Governmental and Legal Issues in China Retailing

1. Governmental and Legal Issues in China Retailing

2. “A company should keep 10 centimeters distance from the edge of laws. If it is too far, the company will lost opportunities; if too close, the company will have legal risk ” - Liu Chuanzhi, Director of Lenovo “A firm should have three eyes: one is on internal management…; one is on market changes…; and the third is on governments’ polices” - Zhang Ruimin, CEO of Haier

3. Objectives • Gain insight into the role of central and local government in economic development and retail industry regulation • Study major retail regulations and rules in China and their implications for MNREs’ operation in China

4. Outline The Role of Government Retail Laws and Regulations Opening a Store in China

5. The Role of Government

6. Overview Government plays an important role in retail industry China has the elements of a planned economy. China’s retailers are still affected by the legacy of the command economy. The government’s role evolves with the reforms over time. The general direction is that the government will be less likely to directly intervene the operations of retailers. The government’s role varies across the country. Retail market reforms occurred first in the major special economic zones and cities along the east coast and then slowly spread out to other inland areas.

7. Chinese Government Structure CENTRAL COMMITTEE OF COMMUNIST PARTY OF CHINA (CCCPC) Political Bureau Secretariat Central Military Commission Central Discipline Inspection Commission NATIONAL PEOPLE'S CONGRESS(NPC) State Central Military Commission Supreme People's Court Supreme People's Procuratorate STATE COUNCIL CHINESE PEOPLE'S POLITICAL CONSULTATIVE CONFERENCE(CPPCC)

8. Chinese Government Structure (Cont.) Chinese Government Chart (http://www.chinabusinessreview.com/public/0803/prc_government_chart.pdf) (angloconference.com/chines_comm_party.php) Administrative Hierarchy of China (http://www.unescap.org/huset/lgstudy/country/china/china.html) Additional Reading UN ESCAP Country paper: China (http://www.unescap.org/huset/lgstudy/country/china/china.html)

10. Corporate Structure of Chinese Retailers (Cont.) Corporate Governance of Chinese Retailers General Meeting of Shareholders Supervising Committee Board of Directors CEO/President/General Manager Union Branch of Communist Party

11. Corporate Structure of Chinese Retailers (Cont.) Organizational Chart of Chinese Retailers Wangfujing Group (State-owned) (http://www.wfj.com.cn/pages/main.html?sub=company_1) Gome (Private) (http://o.cpw.com.cn/Article/2006-11/20061124132802020150.Htm) Wuhan Zhongbai Group (State-owned) (http://www.whzb.com/myAction.do?method=execute1&type=jtjg)

12. Wangfujing President Secretary Corporate Branch of Communist Party Vice Presidents President Union President Office Business Development Retailing General Department Store Finance Auditing Super Market Merchants Invitation Cooperate Branch Of Communist Party Union Human Resource Engineering Property & Security Information Technology Enterprise Planning Legal Office Business School Cooperate Newspaper

13. Wuhan Zhongbai General Meeting of Shareholders Supervising Committee Board of Directors Audit Department President President Office Finance Stock Administration Human Resource Information Training Security Business Development Wuhan Zhongbai Department Store Co., Ltd Wuhan Zhongbai Warehouse store Co., Ltd Wuhan Zhongbai Supermarket Co., Ltd Wuhan Zhongbai Electronic Appliance Store Co., Ltd Wuhan Zhongbai Distribution Co., Ltd Wuhan Zhongbai Property Management Co., Ltd Wuhan Zhongbai E-commerce Co., Ltd Wuhan Zhonglian Pharmacy Co., Ltd.

14. Gome Board Director President Decision Committee Executive Vice-president Headquarter Location Logistic Inventory Buying Human Resource Information Administration Branding Yongle Gome Pengrun Customer Service Marketing Store Management Merchandising Administration

15. Role of Government How does the government influence retailers? Make guidelines for the direction of the industry Make policies to regulate the industry and retailers Influence the industry through state-owned retailers Special treatment to foreign retail investment

16. General Guidelines from the Central Government Five-year plans Ninth five-year plan (1996-2000) Focused on regulatory issues such as modernization of ownerships. Tenth five-year plan (2001-2005) Encouraged investment in western China. Eleventh five-year plan (2006-2010) Suggested the furthering of market reforms and development of a modern distribution system. Twelfth five-year plan (2011-2015) Emphasized the development of firm size and brand. Encouraged e-commerce.

