Retail joint ventures approved by the Ministry of Internal Trade and the State Council

This article is intended to provide a general guide to the subject matter. Specific advice should be sought about individual circumstances. Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

The following article examines the Foreign Investment in Retailing Provisions ("Retail Provisions") which was the first set of legislation promulgated in the PRC in respect of retail activities by foreign investors.

The Retail Provisions were issued by the State Council (the highest political body in the PRC) as an internal document in consultation with the then Ministry of Commerce (now renamed the Ministry of Internal Trade), and were first reported in the PRC press on 23 November 1992.

The Retail Provisions govern only investments by foreign parties in retail joint ventures approved by the Ministry of Internal Trade. The Retail Provisions do not deal with other methods of entering into the retail market such as those others listed under Sections B to H in the article under the heading "Ways to Enter the PRC Retail Market".

The Retail Provisions consist of six articles and provide only a few general principles on the approval of retail joint ventures. But a few points may be noted from the Retail Provisions:-

1. The retailing business under the Retail Provisions must take the form of a joint venture, whether equity or cooperative which must be approved by the State Council, the Ministry of Internal Trade and MOFTEC. The foreign retailer cannot operate through a wholly foreign owned subsidiary, and will be required to seek out a PRC joint venture partner.

In practice, it is unclear whether the Retail Provisions would be applicable to apply to other forms of engaging in retail listed under the previous section heading, "Ways to Enter the PRC Retail Market". It is not clear whether such forms of retailing may be acceptable. Specific advice from local PRC lawyers in each particular case should be obtained, in view of the re-assertion of central government control over the retailing sector as evidenced by the Guidelines on Foreign Investment.

2. The retail venture may not engage in wholesale business nor import-export agency business.

3. Goods may be imported and sold by the retail venture, although this must not exceed 30% of the retail venture's turnover of that year. It is not specified whether in the calculation of this 30% threshold, customs and excise duties (which may amount to quite a lot) will be taken into account. Notwithstanding this, the PRC government has shown some flexibility in applying the 30% limit. For instance, the Sino-Japanese SCITE Shopping Centre in Beijing, which opened in December 1992, is reportedly allowed to sell imported goods comprising 60% of its turnover.

4. The Retail Provisions state that the retail joint venture must obtain approval from the State Council and the Ministry of Internal Trade. In practice, however, potential PRC joint venture partners have appeared unwilling to take approval submissions higher than the local level, and in the past, local authorities have purported to approve the retail ventures although they lack the authority to do so under the Provision. Under the Foreign Investment Guidelines, the central government may invalidate the projects for the lack of proper approvals being obtained, and consequently, caution should be exercised and the views of local counsel should be sought in this respect. The lack of proper approvals may also affect a bank's willingness to lend to the project. Sincere, which has established a popular department store in Shanghai, is quite open about the fact that the State Council's approval was not sought nor given.

5. The setting up of retail joint ventures under the Retail Provisions is limited to 11 designated cities and zones only, and within each city or zone, there will be allowed one or two ventures only. The currently designated cities and zones are Beijing, Tianjin, Shanghai, Guangzhou, Dalian, Qingdao, Shenzhen, Zhuhai, Shantou, Xiamen and Hainan.

Foreign retailers wishing to set up a retail business in a city where the retail joint venture quota has been used up may have to utilise alternative methods of entering the PRC retail market.

Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.