Paul:So for many people the concept of crossborder eCommerce is a relatively new concept, can you give a basic overview of the concept and how it works in China ?
Jim: If asked what I feel is the single most efficient route to China’s markets for overseas enterprises my answer must be cross-border eCommerce. With fully integrated inspection, warehousing, sales platform, logistics, tracking and traceability it represents the future of China’s food & cosmetic industries. In addition to this the Chinese government is vigorously promoting the development of cross-border eCommerce and has introduced a number of incentives, established four free trade zones (Shanghai, Guangdong, Fujian, Tianjin) in the mainland and greenlighted seven cross-border pilot cities (Hangzhou, Shanghai, Chongqing, Ningbo, Zhengzhou, Guangzhou, Shenzhen). The rise of crossborder eCommerce aligns with a broader policy expounded by Premier Keqiang on several different occasions calling for a "Internet+", which would simultaneously solve the country's slowing economic growth rate and move towards a consumption based economy and harness the power of China’s massive middle class and their equally impressive demand for imported goods. By 2014 the value of China's cross-border had reached 3.75 trillion Yuan.
Paul: In practice the standard CIQ requirements for imported goods don’t seem to apply to goods imported through crossborder eCommerce channels, is there any explanation for this?
Jim: For those who have earnestly followed the fortunes of China’s food industry over the last several years the practices involved in China’s cross-border eCommerce system are very difficult to understand. Goods imported through regular channels must undergo strict inspection and over the course of the last several years have been subjected to successively more stringent technical barriers to trade. Take infant formula for example, one of China’s most tightly regulated commodities and the subject of concentrated legislative developments. For general import through any of mainland China’s ports, at minimum one needs to undertake customs clearance, commodity inspection sampling, label verification and a series of laboratory testing procedures before they can be released and marketed. First import processes takes a minimum of 15 days but in many cases can last as long as a month (not to mention the high number of goods failing inspection due to non compliant labels etc.). Further detailing this example if we take Australian milk powder exported to China, it is subject to 5% import tax (five percent for infant formula, 10% for ordinary milk) of customs duties and 17% VAT. After the distributors have added their margins and it finally reaches the hands of Chinese consumers the product retails with a hefty price tag….
Contrast this with Cross-border eCommerce….
Using the cross-border eCommerce model infant formula and milk products can be shipped in bulk to the cross-border eCommerce supplier’s bonded warehouse. Goods stored in the bonded warehouse can be shipped directly to the consumer and are not subject to first-import-full-tests, label verification and get this…… do not even require a Chinese label. The only tangible inspection carried out on the goods shipped to the bonded warehouse is a routine X-ray scan to ensure no prohibited items are mixed within the consignment. The integrated supply chain management system used in the crossborder zones means that orders placed on the back end consumer interface offered by these eCommerce platforms are processed and delivered at a staggering pace. If a consumer orders today they will receive their goods tomorrow. Even better than this as long as the total value of an order of food products does not exceed 500 Yuan the consumer will pay no tax on their purchase (100 Yuan for cosmetic products).
Paul:Why has China opened the crossborder eCommerce floodgates?
Jim:The answer to this question is multifaceted, first of all, on one front the Chinese government was faced with an unstoppable tide of foreign goods entering Chinese markets through black market channel, general called:”Hai Tao”, providing an incentive for criminal elements and making taxation and management impossible. By instituting the crossborder eCommerce policy it will effectively end many of the unregulated practices previously undermining the food safety work of the Chinese government. It will also allow government it to properly assess the extent of imported goods entering the Chinese market and allow them to finally harness the demand for imported goods.
Global Trade Policy is Game of Chess:
Paul: From a foreign trade policy perspective why has the government allowed crossborder eCommerce to grow so quickly?
Jim: This year is the last year of China's accession to the WTO and the end of its five-year grace period to fulfill its commitments to reduce tariffs and accelerate integration into the global economy. Since 2006, China has enjoyed a resoundingly positive trade balance and seemingly unstoppable economic growth. Coupled with the downturn in western economies there has been a significant increase in foreign direct investment of roughly 50 billion US dollars on average per year. At the same time, US interest rates continue to be significantly lower than Chinese interest rates further promoting an inflow of foreign investment. Sharp growth in China's foreign exchange reserves has seen its capital account surplus double. Figures as of February 26th, 2015, produced by the National Bureau of Statistics “National Economic and Social Development Statistics” show that at the end of 2014 China had foreign exchange reserves of $ 3.843 trillion, an increase of $ 21.7 billion over the previous year, ranking China as the world’s largest holder of foreign exchange reserves. The average annual average exchange rate of the RMB against the US dollar has been 6.1428 Yuan and has seen an appreciation of 0.8% over the course of the last year.
Faced with an influx of foreign investment, a staggering increase in the value and volume of imported foreign goods and US and European fiscal policies that are looking to solve their respective economic woes using methods such as increasing the money supply and lowering interest rates, the Chinese economy has a serious problem due to its large investment in foreign exchange reserves. Using a rather crude analogy we can compare the Chinese economy to a big swimming pool, Europe and the US continue to print money devaluing their own currencies. At the same time Chinese consumers continue to purchase imported goods through unregulated channels filling China's swimming pool with devalued currency and threatening to depreciate the Chinese Yuan due primarily to a phenomenon economist’s term "imported inflation pressures."
In the past Chinese consumers were spending trillions of RMB every year by purchasing imported goods through these unregulated channels which the Chinese government recognized early as a serious threat to the integrity of the Chinese Yuan. With the integrity of its economy at stake the Chinese government has realized the futility of attempting to completely regulate the influx of foreign goods. To stem the tide of this worrying trend the Chinese government will instead attempt to harness the power of this Chinese consumer demand. With China’s swimming pool filling with dirty "water", the Chinese government has come up with a unique system to filter the water and ultimately safeguard the integrity of its economy and the value of its currency.
Although crossborder eCommerce policies taken at face value may appear overly liberal, the devil is certainly in the detail. First of all foreign companies must register before they can use China's crossborder eCommerce providers. In addition all purchases made must be transferred to offshore company accounts. The simplicity of the system combined with the obvious benefits to international enterprise means that crossborder eCommerce will act as a perfect safety channel to ensure China’s currency is not watered down and overly degraded by the increasing purchase and demand for imported foreign goods.
* If you are interested in learning more about Chinese eCommerce or wish to launch a product using eCommerce here in China, please do not hesitate to connect Jim Wei on LinkedIn.
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