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China’s Direct Selling Industry to Undergo Largescale Administrative Reform

  •   27 Feb 2019
  •    Lennie Tao
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    • China's MOFCOM has been collaborating with SAMR in overhauling the health food market. Filing and administrative approval of direct selling companies was suspended.

    On February 14th, 2019, Gao Feng, a MOFCOM spokesman said, "MOFCOM has suspended the filing and administrative approval of direct selling companies in China[1]. He also indicated MOFCOM will push forward the optimization of the direct sales regulatory system and establish a "black-list" system to promote the development of the industry.

    Current Issues in the Direct Sales Sector

    • The Spark that Ignited the Flame of Reform

    The recent emphasis on regulatory reform in the direct sales sector can be traced back to one high profile case involving false advertising of the therapeutic efficacy of a health food made by a direct sales company called Quanjian, leading to the unnecessary death of a 4-year-old girl suffering from cancer. The incident sparked widespread public condemnation and after the dust settled, the finger of blame was pointed not only at Quanjian for its use of spurious claims and unethical pyramid style marketing and retail practices, but also at regulatory authorities for their inability to effectively regulate the market and prevent these incidents.

    In the wake of the event, on Jan. 8th, 2019, 13 ministry level authorities began a joint action to crack down on illegal practices in the health food market. (Read China Embarks on 100-Day Campaign to Regulate Illegal Practices Involving Health Related Products [2] for more details)

    • Companies Selling Health Food Using Direct Sales were Affected Most

    As regulated by the Allowed Types of Direct Sales and Production Guideline [3], only six types of products are allowed to be sold using direct sales. They are cosmetics, health food, sanitary products, health care equipment, small kitchen implements, and household electronic appliances.

    And health food is the most preferred product amongst these companies. Among all the qualified direct sales companies (91 enterprises [4]), 75 of them are involved in the health food industry and they were severely influenced during this inspection and rectification campaign. The results of the crackdown as of January 30th, 2019 show that 1287 pieces of false advertisement were removed or rectified, 1799 websites were removed or rectified, hundreds of Wechat official accounts were closed, the food business license of 6 companies was revoked, 43 companies lost their business license; 55 cases were transferred to judicial organs, 287 cases were solved and the fines totaling to RMB 57 million yuan were issued and collected according to official data [5].

    Direct Sales in the Crosshairs

    On January 31st, SAMR and MOFCOM summoned all the direct sales companies for talks and pointed out the serious problems existing in the direct sales industry, such as false advertising, counterfeit or substandard products. These companies were ordered to cease all illegal practices, be responsible for product quality and ensure above all the safety and compliance of their merchandise. Enterprises were also warned to strengthen their internal management systems during this meeting [6].

    A legally authorized direct sales company shall also apply for the direct sales license and comply with relevant regulations such as Direct Sales Management Method [7] and Regulations on Prohibition of Illegal Pyramid Selling [8].

    Future of Direct Sales

    In 2018, China approved only one direct sales license. After the case of Quanjian, the management of direct sales companies will be much stricter in future. Although lots of problems exist in this industry, this business model will not be canceled. Relevant filing and administrative is expected to be reinstated after the current suspension is lifted pending ongoing industry rectifications.

    Reference Link

    [1] MOFCOM Notice
    [2] China Embarks on 100-Day Campaign to Regulate Illegal Practices Involving Health Related Products
    [3] Allowed Types of Direct Sales and Production Guideline
    [4] Qualified Direct-selling Enterprise List
    [5] Fruit of the joined action
    [6] SAMR warning meeting
    [7] Direct Sales Management Method
    [8] Regulations on Prohibition of Illegal Pyramid Selling


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    ChemLinked Editor

    Lennie has broad experience in the food sector, especially in dairy products and health food.

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