17. Modernize China’s distribution and retail system and emphasize the appliance of IT technology. Encourage e-commerce Modify old retail industry and develop new retail formats Enforce urban business network planning and rationalize the establishment of big retail stores and shopping malls. Establish auditing procedures and restrict the expansion of hypermarkets in city centers Update traditional grocery stores to supermarkets or convenience stores. Encourage the development of category specialists. Encourage the development of C&C stores Encourage the development of modern supermarkets and convenience stores in rural areas Establish the direct connection and cooperation between retailers and farmers. The 11th Five Year Plan of National Business Development (2006)

18. Encourage the retail development in Western area Encourage the establishment of distribution centers and third party distribution. Emphasize the service functions of retailers for communities. Cultivate large domestic retailers Support the development of small retailers. Encourage the development of green food and green supply chain. The 11th Five Year Plan of National Business Development (2006)

19. Control over Sate-Owned Retailers Government keeps its control over major retailers and contracts or sells out small retailers. “Control the big ones and let go the small ones” Government influences the whole industry through its control over the leading retailers. Government forms big retail groups in order to achieve economies of scale and compete with foreign retailers. Bailian, the largest Chinese retailer, was developed by combing four big state-owned retailers. Capital Chain Store Group, the largest retail group in Beijing, was created by combing 13 leading retailers in Beijing.

20. Special Treatments from Government Potential special treatments from local government. Reduced taxes Prime retail location Low rent Low interest loan Bypass state restrictions (Grey Area) By the end of 2000, 277 foreign retailers were approved by local government without the notice of the central government. At the same time, only 28 foreign retailers were approved by central government.

21. Local Government’s (Yingkou) Role in the Development of Retail Market: Yinkou Government Offer better service and favorable policies Guide the retailers to fit the urban planning of the city Interviews Video with Yinkou government officials

22. Retail Laws and Regulations

23. General Laws • Company Law of the People’s Republic of China • Law of the People’s Republic of China On Sino-Foreign Equity Joint-Ventures • Law of the People’s Republic of China on Sino-Foreign Contractual Joint Venture • Law of the people’s Republic of China on Wholly Foreign-owned Enterprise • Law of the People's Republic of China for Countering Unfair Competition • Law of the People’s Republic of China on the Protection of Consumer Rights • Law of the People's Republic of China on Promotion of Small and Medium-sized Enterprises • Etc.

24. Specific Regulations on Retail Industry • Measures for the Administration of Foreign Investment in Commercial Fields • Measures for the Administration on Sales Promotion Acts of Retailers • Administrative Measures for Fair Transactions Between Retailers and Suppliers • Administration of Direct Selling Regulations • Prohibition of Pyramid Selling Regulations • Measures for the Administration of Commercial Franchises • Notice on Restricting the Producing, Selling, and Using of Plastic Shopping Bags

25. Standards • Standards of Retail Store Environment • Evaluating Method of the Damage to Retail Competitors • Standards on Retail Formats

26. Measures for the Administration of Foreign Investment in Commercial Fields • By Ministry of Commerce • Purpose • Further expand the open-up to the outside world and improve the construction of market distribution system. • Approval of opening a store by a foreign retailer • Provincial government or the government of state special economic zones • A foreign retailer has fewer than 3 stores in the province or zone, and each store is smaller than 5000 square meters. It has no more than 30 stores in China in total. • A foreign retailer has fewer than 5 stores in the province or zone, and each store is smaller than 3000 square meters. It have less than 50 store in China in total. • Each store is smaller than 300 square meters. • Ministry of Commerce • For other situations

27. Measures for the Administration on Sales Promotion Acts of Retailers By Ministry of Commerce, National Development and Reform Commission, State Taxation Administration, State Administration of Industry & Commerce, and Ministry of Public Security and effective on 10/15/2006 Purpose Regulate retailers’ promotion, protect consumers’ benefits, maintain fair competition among retailers, and help the healthy development of retail industry. Retailers should state clearly the purposes, rules, formats, scope, time, and restrictive conditions for promotions. The statement of “retailer explanation” is invalid. Retailers should not increase price before discounts or promotions.

