NOTICE CONCERNING THE CHANGE OF SALES METHOD BY FOREIGN-INVESTED DIRECT SALE ENTERPRISES

(Valid From:1998.06.18)

In order to implement the Notice on the Ban of Direct Sale Activities of the State Council (Guo Fa [1998] No. 10) and do a good job in changing the sale method (hereinafter abbreviated as transformation) of the foreign-invested enterprises which originally engaged in direct sale activities (hereinafter referred to as foreign-invested direct sale enterprises), this notice on relevant issues is hereby issued with the approval from the State Council:

I. Foreign-invested direct sale enterprises shall change to store operation (including setting up counters at shops, selling their products in wholesale to domestic wholesalers or retailers and setting up stores for their own).

II. Enterprises that have changed to store operation are divided into those hiring sales personnel (referring to personnel who are not formal employees of the enterprises and obtain compensation from selling products of the enterprises) and those that do not hire sales personnel.

III. Requirements and procedures for transforming to enterprises that do not hire sales personnel

(I) Applicant enterprises for transformation shall meet the following conditions:

1. The enterprise is established with legal approval;

2. The enterprise must be a manufacturing enterprise and can only sell products produced by itself;

3. The enterprise has not conducted any law-violating activities in its production and operation and has passed the joint annual inspection of 1998.

(II) Procedures for transformation:

1. Enterprises which have pyramid or direct sale business clearly specified in their contracts, articles of association or approval certificates

(1) Investors in the enterprise shall modify the contract and articles of association;

(2) The agreement on the modification of contract and articles of association shall be sent to the original approving agencies for approval and the issuance of new approval certificate;

(3) The enterprises shall complete the procedures for registration changes at the original registration agencies with the newly-issued approval certificate.

2. The enterprises with no contents on pyramid or direct sale in their contracts, articles of association or approval certificates can directly go to the original registration agencies to complete the procedures for registration changes.

IV. Requirements and procedures for transforming to enterprises which hire sales personnel

(I) Applicant enterprises for transformation shall meet the following requirements:

1. The enterprise shall fulfill the three requirements in Section (I) of Article (III);

2. The enterprise shall have a total investment above US$10 million (not including investments for the establishment of branch sales offices);

3. Foreign investor in the enterprise shall have direct sale as its core business.

(II) Procedures for transformation:

1. Investors in the enterprise shall modify relevant articles in the contract and articles of association according to the principles of the transformation plan;

2. The enterprise shall report the agreement on the modification of contract and articles of association to MOFTEC according to legal procedures (together with the transformation plan) and send copies to the State Administration for Industry and Commerce and the State Bureau of Internal Trade. MOFTEC will examine and approve the agreement according to law after soliciting opinions from the above-mentioned two departments and issue new approval certificate to those approved;

3. The enterprise shall complete the procedures for registration changes at the State Administration for Industry and Commerce with the newly- issued approval certificate.

(III) The transformation plan shall satisfy the following principles:

1. The enterprise must have shops with product prices clearly marked;

2. The enterprise shall formulate rules on after-sale service and customer refund in conformity with the requirements of various laws and regulations of the State and have the systems publicized;

3. The enterprise shall sign labor contract with the sales personnel and the enterprise shall bear the legal liability arising from the sale of enterprise products by the sales personnel within the scope mandated by the labor contract;

4. The qualifications of the sales personnel shall satisfy the stipulations of relevant State laws and regulations and sales personnel shall fulfill the basic requirements in the Standards on Professional Techniques and Skills of Sales Personnel (Lao Bu Fa [1997] No. 10 Document) promulgated by the original Ministry of Labor and Ministry of Internal Trade;

5. Sales personnel shall not buy up products from the enterprise and can only get compensation for the sales volume directly realized by themselves; The selling price charged by the sales personnel shall be the same as the retail price at shops; Sales personnel can only sell the products directly to the end consumers;

6. Sales management personnel shall be formal staff members of the enterprise.

V. The government shall print and issue uniform certificate of sales personnel.

VI. Applications for transforming to commercial retail enterprises which sell products of other enterprises (including individual shops and chain stores) shall be submitted to the State Council for approval according to relevant State stipulations.

VII. Branch sales offices set up by transformed enterprises shall be subject to re-verification. Branch offices without independent legal person status shall open their own stores to sell products produced by their own enterprises.

VIII. For enterprises transformed to those that do not hire sales personnel, relevant departments shall complete various procedures within one week after the application is received. For enterprises transformed to those that hire sales personnel, relevant departments shall give an official written reply within one month after receiving all the application materials submitted by the local foreign economic and trade departments. Where the submitted materials meet the above-mentioned stipulations, procedures for registration changes shall be completed within 15 days after the official written reply is given.