Tourism Law in China
Third International Conference 
June 1998
"Tourism and Hotel Industry in Indo-China & Southeast Asia: Development, Marketing, and Sustainability"
 
Yves Dolais
Faculty of Law, Economics and Business University of Angers

Abstract

Tourism phenomenon in China is young. It is now one of the goals of the Chinese economic development policy. The growth of tourism flows is exponential. Chinese authorities have opened recently this sector to foreign investments and Chinese private investments. But foreign projects in high-class hotels and travel agencies are still in restricted project category and procedure for approval still remains complicated. The administration of tourism activities, despite the liberalization of the forms of enterprises, evolves towards a strengthening of control. Nevertheless, the discussions for China's entry into the World Trade Organization could influence the access to the Chinese market and the evolution to more liberal policy.

Introduction

Tourism in China is 20 years old.

Since the opening of China in 1978, efforts to integrate the world tourist economy have been growing, and tourism is regarded as an important accompaniment to growth progression. In 1983, China became a member of the World Tourism Organization.

In order to meet the increasing demand, the Chinese Government has softened its policy, opening this activity sector both to private capital and foreign capital, but the tourist activity still remains in 1998 under the strict control of the State. Foreign investment in tourism industry as well as development of the different forms of the tourist activities are stricter controlled.
 

An Exponential Growth of Tourist Flows

Tourism in China has been marked up to now by a pre-eminence of foreign tourism, mostly that of Chinese overseas, but the development of a domestic Chinese tourism is a new, recent phenomenon, which is expanding fast. Its growth is today more important than that of foreign tourism.
 

A Very Asian Tourism

The number of foreign visitors rose from 1.81 million in 1978 to 43.684.456 in 1994.92% of these visitors come from Northeast Asia, with 29.479.293 (67,48%) from Hong-Kong, 7.517.643 (17,2%) from Macao and 1.390.215 (3,18%) from Taiwan. The non-Chinese overseas visitors only account for a small percentage of the tourist flow, among whom there are 1.141.225 Japanese (2,61%), 1.479.622 Europeans (3,38%), and 586.254 North Americans (1,34%).

The development during the 90's (nineties) reveals an increase of Japanese and non-resident Chinese tourism. In 1995, more than 3 million Asian tourists, other than from Hong-Kong, Macau and Taiwan, visited China. The number of Asian tourists is growing faster (increase of 5,8% in 1994) than the number of European or American tourists. The latter is stagnating, and even decreasing (drop of 8,2% of European tourism in 1994), dependent in particular on the political ups and downs internationally, such as the events of Tian-An-Men in 1989, or the many bi-lateral tensions, like Franco-Chinese relations, marked by human rights issues, or sales of weapons to Taiwan.

Hong-Kong continues to play an important part in the booming Chinese tourist business. As early as 1980, the Chinese from Hong-Kong accounted for 6 visitors in 7 and 90% of the revenue from tourism. With the retrocession of Hong-Kong on 1st July 1997, tourists from the Special Administrative Region of Hong-Kong are now to be looked on as national tourists, and foreign visitors to Hong-Kong are to be calculated in the Chinese statistics. China has just adopted the standards of the World Tourism Organization as regards tourist accounting, which should, eventually, clarify the figures of border tourism. Indeed, because of the status of Hong-Kong and of Macao, it has always been difficult to distinguish between national and international clientele. China hopes to reach 55 millions foreign tourists in the year 2000. However, business tourism has accounted for 20% of foreign tourist arrivals in the last few years.
 

The Expansion of Individual Tourism

Long hesitant with regard to mass tourism and individual tourism, China has recently opened to the latter. Since 1984, foreign tourists have been able to visit China without going through Chinese or foreign agencies. Almost all Chinese towns are today accessible to foreign tourists. The percentage of individual tourism should reach between 20 and 30% of tourist flows in the year 2000. This movement concerns both American tourists and tourists arriving from Hong-Kong or Taiwan, and more particularly young people.

The Boom of Domestic Tourism

The boom in domestic tourism is linked to the emergence of a new, urban middle-class, based on the growing consumption of tourist products. In 1993, the hotel occupancy rates settled at an average of 72%, showing a progression of 11 points in comparison with the previous year, of which local clienteles accounted for 70%. The weight of domestic tourism can also be measured according to the 30 million tourist packages sold in 1993, which places China among the highest world level in term of volume. The first consequence is the creation and fast expansion of private travel agencies. 1.400 were listed in 1992, that is to say an increase of 80% compared to 1991.