28. Measures for the Administration on Sales Promotion Acts of Retailers • Retailers should clearly state the quantity of products for timed panic buying. • Promoted products should have the same after-sale service and return policies as regular products. • Maximal fine is ¥30,000.

29. Administrative Measures for Fair Transactions Between Retailers and Suppliers By Ministry of Commerce, National Development and Reform Commission, State Taxation Administration, State Administration of Industry & Commerce, and Ministry of Public Security and effective on 110/15/2006, Applicable to retailers with more than10 million RMB Sales. Maximal fine is 30,000 RMB.

30. Administrative Measures for Fair Transactions Between Retailers and Suppliers Retailers should not conduct the following unfair transactions: Refuse to accept products with no excuse, ask suppliers to pay for the damage to goods, ask for return profit, and request supplier to purchase certain product or service. Retailer should not charge fees in the following conditions For signing or renewing a contract; charge fee on store bar code for products already having national approved bar codes; the fee for store bar code should not exceed its cost; store renovation or decoration; charge fees for festival, new store opening, store anniversary etc without any promotions; any other cost that are not directly related to the selling of products. Payment should be made in 60 days, and retailers should not delay its payment without reasonable excuses.

31. Administration of Direct Selling Regulations By State Council and effective at 11/2005 Purpose Regulate direct selling behaviors, strengthen the supervision on direct selling activities, preventing fraud and protecting consumers’ legitimate and social and public interests. Direct selling means a type of business model, which direct selling enterprise recruits distributors, and distributors sells product directly to end consumers away from a fixed retail locations. Pay-up registered capital is not less than 80 million yuan.

32. Administration of Direct Selling Regulations • Direct selling enterprise should have a deposit of no less than 20 million yuan. • For foreign investors, it must have been involved in the direct selling business for at least three years outside China. • Direct selling enterprise must pay the distributor by month. Payment should be calculated only based on individual sales, and may not exceed 30% of the sales. • Direct selling enterprise should not hire government employees, teachers, doctor, soldiers, full time students, foreigner, and lawyers as distributors.

33. Prohibition of Pyramid Selling Regulations By State Council Purpose Preventing fraud, protecting the legitimate rights and interests of citizens, legal persons and other organizations, maintaining the socialist market-economic order, and maintaining the social stability. Pyramid selling means an act, in which organizers or operator sponsor people, and calculate and pay bonus based on the number or sales of directly and indirectly sponsored persons, or obtain illegal interest by forcing the sponsored persons to pay amount of entry fee as the condition of meet the entry requirements.

34. Prohibition of Pyramid Selling Regulations (Cont.) • Formats of pyramid selling • Calculate the payment based on the number of the directly and indirectly sponsored persons. • Force the sponsored persons to pay an entry fee or pay an entry fee in a disguised way- such as purchasing a product to qualify sponsoring to obtain illegal interest. • Calculate and pay the payment to the up line sponsor based on the sales of the down line to obtain the illegal interest.

35. Evaluating Method of the Damage to Retail Competitors • By Ministry of Commerce • The concept of damage to retail competitors • The negative influence of big retailers on small retailers, or the negative consequence caused by unfair competition between retailers with similar sizes. • It includes substantive damage and generic damage. • Standards • Customer loss • Sales decrease • Business environment deteriorates

36. Evaluating Method of the Damage to Retail Competitors (Cont.) • Conditions • Building a new retail store with the same or similar format in a supermarket, hypermarket or warehouse’ primary business area • One corporation builds two retail stores, whose minor business areas cover another retailer with the same or similar format. • Building a shopping center in or near an established urban business center, regional business center or urban business street. • A new store blocks other retailers’ entrance and parking lots.

