2. Pre WTO Regulatory Environment

§ Before 1992, foreign investors were banned from setting up Joint Ventures (JVs) or Wholly Foreign Owned Enterprises (WFOEs) to conduct retail or wholesale business in China.

§ In July 1992, the State Council formulated the Provisions on Foreign Investment in Retailing, which permitted Beijing, Shanghai, Tianjin, Guangzhou, Dalian and Qingdao, and the five Special Economic Zones of Hainan, Shenzhen, Zhuhai, Shantou and Xiamen to allow foreign investment in retailing on a trial basis. WFOEs remained prohibited.

§ Further measures were put into effect in June 1999 in the form of the Trial Measures for Commercial Enterprises with Foreign Investment, with the intention of strengthening central government control over the sector. This document reiterated that foreign investment in the form of JVs was allowed, although limitations such as fixed-assets and sales revenue thresholds and equity still applied. These measures theoretically extended permitted locations to provincial capitals, municipalities, selected major cities and SEZs, pending approval from central government for each individual venture. Responsibility for such approvals was transferred from the sectoral body (formerly Ministry of Internal Trade) to the SETC and MOFTEC.

§ For chain stores with fewer than three outlets, these regulations allowed foreign partners to have majority equity of up to 65%. For chain stores with more than three outlets, the Chinese partner’s equity share had to be at least 51%.

§ Until recently, only 20 foreign-invested retailers were approved by the central government, including Wal-Mart, Metro, Lufthansa, Makro, Ito Yokado, Yaohan, China Resources, Jusco, and Parkson. However, local governments seem to be more eager than central government to open China’s retail market: a further 277 retailing outlets were approved by local governments.

§ With an influx of foreign investors, China is adapting its regulatory environment to keep pace with growth. Regulations are to be relaxed in the years ahead, now that China is a member of the WTO.

§ A 1998 ban on direct sales was aimed at cracking down on “pyramid selling” schemes and sales of low quality or smuggled goods. The decision aversely affected American firms Amway, Avon, and Mary Kay, which relied heavily on direct sales. According to China’s WTO commitments, China will remove market access restrictions, including the ban on direct sales, by 1 January 2003. Nevertheless, more detailed regulations came into effect as of 1 April 2002 that allowed single level direct sales activities, but reiterated the ban on multilevel ones.