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Shanghai - News from Archives
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China Drops Barriers
To Foreign Retailers
Rule Makers Reject Demand
For Protectionist Provisions
In Meeting WTO Promises
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By LESLIE CHANG Staff Reporter of THE WALL STREET JOURNAL June 1, 2004 BEIJING -- A new law will throw China's retail and distribution sectors wide open to foreign investors, and probably lead to faster growth in an already rapidly expanding area of the economy. The law, which was issued in April and goes into effect today, removes both longstanding restrictions and the threat of recently proposed measures to further hamper foreign investment. Beginning in December, foreign retailers can do business without Chinese partners and set up stores anywhere in the country. The law removes prohibitive asset and sales requirements that had barred all but the world's largest retail chains from entering China, and it loosens an earlier rule that all store openings needed approval from the central government. While the law merely puts into effect China's promises to the World Trade Organization -- under which Beijing agreed to open its retail and distribution sector within three years of joining the global trade body -- it is particularly welcome to foreign investors, since it runs counter to recent protectionist calls by Chinese retailers and some officials. "It will increase the speed of expansion of the big retailers," says Li Fei, a professor at Tsinghua University's School of Economics and Management who was involved in drafting the new law. In recent years, global chains like Wal-Mart Stores Inc. and France's Carefore SA have expanded aggressively in China. Local retailers had lobbied heavily for protection from the onslaught. Earlier drafts of the law had included a system to rate and punish foreign retailers who had previously set up stores without central-government approval. Another proposal would have banned foreign retailers from opening stores in cities that haven't drawn up detailed maps of planned retail sites, which would include many smaller cities. But the new law -- which Mr. Li says went through about 10 draft versions, with input from foreign and domestic retailers as well as outside experts -- contains neither of those provisions and appears to reflect a commitment toward an open and fair market. U.S. trade officials say they lobbied China hard to remove vague and, at times anticompetitive, provisions in earlier drafts. The final result "shows that officials are quite determined to not protect what does not need to be protected anymore," says Allan Liu, president of the China Retail Fund, which invests in retail ventures. "It's an encouraging sign." The big chains probably will be the first to benefit. The Ministry of Commerce, which oversees the retail sector, has begun accepting applications from foreign retailers seeking to restructure through buying out their Chinese partners, says one person who has filed such an application. Previously, retailers had to operate through joint ventures. Cutting out local partners will enable foreign companies to expand faster, since in many cases a local partner's limited cash or narrow geographical focus hindered companies' expansion plans. Longer term, the law opens up whole new areas of business for smaller companies that didn't qualify to compete under previous retail and distribution laws that favored big multinationals. Only retailers with average annual sales of more than $2 billion, for example, were allowed to apply to set up in China. And for the most part, only companies who manufactured in China -- generally, big companies like Procter & Gamble Co. and Coca-Cola Co. -- could distribute their own goods in the domestic market. Everyone else had to rely on Chinese distributors, forcing companies to cede control over important aspects of business such as quality control of their products during shipment. Now foreign companies of any size will be able to distribute or sell goods at retail. Likely players include makers of high-end electronics, luxury goods and industrial products, says Eduardo Morcillo, a senior consultant for InterChina Consulting, a management-consulting firm. Foreign companies also will be permitted to import and export goods; previously they could do this only through approved Chinese companies. "It's a revolution in the investment environment in China," says Mr. Morcillo, who is based in Shanghai. "There's a huge market for imported products, but now you will be able to import directly and sell directly." The law also moves much of the approval process down to lower levels. Previously, all new store openings required Beijing's approval. Now, chains that have more than 30 stores nationally will still require Beijing's approval to open an outlet larger than 3,000 square meters (9,900 square feet), but anything smaller will require only a provincial government's endorsement. Industry watchers welcome the reduced bureaucracy, though they say the greater reliance on local governments will bring its own challenges, since local officials often impose their own rules to get more out of foreign investors. "It's good and bad, because the central government is transferring more responsibility to the local level, but then you have to deal more with local governments," says the China Retail Fund's Mr. Liu, who hastens to add, "It's more good than bad." | | |||||