Background

China’s Consumer Rights and Benefits Protection Law (“Consumer Law”)1, promulgated in 1993, established guidelines for merchants in order to limit abuses in China’s rapidly developing market economy. The Consumer Law has officially entered a second round of amendments. China’s State Administration for Industry and Commerce (“SAIC”) is currently reviewing and discussing the draft Consumer Law for final submission to the State Council of the National People’s Congress. Key amendments to the Consumer Law are summarized below:

Consumer Cooling-Off Period

Under the amendments, consumers purchasing goods through telephone, door-to-door sales, and other non-fixed place-of-sale methods are entitled to a 30-day “cooling-off period,” wherein they will be allowed to return the goods subject only to limited restocking fees.  

Consumer Privacy

The draft amendments create an explicit right to protection of personal consumer information. Marking the importance of this addition, the amendment is interposed with an existing provision enumerating rights to personal dignity, national customs, and traditions. Protected information includes consumer names, sex, age, occupation, contact information, health status, family status, property status, and consumption records. Under this proposed amendment, sale of consumer data is prohibited, seriously limiting existing consumer datamining operations. Further, the draft amendments impose penalties (including damages for actual loss and emotional distress) upon entities violating these new provisions.

Defective Goods

Amendments to Article 18 impose strict requirements upon merchants who are discovered to be producing substandard or dangerous products. Merchants will be required to not only halt production and pull these products from distribution channels but to also make public announcements warning consumers of a defect. Losses under normal use conditions that are attributed to defects are to be compensated by merchants. Further, merchants are required to publish “true, accurate, and complete” information about their products to avoid misleading advertising. Victims of false advertising are entitled to civil compensation from the merchant.  

Warranties

The draft amendments enhance warranty protection for consumers. Under the amendments, merchants are required to provide substitutes during repair periods, free replacements or refunds if they fail to repair within established warranty periods, and must shoulder the burden of transporting “big-ticket” items in need of repairs.  

Advance Payments

Advance payments, installment payments, and other transactions involving merchants’ management of consumer funds will require the establishment of earmarked, trusteeship accounts at commercial banks.  

Dispute Resolution

As a first step to resolving merchant-consumer disputes, the amendments promote the use of court-enforceable mediation and arbitration as the primary methods of dispute resolution. Further, settlements and judgments will carry through reorganization of corporate entities. Such reorganizations cannot be used to prejudice the legitimate interests of consumers. Consumer judgment and settlement creditors are to hold super priority in bankruptcy. Joint and several liability rules will apply to all responsible parties in the supply chain.  

Fraud & Coercive Practices

Merchants engaging in fraudulent or coercive practices when providing their products to consumers may be liable for multiples of actual damages. These undefined multiples will apply where merchants transact in adulterated, spoiled, or deteriorated goods; willfully mislead consumers; manipulate pricing; use deception to reduce standards; unreasonably split the sale of goods and services; or commit other forms of fraud. In addition, the government may order merchants to correct existing problems and may impose substantial fines up to 500,000 RMB.  

In extreme cases criminal liability may be imposed upon merchant executives and other responsible parties.  

Impact & Analysis

Following the recent tainted milk scandal and other major national incidents, it is clear that the Chinese government seeks to modernize and enhance enforcement of consumer protection standards. These latest amendments to the Consumer Law represent considerable developments in the field and, if approved by the State Council, will lead to increased local and national enforcement efforts.

However, pending the promulgation of enabling legislation, it remains to be seen whether the inspection and investigation strategies of existing regulatory bodies under the SAIC and its local counterparts will change. Essential to the development of consumer protection standards are an effective consumer reporting system and active consumer interest groups.

Currently, consumer reporting channels are available but of questionable effectiveness as a lack of consumer education limits popular use of these services. Thus, the government is often unaware of problems until they reach national proportions.  

Similarly, while the draft amendments provide that consumer protection groups “have the right to social supervision of goods and services2,” the impact of this new right may be de minimis, as civil society is still quite limited in China.  

Nevertheless, foreign businesses operating in the Chinese consumer goods sector should consider these amendments as part of the Chinese government’s recent initiative to clean up the domestic market and improve public sentiment. Following implementation, the amendments may yield increased consumer protection claims and government inspection of manufacture and retail facilities.