Governmental and Legal Issues in China Retailing -...

David F. Miller Center For Retailing Education and Research

International Retailing Education and Training (IRET )

Governmental and Legal

Issues in China Retailing

Government Module David F. Miller Center for Retailing Education and Research

“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


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


Outline

The Role of Government

Retail Laws and Regulations

Opening a Store in China


The Role of Government


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.


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)


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 ReadingUN ESCAP Country paper: China

(http://www.unescap.org/huset/lgstudy/country/china/china.html)

http://angloconference.com/chines_comm_party.php

http://www.unescap.org/huset/lgstudy/country/china/china.html

http://www.unescap.org/huset/lgstudy/country/china/china.html


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


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)

http://o.cpw.com.cn/Article/2006-11/20061124132802020150.Htm




Wangfujing

President

PresidentUnion

President

Office

Business

Development

Retailing

General

Department

Store

Super

Market

Merchants

InvitationFinance Auditing

EngineeringProperty

& Security

Information

Technology

Human

Resource

Business

School

Legal

Office

Cooperate

Newspaper

Enterprise

Planning

SecretaryCorporate Branch of

Communist Party

Cooperate

Branch Of

Communist Party

Union

Vice Presidents


Wuhan Zhongbai

General Meeting of Shareholders

Board of Directors

Audit Department

President

Supervising Committee

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.


Board

Director

Executive

Vice-president

PresidentDecision

Committee

Headquarter

Location

GomeYongle Pengrun

Store

Management

Logistic Inventory BuyingHuman

ResourceInformation Administration Branding

Customer

ServiceMarketing Merchandising Administration

Gome


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


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.


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 formatsEnforce 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)


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)


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.


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.


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


Retail Laws and Regulations


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.


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


Standards

Standards of Retail Store Environment

Evaluating Method of the Damage to Retail

Competitors

Standards on Retail Formats


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




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.




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.




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.




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.



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.



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.



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.



(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.



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



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.



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.


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.


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.


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.


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.


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


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


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


Opening a Store in China


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.

http://www.bjmsn.com/n-7668.html





(Cont.)

What are the major procedures for Registering a Foreign

Retail Store in China?(www.gszhuce.org/waizizhuce/html/202.html )

http://www.gszhuce.org/waizizhuce/html/202.html

http://www.google.com/imgres?imgurl=http://brucewagner.files.wordpress.com/2008/02/questions_and_answers.jpg&imgrefurl=http://brucewagner.wordpress.com/2008/02/08/bruces-favorite-things/&usg=__mdwiOP6M8VMTZnUmFgm6S1rfb3Q=&h=447&w=300&sz=24&hl=en&start=17&zoom=1&um=1&itbs=1&tbnid=OHWdYFXrOGrJlM:&tbnh=127&tbnw=85&prev=/images?q=questions&um=1&hl=en&sa=N&rlz=1T4ADFA_enUS338US338&ndsp=20&tbs=isch:1

http://brucewagner.files.wordpress.com/2008/02/questions_and_answers.jpg


Enterprise Name Registration Bureau of Industry and Commerce

Approval Certificate (Contract,

Feasibility Study Report, Articles of

Association, and Application)

Certificate of Organizational Code

Business License

Charter Moment

Statistics Registration

Customs Registration

Foreign Exchange Registration

Tax Registration

Open Bank Account

Capital Certificate Registration

Business License Change

Bureau of Foreign Trade and Economic

Cooperation

Bureau of Quality and Technical

Supervision

Bureau of Industry and Commerce

Bureau of Public Security

Bureau of Statistics

Customs

Administration of Foreign Exchanges

State and Local Taxation Bureau

Banks

Law Firms

Bureau of Industry and Commerce



(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.

Governmental and Legal Issues in China Retailing -...

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