However, these figures must be put into perspective in so far as it is mostly a question of business tourism. Leisure tourism, apart from that of the elite, is still hampered by various factors scarcity of paid leave, insufficient light infrastructure, access to air transport still too expensive for the greater part of the population. Nevertheless, it is growing fast in these last years of the century.

A Limited Foreign Tourism

Foreign tourism remains limited for those Chinese who do not have a foreign link (family, official invitation), due to considerable administrative difficulties and because the standard of living is still low. Thus, 60% of foreign trips take place within the context of business trips. 4,1 million foreign exits were recorded in 1993.

A Restricted Foreign Investment Policy

The Ministry of Foreign Trade and Economic Co-operation (MOFTEC) has issued in November 1996 a new policy on the approval of foreign investment in twelve specific industry sectors. Among them, one finds Hotels and Travel Agencies. The MOFTEC Opinion attempts to unify policy and practice on the approval of foreign investment in specific industries and sectors, as well as approval of specific types of foreign investment vehicles, such as investment companies.

Hotels

Hotels represent an area where local approval authorities have often taken the view that the project may be approved locally, despite the Provisions of the State Planning Commission, issued in 1995, which list hotels as a restricted (category B) form of investment. Effective from 1st January 1998, a new guideline catalogue of industry sectors and products which are designated as either « encouraged  or « restricted  for foreign investment purposes replaced the catalogue which has been in effect over the previous two years, complementing the foreign Investment Guidelines, which were enacted in 1995. The new
guidelines catalogue was characterized as an effort to broaden opportunities and achieve greater market access for foreign investors, and to promote discussions for China's entry into the World Trade Organization.

High-class tourist hotels are still in restricted project category (B). THE MOFTEC Opinion instructs officials that central government approval is necessary for the project proposals and feasibility studies of joint-venture hotels. These documents shall be jointly presented by the local planning commission, local foreign investment authorities, and local travel administration to the State Planning Commission, MOFTEC and the National Tourism Association, for approval by the state Planning Commission. Wholly foreign - owned hotels and establishment of high - class (four- and five-star) hotels are restricted. In general, the operation term for Sino-foreign equity and co-operative hotel enterprises should not exceed 30 years and extensions should not be approved except in special circumstances, and by the MOFTEC.

Travel Agencies

Until 1995, foreign investments were prohibited. Now, travel agencies are listed under restricted project category (B) and at present only Sino-foreign equity travel agencies within national tourist and holiday resort areas are permitted and branches cannot be established in other areas.

The Chinese partner must be an existing Grade-one travel agency in the municipality or region that the resort area is in whereas the foreign partner must be an international travel agency dealing mainly in holiday travel or a travel agency sending at least 5,000 customers a year to China. The Chinese partner's investment in the equity joint-venture must be at least 51 per cent and the joint-venture's registered capital should be not less than US $1 million. The enterprise must place a deposit of US $ 10,000 or the RMB (Renminbi) equivalent in a designated bank.

The Form of Investment

Traditional investment vehicles in China include equity joint-venture (EJV), cooperative or contractual joint-venture (CJV) and wholly foreign-owned enterprises (WFOE). 

The establishing legislation and implementation regulations for EJVs were promulgated in 1979 and 1983 respectively, for WFOEs in 1986 and 1990, and for CJVs the relevant dates are 1988 and 1995. In 1995, these forms of investment were joined by regulations concerning the establishment and operation by foreign companies of an investment company or holding company.  When the Company Law was promulgated in 1993, it offered a new possibility for foreign direct investment in China, i.e. the setting up of a joint-venture solely under framework of the Company Law rather than under traditional methods. One obvious disadvantage of Company Law Joint-Ventures is their ineligibility for preferential treatment and many incentives which are granted to foreign investment enterprises with traditional foreign investment legislation.

However, in general, most of the projects in tourism sector take the form of Co-operative joint-venture. The CJV has special characteristics. It has always been the option of the joint-venture parties of a CJV to determine whether or not they wished to create an independent entity with legal person status. In practice, if the parties determine that a separate legal entity best suits their business needs, then they will express this in the governing co-operation contract. In that case, CJVs will be limited liability companies and will otherwise be subject to the Company Law. The CJV rules give the joint-venture parties a wide flexibility in choosing the form of their capital contributions to a CJV. One advantage of CJVs over EJVs is that they afford a foreign party the opportunity to recover its investment in priority during the term of the CJV provided the joint-venture contract states that the Chinese party shall have ownership of all the <~ fixed assets » of the CJV on its expiration.

