What's Next For China CBEC?

Use the Past to Predict the Future....

China crossborder ecommerce is a phenomenal success story. Its precocious development and steep upward trajectory is unprecedented. It continues to exceed the expectations of the public, government and international stakeholders. It has been a maker for some but for many of the less cautious investors, also a breaker. At the very beginning of CBEC, investors were gifted swift initial returns. The feeding frenzy that ensued as CBEC gathered momentum attracted massive interest as both domestic and international interests scrambled to grab a piece of the pie. The floodgates were open and China was ripe for the picking...hurrahhhh.....ehhh....seriously....did you miss out on the last several decades of Chinese trade policy?

Looking the gift horse in the mouth...

Sure CBEC looked great, but i think too many companies fail to appreciate the context and market environment which gave birth to CBEC. CBEC success was largely due to its ability to simultaneously harness Chinese consumers demand for imported goods with China's existing digitalized supply chains. It offered consumers access to a staggering array of imported goods previously only available through grey and black market channels all at the tip of their fingers. Open a mobile app, search an item, click a button, pay, track and return if necessary.

China already had the most valuable and well developed ecommerce infrastructure in the world thanks to the work of Jack Ma and co. In addition it had massive demand for high quality imports due to the inability of its domestic enterprise to produce safe and high quality products and with these two forces in play its success was pretty much inevitable.

So we can see the reason for the success of CBEC is quite obvious....A much more important issues relates to the question of why CBEC was allowed to grow despite China's traditional protectionist foreign trade policies and the billions spent on domestic capacity building, legislation and administrative reforms.....The answer to this question is also quite simple but the implications this has for foreign enterprise considering this route to market are far more complex.

CBEC was allowed to grow quickly because China was between a rock and a hard place when it came to controlling imports and maintaining trade balance for certain sectors of the economy within favorable limits....On one front it was facing an unstemmable tide of products being imported through grey and black market channels, with the equally undesirable side effect of swathes of Chinese currency and capital leaking out.

On the other front China's accession to WTO and the huge benefits it had reaped in the past were now also a source of major problems as international manufacturers with far higher quality products were making serious gains in China's markets and cashing in on the demand for imports. Regulation was a useful tool to help curb some of the influx but regulation alone wasn't enough to effectively manipulate market forces. Beijing was also keenly aware of the dangers of regulation increasing the negative impact of daigou on China's economy but was left without moves.

The rock and the hard place: Daigou and regulation

Increased regulation funneled energy into daigou and deregulation played into the hands of international enterprise, a terribly inconvenient inverse relationship for Chinese authorities .....Barring the construction of a Trump style Greater Great Wall, Daigou was a problem that could only be solved by making it a less appealing option to Chinese consumers. What were China's options ?...I'm pretty sure Beijing policymakers came up with the solution while sitting around a table looking at dismal forecasts and a worsening trade balance getting grilled for answers by top brass. The pressure obviously got to one and in a paroxysm of madness he let slip blasphemy....

" What if we completely forget all the laws we made, forget the fact we are spending billions on increased market supervision and regulation, forget the fact that we don't want to protect our markets and just allow foreign enterprise to enter our markets?"

The table erupts in laughter... then a pause....Wait... it’s absolutely brilliant......... open the markets, undercut Daigou and other retailers, develop the CBEC retail channels until the IT systems and supply chain are accepted by consumers, wait for a critical mass to be reached and...boom...new taxation policy, new regulations and back to business as usual....3 birds with 1 stone...Ok so it probably went down nothing like that... but the basic facts are plain for all to see...China basically forgot its food law, cosmetic law, consumers product regulations etc and gave a greenlight for international interests to access Chinese markets. If you were analyzing Chinese regulations like I was in late 2013 and early 2014 when CBEC was just developing the whole system looked like absolute madness. Everyday i was reading about new regulations, meetings in Beijing to stamp out food safety issues, product adulteration, millions of dollars of products being destroyed at port due to fairly innocuous labeling problems or products with ingredients beyond regulated scope etc. and in the background a steady trade of goods being allowed into the country without Chinese labels, ingredients beyond scope etc....

Flip Flopping on CBEC Policy

In 2016 China introduced a positive list (a list of all the goods permitted to be traded via CBEC - all goods not included are banned), a new tariff policy (all goods subject to a combination of import tariff, consumption tax and VAT * 70%) and announced a deadline for implementation of new CBEC requirements that would require products traded through CBEC to have a CCEC, which essentially amounted to imposing regulatory compliance requirements identical to general trade...The deadline for CCEC requirements was set at Jan 1st, 2018. Hurrah..... food law back, cosmetics law back, consumer product compliance requirements back.....

Fast forward to May 17th 2017 and Beijing releases another bombshell...."actually guys...we thought about it and we decided.....free for all is back on....hurrah.....grab your supplements, grab your cosmetics, grab your infant formula and grab your expensive wines cause there ain't no party like a CBEC partyyyyy. Overnight share prices of Australian companies rocked by their mistakes in the CBEC world immediately rebounded with some stock going up 8%.

All is forgotten,..rejoice....Really ???? There's an old saying, fool me once....can't get fooled again. Surely everybody has learned their lessons about the volatility of these markets and the mercurial tastes of Chinese policymakers? ...Why are Chinese policymakers making such a crazy policy u-turn? Could it be that the influences of daigou and dominance of international interests in massively important areas of China's food sector are still destabilizing factors that need further manipulation?

Or is it more to do with bilateral trade agreements between China and its close partners Australia and New Zealand that will allow Chinese enterprise to continue a policy of unchecked overseas expansionism while allowing Australian and New Zealand companies to trade using CBEC? With the breaks off the CBEC engine a nagging question should remain in the back of the minds of international trade policymakers dealing with China ...When whatever grand design and plan Beijing is currently implementing is realized and when Chinese enterprise own enough farms, control enough manufacturing and have enough of a stake in production of imports or the profits associated with imports like health foods, infant formula, FSMPs, wine and honey ....what will happen to CBEC regulation?

"Flip-flop proof" market entry: Follow Regulatory Compliance Requirements

My parting advice for stakeholders is quite simple and amounts to this, "follow regulatory compliance requirements" or start new product development with Chinese national standards as a reference. Hire an experienced food compliance technical team to help out with Chinese regulatory requirements and "flip- flop-proof" your market entry strategy. In terms of the implementation of regulatory requirements for CBEC it's not a matter of if but a simple matter of when.

Disclaimer: the above is the author's personal opinion and is not the opinion or policy of Chemlinked.