Everyone in the UK who provides products or services should be thinking about trying to sell them in larger markets as a way of scaling up. One of those larger markets is likely to be China. Sometimes, the answer to the question “Do I want to sell in China?” is a simple “no,” for all kinds of reasons which are far beyond the scope of this article. If the answer is “maybe”, however, then you need to know a little about ways of selling into China. The following applies to pretty much any business model.
Wholesaling and retailing
For three years now China has applied only light-touch restrictions to foreign investment in the retail and wholesale activities since the implementation of the Foreign Investment Law in early 2020. Foreign investors can establish 100% wholly foreign-owned wholesale or retail enterprises in all industries except for certain sectors such as rare earths, maps and tobacco.
A foreign company wishing to have a franchised network in China must have at least two directly-operated branches that have been operating for over a year, and must make a filing for the record at the local branch of the Ministry of Commerce in the location where it is to be set up. Since the process is difficult, unless the proposed business model follows the franchise arrangement, it is better to treat the business model as a straightforward IP licence.
There is a grey area between the two models, but by way of example, a foreign school allowing its brand to be used by a school or schools in China would not wish to set up a franchised business in China, whereas a restaurant chain usually would.
Regulations for the Administration of Direct Selling by the State Council were re-issued in 2017. It should be noted that Chinese law makes a clear distinction between direct selling and pyramid marketing, with the latter being banned.
“Direct sales” is defined as “a sales method whereby[…]the sellers will market the products directly to the ultimate consumers other than through a fixed place of business”. A direct sales enterprise may only sell products that were produced by itself or by its parent or holding company, and not all types of products can be sold through direct sales. It is permitted, however, to convert a pre-existing company into a direct sales company by amending its business scope. As with franchise operations, you have to submit an application to the Ministry of Commerce, but in this case, you need a permit rather than just a filing for the record.
This is where so many UK retailers have been stung, because they think that if they sell online, they’re somehow magically free of regulation in the country where the buyer is based. This is wrong: a product or service sold in China has to be compliant with Chinese law.
China introduced a program in 2014 to regulate the sale of goods by overseas retailers directly to Chinese customers through approved e-commerce platforms. This was slightly liberalised in 2019 when China published cross-border e-commerce regulations under which certain consumer goods are treated as personal effects, exempted from tariffs and given lower import taxes.
Separately, the 2014 programme allows
(a) A bonded sale model for the foreign seller to route the goods through a customs supervision zone before sending them to Chinese buyers.
(b) A direct sale model for shipment of goods directly from a foreign seller to the individual Chinese buyers through stipulated couriers.
Sales under the above models are entitled to better tax and customs treatment than ordinary commercial trade, and neither model requires the foreign seller to establish a subsidiary in China.
From 2016 onwards, China has also provided a list of products permitted to be imported under the pilot program. This list is updated every few years (we’re currently on the 2020 version) so it is always worth checking when you start.
Categories of imported goods include retail goods, ordinary commercial goods, and personal effects, and are treated differently in terms of licensing, registration and filing requirements, and as mentioned above, goods imported under the e-commerce pilot program are treated as personal articles.
The above is a skate through the different forms of selling into China; topics such as due diligence, contract drafting, regulatory compliance and many others are as important but beyond the scope of this summary.