Legal Issues Pertaining to Food & Drinks Retail and Distribution in China ------What You Need to Know

1. Legal Issues Pertaining to Food & Drinks Retail and Distribution in China ------What You Need to Know Back to Law Bridge By Chambers Yang Partner/Attorney Haworth & Lexon Phone: 8621-68767750 Fax: 8621-68767740 Personal website: http://www.law-bridge.net Firm’s website: http://www.hllawyers.com E-mail: Chambers@hllawyers.com © 2002 Chambers Yang

2. Legal Issues Pertaining to Food & Drinks Retail and Distribution in China ------What You Need to Know Back to Law Bridge • Legal requirements of retailing and distribution in China --- General legal requirements --- Special requirements of setting up foreign-funded retailing and distribution companies • New legal issues in post-WTO China © 2002 Chambers Yang

3. General Legal Requirements Back to Law Bridge • Domestic retailing and distribution • Importation & exportation © 2002 Chambers Yang

4. Domestic Retailing and Distribution Requirements Back to Law Bridge • Names, producing place, factory name, producing date, batch number/code number, specification, prescription/chief ingredient, eating/using method,etc of fixed packaging food and food additive, should be indicated on the package symbols or instructions for products © 2002 Chambers Yang

5. Importation & Exportation ---- Hygiene Supervision and Examination Back to Law Bridge • Importation: food hygiene supervision and examination organization • Exportation: the inspection and quarantine organizations for import and export commodities © 2002 Chambers Yang

6. Importation & Exportation ---- Food Label Back to Law Bridge • File an application for examination of the food label to designated inspection and quarantine organizations • Obtain the import and export food label examination certificate • Imported food label must be in Chinese © 2002 Chambers Yang

7. Foreign-funded Retailing and Distribution Company Back to Law Bridge • Included in restricted (B) list under Master List for Foreign Investment Industries • Wholly foreign-owned enterprise is not permitted © 2002 Chambers Yang

8. Requirements to Set upForeign-funded Company Back to Law Bridge • Accord with the commercial development plan of the city • Be able to introduce advanced world marketing art and management experience • Promote modernization of domestic enterprises • Bring along export of homemade products • Create perfect economic and social benefits • Special regions and special investors © 2002 Chambers Yang

9. Region Requirements Back to Law Bridge • Provincial capitals • Capitals of autonomous regions • Municipalities directly under the central government • Big cities nominated by the State Council • Special economic zones (Actually only specialeconomic zones, Beijing, Shanghai, Tianjin, Guangzhou, Dalian and Qingdao are open to JV retailing company) © 2002 Chambers Yang

10. Requirements for Foreign Investor Back to Law Bridge • Has powerful economic strength, advanced business management experiences and marketing art, wide international sales network, perfect reputation and performance • Be able to bring along the export of Chinese products through the planned JV • To set up retailing/wholesale JV, its average annual sales income within three years before application shall be more than US$2/2.5 billion, and its assets one year before application shall be over US$200/300 million © 2002 Chambers Yang

11. Requirements for Chinese Investor(1) Back to Law Bridge • A circulation enterprise that has powerful economic strength and business capacity • Its assets one year before application should be more than RMB 50 million (for enterprise • in the middle and western China, its assets shall be RMB 30 million) © 2002 Chambers Yang

12. Requirements for Chinese Investor(2) Back to Law Bridge • In case it is a commercial enterprise, its average annual sales income within three years before application shall be RMB 300 million (for enterprise in middle and western China, its sales income shall be over RMB 200 million) • In case it is an import-export enterprise, its average annual value of self-managed import and export within three years before the application shall be over US$50 million, of which, the export value shall not be less than US$30 million © 2002 Chambers Yang

13. Minimum Registered Capital Requirements for JV Back to Law Bridge • For retail JV, registered capital no less than RMB 50 million(for the enterprise in middle and western China, no less than RMB 30 million) • For wholesale JV, registered capital no less than RMB 80 million(for the enterprise in middle and western China, no less than RMB 60 million) © 2002 Chambers Yang

14. Share Proportion Restrictions for JV(1) Back to Law Bridge • As for chain commercial JV with over three branches (except convenient stores, specialized stores and monopoly stores), the Chinese partner shall hold no less than 51%shares • As for chain commercial JV with three (or less) sub stores or convenient chain-stores, specialized chain-stores and monopoly chain-stores, the Chinese partner shall hold no less than 35% shares © 2002 Chambers Yang

15. Share Proportion Restrictions for JV(2) Back to Law Bridge • In case foreign partner has purchased a large quantity of products in China and be able to further expand the export of home products, it shall be permitted to hold majority of shares after approval of the State Council • As for the wholesale joint venture company (including retail enterprise that concurrently manages wholesale), the contribution proportion of the Chinese partner shall not be less than 51% © 2002 Chambers Yang

16. Other Restrictions for JV Back to Law Bridge • Can only set up chain branch stores that are directly invested and managed by Sino-foreign investors jointly. Other chain stores like free chain and franchise chain are prohibited • The operation duration shall not exceed 30 years(for those in middle and western China, its duration shall not exceed 40 years) • The annual value of import commodities of the JV shall not be more than 30% of its sales income of commodities of that year © 2002 Chambers Yang

17. New Legal Issues in Post-WTO China (China’s Commitments -1) Back to Law Bridge Retailing services • Zhengzhou and Wuhan(upon China’s accession to WTO) • All provincial capitals and Chongqing, Ningbo; Foreign majority control(within 2 years) • No limitation, ex those chain stores which sell products of different types and brands from multiple suppliers with more than 30 outlets (within 3 years) © 2002 Chambers Yang

18. New Legal Issues in Post-WTOChina (China’s Commitments -2) Back to Law Bridge Distribution services: • Can engage in the commission agents’ business and wholesale business of all imported and domestically produced products( within 1 year); • Foreign majority control; No geographic or quantitative restrictions (within 2 years) • No limitation (within 3 years) © 2002 Chambers Yang

19. New Legal Issues in Post-WTO China (China’s Commitments -3) Back to Law Bridge • Franchising No limitation (within 3 years ) • Wholesale or retail trade services away from a fixed location, no limitation (within 3 years ) © 2002 Chambers Yang

20. New Master List for Foreign Investment Industries Back to Law Bridge • Will come into force on 1 April • Wholesale, retail and distribution is generally encouraged • Commodity transaction, direct sale, mail order, online sale, franchise, sale agent, business management, import-export company are included in restricted list • China’s commitments to WTO are confirmed © 2002 Chambers Yang

21. Conclusions Back to Law Bridge • Firstly, business existence in China market --- Establish joint ventures to engage in retailing and distribution --- Set up a representative office • And then, improve market chance with the market access increased step by step • Back to Law Bridge © 2002 Chambers Yang