International freight forwarders are regulated by the “Regulations of the People’s Republic of China on Management of International Freight Forwarders” promulgated by Decree No. 5 of the MOFTEC on the 29th of June 19951. Licenses for domestic logistics service providers with foreign participation and licenses for international freight
Figure 3.4 Foreign JV approval procedure for Freight Forwarding and domestic logistics services with foreign participation. Source: Hong Kong Trade Development Council
forwarding must be approved by MOFTEC in accordance with the prescribed procedure. Licenses are only valid for three years, and applications for renewal must be submitted 30 days before the expiry date. Moreover, licensees must submit annual reports to the Commission of Foreign Trade and Economic Cooperation.
Currently, logistics providers must form joint ventures (JV) with Chinese companies to obtain a license. After finding a suitable JV partner, the application procedure involves approvals by several government authorities and can be rather long and drawn out. Figure 3.4 outlines the approval process for freight forwarding joint ventures.
Customs Clearance Customs clearance can be a painful experience for logistics managers. Customs agents can be un-cooperative and are sometimes corrupt. Foreign importers and exporters complain of long clearance times and inconsistent practices at customs. Current Chinese Customs Law subject all import and export goods to customs examination. During the examination, the consignee in the case of imported goods or the consignor in the case of goods for export must be present and is responsible for moving opening and re-packaging the goods. Customs officers are entitled to examine or re-examine goods or take samples as they see fit.
Although it is a federal bureau, China Customs is separately administered in each province. Customs officials are given wide powers to enforce administrative law and implement anti-smuggling policy and some provinces have complicated the customs clearance process. In fact, cargo must pass through customs even in crossing from one province to another.
In the past guanxi and out right corruption played a too important role in Chinese customs. The Chinese government has taken action to fight corruption. In July 2000, a new chapter under the title of “Law Enforcement Supervision” was added to the Customs Law. Under the amended legislation, discipline inspectors and supervisors oversee all customs offices. Moreover, China’s customs authority is making substantial reforms to cope with the increased trade flow accompanied by WTO membership. A unified electronic customs clearance system is being built in Shanghai, Beijing, Tianjin and Guangzhou on a trial basis. In September 2002, 500 firms began trials of the new system in Shanghai (China Daily 200239).
Free Trade Zones
To date, 15 Free Trade Zones (FTZ) have been established in China:
Dalian Free Trade Zone http://www.dlftz.gov.cn/
Fuzhou Free Trade Zone http://www.fdz.com.cn/
Guangzhou Free Trade Zone http://www.getdd.com.cn/
Haikou Free Trade Zone http://www.hkftz.gov.cn/
Ningbo Free Trade Zone http://www.nftz.gov.cn/
Qingdao Free Trade Zone http://www.qdftz.com/
Shanghai Waigaoqiao Free Trade Zone http://www.china-ftz.com
Shantou Free Trade Zone http://www.stftz.gov.cn/
Shatoujiao Free Trade Zone
Shenzhen Futian Free Trade Zone
Shenzhen Yantian Free Trade Zone http://www.yantian.com.cn
Tianjin Port Free Trade Zone http://www.tjftz.gov.cn/
Xiamen Xiangyu Free Trade Zone http://www.shinyco.com/new/english/info.htm
Zhangjiagang Free Trade Zone http://www.zjgftz.gov.cn/
Zhuhai Free Trade Zone http://www.zhfreetradezone.org/
No quotas or licenses for import and export are required in the FTZ. The warehousing enterprises in the FTZ can store goods demanded in the domestic and international markets, with the exception of those prohibited by law. There is no time limit for the storage of goods for transit, and the transit goods may undergo processing, grading, and repackaging in the FTZ. The Zhuhai FTZ (2001) claims to connect in-zone enterprises and the customs office by a computer system that supports Electronic Data Interchange.
3.3 WTO Impacts on Policy
To comply with the rules of the WTO and its commitments in bilateral agreements, the Chinese government is committed to implement measures to further open the market for trade in goods and services. In particular:
In December 2000, MOFTEC issued a notice canceling the examination and approval regulations for the establishment of branches by international freight forwarding enterprises in areas for which business operations have already been approved. The notice introduced a registration system to replace the examination and approval system.
In January 2001, MOFTEC issued a notice opening up China’s railway freight market to foreign investors. Foreign companies are allowed to establish joint-venture railway freight service companies with Chinese partners. The foreign investors must be financially strong, have no less than 10 years of operational experience in the railway freight service industry, and have a good performance record. Moreover, the Chinese partner must hold greater than 50 percent of the shares in the joint venture, and the joint venture must have over US$25 million in registered capital.
In June 2002, The MOFTEC has issued a circular allowing the establishment of foreign invested logistics enterprise in eight certain pilot locations. These pilot locations include Juangsu, Zhejiang, Guangdong, Beijing, Tianjin, Shanghai, Shenzhen and Chongqing. The allowable business scope of the logistics companies includes international logistics business and third-party logistics business. The companies may be formed as joint ventures with foreign investors’ shares not exceeding 50%. International logistics business includes: Import/export (‘I/E’) and relevant services, including I/E on its own account or I/E agency services, export agency services for export processing enterprises, international transportation agency services for I/E of commodity by sea, air and land. Third-party logistics business includes: general land commodity transportation, warehousing, loading and unloading, processing, packaging, distribution and relevant information processing as well as consulting; domestic freight forwarding.34
Under Section II of the US-China WTO Market Access Agreement on Services Commitments, China agreed to grant distribution rights to foreign exporters and manufacturers for both agricultural and industrial goods. According to those commitments, the following changes are to be implemented within a few years after WTO entry5:
Storage and warehousing services Foreign operators will be permitted to establish joint ventures to provide warehousing services as minority equity shareholders upon accession. The foreign operators can then become majority shareholder within one year, and be free of all restrictions within three years.
Freight forwarding services Foreign companies operating in China should have at least three consecutive years of experience. Majority ownership in freight-forwarding joint ventures will be allowed one year after accession. The minimum registered capital of a joint venture must be at least $1 million and the length of operation must not exceed 20 years. After one year of operation in China, a joint venture may set up a branch if it adds $120,000 to the original registered capital for each branch established. Wholly owned subsidiaries can be set up four years after accession. All restrictions will be eliminated within four years.
Distribution of products In the first year after China's entry, foreign-invested companies may distribute products made in China and imported products. Majority ownership in Wholesaling and Retailing joint ventures are allowed two years after accession. Foreign investment wholesaling and retailing companies are allowed to provide services and set their own distribution channels free of land restriction within three year of accession.
Freight transportation Currently, international maritime carriers are not allowed to offer inland distribution services. Under the new WTO regime, within a year of accession, foreign shipping companies can establish joint ventures with domestic companies to offer inland transport for international containers and establish domestic distribution networks. All restrictions to establishment will be phased out within four years. Majority ownership in Road Transportation joint ventures will be allowed one year after accession. Wholly owned subsidiaries can be set up three years after accession. Majority ownership in Rail Transportation joint ventures will be allowed three years after accession. Wholly owned subsidiaries can be set up six years after accession.
Courier services The commitments cover land-based international courier services and all services related to international shipments handled by an express carrier. Foreign companies will be able to establish joint ventures upon accession, hold majority equity shares within one year, and be free of restrictions within four years.