Andrew Halper - Eversheds

Attracted by China's low labour costs and large markets, foreign direct investment ('FDI') has flowed into the PRC for over 25 years, initially in the form of joint ventures ('JVs') and increasingly now in the form of wholly foreign owned enterprises ('WFOEs'). China has now overtaken the US as the premier recipient worldwide of FDI.

Yet, for many years the PRC maintained obstacles to FDI in retail and wholesale, as well as franchising, through outright sectoral restrictions, geographical limitations, high capitalisation requirements, limits on foreign equity stakes and burdensome central governmental approvals processes.

China's entry into the WTO on 11 December 2001 ended many but not all such obstacles. However, China did not commit to immediate liberalisation in franchising upon its accession to the WTO and in fact only recently opened franchising to FDI.

The first step in this direction was the promulgation of the Foreign Investment in Commercial Enterprises Regulations ('FICE Regulations') in 2004. The FICE Regulations significantly liberalised the rules for involvement by foreign invested enterprises ('FIEs', which includes both JVs and WFOES) in retail and wholesale distribution, but the Regulations only incidentally addressed foreign investment in franchising, and did not provide a systematic regulatory framework to structure such investments. This had to await the promulgation of the 2005 Administration of Commercial Franchise Measures ('Franchise Measures'). But whilst the Franchise Measures have indeed liberalised FDI access to franchising, the two sets of regulations do not sit together well, and have created some confusion about what is and is not allowed. Foreign investors with experience in China will know that such legislative confusion is not unusual.