CHINA LOOKS TO FIX US$60 LOOP­HOLE

Bei­jing to har­monise rules to en­sure fair com­pe­ti­tion for local re­tail­ers

New Straits Times - - Business -

SHANG­HAI the reg­u­la­tory is­sues that have stymied ac­cess to con­sumer prod­ucts from cos­met­ics to Co­gnac. Faced with pres­sure from con­ven­tional re­tail­ers at home, and the loss of tax rev­enue, the gov­ern­ment is now look­ing at over­haul­ing the le­gal loop­hole.

“If you do not har­monise the rules for com­mer­cial im­ports and cross-bor­der e-com­merce, there is an ad­van­tage you give to com­pa­nies over­seas,” said Chan WaiChan, a re­tail part­ner at con­sul­tancy Oliver Wy­man in Hong Kong.

Com­pa­nies that have in­vested in a bricks-and-mor­tar pres­ence in China feel as though they’re be­ing usurped by busi­nesses that haven’t gone through the same ex­pense of set­ting up shop, he said.

Wal-Mart Stores Inc, Costco Whole­sale Corp, Aldi Stores Ltd and Body Shop In­ter­na­tional Plc are among com­pa­nies shar­ing in the US$60 bil­lion of sales that make up the al­ter­na­tive chan­nel, and their mer­chan­dise can be de­liv­ered from bonded ware­houses in des­ig­nated zones to con­sumers in as quickly as a day.

Cross-bor­der e-com­merce may triple to 15 per cent of the to­tal ecom­merce mar­ket within five years if it’s not curbed by new reg­u­la­tions, said Xia Chenan, an In­ter­net and dig­i­tal prac­tice an­a­lyst with McKinsey & Co in Shang­hai.

The cross-bor­der chan­nel is pro­jected to grow 43 per cent next year, with goods val­ued at 758 bil­lion yuan, ac­cord­ing to McKinsey and iRe­search. The en­tire e-com­merce mar­ket is pro­jected to be 6.5 tril­lion yuan next year.

The busi­ness is so pop­u­lar that new Chi­nese words have emerged to de­scribe it: “haitao,” which means to buy im­ported items from on­line sites, and “daigou,” which means to have a buyer phys­i­cally in a for­eign coun­try pur­chase items on your be­half.

While the vast gray mar­ket was for­malised in early 2015 by Chi­nese lead­ers as a way to stim­u­late do­mes­tic con­sump­tion, there’s now a con­sumer groundswell — as well as on­line re­tail be­he­moths like Alibaba Group Hold­ing Ltd and JD.com Inc — be­hind it. And that may cre­ate difficulty for the gov­ern­ment as it seeks to “clar­ify” the rules by next Jan­uary.

“They opened a gap and ev­ery­one started plow­ing through it,” Oliver Wy­man’s Chan said. “They’ve taken the ge­nie out of the bot­tle, and now they can’t put it back in.’’

One rea­son for the pop­u­lar­ity is that it’s en­abled con­sumers to buy for­eign-man­u­fac­tured in­fant milk for­mula, health sup­ple­ments and other prod­ucts from cat­e­gories whose safety and in­tegrity have been chal­lenged by a se­ries of food scan­dals the past decade.

It’s also given Chi­nese con­sumers greater choice, in­clud­ing the abil­ity to buy ex­otic pro­duce, such as chia seeds and acai berries.

Goods sold through the route are also not sub­ject to the myr­iad taxes that are levied on that same item sold through tra­di­tional chan­nels within China, ef­fec­tively al­low­ing brands to ar­bi­trage against them­selves.

The gov­ern­ment pro­posed three changes in April last year: a mar­ginal tax in­crease, lim­its on the vol­ume of pur­chases to en­sure trans­ac­tions are for per­sonal use only, and a list of per­mis­si­ble, or “pos­i­tive,” for­eign prod­ucts that could be bought on­line.

“It was grow­ing so fast, pen­e­trat­ing so many dif­fer­ent sec­tors and dis­rupt­ing much of busi­ness in China,” said Matthew Crabbe, Min­tel In­ter­na­tional Group Ltd’s di­rec­tor of Asia-Pa­cific re­search.

“They don’t want it to be a source of un­fair com­pe­ti­tion for local re­tail­ers.” Bloomberg

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