The Ministry of Commerce plans to restrict the expansion of foreign-invested retailers amid concerns by industry insiders over rampant unauthorized expansion of some foreign retailers and call for a legal framework to curb the trend.

The restriction, expected to take effect early next year, will regulate the expansion of foreign retailers that are operating in China. Some of the retailers are alleged to have expanded without proper authorization from the ministry.

Huang Hai, assistant to the commerce minister, said in an interview that the new regulation aims to encourage foreign investment in the retail sector under a legal framework while at the same time checking possible violations.

Under the new rules, foreign retailers would be graded as A, B and C. Violators would be designated as B and C and would not be able to expand or open new stores for a certain period of time.

Foreign retail giants such as France-based Carrefour SA and the world's biggest retailer Wal-Mart Stores Inc would be affected by the new rule, analysts said.

"It has become a serious situation that foreign retailers opened new stores and new companies without proper approval from the central government," said Gu Guojian, a professor with Shanghai Commercial Polytechnic. "The regulation is now very necessary to curb such violations and protect domestic retailers which have been seriously affected by the rampant expansion."

"Most of additional stores that were opened got approval from local authorities instead of the central government," said an official with Shanghai Economic Commission, who requested anonymity. "Local governments are under pressure to attract more foreign investment."

Currently, more than 350 outlets in China are operated by foreign retailers while the ministry has only given licenses to more than 70, according to industry insiders.

The world's top retailers such as Wal-Mart, Carrefour and Metro have opened many stores in China's major cities in recent years. They have grabbed market share from local retailers with their low prices, more varieties and world-renowned brandnames.

At present, foreign-invested companies are allowed to hold a maximum 65 percent stake in the retail business. They are permitted to set up wholly owned companies at the end of 2004 in line with China's WTO commitments.

(Shanghai Daily December 29, 2003)