China does not like direct marketing and its direct marketing laws are so restrictive the direct marketing industry has little in common with direct marketing in the United States or even Europe.
The other day, one of my law firm’s international corporate lawyers received an email from a potential client with a link to a site describing China’s direct marketing laws. The email merely asked whether the information on the site was accurate, and if it was accurate, whether we would explain it in “plain English.”
It was somewhat accurate, but rather than rewrite it in plain English, we provided the following to our client (and now to you):
Direct selling is defined by Chinese regulators as a business model involving the recruitment of direct marketing sales agents or promoters, and the selling of products to end-consumers outside fixed business locations or outlets. China’s commitment to the WTO included allowing market access for wholesale or retail services outside fixed locations. However, the regulations related to direct selling in China are notably restrictive:
- Multi-Level Marketing (MLM) Restrictions: MLM organizations are considered illegal pyramid schemes.
- Commission Structure: Sales promoters are paid commission based solely on their sales performance. The payment to sales promoters must not exceed 30% of the sales income.
- MLM Commission Calculation: Commissions cannot be based on the MLM structure.
- Fixed Location Service Centers: There’s a requirement to build service centers in each sales area for after-sales service and consultation.
- Licensing Barriers: To obtain a direct sales license, companies must navigate several hurdles:
- A three-year foreign experience rule.
- A bond deposit between RMB 20-100 million (USD 2.9-14.5 million).
- A registered capital threshold of RMB 80 million (USD 11.6 million).
Despite these challenges, some international companies have successfully entered the market, and our law firm represents a number of such companies. However, the Chinese government has been slow in approving new direct-sales licenses in recent years, reflecting the heavy regulation and supervision of this sector by both central and local authorities.
However, in the last few months, as China seems to be making more effort to bring in and keep foreign companies, we have detected a bit of a thaw with respect to foreign direct marketing companies as well. For more on direct marketing in China, check out Multi-level Marketing (MLM) in China: The 8 Basic Rules.
