David F. Miller Center For Retailing Education and Research International Retailing Education and Training (IRET ) Governmental and Legal Issues in China Retailing
Jan 09, 2016
David F. Miller Center For Retailing Education and ResearchInternational Retailing Education and Training (IRET )
Governmental and Legal Issues in China Retailing
page 2Government 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
page 3Government Module David F. Miller Center for Retailing Education and Research
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
page 4Government Module David F. Miller Center for Retailing Education and Research
Outline
The Role of Government Retail Laws and Regulations Opening a Store in China
page 5Government Module David F. Miller Center for Retailing Education and Research
The Role of Government
page 6Government Module David F. Miller Center for Retailing Education and Research
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.
page 7Government Module David F. Miller Center for Retailing Education and Research
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)
page 8Government Module David F. Miller Center for Retailing Education and Research
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)
page 9Government Module David F. Miller Center for Retailing Education and Research
page 10Government Module David F. Miller Center for Retailing Education and Research
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
page 11Government Module David F. Miller Center for Retailing Education and Research
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)
page 12Government Module David F. Miller Center for Retailing Education and Research
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
page 13Government Module David F. Miller Center for Retailing Education and Research
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.
page 14Government Module David F. Miller Center for Retailing Education and Research
Board Director
Executive Vice-president
PresidentDecision
Committee
Headquarter
Location
GomeYongle Pengrun
Store Management
Logistic Inventory BuyingHuman
ResourceInformation Administration Branding
CustomerService
Marketing Merchandising Administration
Gome
page 15Government Module David F. Miller Center for Retailing Education and Research
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
page 16Government Module David F. Miller Center for Retailing Education and Research
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.
page 17Government Module David F. Miller Center for Retailing Education and Research
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)
page 18Government Module David F. Miller Center for Retailing Education and Research
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)
page 19Government Module David F. Miller Center for Retailing Education and Research
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.
page 20Government Module David F. Miller Center for Retailing Education and Research
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.
page 21Government Module David F. Miller Center for Retailing Education and Research
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
page 22Government Module David F. Miller Center for Retailing Education and Research
Retail Laws and Regulations
page 23Government Module David F. Miller Center for Retailing Education and Research
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.
page 24Government Module David F. Miller Center for Retailing Education and Research
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
page 25Government Module David F. Miller Center for Retailing Education and Research
Standards
Standards of Retail Store Environment Evaluating Method of the Damage to Retail
Competitors Standards on Retail Formats
page 26Government Module David F. Miller Center for Retailing Education and Research
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
page 27Government Module David F. Miller Center for Retailing Education and Research
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.
page 28Government Module David F. Miller Center for Retailing Education and Research
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.
page 29Government Module David F. Miller Center for Retailing Education and Research
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.
page 30Government Module David F. Miller Center for Retailing Education and Research
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.
page 31Government Module David F. Miller Center for Retailing Education and Research
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.
page 32Government Module David F. Miller Center for Retailing Education and Research
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.
page 33Government Module David F. Miller Center for Retailing Education and Research
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.
page 34Government Module David F. Miller Center for Retailing Education and Research
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.
page 35Government Module David F. Miller Center for Retailing Education and Research
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
page 36Government Module David F. Miller Center for Retailing Education and Research
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.
page 37Government Module David F. Miller Center for Retailing Education and Research
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.
page 38Government Module David F. Miller Center for Retailing Education and Research
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.
page 39Government Module David F. Miller Center for Retailing Education and Research
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.
page 40Government Module David F. Miller Center for Retailing Education and Research
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.
page 41Government Module David F. Miller Center for Retailing Education and Research
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.
page 42Government Module David F. Miller Center for Retailing Education and Research
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
page 43Government Module David F. Miller Center for Retailing Education and Research
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
page 44Government Module David F. Miller Center for Retailing Education and Research
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
page 45Government Module David F. Miller Center for Retailing Education and Research
Opening a Store in China
page 46Government Module David F. Miller Center for Retailing Education and Research
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.
page 47Government Module David F. Miller Center for Retailing Education and Research
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 )
page 48Government Module David F. Miller Center for Retailing Education and Research
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
page 49Government Module David F. Miller Center for Retailing Education and Research
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.
page 50Government Module David F. Miller Center for Retailing Education and Research
page 51Government Module David F. Miller Center for Retailing Education and Research