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Contractual arrangements appoint Chinese partners as distributors, or trading or sourcing agents. It is an appropriate option for foreign investors who do not want to set up permanently in China. However, who are still looking to manufacture, sell and distribute their products in China, while monitoring the operations from abroad. Moreover, those arrangements do not require approved/license except otherwise required by competent authorities.  

Investment Options in China : Distribution Arrangements 

Entering into a distribution arrangement in China is one of the most common ways for investors to invest in China. Foreign investors can enter into distribution agreements with Chinese distributors who already have distribution networks in China.

Manufacturing Arrangements

Manufacturing agreements or Original Equipment Manufacturer (OEM) agreements are contracts providing for the terms and conditions of the relationship between one company, and a manufacturer which manufactures products to be distributed under the previous company’s name and branding. Such relationship needs to be carefully managed with special consideration given to intellectual property issues.  

Variable Interest Entities (VIE)

The interest for VIE structures came from the constraints imposed by the Chinese government regarding foreign investment structures. Indeed, in some sectors, it is made mandatory by the Foreign Investment Catalogue, Negative List and sector-specific regulations, to establish a business with a Chinese partner. Moreover, many joint ventures set up in the past faced many difficulties with their Chinese partners.  

In accordance with the New Foreign Investment Law promulgated on 15 March 2019, the VIE structure might be considered as a “foreign investment enterprise”. Consequently shall abide by the rules promulgated under the New Foreign Investment Law.

Franchise 

Franchise is a wide concept in China. Many distribution agreements such as “commission/affiliation,” and agency contracts are facing the risk to fall under the category of franchising agreements.

Foreign operators can launch franchising operations in China either through cross-border franchising or by setting up a company in China.  

Kindly note that price fixing and minimum resale prices are prohibited in vertical agreements or horizontal monopoly agreements between competitors. However, the Anti-monopoly Law provides some exceptions for horizontal agreements. The practice of setting ‘recommended prices’ may attract scrutiny from the anti-monopoly authorities if the Franchisor enforces the recommendation.  

Franchisors should observe the price fixing restrictions under the Anti-monopoly Law. The authorities actively enforce the law, including against certain industries such as car dealerships. 

To know more, download our legal handbook related to contractual options in China…

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