http://online.wsj.com/public/article/SB115308783430608102-idDKK0cKHy4YK37dq7U6n75k4P4_20060723.html

BEIJING -- China is drafting new rules to regulate large-scale shopping outlets, which could impede the expansion plans of foreign retailers such as Wal-Mart Stores Inc. and Carrefour SA.

If the rules are finalized, they could raise costs and increase red tape for big retailers by requiring them to file detailed blueprints for proposed new outlets and hold public hearings on the impact on communities.

The rules are under review by China's cabinet, the State Council, and could be released later this year, according to an official at the Ministry of Commerce, which is drafting them. The proposed rules would apply to both foreign and local retailers. But some industry executives say they would be especially cumbersome for large foreign retailers, many of which have been planning major expansions since the liberalization of China's retail industry in early 2005.

Leo Yeung, director of retail services for China at real-estate firm Cushman & Wakefield, said the proposals would make foreign big-box retailers and investors in large malls "consider more carefully their expansion plans" into China's smaller cities and hinterlands.

Despite pilot projects, public hearings on zoning projects are a relatively new concept in China. And in practice, neighborhood committees and citizens' community groups have had little power fighting renewal projects, although they are starting to be more active.

The draft regulations could play to the advantage of local companies like Shanghai-based Lianhua Supermarket Co. and Beijing's WuMart Stores Inc. Many Chinese retailers have lobbied the government to address a perceived bias among local governments in favor of well-funded foreign retailers holding brand-name cachet. "We are not going to restrict the development of foreign investors in China," said Wang Yongping, secretary-general of the China Commercial Real Estate Union and a senior adviser to the Ministry of Commerce. "Instead, we just want a more balanced and scientific commercial layout. Foreign companies can no longer get special advantages from the government."

Details of the rules could still change. In their current form, they would consist of two parts, according to Mr. Wang and the Commerce Ministry official. Cities would be required to file detailed blueprints of their commercial plans, including plans for department stores, big supermarkets and other retail outlets in residential neighborhoods.

Retailers applying to build outlets larger than 10,000 square meters would be required to submit to a public hearing, much as they are required to do in some North American and European countries. The hearings would include regulators, industrial associations and academic experts as well as competitors and representatives of local residents.

Pilot public hearings have already been held in some cities since 2003. None has derailed any projects, and they aren't expected to in the future, said Mr. Wang. However, he said, the hearings could result in higher project costs if, for example, local governments require retailers to put in refinements, such as pedestrian tunnels to improve traffic.

Foreign retailers are reluctant to comment on the proposed regulations before details are formally made public. But privately some express concern. "The law is quite cleverly worded because it doesn't explicitly apply to foreign companies, but is based on size, which is where the foreign retailers specialize in. So this is hurting them," said one foreign retail executive.

James Zimmerman, vice chairman of the American Chamber of Commerce in China, said in email response to questions that if the proposed regulations "have the effect of unreasonably and unfairly restricting foreign retailers from the market," then China might be setting up a nontariff barrier in violation of World Trade Organization rules, "and we therefore take exception."

Todd Wang, a Shanghai-based spokesman for Carrefour, said he is aware of the draft rules, but says the company doesn't know the details of the contents. Executives for Wal-Mart couldn't be reached for comment. An official at Shanghai Brilliance (Group) Co., owner of major supermarket chains including Lianhua, welcomed the proposed regulation. "Foreign retailers are always enjoying special favor and treatment from local governments. But the government should protect the national companies better if they want us to grow strong," said the official.

China has gradually liberalized its retail regulations since its WTO entry in 2001. Last year, it ended rules requiring foreign retailers to form joint ventures with local partners, sparking a surge in expansion by foreign retailers. Wal-Mart announced plans to add about 18 stores to the 60 it currently operates in China; Carrefour has plans to add 12 stores to its existing 79. Best Buy Co., Germany's Metro Group AG, U.K.-based Tesco PLC and Swedish retailers Ikea and Hennes & Mauritz AB also announced plans to open or expand in China.

The proposed regulations are also meant to curb waste, Chinese officials said. In recent years, some of the world's largest shopping malls have been built in China. But many have been unable to convert crowd traffic into robust sales, retail executives say.

If public hearings are effective, the proposed rules could also help preserve local neighborhoods, many of which are being demolished in China's quest to modernize swiftly, especially in preparation for major events such as the 2008 Beijing Olympics and the 2010 Shanghai World Expo. "In the past, the government was very keen to land large-scale projects," said Michael Hart, head of Shanghai research at real-estate consultant Jones Lang LaSalle. "It's refreshing to see concerns about neighborhood preservation."