Grand Opening: New Rules for Foreign Investment Break Open China's Commercial Sector

By Shirley Xu and Randall Peerenboom, Yiwen Law Firm

The Ministry of Commerce (MOFCOM) issued the Administration of Foreign Investment in the Commercial Sector Procedures (商务部外商投资商业领域管理办法)(the Procedures), on April 16 2004 with effect as of June 1 2004. The Procedures constitute a major overhaul of the regulatory regime for foreign investment in the commercial sector in China.

The State Council started to allow foreign investment in the retail business on a trial basis in 1992. The 1999 Procedures for Pilot Projects for Commercial Enterprises with Foreign Investment (issued on June 25 1999 by the former SETC and MOFTEC, and hereafter, the 1999 Procedures) slightly expanded the opportunities for foreign retailers and wholesalers. Nevertheless, by the end of the 1990s foreign investment in the commercial sector remained subject to numerous restrictions that left investors cold, including high registered capital thresholds, severely circumscribed geographical limitations, equity limits that prevented foreign investors from taking a controlling share, restrictions on business scope and a burdensome approval process requiring central government approval. Seeking to circumvent these restrictions, foreign investors established hundreds of companies with local approval despite the legal risks. The proliferation of such companies has led to periodic crackdowns and a slew of regulations and notices.