Speech: Legal Issues Pertaining to Food & Drinks Retail and Distribution in China

This is a speech made at the China Food & Drinks Retail & Distribution Conference in June 2002.

China Food & Drinks Retail & Distribution Conference was supported by Singapore Trade Development Board and organized by Eastern Trade Media Pte Ltd. The delegates from all over the world in the industry attended the conference. Dozen of speakers from China National Light Industry association, Shanghai Foreign Investment Service Center, Promar International, 7-Eleven, Inc, egistics Corporation, Anderson, etc. also gave their speeches at the Conference.

• Legal requirements to retailing and distribution in China
--- General legal requirements
--- Special requirements to set up foreign-funded retailing and distribution companies
• New legal issues in post-WTO China

General Legal Requirements
• Domestic retailing and distribution
• Importation & exportation

Domestic Retailing and Distribution Requirements

• Names, producing place, factory name, producing date, batch number/code number, specification, prescription/chief ingredient, eating/using method,　etc of fixed packaging food and food additive, should be indicated on the package symbols or instructions for products

Importation & Exportation
---- Hygiene Supervision and Examination

• Importation: food hygiene supervision and examination organization
• Exportation: the inspection and quarantine organizations for import and export commodities

Importation & Exportation
---- Food Label
• File an application for examination of the food label to designated inspection and quarantine organizations
• Obtain the import and export food label examination certificate
• Imported food label must be in Chinese

Foreign-funded Retailing and Distribution Company

• Restricted (B) list under Master List for Foreign Investment Industries
• Wholly foreign-owned enterprise is not permitted

Requirements to Set up Foreign-funded Company
• Accord with the commercial development plan of the city
• Be able to introduce advanced world marketing art and management experience
• Promote modernization of domestic enterprises
• Bring along export of homemade products
• Create perfect economic and social benefits
• Special regions and special investors

Region Requirements
• Provincial capitals
• Capitals of autonomous regions
• Municipalities directly under the central government
• Big cities nominated by the State Council
• Special economic zones
(Actually only special economic zones, Beijing, shanghai, Tianjin, Guangzhou, Dalian and Qingdao are open to JV retailing company)

Requirements for Foreign Investor
• Has powerful economic strength, advanced business management experiences and marketing art, wide international sales network, perfect reputation and performance
• Be able to bring along the export of Chinese products through the planned JV
• To set up retailing/wholesale JV, its average annual sales income within three years before application shall be more than US$2/2.5 billion, and its assets one year before application shall be over US$200/300 million

Requirements for Chinese Investor(1)
• A circulation enterprise that has powerful economic strength and business capacity
• Its assets one year before application should be more than RMB 50 million (for enterprise in the middle and western china, its assets shall be RMB 30 million)

Requirements for Chinese Investor (2)
• In case it is a commercial enterprise, its average annual sales income within three years before application shall be RMB 300 million (for enterprise in middle and western China, its sales income shall be over RMB 200 million)
• In case it is a foreign trade enterprise, its average annual value of self-managed import and export within three years before the application shall be over US$50 million, of which, the export value shall not be less than US$30 million

Minimum Registered Capital Requirements for JV
• For retail JV, registered capital no less than RMB 50 million(for the enterprise in middle and western China, no less than RMB 30 million)
• For wholesale JV, registered capital no less than RMB 80 million(for the enterprise in middle and western China, no less than RMB 60 million)

Share Proportion Restrictions for JV (1)

• As for chain commercial JV with over three branches (except convenient stores, specialized stores and monopoly stores), the Chinese partner shall hold no less than 51% shares
• As for chain commercial JV with three (or less) sub stores or convenient chain-stores, specialized chain-stores and monopoly chain-stores, the Chinese partner shall hold no less than 35% shares

Share Proportion Restrictions for JV (2)

• In case foreign partner has purchased a large quantity of products in China and be able further to expand the export of home products, it shall be permitted to hold majority of shares after approval of the State Council
•  As for the commercial joint venture company undertaking wholesale (including retail enterprise that concurrently manages wholesale), the contribution proportion of the Chinese partner shall not be less than 51%

Other Restrictions for JV
• Can only set up chain branch stores that are directly invested and managed by Sino-foreign investors jointly. Other chain stores like free chain and franchise chain are prohibited
• The operation duration shall not exceed 30 years(for those in middle and west china, its duration shall not exceed 40 years)
• The annual value of import commodities of the JV shall not be more than 30% of its sales income of commodities of that year

New Legal Issues in Post-WTO China (China Commitments -1)

Retailing services
• Zhengzhou and Wuhan(upon China’s accession to WTO)
• All provincial capitals and Chongqing, Ningbo; Foreign majority control(within 2 years)
• No limitation, ex  those chain stores which sell products of different  types and brands from multiple suppliers with more than 30 outlets (within 3 years)

New Legal Issues in Post-WTO China (China Commitments -2)

Distribution services:
•  Can engage in the commission agents’ business and wholesale business of all imported and domestically produced products( within 1 year);
• Foreign majority control ;No geographic or quantitative restrictions (within 2 years)
• No limitation (within 3 years)