37. Evaluating Method of the Damage to Retail Competitors (Cont.) • Building a new store by disobeying urban commercial network planning • Building a new store by disobeying general urban planning • Regional market monopoly • A retail store or two retail stores with the same or similar format owned by the same corporation have 50% or more market share in a urban business center, regional business center, or urban business street. • A retail store have 50% or more market share in a middle size (7000 population) or larger community.

38. Standards on Retail Store Environment • National standards effective from 10/2009 • It stipulates the requirement for the store environment, equipment, and facilities for supermarket, hypermarket, discount store, convenience store, and warehouse store. • E.g. the aisles in a convenience store and discount store should be wider than .9 meter; the aisles in a hypermarket and warehouse store should be wider than 1.6 meters.

39. Measures for the Administration of Commercial Franchises By State Council and effective at 05/2007 Purpose Regulate commercial franchises, promote the healthy and orderly development of the commercial franchise industry and maintain the market order. The qualifications of franchisers and franchisees A franchise should process a mature business model and the ability to provide long-term guidance, technical support, business training and other services to the franchisee. A franchiser shall have at least two direct sales stores and have undertaken the business for more than a year.

40. Measures for the Administration of Commercial Franchises (Cont.) Regulation on franchise operation activities Regulation on information disclosure Regulation on the responsibilities and rights of both parties.

41. Notice on Restricting the Producing, Selling, and Using of Plastic Shopping Bags • By State Council and effective on 6/2008 • Producing, selling and using super-thin (< .025 mm) plastic shopping bags are prohibited. • Retailers are forbidden to provide free plastic shopping bags to consumers. • Plastic bags should have clear signs on identification, e.g., ordinary plastic bag, degradable plastic bag, and plastic bag for food etc.

42. Current Status • Maintain the order of the retail market • Further open retail industry • Help and regulate the development of retailers • Have the legacy of command economy • Lack of law or policies specific for retail industry • Difficult to implement

43. The Future of Government Retail Policies • Government→market • Laws and regulations will become clearer and more specific. • Policies on cultivating the competitive advantages of Chinese retailers • Suggestion on promoting the development of distribution industry (State Council, 2005) • Prevent from the monopoly of big retailers and promote the development of small retailers • Regulations on urban planning of commercial network (Ministry of Commerce) • Anti-monopoly law

44. The Future of Government Retail Policies • Consumer protection • Retailing and distribution in rural area • Fair competition between Chinese and foreign retailers • Retailing special products (e.g., alcohol, tobacco, oil, and drugs ) • Retail IT system

45. Opening a Store in China

46. Open a Retail Store in China What are the basic requirements? Regulations on Registered Capital of a Foreign Retailer No less than 300,000 RMB (http://www.bjmsn.com/n-7668.html) Regulations on Franchising (Sternquist,2007) Operate two physical stores in China for one year before operating a franchise system. Master franchising needs special permission. Have a proven business format.

47. Open a Retail Store in China (Cont.) What are the major procedures for Registering a Foreign Retail Store in China? (www.gszhuce.org/waizizhuce/html/202.html )

48. Enterprise Name Registration Bureau of Industry and Commerce Bureau of Foreign Trade and Economic Cooperation Approval Certificate (Contract, Feasibility Study Report, Articles of Association, and Application) Bureau of Quality and Technical Supervision Certificate of Organizational Code Business License Bureau of Industry and Commerce Charter Moment Bureau of Public Security Bureau of Statistics Statistics Registration Customs Registration Customs Foreign Exchange Registration Administration of Foreign Exchanges Tax Registration State and Local Taxation Bureau Open Bank Account Banks Capital Certificate Registration Law Firms Bureau of Industry and Commerce Business License Change

49. Open a Retail Store in China (Cont.) Bureau of Industry and Commerce and Bureau of Foreign Trade and Economic Cooperation are the two most important government departments in the process. Foreign retailers can consult Bureau of Industry and Commerce and Bureau with any questions about general procedures regarding opening a new store Foreign retailers can consult Bureau of Foreign Trade and Economic Cooperation with any questions about foreign investment. The process takes around 2-4 months in Beijing, Shanghai, and Guangzhou, and it might be longer in inland cities.