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Direct-selling Opening Delayed

More patience is required from companies that have been awaiting the opening of the direct-selling business after the issuing of the rules governing this area were delayed.

Publication of the rules failed to take place on December 11, due to a number of minor changes and procedural issues.

China promised to remove a ban on direct selling as part of its World Trade Organization commitments.

An official from the Ministry of Commerce (MOFCOM) said the rule on direct-selling management has to be delayed due to procedural reasons, although the government has paid great efforts to writing the rule since the beginning of this year.

The official, defying a report saying that the draft rule for the direct-selling management was rejected by the legal office under the State Council, said the ministry is still working with the State Administration of Industry and Commerce (SAIC) to complete the final document, which will soon be submitted to the State Council's legal office.

"Theoretically, foreign companies can apply for direct selling beginning December 11, according to China's promise to the WTO. But the absence of a rule governing the area made it practically impossible," said the ministry official.

"We have talked to many companies about it and they believed it is understandable," he said.

Regarding a report saying the rule is expected to come out by the end of this year, the official said this was too optimistic a prediction.

"There are too many procedural problems we cannot master," he said.

Supervision worry behind delay

Analysts attributed the delay to the government's anxiety about direct selling's potential for causing social unrest.

China imposed a ban on direct sales in 1998 because it is hard to differentiate direct sales from so called "pyramid sales," which had led to widespread fraud, consumer losses and social disorder.

The SAIC cracked down 2,797 times on pyramid sales, and smashed 11,000 pyramid gangs from September 2003 to October this year.

The news of the lifting of the ban excited many pyramid-sales companies and they took advantage of the opportunity to publicize the business.

In April, the China High-Tech Health Industry Committee (CHHIC) approved four direct-selling pilots in four companies in Sichuan, Hubei, Zhejiang and Liaoning provinces. But these so-called pilots are unauthorized.

And many pyramid-selling companies, mostly registered in Hong Kong, began to recruit a large amount of salesmen on the mainland, claiming the business will soon become legal.

"The opening of direct-selling will be a big challenge to the SAIC, which has spent lots of time discussing supervision measures," said Hu Yuanjiang, a direct-selling expert from the China Institute of Commercial Studies.

According to the draft rule, the Ministry of Commerce will be responsible for licensing direct-selling companies and the SAIC is responsible for supervision.

Foreign companies cautious

Major foreign direct-selling companies like Amway and Avon are all very cautious about the issue and declined to make any comment on the rule.

Avon, Amway and other overseas direct-selling firms are increasing their investment in the country, betting that the removal of the ban will lift sales.

China is Avon's fastest-growing market in Asia. The company posted sales of US$157 million in China in 2003 and forecasts this figure will reach US$400 million by 2007.

New York-based Avon, which has 5,700 shops and 2,000 counters in department stores in 74 cities, said in July that it received verbal approval to resume direct sales in a pilot plan.

Michigan-based Amway is way ahead of Avon in China. Its China sales hit US$1.2 billion last year, 20 per cent of its global revenues. Amway planned to increase the number of Amway retail outlets, from the current 120 to 180 by the end of the year.

Avon and Amway are two of the 10 foreign-funded direct-selling companies which were allowed to continue their operation in China after the 1998 ban, but they had to change their sales mode to selling goods through fixed outlets and sales representatives.

Another potentially big company is Nu Skin, which is not one of the 10, but plans to increase the number of its retail stores to 500 by 2006 from the current 115. Nu Skin's sales jumped from US$39 million last year to about US$105 million this year.

But these companies will have to wait at least six months to get the business licences after the rule is introduced, according to the procedures established by the draft rule, said Hu.

Key stipulations

The draft rule requires that direct sellers in China have at least 80 million yuan (US$9.67 million) in registered capital.

The direct selling companies have to pay a deposit of 20 million yuan (US$2.4 million).

The government will also require direct selling companies to have no records of severe law-breaking in the past two years and overseas firms to have at least three years' management experience in direct selling.

The commission paid to the salespersons should not exceed 25 per cent of the product price and the companies should be responsible for the illegal activity of salespersons.

(China Daily December 28, 2004)

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