Background

Cosmetics is big business in mainland China and growing. Data from China’s National Bureau of Statistics suggests total retail sales of cosmetics in China in 2018 exceeded RMB 260 billion and a year-on-year growth of almost 10%.

The size and growth of the Chinese cosmetics market has not gone unnoticed by the authorities. The PRC authorities are now overhauling the system to better regulate the cosmetics industry.

The Regulations on Hygiene Supervision of Cosmetics (<化妆品卫生监督条例>) (“Current Regulation”)are the most important and also primary regulation that currently governs the production of cosmetics and the operation of cosmetics companies in China. As the Current Regulation was passed a long time ago (actually when there was still a Soviet Union) and a lot has happened in China ever since, it is more and more obvious that the Current Regulation is too outdated to deal with new issues that continue to emerge in the cosmetics industry.

The Chinese authorities have taken measures to improve the regulatory framework under the Current Regulation to meet changing needs of the market and also of an industry that has evolved towards increasing complexity but the time is nigh that the Current Regulation is now ripe to bow out after almost thirty years since first being published

The much awaited second draft of Regulations on Supervision and Administration of Cosmetics (<化妆品监督管理条例 (草案)>) (“Second Draft”) was circulated for comment amongst cosmetics industry associations and stakeholders back in August 2018. A final draft is anticipated to be issued in the near future and when this happens it will replace the Current Regulation.

Main Changes

With a total of 72 articles the Second Draft is far more comprehensive than the Current Regulation which consists of only 35 articles. Accordingly, the Second Draft provides a more detailed and practical regulatory framework that better fits the market realities of China in 2019.Reports suggest the main drivers for the authorities were to simplify the administration but also encourage technological innovation. The Second Draft has adopted a classification management system for the administration of cosmetic new ingredients and also for cosmetic products which is based on different perceived risk levels. This aims to balance consumer safety on the one hand but on the other to ensure that regulation is not an overly burdensome constraint and thereby still allow for innovation.

Reducing Red Tape

Easier to Use New Cosmetics Ingredients in China

Currently, prior approval must be obtained from China Food and Drug Administration (“CFDA”) for the use of any new ingredient, either natural or synthetic, if this ingredient has not already been used in the manufacture of cosmetics in China.

The Second Draft provides that new ingredients (except for ingredients used for antiseptic, sunscreen, colorant, hair dye, skin whitener and other higher risk ingredients) will be admitted on a CFDA filing basis rather than requiring approval.

High-risk new ingredients will still be subject to pre-use registration with CFDA. After registration or filing, the applicant shall report regularly for three years to CFDA as to the use and any safety issues related to the new ingredients. If a new ingredient results in safety concerns during such three-year period then the CFDA will revoke its filing or registration. If the three year passes without incident then the new ingredient will be included in the catalogue accepted for use in cosmetics production in China.

Easier to Import Non-special Use Cosmetics

Cosmetics companies have long been frustrated by restrictions on the import of non-special use cosmetics into China.

The Chinese authorities have simplified the import of non-special use cosmetics by starting a pilot program in Shanghai Pudong New Area in 2017 to allow for a filing only process. This Pudong pilot scheme was extended on a nationwide basis in 2018.

The Second Draft further clarifies that non-special use cosmetics, either manufactured domestically or imported, only require filing with the competent CFDA.

This new policy will greatly simplify the process by which foreign cosmetics can be imported into the Chinese market. This will lead to the purchasing cycle for imported cosmetics being shortened and this will also lead to lower logistics and warehousing costs for foreign cosmetic companies.

Special Use Cosmetics are becoming More Special

Special use cosmetics will still be subject to registration before being allowed to be manufactured or imported into China. However, the scope of what constitutes special use cosmetics in the Second Draft has been narrowed from ten categories under the Current Regulation to five categories going forward. The special use cosmetics categories include: 1) hair dye products; 2) hair perm products; 3) spots removal and skin whitening products; 4) sunscreen products; and 5) other products which claim a new function.

Products for hair nourishment, hair removal, breast shaping, fitness, and deodorizing have been removed from the list and are now considered to be ordinary cosmetics and therefore only need a filing.

Safety First

Responsible Persons for Quality Control and Safety Assessment

The Current Regulation sets out only the most general of requirements for cosmetics manufacturers in that they are required to conduct hygiene quality examination of products before market launch. The Second Draft requires cosmetics manufacturer to appoint a responsible person in charge of safety and quality. The responsible person must have specialist knowledge for medicine, pharmacy, chemistry, toxicology, chemicals and biology and have at least five years working experience in cosmetics manufacturing or quality management.

The Second Draft provides that applicants for cosmetics registration or filing must carry out a safety assessment of the products before the application.

Supplementary Testing

The Chinese government has taken a tough stance against the illegal use of forbidden substances in cosmetics. The Second Draft provides the CFDA may carry out supplementary tests if current tests are considered insufficient to guard against adulteration or illegal use of restricted or forbidden ingredients in cosmetic products.

Proactive and Diversified Supervision Approach

All Round Approach

The Second Draft provides a number of new methods by which the CFDA can administer and supervise cosmetic products and cosmetic manufacturers. The guidelines cover the whole manufacturing process, market entry and post-sale administration for the cosmetics.

Take Action against Overseas Manufacturers

The Current Regulation has attracted criticism for not providing legal grounds for the CFDA to take a more proactive approach to regulation and supervision on imported cosmetics and overseas cosmetics manufacturers.

The Second Draft vests in CFDA the power to carry out overseas on-site inspection in respect of manufacturers of imported cosmetics in order to ensure the manufacturers have met Good Manufacturing Practice (GMP) requirements and to ensure the registration or filing documentation submitted by importers are true and valid.

