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CIRCULAR OF THE GENERAL OFFICE OF THE STATE COUNCIL ON RELATED MATTERS CONCERNING THE ESTABLISHMENT OF DUTY-FREE STORES (MARKETS)

    In the early period of reforming and opening, the business of
duty-free commodity sales has been introduced in China to meet the
needs of opening to the outside world and promote tourism development.
There are strict restrictions on the categories of people who supply
commodities and in the variety of those duty-free items on sale. In
the past ten years, the following types of duty-free stores (markets)
have been established successively in China: those operated and
administrated by the China Duty-free Commodity Company and other units
for supplying those leaving the country and resident personnel of
foreign institutions in China, foreign personnel of enterprises with
foreign investment; those operated by the Service Company for Chinese
Personnel Going Abroad and other units for supplying to people
travelling abroad on behalf of the State, working personnel and
service personnel of inward and outward transportation entities; those
operated by the General Cooperation of Chinese Overseas Travel and
Overseas Remittance Service in China for supplying to Taiwan
compatriots, overseas Chinese, Chinese holding foreign nationality and
personnel going abroad privately; State operated units opened in the
special economic zones for supplying to Hong Kong and Macao
compatriots, overseas Chinese, foreigners and staff living without
China etc.. The establishment of such a wide variety of duty-free
stores (markets) has played a positive role in expanding the opening
process to the outside world, improving the investment environment,
satisfying consumer needs and increasing foreign exchange revenue.
However, at the moment, some duty-free markets are operated beyond the
scope of normal business operations and have increased the categories
of people to whom the commodities are supplied without authorization.
Some duty-free stores established in localities which are
administrated by the central companies have insisted on separating
themselves from the general companies, operating and administering the
outlets themselves. In recent years because of the higher profits
realized in the sale of duty-free goods many localities and
departments have wanted to establish duty-free stores (markets) and
engage in importing duty-free commodities. We must therefore adopted a
prudent attitude towards it.

    The sales of duty-free commodities involves such matters as import
regulations, import tax revenue, foreign exchange control and the use
of foreign exchange within China. As a result it is extremely
sensitive. Owing to exempted State tax revenue from the commodities
offered by duty-free stores (markets), there has emerged an
administrative loophole which enables such stores to open in large
numbers, and for an increase in the categories of people to whom the
commodities are supplied along with the amount of commodities. This
will most certainly reduce the central financial revenue, affect and
hurt the domestic market and commodity production. Meanwhile, along
with the development of China's economic construction, the production
level, quality, grade, and variety of designs of consumer goods in
China has been greatly improved. Duty-free stores (markets) are also
able to promote the sales of home-produced goods in order to improve
exports and thus increase foreign exchange revenue. Therefore, having
been approved by the State Council, the following are outline
regulations on such related matters:

    1. All types of duty-free stores operated and administrated by
various types of central companies in a unified way at the moment,
must still adhere to the principle of unified management, which
incorporates stock, retail prices and administration. Where it is
found necessary to establish branches of duty-free stores, the unit
concerned must apply to the central companies and the General Customs
Administration must be kept informed and give its approval. The
customs in localities and local governments shall not approve such
projects without central authorization. The central companies of
various types shall improve and complete related measures for
administration, and to enhance the quality of service.

    2. At present, there is no approval for opening duty-free markets
in special economic zones or beyond the zones in principle. Those
already established may not set up a branch of a duty-free market
of special zone' model. The existing duty-free market of special zone's
model must be strictly handled according to the relevant State Council
regulations. They may not expand the variety of commodities or the
categories of people to whom the commodities are supplied without
authorization, and must be supervised and controlled by Customs. It is
now five years since duty-free markets were first initiated. It is
necessary to further summarize and improve on their administration. We
request that the State Planning Commission be responsible for leadership
and jointly with the Ministry of Finance, the State Economy and Trade
Commission, the General Administration of Customs, the Special Economic
Zones Office of the State Council, the State Administration of Taxation
and the State Administration of Exchange Control carefully investigate
and summarize the situation and make suggestions for further development
after such research.

    3. The State actively encourages duty-free stores (markets) to sell
home-produced products. The specific measures and rules shall be drawn
up by the Ministry of Finance jointly with the State Administration of
Taxation and the General Administration of Customs.

    4. With a view to developing the domestic industry, increase sales
to tourists, meet the needs of travellers leaving the country and
domestic residents, and to increase China's foreign exchange revenue,
foreign exchange stores may be established in major tourist cities,
the coastal cities in which the domestic residents use foreign
exchange much more than other area, and in provincial capital cities.
This is in addition to the existing friendship stores and overseas
Chinese stores. These stores shall sell mainly home-produced products,
and a small amount of import commodities, but the import tax shall not
be reduced or remitted. We request that the State Administration of
Exchange Control consults with other departments concerned to study and
formulate the specific measures needed for such projects.

    5. It shall be prohibited for foreigners to invest and operate the
duty-free stores (markets) or foreign exchange stores of various types
within the People's Republic of China.

    6. The sales of duty-free commodities is classified as a special
business item and, therefore, all types of import tax have been
exempted by the State. Thus, the operating profits of duty-free stores
(markets) of all types shall be turned over to the Central Treasury in
proportion. The specific measures shall be determined by the Ministry
of Finance jointly with the departments concerned.

    7. As the foreign exchange earned from the operation of duty-free
stores (markets) belongs to the non-trade foreign exchange revenue,
the unit concerned shall conduct the foreign exchange settlement,
handle the foreign exchange retained and turn over the foreign
exchange quota to the central government in accordance with the
relevant stipulations of the State. We request that the specific
measures shall be formulated by the Ministry of Finance jointly with
the State Planning Commission and the State Administration of Exchange
Control.