China has strictly regulated online marketplaces, putting them into a closely regulated category that has prevented foreign companies from owning multi-merchant web shopping portals that operate in China. But the Chinese government introduced a new policy this week that will provide an opportunity for foreign companies to operate their own online marketplaces in China.
The Ministry of Industry and Information Technology,which regulates Internet activity in China, has announced that foreign companies now can wholly own an “online data process and e-business transaction” type of business, as long as it is based in Shanghai’s Free Trade Zone, an experiment in freer trade that China launched in 2013.
“For the Chinese government, the e-business transaction type of business means online marketplaces,” says Shao Jun, a partner in the Shanghai law firm Yuantai, tells Internet Retailer. While a foreign company can already operate a web site to sell directly to consumers, if it wants to create a platform from which other retailers sell—such as eBay.com or Amazon.com in the United States—the business falls into the more closely regulated “telecom value-added services category,” Shao says. Foreign companies previously have been prohibited from owning more than a 50% stake in such companies.
According to a Chinese government web site, in 2010 the Wal-Mart China subsidiary of Wal-Mart Stores Inc. suggested that the Chinese government change the policy by removing online marketplaces from the “telecom value-added services” category. Wal-Mart is No. 4 in the Internet Retailer 2014 Top 500 Guide, which ranks North American retailers by their online sales. Wal-Mart owns a 51% stake in Yhd.com, an online retailer of food and other products that is No. 6 in the 2014 China 500.
For foreign retailers that just want to set up an e-commerce site in China, there are no current restrictions based on their not being Chinese companies, according to Shao. For example, Internet Retailer has received a copy of the China business license of U.K. web-only apparel retailer ASOS Plc., No. 22 in the Internet Retailer Europe 500, which shows that it is wholly owned by a foreign company and that it operates in the field of “Internet retail.” Asos began selling online in China in 2013.
To get around the strict restrictions on foreign ownership in certain fields, many foreign companies, particularly those in the Internet sector, have set up their operations in China as what are known as “Variable Interest Entities,” Shao says. In this kind of structure, the foreign company has its Chinese management team establish a Chinese company and operate the business in China for the foreign company. The foreign company signs an agreement with the Chinese company to control the business.
Amazon.com Inc., for example, may have used this approach to set up Amazon.cn, which is a marketplace on which many retailers sell in China. That online marketplace is operated by a company called Beijing Century Joyo Information Technology Co. and its business license shows it is a Chinese company owned by a Chinese citizen. However, Amazon.com Inc. includes online sales in China in its financial reports.
Amazon did not immediately respond to a request for comment on its structure in China.
Amazon ranks No. 1 in theTop 500and Amazon.cn is No. 4 in the2014 China 500.