New Legal Issues in Post-WTO China (China Commitments -3)

• Franchising
No limitation (within 3 years )

• Wholesale or retail trade services away from a fixed location, no limitation (within 3 years )

Conclusions
• Firstly, business existence in China market
--- Establish joint ventures to engage in retailing and distribution
--- Set up representative office
• And then, improve market chance with the market access increased step by step

With China’s entry into World Trade Organization, many laws and regulations cannot keep with our commitments to Protocol On The Accession Of P.R.C., signed on November 10^th, 2001. So do the rules regarding food and drinks retail. Confronted with such contradiction, many investors, especially the foreign ones, in most instances are stuck in this dilemma. To get the rare chance and then to survive in the market full of turbulence become the chief goal in investors’ minds. With restrictions to access Chinese market, these merchants are now facing barriers no less than those of past.

Firstly, we should have a clear recognition on the difference of requirement between the domestic investors and the foreign ones. Pursuant to the Temporary Rules on Foreign Investment Commercial Enterprises, issued by State Economic & Trade Commission of P.R.C. (SETC) along with Ministry of Foreign Trade & Economic Cooperation of P.R.C.(MFTEC), the threshold for the foreigners to invest in the retailing is still too high, which is harmful to the growth of our mature market in long run. These provisions explicitly provide that only joint ventures (JV) as well as cooperative enterprises involving foreign elements are allowed to set up, and the wholly foreign-owned commercial enterprises are prohibited from establishing nowadays. Furthermore, the locations for JV are also limited to regions as followings: provincial capitals, capitals of autonomous regions, municipalities directly under the control of central government, big cities nominated by the State Council and special economic zones. Therefore only special zones, Beijng, Shanghai, Taijin, Guangzhou, Dalian and Qingdao are open to JV retailing company in reality. Besides the region restrictions, the investors also have to meet the overall requirements as followings: to accord with the commercial development plan of the city; to be able to introduce advanced world marketing art and management experience; to promote modernization of domestic enterprises; to bring along export of homemade products; to create perfect economic and social benefits.

All the above are merely the basic conditions, compared with the detailed one set forth for the foreign investors, much more strict than those of Chinese ones. The foreign investors, legal person or individual, should have the characteristics of powerful economic strength, advanced management experiences and market art, wide international sales network, perfect reputation and performance. Moreover, the investor is expected to be capable of bringing along the export of Chinese products through the planned JV. In order to ensure the economic strength of the foreign investors, his (or her) annual sales income within 3 years before application shall be exceed US$ 2 billion, and the assets one year before application shall be more than US$ 200 million. In Comparison, the provision only require the Chinese investor to have the assets more than RMB 50 million, one year before the application. To speed up the market growth in middle and western China, the minimum assets is allowed to be RMB 30 million.

On the other hand, the minimum registered capital requirements for JV are harsher than those of the usual ones. For retail JV, registered capital shall be no less than RMB 50 million, while for the enterprise in middle and western China, no less than RMB 30 million is needed, the same as that of domestic enterprises.

Next come the share proportion restrictions for JV: as for chain commercial JV with more than 3 branches (except convenient stores, specialized stores and monopoly stores), the Chinese partner shall hold no less than 51%, for the purpose of protecting the domestic market. While for chain commercial JV with 3 (or even less) sub stores or convenient chain stores, specialized chain stores and monopoly chain stores, the Chinese partner shall hold no less than 35% shares. In case of foreign partner has purchases a large quantity of products in China and be able to expand the export of home products in further step, he (or she) shall be permitted to hold majority of shares after approval of the State Council.

Other restrictions for JV can also be provided for in this regulation. It is stated that only chain branch stores, directly invested and managed by Sino-foreign investors jointly, are permitted to set up. Other chain stores such as free chain and franchise chain are prohibited by now. The duration of JV is also one of the restrictions, whose usual limitation is 30 years, while for those in middle and west China; its duration shall not exceed 40 years.

The Temporary Rules on Foreign Investment Commercial Enterprises, issued in 1999, is still valid until now. At the concern of China’s commitment to WTO, we have a long way to go before achieving these goals. A notice, issued by 4 ministries in August 2001, just 3 months before China’s entry into WTO, reflected a tendency of restriction on JV. It asked all of the JV which are established by ultra vires to close immediately, and those not qualified enterprises to be rectified and reformed as soon as possible. Such tendency will actually comply with China’s commitments consummately instead of hindering its development. However, all the investors, Chinese ones or foreign ones, should bear in mind that China’s entry into WTO doesn’t mean non-limitation on investment involving foreign elements, but mean gradual open to foreigners. The conclusions that I can draw is as followings: Firstly, there is business existence in Chinese market with joint ventures established to engage in retail and distribution fields along with some representative offices; secondly, our government are doing its efforts to improve market chance with the market access increased step by step.

Generally speaking, the suggestion that I can offer you now is to never be blindly optimistic about the nowadays situation which would lead to unexpected failure, nor should you ignore the chance before you during such rapidly developing period.