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E-commerce in China: the latest trends

E-commerce in China is a large and ever growing market. Broadly speaking, there are currently two models in use: some businesses sell their products by means of their own online platform (e.g. Amazon and, until some time ago, JD.com). Other online platforms are just a “marketplace website” where traders can open their own “online store”: this is the case with Alibaba, Taobao and, today, also JD.com. Online trade is expanding not only in terms of gross merchandise value, but also in terms of the types of products, which are for sale. For example, it will not be long before pharmaceuticals will be available: JD.com and Alibaba are currently negotiating, respectively, with Shanghai Pharmaceuticals and Merck, while the authorities in Beijing are drafting a list of pharmaceutical products for which online sales will be authorized.

The new Foreign Investment Guidance Catalogue (which came into effect as of April 15, 2015) has eliminated the restrictions on foreign investment in e-commerce, which existed before (49% of the stock of a joint venture). This means that foreign persons can now invest in this sector through joint ventures with an investment larger than 49%, or by incorporating wholly foreign-owned enterprises (WFOEs). Furthermore, registration of the joint venture or of the WFOE with the State Administration for Industry and Commerce (SAIC) can now be obtained with no need for the previous approval of the Ministry of Commerce.
 
This development was anticipated by experiments carried out in the Shanghai Pilot Free Trade Zone, where the 49% cap was abolished earlier, in January 13, 2015. The list of sectors in relation to which foreign investment is restricted (so-called “negative list”) for the four FTZs of Shanghai, Fujian, Guangdong and Tianjin (which came into force on May 8, 2015), does not set forth any limitations as to the field of e-commerce. As of today, although the limitations on foreign investment in e-commerce have been eliminated in all the territories of China. It is now the case that to make such investments in the FTZs may actually be advantageous, essentially due to the extraterritoriality of those Zones in terms of customs and the recent streamlining of administrative procedures. More advantages are expected to stem from the start of some form of customs cooperation between, respectively, the Guangdong FTZ and Hong Kong/Macau, the Fujian FTZ and Taiwan, the Tianjin FTZ and Beijing and Hebei Province.
 
Electronic signatures
The PRC Law on Electronic Signature, in force since 2005, has undergone slight modifications with the reforms, which into effect on April 24, 2015. An electronic signature has the same effect as a traditional signature or the company seal (“chop”), provided that it is “reliable” under the definition provided by the Law; precise conditions are established as to the validity of the electronic transcript on which the signature is made. An electronic signature must be certified by an electronic certification service provider, which in turn is authorized by the competent state bureau. The Law sets some rules, which dictate the time and place at which an electronic transcript is deemed to have been sent and received. Alongside this, it regulates the liability of the signatory and of the certification service provider for any damages caused to third parties who have relied on an invalid electronic signature.
 
Foreign account transactions
The payments made from foreign bank accounts to Chinese accounts do not raise problems peculiar to Chinese law. The same cannot be said of payments made from China to other countries, which are controlled by the State Administration of Foreign Exchange (SAFE) and can be carried out only through authorized institutions.
 
In 2013 SAFE launched a pilot program for cross-border payments resulting from online transactions; albeit limited to authorized institutions in the areas of Shanghai, Beijing, Chongqing, Shenzhen and Zhejiang. A Notice (dated March 16, 2015), after acknowledging the positive results of the experimentation, has introduced some interesting innovations for the banking institutions participating in the program. The quantitative limit per single transaction has been raised from the equivalent of USD 10,000 to the equivalent of USD 50,000; also, the limits on the number of accounts authorized for payments abroad that each institution can open have been eased. Interested institutions are under an obligation to verify the authenticity of transactions, keeping the relevant documents in their archives for 5 years, and to comply with any disclosure request on the part of SAFE.
 
As for tax profiles, despite the fact that online trade is theoretically subject to the same rules that apply for any form of commerce, it is nevertheless quite hard to control. This is due to its peculiar features, rapid expansion, and the lack of adequate administrative resources for an effective implementation of the law. Therefore, e-commerce escapes (as of today), regular taxation. Nonetheless, the competent authorities have readily shown a will to bring e-commerce with an effective tax regime: a prime example is a recent Notice issued by the General Tax Bureau as to the taxation on the trade of software and electronic publications.  
 
Data protection
It is not surprising that e-commerce is subject to various norms that aim to protect personal data. In the absence of a unified statute, the foundations of the law on this subject are set out by the Decision on Strengthening Internet Information Protection, issued by the NPC Standing Committee at the end of 2012. Other documents were later issued in addition to the Decision: namely, the Telecom and Internet Users’ Personal Data Protection Regulations of 2013 and the Internet Trading Administrative Measures of 2014. Besides those provisions, the PRC Law on Consumers Protection, most recently revised in 2013, also addresses the matter.
 
The object of data protection is defined as the electronic information that can be used to “identify an individual citizen or that involve the privacy of a citizen” (Decision on Strengthening). This data must be collected and used in a legitimate and appropriate way, and only where the measure, which entails such collection and use, is necessary; the principle here is similar to that adopted in the EU Directive on Data Protection. More specifically, in the sector of telecommunications – to which e-commerce belongs – the requisites of prior disclosure (the user must be informed as to the treatment of his data) and previous consent apply.
 
