In the spring of 2016, China is carrying out a series of new policies to reform its management of cross-border E-commerce (CBEC). While the reforms mainly focus on adjustment to the tax policies that apply to CBEC, in April, China published the List of Products Eligible for CBEC(known as the "Positive List" by the industry) in two batches1. Through the Positive List, products that can or cannot be imported through CBEC are clarified, which represents the establishment of a so-called "Positive List" for CBEC products. These new rules have completely changed the regulatory landscape of CBEC and brought significant changes to the industry, such as demanding approvals for special foods and cosmetics, as well as medical devices.

Checks and Balances to Booming CBEC

In 2014 and 2015, China issued a series of legal guidancedocuments2 at the central level to boost the development of CBEC. While the industry has been developing at an unprecedented speed, the Government is now adding some checks and balances to the booming CBEC. Notably, in October of 2015, AQSIQ3 released draft Regulations for the Safety Supervision and Administration of Cross-Border E-commerce of Imported Food via Bonded Warehouse Model, which raised the regulatory bar for distributing food via CBEC. Further, the draft amendment to theImplementing Regulation of the Food Safety Law, released in December 2015, explicitly stated that CBEC imported and exported food products shall comply with the Food Safety Law and all relevant regulations. While this draft amendment remains to be finalized, we continue to see a trend in recent regulatory developments (discussed below) where authorities are narrowing the gap between regulations governing specially regulated products in CBEC and traditional modes of import, while leaving some regulatoryflexibility to the management of conventional products.

Negative Listing to Positive Listing

In the past, commodities traded via CBEC were monitored in a risk management system, where safety risk analysis is performed and items are scrutinized in terms of safety and hygiene requirements. Under the bonded warehouse model4, inspection procedures vary depending on the risk level of the product. Given that no standard risk analysis guidelines have been established on the national level, local CIQs developed and implemented varying product classifications and clearance requirements per their own interpretations. Per internal instructions from the General Administration of Customs (GAC)5, it was not a rare practice that as long as a product was not on the List of the People's Republic of China of Articles Prohibited/Restricted from Import and Export6,and complied with "proper amount" for personal use7, the product was not prohibited from entering the Chinese border via CBEC.

With the establishment of the Positive List, this practice has now changed. The Positive List - jointly released by the Ministry of Finance (MOF) and ten other ministries and government bodies - includes tariff codes and product names of permitted CBEC categories encompassing almost 1,300 commodity categories in total, including foods and drinks, clothes/shoes/hats, some cosmetics, diapers, etc., along with various notes, which provide additional regulatory requirements where necessary. Per official explanations8, the Positive List is going to be a dynamic system and updated from time to time.

While many of the approved products are listed without additional notes, a number of product categories contain exclusions and additional guidelines. Specifically, government registration/notification requirements were highlighted for special foods, cosmetics and medical devices. Up until now, CBEC requirements have been ambiguous and left to interpretation by local ports; however, on May15, AQSIQ issued a notice9 to clarify that products imported via CBEC are considered commercial goods and those imported in bonded warehouse model must obtain customs clearance certificate if they are listed in the Catalogue of Commodities Subject to Entry and Exit Inspection and Quarantine ("Catalogue")10. Most food and cosmetics are listed in this Catalogue. This further confirms the "commercial" element of CBEC and the regulatory trend that CBEC products are moving in the direction of being governed in the same way as products imported via traditional modes of import.

Below, we discuss product categories worth special attention highlighted by authorities.

Potential Impact on Individual Sectors

China's Food Safety Law, promulgated in 2015, sets forth strict supervision standards for special food products, namely baby formula milk powder (baby formula), health food and formulae for special medical purposes (FSMP). Not surprisingly, if these products have not obtained pre-market clearance from the Government, they are excluded from the Positive List and cannot be sold on the CBEC platforms in the reformed system. However, there is slight variation in their respective management as elaborated below.

Baby Formula

Starting on January 1, 2018, all baby formula imported via CBEC must obtain a product formula registration certificate from CFDA, following Administrative Measures for the Registration of Baby Formula Milk Powder Products Formula ("Registration Measures"), which should be finalized soon. This suggests baby formula developed per foreign standards will not be available via CBEC, unless its formula is also approved in China. Once the Registration Measures are published, the industry should gain more clarity as to whether special rules are tailored to meet the needs of baby formula purchasers via CBEC.

In traditional modes of import, before any infant formula milk powder can be shipped to China, not only must product formula be registered, but its overseas producers must undergo CNCA11 registration (known as "producer registration," this is separate from formula registration) upon completing the audit of its overseas production site12. The Positive List remains silent in this regard; however, further clarification is expected as to whether all baby formula milk powder via CBEC must be sourced from CNCA registered foreign producers. That being said, local regulations, such as the one being draftedby officials in Hangzhou (the capital city of Zhejiang Province)13, have shed some light on producer registration specific to CBEC. It is stated in the draft that overseas producers of products (such as dairy products including baby formula) imported via both traditional mode of import and bonded warehouse model CBEC must complete CNCA's producer registration. However, where the products are only imported via CBEC, these overseas producers may alternatively choose to register with Zhejiang CIQ, instead of CNCA.