In addition to the traditional measures of administrative penalties in the case of production quality problems the Second Draft also enables CFDA to have more weapons in their arsenal to police problematic cosmetics manufacturers.

These new powers of the CFDA include the ability to issue safety warnings to the public, ordering mandatory product recalls, reviewing and copying relevant documentation (contracts, bills and ledgers etc.), sealing up and seizing potentially harmful cosmetics and ingredients, and closing down production or distribution sites involved in illegal activities. The Second Draft also sets forth a credit system established by CFDA for cosmetics manufacturers and distributors. Manufacturers and distributors with bad records will invite stricter supervision and be subject to increased numbers of unannounced spot checks.

Be Aware of Your Efficacy Claims

The Current Regulation sets strict principles regarding the labelling of cosmetic products. In particular, the packaging, labelling and instructions for cosmetic products are prohibited from carrying medical terms or indicating any curative effect.

The prohibition against the use of medical terms does continue in the Second Draft but it is unclear in the draft as the prohibition applies only to the “label” of the cosmetic products but there is no definition of “label”. Based on the context of the Second Draft and considering the legislative intent we are inclined to interpret “label” in a broad sense. Therefore, we assume this prohibition will also cover packaging and instructions for cosmetics products.

The Current Regulation also provides a series of principles that must be followed when advertising cosmetics products. These include, amongst others, a prohibition on the use of any false or exaggerating or misleading descriptions as to the efficacy of such products. The Second Draft further expands upon such scope of the prohibition in respect of labelling of cosmetic products and also advertisements.

In addition, claims of any function or efficacy of cosmetic products must be supported by sufficient scientific evidence, such as research data, assessment reports or relevant literature. Cosmetic manufacturers are responsible for such claims and must disclose a summary of the scientific evidence on designated websites.

Adverse Reaction Monitoring and Control

The Second Draft establishes an adverse reaction monitoring system for cosmetics. This system requires cosmetics manufacturers and distributors to report to the monitoring authority any reported adverse reaction to their products. After the gathering, analysis and assessment of all the materials regarding the adverse reaction, the monitoring authority will provide suggestions for steps to be taken.

In the case of a serious or large-scale adverse reaction then the CFDA can take emergency measures to prevent an outbreak including suspending manufacturing and sales. Customs is also empowered to block import of such cosmetics.

With Greater Power Comes Greater Responsibility

Third Party Obligations

China’s massive e-commerce market continues to grow at a staggering rate.

In this regard the Second Draft when read together with the new PRC E-Commerce Law increases the responsibility upon cosmetics e-commerce operators and subjects them to stricter oversight and greater obligations.

Specifically, cosmetics e-commerce platform operators must ensure real-name registration and check necessary qualifications of cosmetics retailers that operate on their platforms. They must also promptly put a stop to any activities in violation of the Second Draft and report to the competent authority.

Offline retailers are also subject to increased responsibility. Operators of centralized cosmetics stores, store counters for cosmetics and organizers of cosmetics trade fairs are also required by the Second Draft to meet a range of management obligations, including pre-entry examination as to the qualifications of the participating cosmetics operators, post-entry inspection of participating cosmetics operators on a regular basis and promptly stopping and reporting to the competent authority any activities that violate the Second Draft.

E-commerce platforms and offline operators that fail to perform abovementioned duties may be subject to fines of up to RMB 100,000.

In addition, hotels and beauty salons that provide or use cosmetics when providing their services shall bear the same responsibilities as operators of cosmetics.

Increased Penalties

One of the major complaints after the circulation of the Second Draft was that harsh punishments were overkill. These complaints are becoming louder and many claim the increased penalties will turn cosmetics manufacturing into a high-risk industry.

Compared to the Current Regulation the penalties provided for in the Second Draft are far greater.

By way of example, under the Current Regulation, a manufacturer that produces cosmetics that do not meet applicable mandatory standards will be subject to the punishment of confiscation of the relevant products and illegal earnings and may be imposed a fine in the amount of 3 to 5 times of its illegal earnings. Under the Second Draft in addition to confiscation of the relevant products and illegal earnings, the manufacturer of the non-conforming cosmetics could also face confiscation of raw materials, packing materials, tools and equipment used for the manufacture and a fine of between 2 to 10 times of the value of the relevant commodity (depending on the exact value); be ordered to stop production and have its cosmetics licenses revoked. In addition, the individuals in charge and directly responsible may face personal liability which may include fines ranging from RMB 10,000 to 50,000 and five-year bans from working in cosmetics.

On balance it seems trite to brand the penalties under the Second Draft as being too harsh. Upon careful reading of the relevant provisions it appears clear that the Second Draft not only increases penalties but also provides much clearer guidance as to the application of different penalties depending on the severity of the actions and other relevant factors. In this way although the Second Draft increases potential liability it does protect cosmetics operators by providing greater certainty as to what is considered a violation and also guidance as to how punishments will be meted out.

Summary

A reading of the Second Draft gives the reader a clear impression that the regulation tends to evolve in the direction of complexity. This is very much the case with a regulation that is more than thirty years old.

The PRC regulations in respect of cosmetics are no longer fit for purpose today and do not confront the complex market situation in China — a world of booming Chinese middle class consumers; increasing demand for imported products; online purchases and no doubt a wish to foster a domestic Chinese manufacturing industry.

For overseas cosmetics manufacturers the Second Draft provides more market access; less red tape and more certainty. On the negative side the Second Draft will increase obligations and expands the types of measures the Chinese authorities can take. However, none of the measures are highly surprising and the triggers for taking action are also reasonable. Few international manufacturers are likely to be anxious about such measures. It would be wise for overseas manufacturers to monitor the progress of the new Chinese regulations on cosmetics as they will not bring just increased levels of responsibilities but very welcome market access and clarity.