On April 16, 2004, the Ministry of Commerce (MOFCOM) issued the Measures for the Administration of Foreign Investment in the Commercial Sector (the Measures) with effect as of June 1, 2004. The Measures made sweeping revisions to the Pilot Measures for Commercial Enterprises with Foreign Investment (the Pilot Measures, issued on June 25, 1999 by former SETC and MOFTEC) to fulfill one of China's most significant WTO commitments with respect to distribution and retail services. Strictly complying with the principle of national treatment and China's service liberalization timetable under WTO, the promulgation of the Measures represented a significant and symbolic step towards granting full PRC market access to the foreign invested enterprises (the FIEs) and started a new era for foreign companies doing business in China.
In addition to providing foreign investors with relaxed control on their investment in commercial sector such as lowered entry threshold, wider scope of business, expended geographical scope, relaxed foreign equity ratio and simplified approval process, the new Measures also allow the existing FIEs (particularly those in the manufacturing sectors) to expand its scope of business to include trading and distribution. Hence, a simple provision should bring radical changes to the way that foreign companies sell goods and provide services in China. As it stands today, the FIEs in China may distribute only the products they manufacture in China and may provide after-sales services only for such products. For products manufactured by other entities, even if by their affiliated companies, the FIEs don't have the right to trade and distribute in China. Manufacturing FIEs, like other corporate entities in China, are allowed to operate within the narrowly approved business scope, which by law does not include distribution and sale of products manufactured by others. If the full trading and distribution rights were granted, the manufacturing FIEs in China will now be able to sell product lines that include the products of its parent company, other affiliates and unrelated companies, whether foreign or domestic. And the providers of systems integration, after services and many other types of services will also be able to sell parts, components and other products together with their services.
Significant is also the fact that Free Trade Zones in China such as Waigaoqiao will lose their attraction to foreign companies. As the only places where wholly foreign owned trading companies are permitted, Free Trade Zones used to be an alternative for foreign companies to set up subsidiaries with trading and distribution rights, but after the issuance of the new Measures, the future of WOFE trading companies in Free Trade Zones is not looking promising, given their location disadvantage and higher cost base as well as foreign exchange restrictions.
As it is generally the case in China, however, the Measures only indicate that any existing FIEs wish to engage in trading and distribution business shall comply with these new measures and amend their scope of business accordingly, but there is no indication of how this should be done, or whether approval will be automatically be granted to such companies. It remains to be seen whether this process will be relatively straightforward or will prove more arduous than has been suggested.
Originally appeared in Dorsey's China Report