Hong Kong companies can now open wholly-owned retail outlets in China under the CEPA agreement, but businesses need to carefully think through the pros and cons of this against forming a joint venture with a Mainland partner, say seasoned China retail veterans.

Speaking at the Chamber's July 16 CEPA workshop on retail and distribution, Y K Pang, Chairman of Jardine Matheson (China) Limited, says issues such as banking, logistics, taxes, and utility services all have to be carefully considered. A good, carefully chosen Mainland partner may be able to help investors get through these potential minefields.

"You have to decide if you want to go the wholly-owned route, or do you want the safety of a partner," he suggests. "Not a 50 percent partner, but maybe a 20 percent partner who could help you resolve a lot of your 'guanxi' issues that you still need to face. Because at the end of the day, CEPA doesn't with a magic wand simply wave away all the problems, difficulties and bureaucracy that is associated with continuing to do business on the Mainland."

For Mr Pang, getting a license to open outlets in China is only one piece of the puzzle that retailers need to fit into place. Businesses still need to get an import permit, and how these permits are issued and who issues them is still a bit of a mystery, even under the CEPA.

"So you may have a sales license, but you may have no goods to sell," he says.

Yu Pang Chun, Director and Deputy General Manager, Yue Hwa Chinese Products Emporium Limited, also speaking at the workshop, said a lot of details have to be clarified under CEPA, not least the procedure for setting up a retail business in China.

For retailers, once they have committed to a space they need to open as soon as possible, because they must pay rent and wages. At the moment, however, retailers in the Mainland still need to have an address before they can apply for a license to operate. Then they need to get another license if they want to import goods. The whole process can take months, and all the time retailers have to pay their outgoings.

He hopes this issue can be resolved through CEPA's ongoing discussions in addition to banking regulations which require that each chain store have its own bank account.

For businesses considering setting up a chain of stores in China, Mr Pang says investors need to very carefully analyze where they base their headquarters and where they pay their taxes. With each city in China angling for more taxes, local governments may not be as helpful to investors as they could be if they pay taxes to neighboring cities.

For example, if a business sets up an operation in Guangzhou, then decides to open a branch in Shenzhen, city officials will ask investors to register their business in their city so that taxes will go into their coffers. So he recommends that businesses weigh up where they want their headquarters and the majority of outlets to be based, and where do they want to pay tax.

CEPA has given SMEs a running chance of setting up retail businesses in the Mainland with substantial threshold reductions in central and western China to RMB 6 million. While western cities may not have the appeal of Beijing and Shanghai, the region nonetheless has a lot of very wealthy cities, such as Chengdu.