law, the types of the products sold by foreign investors shall be specified in business contracts and articles of association.
3. How can foreign investors utilize business activities and formats under the new Administrative Measures?
According to the old rules of law, foreign investment commercial enterprises could engage in retail business, exportation of domestically made products, and importation of products for assembly. Commodity importation and exportation was not allowed. Branch stores of cooperative commercial enterprises could only deal with direct selling and chain stores. They were not allowed to develop their own chain stores or franchises.
The new rules of law have lifted the above restrictions by allowing foreign investment retail enterprises to engage in retail business, importation of products for assembly, purchase of domestically made products for export and other supporting businesses, and franchise. Foreign investment wholesale enterprises are now able to engage in commodity wholesale sales, commission agency formation, import/export of commodities, and franchising.
Commercial wholesale enterprises will be under no restrictions on assembly for commodity imports. The former limitation that the total value of annual imports be less than the total sales volume of the specific enterprise is also lifted. Since foreign investment wholesale enterprises can now act as import/export agencies, domestic trade companies must now compete with foreign owned firms. In addition, foreign invested enterprises, once approved, can now engage in more than one business activity.
In accordance with other state-level or local supporting regulations of foreign investment, such as " Interim Regulations on M & A of Domestic Enterprises by Foreign Investors within the Territory of China " and " Interim Regulations on Investment by Foreign Invested Enterprises within the Territory of China", direct participation of foreign investors in a business operation in China will not be limited to the establishment of a new foreign investment commercial enterprise (EJV, CJV or WOFE).
In line with Article 23 of the new Administrative Measures, non-commercial foreign investment firms, whether engaged in commission agency, wholesale, retail or franchise formats, must also obey the requirements of the new law and make appropriate changes to their business scope if necessary. In sum, foreign investors may be wise to select their business format on the basis of market strategy and tactics for their specific industry.
In theory, business activities of a market player will follow the related rules and regulations. However, the Administrative Measures themselves are not enough for foreign investors to make sound investment plans. Many issues need to be targeted further for a particular case or foreign investor of course, but in practice the new Administrative Measures offer significantly improved guidelines in the commercial field of foreign investment.
The implementation of the Administrative Measures is a significant and strategic step for expanding foreign commercial activities in China. The new rules of law not only assure the foreign investor of a fair market competition climate, it challenges domestic commercial enterprises to be more efficient at the same time. This marks an important milestone - bringing to an end the planned economic business mode and heralding the beginning of a new era of a more open and free market economy in China.
Articled by Christina Xiao, Partner Attorney of Yizhong
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