China Lowers The Trading Floor

New Chinese Laws and Regulations Pave the Way for Foreign Invested Enterprises to Trade in China and Import/Export Goods with Greater Ease

July 2004

BY: ROBERT C. MAIER

A key commitment that China made when it joined the World Trade Organization (WTO) on December 11, 2001 was to liberalize its trade policy. Two new recent sets of rules promulgated by the Chinese government show that China is serious about achieving this goal, and together they will have a significant impact on the ability of FIEs to freely trade, import and export goods to and from China.

Foreign Investment in the Commercial Sector

On April 16, 2004, the Chinese Ministry of Commerce (MOFCOM) promulgated the Administration of Foreign Investment in the Commercial Sector Procedures (the “Procedures”). While the Procedures take effect on June 1, 2004, several important provisions as highlighted below will not take effect until December 11, 2004, the third anniversary of China’s entry into the WTO.

These new Procedures greatly expand the scope of what FIE’s can sell in the Chinese marketplace and lower the barriers to entry for such companies. For example, starting June 1, 2004, FIEs in the form of majority owned joint ventures will be able to sell both imported and domestically manufactured goods as a wholesaler, retailer or through a franchise system, even if the goods were manufactured by the FIE’s parent company, an affiliate of the FIE, or an unrelated third party. These trading activities will be opened up to Wholly Foreign-Owned Enterprises (WFOEs) starting December 11, 2004. It is important to note that under the Procedures, certain classes of goods are subject to either additional specific distribution restrictions (e.g. pharmaceuticals, pesticides), additional regulations (e.g. books, automobile and gasoline) or outright prohibition on distribution (e.g. tobacco).

All geographic restrictions with respect to wholesaling FIEs are lifted as of June 1, 2004, and certain geographic restrictions for the establishment of a retailing FIE will be completely lifted by December 11, 2004.

The Procedures also streamline much of the approval process for establishing such an FIE, and require an approval decision to be rendered within four months after the application materials are received for review. The application process (which now combines the project proposal, feasibility study and establishment process into one approval step) generally begins with approval at the provincial level commerce bureau (up to one month) and finishes with approval by MOFCOM (up to three months). The FIE must then register with the Administration for Industry and Commerce according to their procedures. The application documents are generally the same as other FIEs, but certain additional documents may need to be filed as part of the application depending on the nature of the business (e.g. trademark license contracts, technology transfer contracts, and in some retail cases an explanatory letter from the local commerce bureau).

Finally, the new Procedures materially reduce the capital requirements for establishing these FIEs – RMB 500,000 (~ US$60,000) for wholesaling FIEs and RMB 300,000 (~US$36,000) for retailing FIEs.

Together, these new Procedures permit much greater flexibility with respect to the trading of goods by FIEs in China, without the cumbersome, approval intensive process and high barriers to entry that existed prior to these Procedures being enacted.

New PRC Foreign Trade Law

Up until July 1, 2004, FIEs were previously only permitted to import goods for use in its own operations and export their own manufactured products, unless the FIE applied for and received special trading company status.

The new PRC Foreign Trade Law (“Trade Law”) effective July 1, 2004, contemplates that FIEs that are otherwise approved as retailers or wholesalers (pursuant to the Procedures described above) may now generally gain the right to import and export third-party goods by simply making what amounts to a clerical registration filing of record with the appropriate governmental authority. Under the Trade Law if an importer or exporter fails to make the filing of record, however, customs officials may refuse to release the goods in question.

The new Trade Law also calls for implementing and administrative regulations to be promulgated in connection with the new Trade Law, so clarification on the particular mechanics of how the registration process will work is still forthcoming.

Impact of the New Regulatory Structure

When fully implemented, the Procedures and the new Trade Law together will dramatically alter the landscape for FIEs pursuing business opportunities in China. FIEs will no longer be limited to setting up special purpose entities in Free Trade Zones and instead can establish trading operations in geographic locations according to their own specific needs.

It remains to be seen how quickly the provincial level approval authorities become familiar with and implement this new regulatory structure, as well as just how simple the “simplified” import/export registration process will be. Nevertheless, these developments have the potential to further open the Chinese marketplace for foreign companies looking to do business in China.

About the Author: Robert C. Maier in an associate in the Business Department of White and Williams LLP. For more information, contact Robert C. Maier (215-864-6266, maierr@whiteandwilliams.com) or Gary P. Biehn, Chair of the Business Department (215-864-7007, biehng@whiteandwilliams.com).