Trading Companies, Distribution and E-commerce

Trading companies

Foreign companies may establish trading companies that engage in purchase and sale activities throughout China and hold their own import and export licenses.

The legal form of a trading company registered in China is usually a Chinese limited liability company as a “Foreign-Invested Commercial Enterprise” (“FICE”).

The permitted activities of a FICE include:

  • Import/ export
  • Retail
  • Franchising
  • Wholesale
  • Transactions involving commission
  • Services such as shipment, storage, repair, maintenance and training.

The provisions also apply to Chinese agency business activities that involve commissions, wholesale and retail.

The required minimum share capital is CNY 300,000 (approx. EUR 40,000) for a retail company and CNY 500,000 (approx. EUR 70,000) for a wholesale company.

Distribution: Commercial agents and authorized dealers

There are no special provisions in Chinese law for contracts with commercial agents or authorized dealers. The terms, conditions and content of such  agreements are subject to Chinese laws that govern contracts generally.

Commercial agents and authorized dealers

Agreements with commercial agents and authorized dealers should be concluded in writing, in particular for evidentiary purposes and regulatory obligations that apply to monetary transactions and foreign currency. Because there are few statutory restrictions on contractual terms, the contract should be drafted in detail.

We recommend a provision on the term of the contract and termination options. There is no statutory compensation claim for termination; however, damages arising as a result of a termination have to be compensated. It is generally possible to agree on a prohibition of competition. A certain level of due diligence is also warranted. For example, the business license of a partner should cover the agreed activities and they must have foreign trade authorization.

A trademark license should be registered with the Chinese trademark office. It is possible under Chinese law to agree on retention of title.

E-commerce

E-commerce in China is an enormous growth market. Even today, the majority of the B2C online trade happens in online marketplaces. The largest market is TMall with a market share of approx. 60%, followed by JD.com. Both offer almost all product groups and each has a segment limited to foreign brands: TM Global and JD Worldwide. Strict guidelines for the new admission of traders are supposed to ensure that there is no product counterfeiting.

A presence on such an online platform is useful for traders who wish to establish a sustainable brand in China.

Chinese are highly reliant on mobile phones for shopping and other daily activities.

In principle, there are two options in the logistics process:

distribution via free trading zones and direct distribution. 

For distribution via free trading zones, large pallet shipments are delivered that are stored in such a zone (usually near an airport or shipping port) and then packaged and shipped per order. But not all products may be distributed this way (additional authorization might be necessary), and customs duty varies based on the product. 

In the case of direct distribution, individual packages are packed in Europe and shipped to China in consolidated shipments. Air freight is mandatory because Chinese consumers want to receive their products within a week or two. Distribution in China is fairly fast, since there is a well-established courier service infrastructure. However, customs clearance procedures can cause delays.

If you intend to sell in China, you must ensure that your required payment method is common in China. (Payment platforms include Alipay, Unionpay and Tenpay.) This either requires contracts with the service providers or hiring a third party provider who will handle payments on behalf of payment platforms such as those mentioned above. Products are sold in the local currency, Chinese yuan. Chinese yuan must then be converted and the Euros transferred abroad. You have to budget costs for this currency transfer, and bear in mind that these transfers are subject to a currency risk.

Last, but not least, customer service has to be offered in the local language. There are service providers for this, such as call centers with trained employees. Although it is possible to provide customer service directly, this necessitates establishing a company and complying with applicable Chinese regulations.