China was and still is the world factory, and China has a new feature, world market. From fast consumed goods to luxury products, all can find their high demand in China. In fact, the export to China at the moment cannot satisfy the need of the Chinese consumers at all, which have been vividly reflected by the clearing of the shelves of baby formula and toilet cover by Chinese tourists in the western supermarket.
Cross-border B2C E- commerce hence was born for meeting such high demand. Currently, there are about three different models of B2C E-commerce in terms of exporting to China.
Direct online selling by foreign retailers can be classified as model 1. To operate this model, the foreign retailer first of all has to accept the Chinese credit card. If that is not facilitated, then nothing could happen. Second, the retailer has to be able to find a way to ship the goods directly to China. This is certainly a second barrier. Only if there is a flow of Chinese purchasers would the retailer want to use a third party’s service to ship for such a long distance. Then when the goods arrive at the Chinese border, there will be issues of custom duty, quarantine inspection which will be all beyond the control of the retailers. The retailers would not have much knowledge about that and cannot make any promise that the goods can arrive to the customer in one piece as it was wrapped in the shop. Hence, this model is not that popular and is often limited to clothes, bags and shoes which require less control on the Chinese border. One well known example is Macy retailer, the well-known American department store who sells large amount of goods to Chinese mainland customers through online-retailing.
Taobao agent purchasing is the second model. Any adult Chinese can open a shop on taobao.com, one of the most popular B to C or C to C online trading platform in China. The owner of a Taobao shop usually has a connection in an oversea country who can supply what is required in the Chinese market, from baby formula, to clothes, bags, skin products, food supplements, tools…etc. The goods are usually ordered in very small quantity, and shipped in small quantity too. The shipping is not usually claimed as commercial use, rather as personal use, thus the duty is either avoided or largely reduced. In fact, some of the goods are brought in by large number of Chinese who are travelling between countries. So, the quarantine inspection is avoided too. Although this model is named as Taobao model, however, Taobao is not the only online platform where oversea agent purchasing can open shops, other representative online platforms are ymatou.com, jd.com, etc.
Taobao agent purchasing is the most popular one, because it is cheap, is more trustworthy as the shops are owned and run by Chinese with real name behind, although in many ways, it may violate the laws. According to Custom law, the import of commercial goods shall be subject to Custom duty; according to the law on Quarantine Inspection, the import of the most of goods with animal or plant traces shall be subject to compulsory inspection; according to Laws and related legislations for foreign trade, only a company registered with right of import and export can import from oversea market. Many of the Taobao agents purchasing shop owners would not have satisfied the qualifications required by the above three areas of laws. Although large number of Taobao shop owners are still out of radar of Chinese customs, a few of them were reported of having been sentenced to imprisonment due to the evasion of large sum of custom duty. According to the media and analysis, it looks the government will enhance their supervision on the import of goods by Taobao shop owners.
The third model is the government approved online trading platform started about a year ago. Shanghai Kuajingtong set up in Shanghai Free Trade Zone, meaning cross-border channel, was the first such platform coming into play. There are other five cities, namely, Ningbo, Hangzhou, Zhengzhou, Guangzhou, and Chongqing, have been approved to conduct B2C import E-commerce, and government approved E-commerce platform have all been set up in the bonded zones of these cities to facilitate the online import and export. All the above six online trading platform share the following common features: 1,is government approved online trading platform; 2, facilitates B2C import E-commerce; 3, Goods purchased through these platforms are 100% foreign sourced; 4, Goods purchased through these platforms will be subject to quarantine inspection if the law requires so; 5, Goods purchased from these platforms will be subject to custom duty if the law requires so.
There are two types of E-commerce in the third model. One is called bonded zone type and the other direct sales type.
Under bonded zone type, companies trading through the E-commerce platform have to be registered in these bonded zones first. Then these companies will import bulk goods from foreign country and store them in the bonded zone. Once the goods arrive into the bonded warehouse, it will be asked to go through quarantine inspection, if that is the requirement of the law. Consumers can then order the goods through the online platform. If the amount ordered reached the level of duty chargeable, the duty will be automatically calculated together with the price of the goods. The goods will be individually wrapped in the bonded zone warehouse and then dispatched to the consumers.
Under the direct sale type, a foreign company who is able to conduct E commerce can become a partner of these E-commerce platform. Through the platform, a foreign company can sell directly to a Chinese customer. Duty will charged together with the price at the time of ordering. The goods ordered will be wrapped in the foreign country, and delivered to the consumers directly. If the quarantine inspection is required, such inspection will take place when the goods arrive at Chinese border.
Some source says currently, the platforms in Chongqing, Gungzhou, Shanghai, Hangzhou can allow both types of E-commerce, while Ningbo and Zhengzhou only allows bonded zone E-commerce. My research into the website of all of these platforms shows that only Shanghai KJT has clearly stated that it welcomes foreign companies to be its partners in conducting direct sale E-commerce, and it has listed detailed requirements on the foreign partner.
The reason for such a difference could be on the nature of Shanghai Free Trade Zone as the opening up pilot zone in China. In Shanghai Free Trade Zone, the implementation of three laws relating to FDI, namely law on Wholly Foreign owned Enterprise, Law on Sino-Equity Joint Venture, and Law on Sino-Foreign Contractual Joint Venture is suspended for three years since 2013. As a result of suspension, a foreign invested company goes through simple registration procedure instead of lengthy approval and registration procedure as that was exercised in other areas in China.
To conduct retailing service in China, a foreign invested company requires approval in all areas except in Shanghai Free Trade Zone. But, by allowing the direct sales through Ecommerce platform, Shanghai Free Trade Zone seems even go one step further. Because in this case, a foreign company even does not need to register a company in order to sell in China.
But looks that the current landscape regarding the cross-border E-commerce might have some change since the issuance of “The Reply regarding the Approval of Setting up in Hangzhou a Pilot Zone for Cross-border E-Commerce” (hereunder the “Reply”) by State Council on 7th of March 2015. In this Reply, the State Council authorises Zhejiang provincial government to formulate a set of rules regarding the payment, supply chain, custom, tax rebate, foreign exchange settlement in the Cross-border E-commerce trade, through the operation of a Cross-border E-commerce Pilot Zone in Hangzhou.
Will the model of Kuajingtong from Shanghai be replicated in other bonded zones, i.e., foreign companies can sell directly to Chinese consumers via these other platforms, under the new rules to be formulated by Zhejiang provincial government? Or, the import model in other regions will remain unchanged until the expiration of three years of trial period of Shanghai Free Trade Zone? The answer is unknown at this stage. One thing for sure is that with a huge foreign exchange reserve, although prudent, China’s pace of relaxing the import restriction is fastening.