Health Food

In line with the requirements for traditional modes of import, health foods, other than vitamins and minerals imported for the first time, now need to be registered with CFDA; vitamins and minerals supplements must complete CFDA notification. The new requirement will take effect on July 1, 2016, when the Administrative Measures for Health Food Registration and Filing enter into force.

However, not all vitamin products are carved out from the Positive List. Specifically, the pre-clearance requirement for several unblended vitamins and their respective derivatives in the List of the firstbatch has now been removed. This may suggest that listed vitamin products imported via CBEC may be accomplished without going through the registration/notification process. Further interpretations are expected, particularly at the local level, which will provide more guidance to the industry regarding the import of these listed products. For example, issues surrounding special dosage forms (e.g., tablets and capsules, sprays), and health function claims have not yet been explicitly addressed under the CBEC context.

Other Specially Regulated Products

FSMP

Similarly, formulae for special medical purposes imported through CBEC will be required to obtain formula registration with CFDA before being marketed. While the Management Measures for the Registration of FSMP will take effect on July 1, 2016, it is not until January 1, 2018 when a formula registration certificate will become a prerequisite to FSMP import via CBEC.

Cosmetics

All CBEC cosmetics products must have already been registered or notified with CFDA, in line with requirements for traditional modes of import. In other words, both cosmetics imported through traditional trade channels and via CBEC will be subject to CFDA clearance. A list of products that have already obtained permission is available on CFDA's website.

While the regulation on CBEC cosmetics has been apparently strengthened, we also have noted a positive trend in streamlining government responsibilities at the central level to promote efficiency. Notably, the State Council issued a notice14 on May 5, 2016, which provides that administrative approval for cosmetics of non-special purpose15 imported for the first time through Pudong New District of Shanghai will be temporarily suspended. Instead, these cosmetics will be subject to notification procedures, which will be handled by the local Shanghai government. The industry will have to wait for further details of this notification, but it suggests some flexibility to import these typesof cosmetics via Pudong. If so, such flexibility could be expanded to other cities in the future.

Medical Devices

Medical devices and related products are now also required to be registered or notified according to existing regulations before import via CBEC, which again, puts the regulatory requirements on par with the requirements already existing in traditional modes of import. A list of medical devices that are already registered (or notified) is available on CFDA's website.

The following table summarizes government clearance requirements for categories outlined above. Currently, there is leeway for baby formula, health food and FSMP imported via CBEC due to later enforcement dates.

Product Requirement Enforcement (traditional modes of import) Enforcement (CBEC)
Baby formula milk  Formula registration To be determined January 1, 2018
powder Overseas producer  registration Already in place To be clarified
Health Food Registration/notification July 1, 2016 July 1, 2016
FSMP Formula registration July 1, 2016 January 1, 2018
Cosmetics
Registration of cosmetics for special purposes;
Notification of cosmetics for non-special purposes
Already in place Publication date ofapplicable Positive List
Medical Devices Registration/notification Already in place Publication date of the applicablePositive List

Moving Forward

Since the Positive List was announced within a very short period of time, many issues await further instructions from the central Government. For example, according to discussions in the industry, AQSIQ has instructed local CIQs internally that products that arrived in bonded warehouses prior to April 8 of 2016, or were shipped prior to April 8 of 2016 but have not yet arrived in the warehouses, may follow previous CIQ practice for CBEC until the products are exhausted. Moreover, according to Shanghai Securities News16, after soliciting opinions from major industry representatives on the effect of the new policy, several ministries, including the Ministry of Commerce, GAC and the MOF, are considering a one-year postponement of the reform policy. In the meantime, the authorities emphasized that the overall trend is to regulate CBEC products based upon the requirements of traditional modes of import.

While the Implementing Measures of the Food Safety Law are expected to be promulgated later this year, more guidance will be provided to the industry once the infant formula Registration Measures and AQSIQ's regulations for managing bonded warehouse CBEC food are finalized and published. By then, answers are expected to be made available for some commonly asked questions, such as whether a Chinese label must be printed on the package of CBEC baby formula prior to its entry into China and whether CBEC foods must conform to applicable national food safety standards.

At the local level, several pilot cities are drafting their own rules for the inspection and quarantine of products on the Positive List. For instance, Ningbo is considering following the same import inspection requirements for products imported via traditional modes of import and bonded warehouse model CBEC. Developments in these pilot cities should be closely monitored, as they reflect the spirit of the central Government in managing CBEC. Any policies developed from these cities could be adopted by other ports.