The Shackles Come Off Foreign Traders

China has recently ratified new regulations that permit foreign companies to establish fully operational wholly foreign-owned enterprise trading companies, allowing them to buy and sell in China. (Previously, foreign companies were restricted in their abilities to both purchase domestically and then re-sell domestically in China.) As Juergen Kracht, Managing Director of the China consultancy company Fiducia Management Consultants states, if the new regulations are implemented without any additional limitations, they mark a significant liberalisation of China's trade sector and indicate far-reaching changes and opportunities for foreign-invested companies in China.

Following the new formulation of China's Foreign Trade Law (6th April 2004), the Ministry of Commerce (MOFCOM) has published new management rules for foreign trade. The �gMeasures for the Administration of Foreign Investment in the Commercial Sector�h herald the long-awaited liberalisation of China's distribution and retail sector. Under the regulations, foreign companies will be allowed to set up majority joint venture trading companies (as from 1st June 2004) and wholly owned trading companies (as from 1st December 2004).

Following the WTO-accession, China agreed to liberalise its trade policy. As such, Beijing is simply complying with its obligations. More surprising than the actual law changes are the low minimum requirements. Previously, the minimum registered capital for retail companies was Yn50m (for wholesale companies, it was Yn80m), which was an extremely high threshold for small or medium-sized investments.

Now, with the new regulations in place, the entry requirements for retail business have been drastically lowered, to Yn300,000 for retail companies (Yn 500,000 for wholesale), so the door to trading in China has been swung open to small and medium-sized foreign companies.

Significant is also the fact that existing wholly foreign-owned companies in China will be permitted to extend their business licence, adding trade to the allowed business scope. Foreign companies will now be able to broaden their product range and offer their full portfolio, including finished goods manufactured outside China.

Previously, full trading rights were only granted to foreign minority joint ventures, although an exception existed for products made in China: in other words, wholly foreign-owned companies were allowed to distribute and sell self-manufactured products. Or, wholly foreign-owned trading companies were allowed to set up in the free trade zones.

Now, it seems likely that China-based assembling or repackaging operations that were previously used to facilitate trade are likely to either vanish or to focus purely on trade. Analysts expect a streamlining of the existing sales and distribution operations and a trend towards more professional and specialised trading services. The future of WFOE trading companies in free trade zones such as Waigaoqiao is not looking promising, given their location disadvantage and higher cost base.

Although it will take a few more months until companies can set up trading entities everywhere in China and even though some uncertainties remain, the new regulation will significantly change the China business environment.

In detail, the new regulations apply for the following five activities:

• Retailing: selling goods and related services to individual persons from a fixed location, as well as through TV, telephone, mail order, internet, and vending machines

• Wholesaling: selling goods and related services to companies and customers from the industry, trade or other organisations

• Representative transactions on the basis of provisions (agent, broker, auctioning)

• Franchising

• Import/export, distribution and retailing by existing manufacturing companies

Set-up requirements

Foreign investors will enjoy national treatment in setting up trading companies with minimum registered capital, which is as follows: for wholesaling enterprises, Yn500,000 and for retailing enterprises, Yn300,000.

There are time limits on how long such companies can operate, being limited to a maximum of 30 years for foreign trading companies set up in the developed coastal areas and 40 years for companies established in the Western areas.

Application procedure

The company formation procedure follows the existing guidelines to set up a wholly foreign-owned enterprise in China. Applications must first be submitted to MOFCOM's provincial-level counterparts. The applications then have to be forwarded to MOFCOM for approval. The regulations stipulate that the whole approval process should be completed within four months.

After obtaining approval, foreign trading companies are allowed to operate in the following business areas:

• Retailing enterprises: retailing, import of merchandise it sells, sourcing and purchasing of domestic goods for export, related services

• Wholesaling enterprises: merchandise wholesaling, commission agency (except for auctions), import & export of merchandise, related services

• Limitations apply to some specific products such as books, periodicals, newspapers, cars, medicines, salt, agricultural chemicals such as pesticides, crude oil and petroleum.

From 11th December 2004, all geographical restrictions for retailing enterprises will be removed; foreign investors will be allowed to establish retail stores anywhere in China.

This article was contributed by Fiducia. For further information, please contact www.fiducia-china.com or info@fiducia-china.com

Highlighted quotes

The door to trading in China will be swung open to small and medium-sized foreign companies

Foreign companies will now be able to broaden their product range and offer their full portfolio, including finished goods manufactured outside China

In short

Manufacturing WFOEs can sell imported products as well as own production from December this year

Manufacturing JVs can sell imported products as well as own production immediately

New WFOEs can be set up to buy and re-sell in China