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WORLD / Wall Street Journal Exclusive

Chinese rules could tie up foreign retailers
By MEI FONG (WSJ)
Updated: 2006-07-17 10:51

http://online.wsj.com/public/article/SB115308783430608102-idDKK0cKHy4YK37dq
7U6n75k4P4_20060723.html

BEIJING -- China is drafting new rules to regulate large-scale shopping
outlets, which could impede the expansion plans of foreign retailers such
as Wal-Mart Stores Inc. and Carrefour SA.

If the rules are finalized, they could raise costs and increase red tape
for big retailers by requiring them to file detailed blueprints for
proposed new outlets and hold public hearings on the impact on
communities.

The rules are under review by China's cabinet, the State Council, and
could be released later this year, according to an official at the
Ministry of Commerce, which is drafting them. The proposed rules would
apply to both foreign and local retailers. But some industry executives
say they would be especially cumbersome for large foreign retailers, many
of which have been planning major expansions since the liberalization of
China's retail industry in early 2005.

Leo Yeung, director of retail services for China at real-estate firm
Cushman & Wakefield, said the proposals would make foreign big-box
retailers and investors in large malls "consider more carefully their
expansion plans" into China's smaller cities and hinterlands.

Despite pilot projects, public hearings on zoning projects are a
relatively new concept in China. And in practice, neighborhood committees
and citizens' community groups have had little power fighting renewal
projects, although they are starting to be more active.

The draft regulations could play to the advantage of local companies like
Shanghai-based Lianhua Supermarket Co. and Beijing's WuMart Stores Inc.
Many Chinese retailers have lobbied the government to address a perceived
bias among local governments in favor of well-funded foreign retailers
holding brand-name cachet. "We are not going to restrict the development
of foreign investors in China," said Wang Yongping, secretary-general of
the China Commercial Real Estate Union and a senior adviser to the
Ministry of Commerce. "Instead, we just want a more balanced and
scientific commercial layout. Foreign companies can no longer get special
advantages from the government."

Details of the rules could still change. In their current form, they
would consist of two parts, according to Mr. Wang and the Commerce
Ministry official. Cities would be required to file detailed blueprints
of their commercial plans, including plans for department stores, big
supermarkets and other retail outlets in residential neighborhoods.

Retailers applying to build outlets larger than 10,000 square meters
would be required to submit to a public hearing, much as they are
required to do in some North American and European countries. The
hearings would include regulators, industrial associations and academic
experts as well as competitors and representatives of local residents.

Pilot public hearings have already been held in some cities since 2003.
None has derailed any projects, and they aren't expected to in the
future, said Mr. Wang. However, he said, the hearings could result in
higher project costs if, for example, local governments require retailers
to put in refinements, such as pedestrian tunnels to improve traffic.

Foreign retailers are reluctant to comment on the proposed regulations
before details are formally made public. But privately some express
concern. "The law is quite cleverly worded because it doesn't explicitly
apply to foreign companies, but is based on size, which is where the
foreign retailers specialize in. So this is hurting them," said one
foreign retail executive.

James Zimmerman, vice chairman of the American Chamber of Commerce in
China, said in email response to questions that if the proposed
regulations "have the effect of unreasonably and unfairly restricting
foreign retailers from the market," then China might be setting up a
nontariff barrier in violation of World Trade Organization rules, "and we
therefore take exception."

Todd Wang, a Shanghai-based spokesman for Carrefour, said he is aware of
the draft rules, but says the company doesn't know the details of the
contents. Executives for Wal-Mart couldn't be reached for comment. An
official at Shanghai Brilliance (Group) Co., owner of major supermarket
chains including Lianhua, welcomed the proposed regulation. "Foreign
retailers are always enjoying special favor and treatment from local
governments. But the government should protect the national companies
better if they want us to grow strong," said the official.

China has gradually liberalized its retail regulations since its WTO
entry in 2001. Last year, it ended rules requiring foreign retailers to
form joint ventures with local partners, sparking a surge in expansion by
foreign retailers. Wal-Mart announced plans to add about 18 stores to the
60 it currently operates in China; Carrefour has plans to add 12 stores
to its existing 79. Best Buy Co., Germany's Metro Group AG, U.K.-based
Tesco PLC and Swedish retailers Ikea and Hennes & Mauritz AB also
announced plans to open or expand in China.

The proposed regulations are also meant to curb waste, Chinese officials
said. In recent years, some of the world's largest shopping malls have
been built in China. But many have been unable to convert crowd traffic
into robust sales, retail executives say.

If public hearings are effective, the proposed rules could also help
preserve local neighborhoods, many of which are being demolished in
China's quest to modernize swiftly, especially in preparation for major
events such as the 2008 Beijing Olympics and the 2010 Shanghai World
Expo. "In the past, the government was very keen to land large-scale
projects," said Michael Hart, head of Shanghai research at real-estate
consultant Jones Lang LaSalle. "It's refreshing to see concerns about
neighborhood preservation."

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