More than a year after Chinese officials accused Carrefour of violating regulations by opening branches without government approval, the French firm is restructuring operations, said one of its Chinese partners, Liaoning Chengda Co (600739.SS).

Carrefour will transfer 35 percent of its ownership in three stores in northeastern China to two domestic trading firms, Chengda and Harbin Dongli Equipment Co, Chengda's board secretary Luo Qiku said.

"To continue operating, Carrefour will have to abide by Chinese regulations," Luo said. "And, basically, Carrefour will have to make similar arrangements for all its China stores."

The French company opened its first supermarket in China in Shanghai in 1996 and expanded rapidly to 27 branches by 2000.

But Carrefour did not grow last year after running afoul of the State Economic and Trade Commission (SETC) by not seeking its approval to open branches, SETC officials said in February last year.

Foreign retailers are required to operate through joint ventures in which they can hold a maximum 65 percent, Luo said.

Carrefour's three northeastern supermarkets were wholly owned and it has now signed agreements with Chengda and Dongli to set up two joint ventures to control the stores, Luo said. Carrefour would retain 65 percent stakes.

China is one of two must-have retail markets in Asia, the other being Japan, analysts say. Sales from chain stores leapt to 200 billion yuan (US$24.17 billion) last year from 3 billion yuan (US$362 million) in 1994, according to DBS Vickers Securities.

The country is a potentially enormous market for retailers like Carrefour, Wal-mart Inc (WMT.N) and Germany's Metro AG (MEOG.DE).

China tightened its grip on the sector in late 1995, banning local governments from approving more chain store ventures to curb excessive competition. In 1998, China came down hard on foreign retailers, closing about 36 stores.

"They did break the rules and I think they got the punishment," said Alex Wang, a legal consultant with Jones, Day, Reavis & Pogue in Shanghai said of Carrefour. "If there are benefits going beyond central government rules probably you can take them, but you definitely need to analyze the risk."

(China Daily HK Edition June 13, 2002)