New law brings structure, discipline to the willful world of Chinese e-commerce

Image credit: Santander

Ding Lu is a “hand-chopper,” internet slang meaning an online shopping addict. The boutique store operator from northeastern Heilongjiang Province made her first online purchase in 2004—when she was still a vocational school student.

Since then she has graduated, started her own career and become a mom. Ding also runs her own shop on Alibaba’s e-commerce platform Taobao, where she sells fashion items and garments. It’s a channel that also helps boost sales of her bricks-and-mortar store. “As an online buyer and seller at the same time, e-commerce is in every aspect of my life,” she says.

Ding, now 30, is typical for those born in the 1980s: she’s a first-hand witness to China’s e-commerce boom. That sector has grown from a budding concept to a trillion-dollar industry in less than a decade.

Much like its first group of users, who have gone from teenagers to grown-ups during the period, China’s e-commerce industry is also facing growing pains. From January 2019, it will also be subject to a new set of rules with which it must navigate its path to adulthood.

China’s became the world’s largest online retail market in 2013, when total sales reached $314 billion, surpassing the US, which tallied $255 billion in the same year. China’s e-commerce retail sales jumped to RMB 7.18 trillion (around $1.15 trillion) in 2017 from RMB 5.43 trillion in 2016, a 32% year on year surge. This marked the first time it broke the $1 trillion mark, according to China’s Ministry of Commerce.

Alibaba’s Singles’ Day shopping extravaganza hit a record-breaking gross merchandise volume of RMB 213.5 billion this year with the figure surpassing last year’s RMB 168.2 billion in less than 16 hours. The event also is a good indicator of the staggering growth of China’s online sales.

Despite the exponential growth, the industry’s development has long been plagued by shady business practices from selling counterfeits to “brushing” of orders, the unruly business practice aimed at crippling competitors by creating fake orders.

Responding to the sector’s flourishing-yet-troubled development, China’s legislative body passed the Electronic Commerce Law on August 31 this year, stepping up to regulate the country’s e-commerce operators for the first time. The law will take effect on January 1, 2019.

The emergence of newer forms of e-commerce—which bring buyers and sellers together—is a major factor contributing to the government’s current shift in attitude toward tougher regulation of e-commerce, according to Ron Wardle, CEO of Export Now (Shanghai) Inc. and industry expert.

Wardle, who is from the US, said that, in the past, sellers and buyers essentially were limited to a Tmall or JD platform, and it was up to the platforms to help regulate and ensure safe transactions between the buyer and seller. “Nowadays, with so many channels and platforms that one can sell or buy on, the government wants to ensure or provide seller and buyer protection,” he added. “This provides a good commercial environment and is healthier for the economy.”

Small players in the spotlight

Most people would envision e-commerce platforms like Taobao or JD when talking about e-commerce regulation. But in China, e-commerce is far more ubiquitous. A major provision under the new law broadens the definition of e-commerce operators, to not only include e-commerce platforms like Taobao and third-party retailers that sell goods on e-commerce platforms (for example, Taobao vendors) but also players who do business through various online channels, such as WeChat and short video app Douyin.

The inclusion of non-traditional e-commerce channels effectively brings the small-sized yet flourishing e-commerce players under regulation. Over the past three years, the number of users who run what they call “micro-shops” as a part-time job, increased manifold. The market size of micro-stores hit RMB 522.6 billion in 2017, up around 45% year on year, according to research institute Zhiyan.

They sell a range of goods from regional food specialties to cosmetics. Since most of the micro-businesses have neither physical store nor business license, it puts users at a disadvantage when they have problems with the product they purchased.

“I tried to complain to a micro-store operator about dubious diapers and asked for a reimbursement last year,” said Deng Shuang, a 32-year-old mother of one. “After a short talk, they removed me from their WeChat contact list. There’s little one can do in cases like this.”

Now, the regulations will require most online vendors to get approval from the regulatory authorities before selling.

One form of micro-business will be dealt a tough blow is daigou (代购), or personal shoppers, who mainly use WeChat and other social media as their means of marketing. Daigou range from groups with large sophisticated operations to individual Chinese who travel or live overseas. They earn extra money by selling quality overseas products to their compatriots.

Customers choose daigou because their products tend to be less expensive and more likely to be authentic when it comes to overseas branded merchandise. However, complicated industrial and commercial registration procedures prescribed by the law could wipe out easy-come, easy-go students and travelers who want to make extra money from the industry, while import taxes would reduce margins.

“I think about 70% to 80% of the shopping agents will stop running their daigou businesses,” one daigou surnamed Ren told local media. “But I think it’s the trend. Daigou has finished its historical mission as a ‘grey industry’,” he said, referring to parallel importing.

Wardle believes the new regulations will push the daigou agents to use “official” cross-border channels that are subject to regulation and involve registration and taxation. For those who still prefer existing channels on WeChat or Weibo, they too must follow the new regulations in order to participate in the new e-commerce economy, he added.

China is clearly getting serious about regulating the daigou business. In July, a Taobao shop operator who runs daigou business was sentenced to 10 years in prison and fined RMB 5.5 million for smuggling and tax evasion.

Platforms under scrutiny

Compared with small retailers who must suffer a painful transition under the new legislation, the more established e-commerce platforms are in a better position to cope with the risks in operating their businesses.

The impact of the new e-commerce law on large players like Alibaba and JD.com is small because many of the requirements set down by the law have already been put in place by these major platforms, according to a report by local media that cited Paul Haswell, a partner at international law firm Pinsent Masons.

Lawmaker Yin Zhongqing told Xinhua that the law puts more emphasis on the obligations and responsibilities on the e-commerce platform operators. Previously, only individual merchants were responsible when caught selling counterfeits. But the new law requires the e-commerce sites to share a jointly liability for selling fake goods on their site. Platform operators that fail to do so could face penalties of up to $30 million.

Alibaba said it has been closely following the progress of the formation of the e-commerce law in China. “We hope the introducing of the new law will bring positive development to the industry,” the company said in a statement without elaborating. JD.com declined to comment on the regulation.

With the goal of bringing more structure and credibility to online e-commerce transactions, the new law put forward a series of customer-rights protection measures to improve the online shopping experience. For example, the new legislation will protect consumers against untrustworthy reviews. Order “brushing,” and getting positive reviews written by customers in exchange for monetary rewards will be illegal. Deleting review, especially negative ones, could result in a fine of up to RMB 500,000.

It also states that an e-commerce business shall deliver commodities or services to a consumer according to its commitment or in the manner and period stipulated with the consumer. This means platforms would be held accountable for the timely delivery of their products, including during peak periods such as around Singles’ Day.

Wardle says both sellers and buyers should live by the same motto: “Doing the right thing, is always the right thing,” he said.