Governmental and Legal Issues in China Retailing

David F. Miller Center For Retailing Education and ResearchInternational 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 Reading UN ESCAP Country paper: China

(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)


Wangfujing

President

PresidentUnion

PresidentOffice

Business Development

RetailingGeneral

DepartmentStore

Super Market

MerchantsInvitation

Finance Auditing

EngineeringProperty & Security

InformationTechnology

Human Resource

BusinessSchool

Legal Office

CooperateNewspaper

EnterprisePlanning

SecretaryCorporate Branch of

Communist Party

Cooperate Branch Of

Communist PartyUnion

Vice Presidents


Wuhan Zhongbai

General Meeting of Shareholders

Board of Directors

Audit Department

President

Supervising Committee

President OfficeFinanceStockAdministrationHuman ResourceInformationTrainingSecurityBusiness Development

Wuhan Zhongbai Department Store Co., LtdWuhan Zhongbai Warehouse store Co., LtdWuhan Zhongbai Supermarket Co., LtdWuhan Zhongbai Electronic Appliance Store Co., LtdWuhan Zhongbai Distribution Co., LtdWuhan Zhongbai Property Management Co., LtdWuhan Zhongbai E-commerce Co., LtdWuhan Zhonglian Pharmacy Co., Ltd.


Board Director

Executive Vice-president

PresidentDecision

Committee

Headquarter

Location

GomeYongle Pengrun

Store Management

Logistic Inventory BuyingHuman

ResourceInformation Administration Branding

CustomerService

Marketing 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-commerceModify 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)


Encourage the retail development in Western areaEncourage 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


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.


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.


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.


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.


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.


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.


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.


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.


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


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.


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.


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.


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 )


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


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.

Governmental and Legal Issues in China Retailing

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