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China retail de-regulations: good or bad thing?

05-Nov-2004

As retail regulations in China are set to undergo big changes, many leading multinational retailers are queuing up in readiness to capitalize on more liberal trading conditions. Simon Pitman takes a closer look at the changes to find out exactly what they will mean to food retailers.

Despite measures to liberalise China's economy, many restrictions have remained in place, particularly for foreign companies wishing to do business in the country. In 1992, the government further relaxed economic restrictions allowing foreign retailers to set up joint ventures in 11 designated cities throughout China. Initially the regulations strongly favoured Chinese businesses, insisting that foreign businesses remained minority stake holders.

However, after China joined the WTO in 2001, one of the stipulations was that the country opened its doors to non-Chinese multinational companies and that, more specifically, the retail sector was completely liberalised within a five-year time-frame. The first move came in December last year, when the authorities ruled that multinational retailers would no longer have to be a minority stake holder in a joint venture.

 

A recent report from M+M Planet Retail points out that this direction has spurred big international food retailers such as Wal-Mart, Carrefour and Metro to ramp up their expansion plans in China. Indeed it has also led British retailer Tesco, to enter the market recently. However, the continued restrictions on geographical location still meant that the multianationals were being left out of the increasing opportunities for expansion into tier two and tier three cities bought about by economic growth.

 

As part of the final move to meet the WTO regulations, the China government announced back in August that it would drop restrictions for multinational retailers wishing to enter the market after December 11, 2004. This means that multinationals can now own 100 per cent of new venture and that there will be no restrictions on where they can operate geographically.

 

This will result in an end to 99 per cent of restrictions, says M+M Planet Retail analyst Robert Gregory. "Further restrictions are likely to exist on ventures involving 30 stores or more, but for the vast majority of new ventures this will mean an end to a lot of red tape."

 

However, Gregory points out that in answer to the de-regulations, the China government is considering other means of propping up its domestic retail players. "Currently the government is saying that it might pledge financial support to 20 of its leading domestic retailers. One of the groups it has ringed for this support is the Shanghai Balian Group, which owns a number of leading food retail operations, including China's largest, Lianhua.

 

"Obviously the China authorities have no intention of lying down and letting foreign retailers have a free ride," said Gregory.

 

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