Most foreign merchants agree that China offers irresistible commercial appeal. That said, when it comes to cross-border online retail and foreign commerce, China appears to be sending mixed signals. So, is China opening or closing its doors to foreign merchants? The answer seems to be – both!! Against this confusing background, retailers interested in launching e-commerce in China must first obtain full understanding of the latest laws and regulations.
According to Ecommerce Europe, China now accounts for almost 35% of global e-commerce sales and according to forecasts, it will account for half of the global market by 2018. The same source notes that purchases are growing rapidly, with a 25% rise in 2014 as compared to the previous year; total online sales in China are expected to pass the one trillion dollar point by 2019.
The reasons for the flourishing of e-commerce in China include: growing government emphasis on consumption, the failure of brick-and-mortar stores to meet shoppers’ needs, online price comparisons conducted by potential buyers, the desire of the Chinese public for greater exposure to foreign goods, and more.
Bin Tang, Co-Founder and CEO of YeePay, a leading e-payment service provider in China, waxed poetic when providing his own explanation for the Internet’s success in China: “The development of the Internet is similar to the development of China itself. China is a gentleman when tolerating differences and radiating harmony. This decentralization can be found in both the Internet and society, and makes the Internet part of the Chinese culture.”
Chinese Government Gives E-commerce a Boost
Gentlemanly or not, the most recent development comes in the form of guidelines issued by China’s State Council aimed at expediting the country’s policy regarding e-commerce imports and exports. These new guidelines include the re-adjustment of taxes, including lowering taxes on the export of online purchases while moderating the official tax policy on imports to increase domestic consumption and encourage e-commerce competition.
Up until recently, online marketplaces in China were closely regulated; foreign companies were barred from owning multi-merchant digital shopping portals operating in China. To get around strict restrictions relating to foreign ownership in commerce, various online foreign companies set up their operations in China as what are known as Variable Interest Entities (VIE). Rather than having direct ownership, the VIE structure enables foreign investors to maintain control over a company based on a set of contracts.
Foreign Companies Can Now Operate Their Own Online Marketplaces in China
In January 2015, the Chinese government announced a new policy allowing foreign companies to operate their own online marketplaces in China. The Chinese Ministry of Commerce issued a draft stating that foreign companies can now wholly own an “online data process and e-business transaction” type of enterprise. This new draft replaces a set of 30-year-old laws and regulations that severely restricted the formation and operation of foreign-invested enterprises in China. The only stipulation is that the venture must be based in Shanghai’s Free Trade Zone, an unrestricted trade area launched by China in 2013.
At the annual session of the National People’s Congress, Chinese Premier Li Keqiang discussed what he called the new “Internet Plus Strategy.” Referring to both Chinese and foreign-owned websites, he declared: “I am most willing to promote the new e-commerce, because it creates employment and stimulates consumption.”
So, conceivably, China has never been so accessible for foreign retailers. Be that as it may, foreign investors using the VIE loophole may need to regroup. It would appear that the Chinese government’s actual goal is to strengthen its control over foreign investment in the Internet category. Foreign investors may well be facing higher risks of regulatory discrimination under the new law.
New China International Payment System to Facilitate Global Usage of the Yuan
A new China International Payment System (CIPS), aimed at facilitating international usage of the yuan, is scheduled to be launched by the end of the year. The new system is expected to significantly improve access for foreign enterprises by enabling cross-border renminbi clearing among both onshore and offshore participants, applying international reporting standards, and handling multilingual payments over 17 time zones in Asia, Africa, Europe and the Americas simultaneously.
Currently, cross-border yuan clearing is done either through offshore yuan-clearing banks in Hong Kong, Singapore and London, or else via a correspondent bank in mainland China.
This development will undoubtedly reduce costs for SMBs operating in China because their correspondent banks will be able to access a wider network for settling payments in yuan. CIPS will remove operational inefficiencies for large companies that will no longer need to ensure the processing of yuan transactions only at certain times of day.
Last-Minute Revocation of Regulations Restricting the Purchase of Foreign Equipment and Technology
In January 2015, China also announced new regulations which would force foreign technology companies that want to sell equipment to Chinese banks to agree to extensive audits, turn over source code, and build “back doors” into their hardware and software.
This announcement ignited a global uproar. U.S. Trade Representative Michael Froman condemned China for violating the trade agreements between the two countries by creating banking rules that favor Chinese companies over international technology firms.
In light of the backlash, a notice issued by the China Banking Regulatory Commission (CBRC) and the Ministry of Industry and Information Technology stated that the rules would be re-issued following revision, but it did not reveal how long this process would take. Nor was it clear what stipulations the revised regulations would include.
Nevertheless, even if the initial tough regulations have not been passed at this time, foreign countries doing business in China would be wise to heed the writing on the wall.
Mixed Results for Several Large US Retailers
A number of large U.S. retailers have injected capital into various Chinese online platforms with mixed results. Several years ago, Macy’s invested $15 million in Jiapin.com, an online fashion vendor that specializes in international luxury brands. The renowned U.S. retailer named the Chinese firm its exclusive partner in China. Three years down the road, Jiapin is still not displaying any of Macy’s merchandise on its site.
Neiman Marcus’s deal with Mei.com, a flash-sales retailer for designer fashion, also ended in failure. Both retailers reportedly experienced difficulty adapting to their Chinese partners’ business management and operational approach.
Home Depot was also disappointed when it bought 12 local stores in China in 2006. The chain had apparently miscalculated; due to widely available cheap labor, ‘do-it-yourself’ skills are less relevant for home improvement there. The retailer ended up taking a $160 million loss.
On the other hand, according to the Internet Retailer China 500, traffic to US-based apparel retailer Gap’s Gap.cn e-commerce site increased more than 154% last year.
Gap is quoted as saying that China is its second most important market after the U.S. The company has opened more than 100 stores in five years. Gap manages its Chinese offline stores itself, but outsources its e-commerce operation to a Chinese company.
Both Green Light and Red Light for Foreign Investment
Foreign investors in Chinese e-commerce are discovering that there is no clear equation for online success in China. The fact that foreign merchants can now conduct their own e-commerce in China may prove to be a mixed blessing – at least initially – because retailers may unwittingly be jumping into uncharted waters. One thing is clear – to succeed, foreign merchants must drop their homegrown preconceptions and dig deep to fully understand their new audience.
Or as Confucius said: When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the action steps.
Zooz is an international payments processor.