Hong Kong: Ways to Enter the PRC Retail Market, Approval Process and Documentation

Last Updated: 26 September 1995
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.

This article examines the ways in which a foreign investor may participate in retailing in the PRC and the relevant approval process and documentation.

The following is a brief summary of some of the methods of entry by a foreign investor into the PRC retail market. The list is by no means comprehensive, but includes:-

A. Sino-foreign retail joint ventures approved by
the Ministry of Internal Trade and the State Council

A retail joint venture is a joint venture for the establishment of a department store, shopping centre or shop between a PRC and a foreign party. For instance, the department store set up by Yaohan, a Japanese retailer, in Shanghai is a retail joint venture between Yaohan and a PRC partner, Shanghai No. 1 Department Store (who runs the biggest department store in the PRC). This type of retail business is only permitted in 11 designated cities and zones (including the major PRC cities and the five special economic zone), and is dealt with further under the article headed "Foreign Investment in Retailing Provisions".

B. Domestic retail joint ventures

This form of joint venture does not need to be approved by the Ministry of Internal Trade. Nor does it need to be approved by the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") since technically this will be a joint venture between two PRC parties.

In this method, the foreign party already has an existing, or establishes a new, business vehicle in the PRC, for instance, a joint venture or wholly owned subsidiary. This foreign investment enterprise ("FIE") vehicle is then used in a further joint venture with, for instance, a PRC retailer. From a legal point of view, once the FIE is set up by the foreign party, this will be regarded as a PRC legal entity so that any joint venture it has with other PRC entities will be regarded as a domestic joint venture for which the approval process will be simpler. If permitted by its articles of association, in theory, the FIE is allowed to invest in other PRC

enterprises without further approval and use its retained earnings or registered capital to do so. However, this method is not usual and in the light of the re-assertion of central government control over the retailing sector as evidenced in the Interim Provisions on the Guidance of the Direction of Foreign Investment, confirmation from legal counsel as to the continuing viability of this method should be sought.

C. Developing commercial complexes and hotels

By developing commercial shopping complexes and hotels with PRC partners, a foreign investor can also obtain the right to do retail business. This appears to be one of the main reasons why there are many Hong Kong investors willing to develop commercial complexes in the PRC today, since such developments offer them a property investment as well as a foothold into the retail market. Upon completion of the development, the foreign developers may lease the space to retailers or itself engage indirectly in retailing by utilising the retail licence of their PRC partners (amongst whom there will usually be a PRC retailer). Hong Kong investors who have utilised this method include Henderson, Dickson Holdings, Ryoden and Hysan.

D. Purchasing an interest in or leasing space from a PRC retailer

This involves negotiating with a PRC retailer (such as a department store) to purchase an interest in the PRC retailer. Thereafter, the PRC retailer's store is run as a sino-foreign joint venture. The foreign retailer will offer to the venture its management skills, and in return, it will obtain an existing store, giving it instant access to the PRC retail market. In May 1995, Guangdong Investment, a Hong Kong company backed by the Guangdong government, announced its purchase of a majority stake in Guangzhou Nanfang Department Store. In July 1995, Shanghai Number One Department Store, the biggest retailer in the PRC, announced that it was considering the possibility of issuing shares to foreign investors.

Alternatively, the foreign retailer may rent store space from the PRC retailer. Wing On, a Hong Kong retailer, reportedly has rented the entire floor of a department store in Wuhan to sell children's products.

E. Offering advanced management skills

Another known method to enter the retail market involves a foreign retailer entering into a cooperation agreement with a PRC partner. A cooperation agreement does not necessitate the setting up of a joint venture vehicle but is more than a management contract; the foreign investor offers its management skills, and the PRC party offers the location. The CVIC Yaohan Shopping Centre in Beijing apparently employed this method.

F. Franchising

This involves a foreign investor entering into franchising contracts with PRC retailers, whereby the foreign retailer provides the products, ideas in store decoration, management and marketing know-how to the PRC retailer in return for a fee and/or a percentage of the franchisee's sales. The Giordano, Benetton, Crocodile and Bossini stores in the PRC are reportedly operated on a franchise basis. Printemps is reportedly franchising its name and mark to a Hong Kong retailer in respect of a store which will be established in Shanghai.