As of today, there are no provisions specifically regulating the cross-border transfer of data. The latest amendment of the PRC Consumer Protection Law has widened the scope of its protection so as to include the consumers’ personal data, essentially applying the same principles of the quoted Decision on Strengthening. The Law establishes a number of judicial and administrative sanctions for the infringement of data protection rules; notably, a fine of up to ten times the amount of any illicit gains (or RMB 500,000 if no illicit gains are reported) can be imposed on the infringer. Although the regulatory framework is still quite opaque, there is continued development, which works towards the adoption of more precise set of rules backed up with stricter enforcement.
 
Intellectual property infringement
An online platform hosting offers of counterfeit products can be held liable for indirect or contributory infringement. Therefore, it is in the interest of every marketplace website to remove any offers of counterfeit products. Notably there is a difference in the attitude taken here by the larger sites compared to their smaller competitors.
 
Alibaba and Taobao, among others, have streamlined, partially automatized procedures for the removal of counterfeit offers (online complaint systems). It is possible to file a complaint attaching a copy of the complainant’s business license, documents proving the ownership of the relevant intellectual property rights and – where an agent on behalf of the intellectual property holder – a power of attorney, files the complaint. The trader accused of infringement can then respond to the complaint. If he does not respond, or where as a result of the debate between the parties there results to be an infringement, the offer is deleted. The trader who posted the offer can be punished with the deletion of his account.
This does not mean, however, that the major Chinese e-commerce sites are safe from accusations of encouraging intellectual property infringement. In May 2015 Kering Group, the owner of world-famous trademarks such as Yves Saint Laurent, Gucci and Balenciaga, filed a lawsuit against Alibaba Group in New York federal courts for a number of infringing transactions carried out in its e-commerce sites.
 
‘Brushing’ in the online marketplace
Another considerable problem facing Chinese e-commerce comes from so-called ‘brushing’, i.e., the phenomenon of fictitious transactions. A “brusher” receives a sum of money from a trader in order to make purchases in his online store; a part of that sum is spent to pay for the purchases; the trader sends to the fictitious customer - the “brusher”- empty packages. The number of sales carried out – and, therefore, the number of positive comments – enables the online trader to gain more visibility and to improve his business.
 
On the other hand, the practice of brushing can also play in favor of the owner of the online trading platform, as it (apparently) improves gross merchandise value. Both Taobao and JD.com have recently been accused of encouraging brushing on their sites; Alibaba claims that it cancels fictitious transactions from the final calculation of total sales value. As of today, there is no national legislation specifically addressing the problem; there is however a clear trend towards imposing heavy sanctions for this type of behavior, as shown by some recent decisions of local SAIC bureaus.
 
 
Obstacles to development
While China has opened the market of e-commerce to foreign investment, it cannot be ignored that some policies of the Chinese central government may create obstacles to the expansion of foreign businesses in the field. In order to carry out business in the mentioned sector, a fast and efficient internet connection service is obviously necessary. Given the restrictions existing in China to the access to some websites, it is a normal practice to use VPN (Virtual Private Network) service, which channels data through a server located outside China and make the user look like he is accessing the website from abroad, therefore bypassing Chinese access restrictions.
 
The Chinese government has been implementing measures for years aimed at curbing the use of VPN services. Be it because of a stronger will to crack down on VPN providers or because of a technical improvement of the technological resources at the disposal of the Chinese government, anti-VPN measures have begun, as of 2015, to be implemented also against providers located outside the PRC. Therefore, accessing certain foreign websites and platforms has become more difficult.
 
Some important indications can be drawn from a draft of amendment to the PRC National Security Law issued in April 2015. According to Article 26 of the draft, “The state establishes national systems for protecting internet and information safety […] and protects national sovereignty on internet space, as well as safety and development interests” (emphasis added). Moreover, the country must “achieve security and control over internet and information core technology, key infrastructures and important data and information systems”.
 
The new issues stemming from the expansion of online trade entail the need for a more organic and precise legislation. A legislative draft on e-commerce is currently being examined by the competent committees and will be formally published as a Law Draft within 2015. According to declarations released by representatives of the NPC, the purposes of the new Law will include: the promotion of an honest, transparent and healthy e-commerce environment, the protection of product quality and consumer’s rights, and the protection of intellectual property rights. The overriding aim of the legislation is to push innovation forward, while keeping it within the boundaries of legality.
 
Some interesting indications came from the Chinese central government in the first quarter of 2015. A report issued by SAIC has criticized Taobao for intellectual property infringements and for the low quality of some goods. Furthermore, on May 8, 2015 the State Council issued a document titled Guiding Opinions on the Vigorous Development of Online Commerce. The document primarily addresses the online trade of agricultural and food products and aims at supporting the joint development of internet and agriculture by implementing modern concepts of industrial chain, price chain and supply chain. 
 
Concluding comments
In conclusion, the new approach of the Chinese government to the regulation of e-commerce seems to be spurred on by a combination of innovation and supervision.  The opening of the sector of e-commerce to foreign businesses must probably be contextualized in this framework. The measures aimed at boosting the development of e-commerce are primarily meant to encourage the development of domestic enterprises. The contribution of foreign businesses (which are offered remarkable profit opportunities) to this development will have to abide by increasingly precise and strictly applied rules. 


L'articolo in italiano è su: http://www.agichina.it/blog-giovanni-pisacane

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