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China E-Commerce: The New Rules

As part of its program designed to modernize the Chinese economy, the State Council has recently issued a series of opinions on development of e-commerce in China. The underlying concept is that e-commerce is one way to push China towards developing a consumer economy. The most recent opinion focuses on the development of international e-commerce in China: Guiding Opinion for the Promotion of Healthy and Rapid Development of Cross-Border E-Commerce (关于促进跨境电子商务健康快速发展的指导意见). Consistent with recent trends in Chinese law, this Guiding Opinion shows two underlying primary themes. First, e-commerce in China shall be conducted in accordance with Chinese law in a manner firmly under the control of the central government. Second, e-commerce in China shall be conducted by Chinese companies. Foreign participation in the ownership and control of e-commerce companies in China is not even mentioned in the document.
 
Consider how these underlying themes apply to the sale of U.S. made consumer products to China. Many U.S. manufacturers of consumer goods seek to focus on the Chinese market. Their efforts are restricted for a number of reasons. First, Chinese product safety requirements are difficult or impossible to comply with by U.S. companies. For example, the Chinese requirement for animal testing on imported cosmetics means that many foreign cosmetic products cannot receive approval to sell their cruelty free cosmetics products in China. For more on this, check out Do This One Thing Before Doing Business In China. Similar issues apply to the sale of many food and beverage products. In the same way, many small volume manufacturers of consumer electronics do not wish to or are unable to comply with PRC electronics safety certification requirements.
 
Many U.S. companies have sought to avoid these issues by selling their product on e-commerce websites. Where the sale is made directly to the individual consumer in China, these companies have worked a loophole in Chinese regulation that gets around these restrictions. First, Chinese consumers are now able to make foreign purchases using their Chinese Unionpay credit cards. Second, the Chinese customs officials have taken a de minimus inspection approach and have tended not to inspect single purchase product shipments sold directly to the Chinese consumer. In fact, Chinese service providers have started to market use of this personal use import loophole to promote sales of non-conforming product in China.
 
It appears that the Guiding Opinion may be intended to presage shutting down this personal use loophole.
 
First, payment systems will be centrally monitored to enforce compliance with central government laws and regulations. The current system  basically allowing unmonitored credit card purchases by Chinese individual consumers and small businesses will be replaced by a centrally monitored system that enforces compliance.
 
Second, for import of consumer goods, strict compliance with central government quality and safety standards will be enforced (See Guiding Opinion, Article 4):
 
The government will impose centralized reporting, shipping and delivery systems. The current loose and disorganized local systems will be shut down.
Under this centralized system, strict compliance with central government quality and safety regulations will be imposed.
Importers will be held personally responsible for compliance.
Those who import in violation of Chinese quality and safety requirements will be prosecuted.
To implement its goal of complete central control, the State Council approved model is the China cross-border e-commerce comprehensive test zone (中国(杭州)跨境电子商务综合试验区 ) established in Hangzhou with Alibaba’s cooperation. Under this model, the plan is to replace the current de-centralized individual importer system with a completely centralized operation under the careful control of the central government authorities.
 
Note also that under the system advocated by the Guiding Opinion, there will be no role for sales into China through most online sales websites of individual U.S. companies. The plan is for large Chinese companies to control the entire process. Chinese companies will purchase consumer goods overseas and then warehouse the goods overseas and then ship those products to China to one of the centralized cross border e-commerce distribution centers. The Chinese consumer will then purchase the products within China from an e-commerce retailer located in one of those distribution centers. Payment processing will be handled and product will be shipped to the consumer from that central location. The role of the foreign manufacturer or online retailer will be reduced. China’s e-commerce model will be very different from the decentralized e-commerce system typifying online selling in the United States.
 
If China implements this system, U.S. manufacturers and retailers will need to comply with the following rules:
 
No direct selling to Chinese customers.
All sales in China will be done through Chinese owned e-commerce companies.
All product must comply with Chinese quality and safety standards.
It remains to be seen what will actually happen in China but for right now, things are not looking so good for many American companies (including many of our clients) who were using e-commerce to sell their products into China using the individual use system. Interestingly though, China just last month announced that it would be opening up some e-commerce sectors to foreign ownership.
 
We will be closely monitoring China e-commerce developments from on the ground here in China and reporting back on what we are seeing and hearing.
 

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