It has been widely reported recently that China will soon have its first Sino-foreign joint venture to distribute and retail pharmaceutical products on the mainland. This is a strong indication that China now intends to open up one of its most non-competitive sectors to foreign investors - medicine distribution.
At an Investment and Trade meeting in China, on 9th September 2000, a senior official from the Bureau of Internal Trade (formerly Ministry of Internal Trade) announced that China will now allow foreign investors to own controlling shares in commercial enterprises subject to certain limitations, which will gradually be lifted.
These two recent pieces of news convey a message to the world - China is on the road to opening up its commercial sector to foreign investors, a commitment undertaken in its WTO entry agreements. Although China has promised to open up the commercial sector three years after its WTO accession, it has to start moving in the right direction now so that the vulnerable domestic commercial companies are gradually exposed to international competitors.
The key legal document in China's current regime on regulating foreign investments in the commercial sector is the Provisional Measures on Foreign-invested Commercial Enterprises ("the Provisional Measures") jointly announced in June 1999 by the State Economic and Trade Commission ("SETC") and the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC"). The main regulations can be summarized as follows:
Area Restriction
Commercial enterprises with foreign investors can only be established in areas approved by the State Council, which are currently confined to the capital cities of provinces, autonomous regions and municipalities directly under the State Council as well as Specially Designated Cities by the State Council and Special Economic Zones. However, according to the Bureau of Internal Trade, these area restrictions will no longer be imposed.
Qualification of Foreign Investors
In order to invest money into a joint venture, a foreign investor must be able to demonstrate economic strength, advanced management systems and marketing techniques, a widespread international sales network, a good performance record and above all to be able to promote the export of Chinese products.
For a joint venture in retail, the foreign partner must be able to demonstrate annual sales greater than USD 2 billion for three consecutive years before their application and have total assets of over USD 200 million. To qualify for a joint venture in wholesale, these two figures should be USD 2.5 billion and USD 300 million respectively.
Furthermore, there are some qualification restrictions imposed on Chinese joint venture partners.
Restrictions on the Joint Venture to be Established
The establishment of the joint venture will have to be in accordance with the Commercial Development Plan of the city where the joint venture is to be located. This may lead to the number of joint ventures being restricted within a city or certain area. The registered capital of the joint venture in retail can be no less than RMB 50 million. If the joint venture is located in central and western regions, the registered capital can be reduced to be RMB 30 million. For joint ventures in wholesale, the registered capital required is RMB 80 million and RMB 60 million respectively.
There are also restrictions in terms of ownership for both retail and wholesale joint ventures. It is expected that the Chinese partner should own a minimum of 51 percent of the joint venture if it has more than 3 chain stores (excluding convenience, specialty and exclusive sale stores). Although what each of the different types of stores is allowed to sell is laid out in other legislation, it is not clear what the differences are between chain stores and these three other kind of stores. Legislation issued by the Bureau of Internal Trade states that supermarkets, convenience stores and specialty stores can all be classed as chain stores. In other words, the chain store is just one of the forms of business available for the operation of the above three kinds of stores, and chain store and the three remaining types of stores are defined from different perspectives and therefore there is no basis for the comparison between chain stores and the rest of the three stores. In this respect, this regulation is quite confusing. Furthermore, the regulation states that exceptions may be made to the 51 percent Chinese ownership if the foreign party can promote export of Chinese-made products through its extensive international sales network. However, the exception needs the approval from the State Council.
For joint ventures with 3 or less chain stores or operating convenience stores, specialty stores or exclusive sale stores, the minimum Chinese ownership has been reduced to 35 percent.
The sales outlets of the joint venture can only be chain stores directly owned and operated by the joint venture. Independent chain stores (defined as one established as a separate legal entity independent of the joint venture) and franchised chain stores (defined as one established by obtaining franchise from the joint venture) cannot be developed by a joint venture.
The length of the joint venture should not exceed 30 years, with the exception of joint ventures in the central and western areas, which should not exceed 40 years.
Business Scope of the Joint Venture
The permitted business scope of a retail joint venture includes retailing, export of domestic products and self-operated import (opposite to import agency). The permitted business scope of a wholesale joint venture includes wholesale of domestic products and imported products and export of domestic products. We can see these two types of joint ventures have the same power in respect of import and export. Both types cannot engage in import and export agency business. The total import volume cannot exceed 30 percent of the total turnover of the joint venture.
Establishment Procedure
Approval authorities involved include SETC and MOFTEC and their local counterparts respectively. The Chinese partner should submit the Feasibility Study Report to the local SETC and the local SETC will refer the submission to the central SETC for final approval. After having the Feasibility Study Report approved, the investors can then submit their joint venture contract and articles of association to the local MOFTEC and then the central MOFTEC for their approval.
Conclusion
The overall impression of the Provisional Measures is that it has set out seemingly too rigid and high restrictions on foreign investors as well as on the joint ventures. So China still has a long way to go in order to meet its commitments undertaken in WTO entry agreements.