This differs from a cooperation agreement (E. above) in that the franchisee can use the foreign investor's name and get-up and may be required to sell only its products.

G. Concessions in a sino-foreign shopping centre or hotel

Rental space in most sino-foreign shopping centres or hotels may be used by a foreign retailer. This may obviate the need for the foreign retailer to obtain a separate retail licence, since the shopping centre or hotel developer may have already secured such rights for its tenants or concessionees. The arrangement is generally in one of two forms:-

(a) the foreign retailer supplies the products and pays a commission to the shopping centre operator who is responsible for selling the product at a counter under the foreign retailer's name. Management of the counter is undertaken by the shopping centre operator;

(b) the shopping centre sublets a shop to the foreign retailer for a rental which may be fixed or expressed as a percentage of sales (usually 20% to 30%) subject to a minimum rent. The foreign retailer is responsible for operating the store, including hiring the staff and maintenance of the premises.

Depending on the shopping centre operator concerned, the operator may provide a range of services including the remittance of earnings in foreign exchange to the foreign retailer's jurisdiction, handling relevant approval processes, and even undertaking the accounting of profits, taxes and duties for the foreign retailer.

H. Chain stores

As a recent form of officially promoted retail operation in the PRC, chain stores such as restaurants, fast food outlets, supermarket - convenience, jewellery, photo-finishing, optical, book, clothing and drug stores are the latest business potential in which several Hong Kong companies such as Fotomax, Hong Kong Optical, City Chain, and Thai companies such as Charoen Pokphand (for its 7-11 franchise) have expressed an interest.

The PRC's own experiment with chain stores began in the late eighties, but the results have not been satisfactory because of the lack of standardisation within the chain operation. Based on the policy announcements of the Ministry of Internal Trade in this past two years, overseas companies with recognised chain store expertise are now encouraged to apply to operate chain store businesses jointly with domestic state-run enterprises.

Approval process and documentation relevant to the establishment of a retail operation

There are no detailed published procedures as to how an application to establish a retail business in the PRC may be made, whether under the Foreign Investment in Retailing Provisions or otherwise. As the retail industry is still undergoing an "experimental" phase in the PRC, the authorities themselves have not yet settled the procedures. Set out in the section below is a summary of documentation required will be, to give the foreign investor an idea of what may be involved. However, the list is not comprehensive, and the approval procedures and documentation required in a given circumstance should be investigated further with the local authorities concerned, any PRC joint venture partners and legal counsel.

1. for retail access, an application to the Ministry of Internal Trade and the State Council to set up a retail joint venture under the Foreign Investment in Retailing Provisions;

2. rental/concession/sub-letting agreement with PRC retailer or shopping centre operator, if applicable;

3. documentation for the establishment of a joint venture, including: feasibility study, joint venture agreement and articles of association, to be approved by MOFTEC;

4. registering with MOFTEC any management, cooperation or franchising agreement where this involves a technology import under the PRC Regulations on the Administration of Technology Import Contracts (which includes the importing of management and quality control know-how);

5. registering any franchise agreement or other arrangement which should involve the licensing of a registered trade mark with the PRC Trade Mark Office;

6. other specific licences and permits in relation to the sale of individual products (for instance, the sale of televisions, records etc.);

7. import licences (if necessary);

8. agreements with transport companies and suppliers;

9. registration with the State Administration of Industry and Commerce or its local bureau of trade names under the Enterprises Name Registration Regulations. Note however that at present the name registration system at the national level has been suspended and is undergoing review (due to an apparent conflict of this system with the 1994 Companies Law) and while it is still possible to register a name at the local level, it is possible to do so only with a name in the Chinese language;

10. registration of trade marks for relevant goods or services at the PRC Trade Mark Office. However, it is not possible to register a service mark for the specific category of retail services (unlike in Hong Kong) and it may be necessary to register the service mark against a closely related category, such as "business administration" and "cost analysis" services, although it is uncertain whether the level of protection here would be sufficient to cover retail services.

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.

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