On 16 April 2004, the Ministry of Commerce ("MOC") promulgated a new regulation, namely, The Administrative Measures Governing Foreign Investment in Commercial Sectors ("the Administrative Measures"). Foreign investor is permitted to set-up wholly owned enterprise engaging in commission agency, wholesaling or retailing businesses in China with a much lower threshold requirement effective from 11 December 2004. Furthermore, geographical restrictions on the locations for setting up the foreign-invested wholesaling and retailing enterprises will be abolished after 11 December 2004.

I. Definition of Foreign-Invested Commercial Enterprises ("FICE")

Article 3 of the Administrative Measures defines FICE as enterprises established by foreign investors to engage in commission agency services, wholesaling, retailing or franchising businesses. Please note that although franchising is included as one of the permitted scope of businesses for FICE, article 19 of the Administrative Measures requires foreign investors engaging in franchise licensing to comply with other related laws promulgated by the government. It is therefore expected that more specific regulations on franchising will be released very soon. Table 1 summarizes the scope of business permitted to FICE by the Administrative Measures.

Table 1: Permitted Scopes of Business of FICE

II. Conditions for establishment of FICE

Article 7 of the Administrative Measures prescribes that the following conditions must be fulfilled for setting up a FICE:

1. the amount of registered capital must satisfy the requirements of the China Company Law (i.e. the minimum registered capital for a wholesaling enterprise is RMB500,000 and a retailing enterprise is RMB300,000 under the current Company Law);

2. the amount of its registered capital and total investment must satisfy the requirements applicable to a foreign-invested enterprise; and

3. the operating period cannot exceed 30 years (for FICE established in the central-western regions, the operating period cannot exceed 40 years).

For FICE engaged in chain store operation, the following additional conditions must also be fulfilled:

1. if the application is submitted together with the application for establishment of the FICE, it must satisfy the requirements for city and commercial development;

2. if the application is submitted after establishment of the FICE, apart from the conditions stated above, the applicant must also ensure that it has paid up its registered capital and passed the annual joint inspection conducted by the government authorities.

III. Examination and Approval Procedures

Foreign investor should submit project proposal, feasibility study report and the related application forms in connection with the establishment of a FICE to the branch of MOC at provincial level for preliminary examination and approval. The application will then be submitted to MOC at central government level for approval within one month after the date of receipt of all the relevant materials from the applicant. MOC will decide whether or not the application should be approved within 3 months after the receipt of the materials. Please note that MOC may delegate its authority to the relevant branch at provincial level to approve those applications involving smaller scale of operations or smaller number of retail shops.

IV. The Administrative Measures

1. Article 18 of the Administrative Measures states that foreign investors operate chain stores with more than 30 shops and retail commodities including books, newspapers, magazines, motor vehicles (shall be abolished as from 11 December 2006), pharmaceutical products, pesticides, mulching films, chemical fertilizers, processed oil, grain, vegetable oil, sugar and cotton of different brand names supplied by multiple suppliers can only set up sino-foreign co-operative joint venture or equity joint venture with maximum equity ownership of 49%.

2. Prior to 11 December 2004, retailing FICE and their retail shops can only be set up in the provincial capitals, the capitals of autonomous regions, the municipalities directly under the administration of the central government, the municipalities with independent planning power and the special economic zones. After 11 December 2004, such geographical restriction will be abolished.

3. FICE engaged in distribution books, newspapers and periodicals, retailing of processed oil in petrol stations, sale of pharmaceutical products, motor vehicles has to comply with other related rules and regulations promulgated by the Chinese government authorities.

4. Other limitations imposed on specific industries:
(i) FICE engaged in wholesaling business is permitted to trade in pharmaceutical products, pesticides and mulching films after 11 December 2004 and is permitted to trade in chemical fertilizers, processed oil and crude oil after 11 December 2006.
(ii) FICE engaged in retailing business is permitted to trade in pharmaceutical products, pesticides, mulching films and processed oil after 11 December 20004 and is permitted to trade in chemical fertilizers after 11 December 2006.
(iii) FICE engaged in wholesaling business is not permitted to trade in salt and tobacco. FICE engaged in retailing business is not permitted to trade in tobacco.

V. Special Provisions Relating to Hong Kong and Macau Investors

Article 25 contains special provisions governing Hong Kong and Macau investors. Commencing from 1 January 2004, Hong Kong and Macau service suppliers as certified under CEPA are permitted to establish wholly owned FICE in the country. The geographical restrictions on retailing enterprises established by Hong Kong and Macau service suppliers will be expanded to include all regional grade municipalities and county grade municipalities in the Guangdong province.

Hong Kong and Macau investors can set up FICE for retailing of motor vehicles provided that the following conditions are met:

1. average annual turnover for the three years prior to the application is greater than USD100 millions;

2. total assets value for the year prior to the application is greater than USD10 millions; and

3. the minimum registered capital of the FICE is greater than USD10 millions (USD6 millions if the FICE is established in the central-western region).

Chinese nationals who are permanent residents of Hong Kong or Macau are permitted to establish individual industrial or commercial units to engage in commercial retailing activities (excluding franchising) but the floor area of the retail shop cannot exceed 300 square meters.

Full articles of Administrative Measures Governing Foreign Investment in Commercial Sectors