China in Major Change: Opens Retail, Distribution Sectors to Foreign Businesses
Some, including Wall Street Journal have described change as
“revolution in China’s the investment environment”
A new law which was issued in April and goes into effect at the first of June will open China’s retail and distribution sectors wide open to foreign investors. Implementation of the new law will set off a new round of faster growth in what is currently an already rapidly expanding area of the economy.
Till now, foreign companies seeking to enter China’s retail market were required to have Chinese partners to set up stores anywhere in the country. The law that comes in effect from June will mean that after December 2004, foreign companies will no longer have to meet prohibitive asset and sales requirements that had barred all but the world’s largest retail chains from entering China. It will also loosen an earlier rule that all store openings needed approval from the central government.
While the law only allows China to meet its’ undertakings to the World Trade Organization (WTO) – under which Beijing agreed to open its retail and distribution sector within three years of joining the global trade organization – it is particularly welcome to foreign investors since it runs counter to recent protectionist calls by Chinese retailers and some officials. According to the Wall Street Journal in a recent article, “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, major international chains like Carrefour SA of France and Walmart Stores Inc. of the United States have expanded aggressively in China. Local Chinese retailers have loudly protested this and lobbied heavily for protection from the new competition in price and service that these major retailers have set off. Earlier drafts of the law had included a requirement for a system to rate and punish foreign retailers who had previously set up stores without central government approval. Another proposal would have prohibited 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 Professor Li says went through about 10 draft versions balanced local concerns by including input from foreign and domestic retailers as well as economic experts – dropped both of these provisions in the final version and appears to reflect a commitment toward a more open and fair market. U.S. trade officials say they lobbied hard to get China to remove vague and, at times, anticompetitive provisions in earlier drafts. Thy note that thee final result “shows that officials are quite determined to not protect what does not need to be protected any more,” says Allan Liu, President of the China Retail Fund, which invests in retail ventures. “It’s an encouraging sign.” Mr. Liu said.
For the immediate future, the big chains will probably be the first to benefit according to local experts. The Ministry of Commerce, which overlooks 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, foreign retailers had to operate through joint ventures. Because most Chinese companies had limited cash or narrow geographical focus, the former requirement to pair with them caused most foreign companies to limit their expansion plans; the change is likely to speed up change in a fast altering field.
In the longer term, the law also opens up a whole new area of business for smaller foreign companies that didn’t qualify to compete under previous retail and distribution laws that favored the big multinationals. Only retailers with average annual sales of more than $2 – billion (US), for example, were allowed to apply to set up in China previously. This meant in practice that only companies that manufactured in China – generally, big companies like Coca-cola, Procter & Gamble, etc. could distribute their own goods in the domestically. Everyone else had to rely on Chinese distributors, forcing companies to cede control over key aspects of business such as quality control of their products during shipment.
According to Eduardo Morcillo, a senior consultant for InterChina Consulting, now with the new law, foreign companies of any size will be able to distribute or sell goods at retail. Those likely to immediately benefit from the new policy include makers of luxury goods, high-end electronics, and industrial products, Also under the new law, foreign companies will also be permitted to import and export goods; previously they could only do this through approved Chinese companies.
“It’s a revolution in the investment environment in China,” according to 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.