Market Access Report: Travel and Tourism

In its Protocol of Accession to the WTO, China promised to further open up foreign investment in its travel sector by allowing, in three sequential phases: (i) equity and cooperative JV travel agencies in areas designated as tourist or resort areas by the Chinese government, as well as in certain major cities like Beijing and Shanghai; (ii) majority foreign ownership in Sino-foreign JVs; and finally (iii) wholly foreign-owned travel agencies.

Removal from Restricted Investment Category

Tourism was designated as a grestrictedh area of foreign investment in the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) issued in 1997. In this yearfs revised Catalogue issued in April, tourism has been removed from the restricted category. By implication, the tourist industry is now a permitted sector for foreign investment under relevant Chinese law.

Lowering of Threshold for Entry

As a result of Chinafs WTO market access commitments, in December 2001 the Chinese State Council amended Chinafs major regulations on travel agencies to formally allow foreign travel companies to establish JV travel agencies.

The revised Administration of Travel Agencies Regulations (Travel Agency Regulations) added cooperative JVs as a permitted vehicle for foreign investment and lowered the threshold for entry by potential foreign and Chinese JV partners. Among other things, the Travel Agency Regulations decrease the operating revenues amount required of a potential foreign investor, and registered capital requirement of a JV travel agency. The regulations also remove the restriction on the term of a JV travel agency.

Until December 2001, JV travel agencies had to be majority-owned by the Chinese partners. The Travel Agency Regulations no longer impose the same restriction, but instead authorize the China National Tourism Administration (CNTA) and the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) to increase the ratio of foreign investment to Chinese investment in JV travel agencies. MOFTEC and CNTA are also authorized to further decrease the minimum registered capital requirement for foreign-invested companies as China moves closer to its WTO mandated deadlines for opening up the tourism industry.

Scope of Business

Chinese tourism businesses are divided into domestic tourism and international tourism, with the latter consisting of both inbound and outbound tourism. Chinese travel agencies fall accordingly into two categories: domestic and international travel agencies, with the latter requiring considerably higher capital injection than the former. While domestic agencies may engage only in domestic travel business, international agencies can engage in domestic tourism, inbound tourism and, with explicit government permission only, outbound tourism. Less than 15% of the roughly 10,000 Chinese travel agencies have been approved as international travel agencies.

Foreign-invested travel agencies are automatically allowed to conduct both domestic and inbound tourism businesses. In its WTO commitment, however, the Chinese government did not indicate when or if it will remove its ban on foreign-invested companies from engaging in outbound tourism.

Looking Forward

As of May 2002, at least 11 majority Chinese-owned JV travel agencies had been established in China, including a high profile JV between American Express Company and China International Travel Service, a long-time leading player in the Chinese tourism sector. CNTA announced near the end of 2001 that China would push for an accelerated opening up of the tourism industry ahead of its committed WTO schedule and allow foreign-controlled JVs in 2002 on a trial basis. In January 2002, the Shanghai Tourism Bureau went even further in announcing that Shanghai is ready for not only majority foreign-owned JVs but also, on a trial basis, wholly foreign-owned travel agencies. Subsequently, the Shanghai authorities have reportedly accepted proposals by top travel companies from the US, Japan and Europe to form wholly foreign-owned travel companies in Shanghai. For foreign travel companies with their eyes on Chinafs US$62 billion tourism market, the opportunity to join the marketplace with significantly fewer restrictions appears finally within sight.

By Mitch Dudek & Ling Zhu
Jones, Day, Reavis & Pogue, Shanghai