A Continuing Headache for Foreign Investors

In general, foreign investment approval authorities can be divided into four levels 
 

(a) the State Council, 
(b) the Ministry of Foreign Trade and Economic Co-operation (MOFTEC), 
(c) provincial governments (including centrally governed municipalities (Beijing, Shanghai, Tianjin and Chongqing) and Special Economic Zones)
(d) governments below provincial level
 

To find out which level of government authority should approve a particular project, one must consider the following factors (a) the size of total investment ; (b) overall balancing by the central government; (c) industrial policy ; (d) special foreign investment vehicles.

Since most foreign investment projects are set up in provinces or cities with local Chinese partners, one has to know whether the project requires central approval, or whether the local authority has approved the project within its authorized power of approval. It is so important because if a local government has approved a joint-venture in excess of its authorized power of approval, the response of MOFTEC will most likely be that it is not a valid contract.

China's complex foreign investment approval system shows no sign of disappearing in the near future, whatever happens to the China's long awaited entry into the World Trade Organization.

A Strengthening of the Administration of Tourism

Despite the liberalization of the forms of activity, as individually-owned businesses, private companies, limited liability companies, State owned enterprises or collective enterprises, the tourism policy and regulation evolves towards a strengthening of the administration of tourist activities.

Travel Agencies

A new regulation has been promulgated on 15 October 1996. The - Administration of travel agencies regulations - apply to travel agencies and resident offices of foreign travel agencies established within the territory of the PRC. The Regulations apply to the administration of offices which have legal person status.
The Regulations provide for the requirements and documentation needed for the establishment of travel agencies; the amount of registered capital and security deposit; annual inspection by the administration department for tourism.

The Implementing Rules, promulgated on 28 November 1996, provide further details regarding the business scope of international and domestic travel agencies; qualifications of personnel employed by international and domestic travel agencies business sites and facilities; application and approval procedures; administration of branches of travel agencies; rules regulating business practice; protection of the rights and the interests of tourists; and imposition of penalties on parties acting against the Rules.
Local governments also adopt Provisions that apply to the administration of offices without legal person status. In Beijing, new provisions, effective from 1 February 1997, introduce a strengthening of the Administration of Offices in Beijing of travel agencies from other provinces and cities. Provisions say that such travel agent offices are subject to examination and approval process, issue of business permit, payment of a quality guarantee sum for establishment of such offices and annual inspection by the Municipal Tourism Association.

Business in Tourist Areas

The State Administration of Industry and Commerce has issued, on 22 January 1997, new Procedures about development of individually-owned businesses.

The Procedures apply to scenic tourist areas. The Procedures define scenic tourist areas as famous scenic areas as well as parks, cemeteries, temples, museums, etc... that can be visited or used for sightseeing purposes.

The Procedures state that individuals running business in scenic tourist areas must hold a license issued by the organization administering industry and commerce. They list prohibited activities, such as unauthorized change of business venue or expansion of premises; transfer, lease, sale or alteration of operating licenses; sale of foodstuffs that do not meet hygiene standards or are harmful to human health ; sale of wild animals protected by the State or their products; sale of counterfeit goods. It also lists the penalties for violating the Law.

Conclusion

Even the growth of tourist flows is interrupted by the financial and economic crisis in Asia, the major fundamental reforms, announced by the Prime Minister, Zhu Rongji, will certainly liberalize the Chinese tourism policy and regulations.
 

REFERENCES

Business Law in China, (1997), Paris, I.C.C. Publishing.
China Law and Practice, Hong-Kong, monthly 
Courtin P. (1993). L'e' veil du tourisme chinois, Revue Espace, mars-avril.
Global tourism Forecasts to the Year 2000 and beyond, World Tourism Organization Publishing.
Luyou Bao (Tourism Journal), Beijing. Wackermann G. (1994).
Loisir et Tourisme -Paris editions SEDES.
Yearbook of Tourism Statistics ; World Tourism Organization Publishing.
Zhongguo Jingji Nianj ian (Yearbook of Statistics of China), Beijing.

 
 
Also See:
Travel Between Politically Divided China and Taiwan / May, 1997 
Asia - Favorable opportunities exist, but.. / Horwath Landauer / May 1998 
Beijing: Commercial Travel Drives Surge in Lodging Market Demand/ Arthur Andersen / Spring 1996 

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