Further Relaxation of Foreign Direct Investment (Commercial Enterprise – Sale of Staple Food in China) under CEPAs

Supplementary Provisions (V) on the Administrative Measures for Foreign Investment in the Commercial Sector

The Supplementary Provisions (V) on the Administrative Measures for Foreign Investment in the Commercial Sector (“Provisions V”) was promulgated by Ministry of Commerce on 10 April 2012 and took immediate effect. The Provisions V were promulgated to further facilitate the closer economic and trade cooperation between the Mainland and Hong Kong (and Macau) under the respective CEPAs.

As we are aware, the sale of staple foods in China has been classified under the restricted category of business according to The Catalogue of Industries for Guiding Foreign Investment which took effect on 30 January 2012 (“Catalogue”). According to the Catalogue, investors were allowed to establish wholly-foreign owned enterprise to sell staple foods (of multi-brands from different suppliers), provided that the number of stores to be opened in China is no more than 30. In the case when the foreign investor would like to operate more than 30 stores in selling staple foods of multi-brands from different suppliers in China, the foreign shareholding had been restricted to no more than 49%. In other words, wholly foreign-owned enterprises were not permitted to operate more than 30 stores to sell staple foods. It had to be operated in the form of a Sino-foreign joint venture with a PRC party (or PRC parties) as the majority shareholder(s).

Provisions V work to relax the foreign shareholding restrictions for Hong Kong and Macau qualified service suppliers in certain circumstances. According to Provisions V, a qualified service supplier from Hong Kong or Macau with more than 30 stores in the Mainland selling multi-branded staple foods is now allowed under CEPA to conduct pilot operation in Guangdong on a wholly-owned basis.

Provisions V specifically reiterate that investors from other countries are not entitled to operate on a wholly foreign-owned basis, if they have been operating more than 30 stores in China in selling multi-branded staple foods.  In such circumstances, the foreign investors shall operate through setting up Sino-foreign joint ventures, and the maximum foreign participation for foreign investors (other than Hong Kong and Macau qualified service providers) is still capped at 49%.

Recap on CEPA between the Mainland and Hong Kong

The “Mainland and Hong Kong Closer Economic Partnership Arrangement” (CEPA) is a free trade agreement concluded by the Mainland and Hong Kong. The main text of CEPA was first signed on 29 June 2003. Since then, 9 supplements have been signed between 2003 and 2012 to further liberalise trade in goods and services between the Mainland and Hong Kong. The preferential treatment for Hong Kong certified service suppliers takes various forms, including:

• relaxed market access conditions, in terms of shareholding restriction, geographical access and scope of business activities
• mutual recognition of professional qualifications
• financial cooperation opportunities
• trade and investment facilitation