CIRCULAR OF THE MINISTRY OF FOREIGN TRADE AND ECONOMIC COOPERATION, THE STATE ADMINISTRATION FOR INDUSTRY AND COMMERCE, THE STATE BUREAU OF INTERNAL TRADE CONCERNING THE CHANGE OF SALES METHOD BY DIRECT SALE ENTERPRISES WITH FOREIGN INVESTMENT

The Ministry of Foreign Trade and Economic Cooperation, the State Administration for Industry and Commerce, the State Bureau of Internal
Trade

Circular of the Ministry of Foreign Trade and Economic Cooperation,the State Administration for Industry and Commerce, the State Bureau
of Internal Trade Concerning the Change of Sales Method by Direct Sale Enterprises with Foreign Investment

WaiJingMaoZiFa [1998] No.455

June 18, 1998

The commissions (departments, bureaus) of foreign trade and economic cooperation, administrative bureaus for industry and commerce,
commissions of commerce, financial office, departments (bureaus, general group companies) of commerce(trade), departments (bureaus,
general group companies) of goods and materials of various provinces, autonomous regions, municipalities directly under the Central
Government and municipalities separately listed on the State plan:

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

I.

Direct sale enterprises with foreign investment 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.