China’s distribution sector is liberalising following the country’s accession to the WTO, but free trade zones will continue to offer foreign investors an attractive trading structure until the sector really opens up in 2004.
Foreign investors in China require a legal structure that allows them to import goods for re-sale in yuan because most of their Chinese customers do not have the rights to pay for the imported goods in foreign currency. Furthermore, it is beneficial if a foreign investor selling goods into China can maintain a stock in the country so that it may shorten the delivery time to customers and promote sales.
The current regulatory regime of foreigninvested trading and distribution activities does not support such a growth potential. Trading, distribution and after-sales services are restricted business sectors for foreign investors in China. Wholly foreign-owned trading companies are prohibited and so foreign investors must form joint ventures with Chinese partners before they can invest in this particular sector. Moreover, no majority foreign equity is allowed and there are various business scope and geographical limitations, as well as stringent entry prerequisites that need to be overcome.
A foreign-invested distribution centre is a legal entity that provides a comprehensive distribution system using its own warehousing facilities to store spare parts or finished products for distribution to manufacturers, second-tier wholesalers or retailers. However, at present such centres are only allowed in the 15 designated free trade zones (FTZs).