China's New E-Commerce Law Has Strict Requirements
By Jack Wu, Executive Director
Multinationals have complained for decades about intellectual property theft and counterfeit goods sold in China, and problems have accelerated with the country’s burgeoning online markets. A new Chinese e-commerce law that went into effect January 1 may provide some relief, though some of its provisions are murky and its enforcement has yet to be tested.
The new law requires all online businesses to register with the government, and those that sell regulated products such as drugs must obtain a license. The comprehensive legislation covers contracts, payments and guarantees for transactions. It also provides channels for dispute resolution, including disputes arising from cross-border commerce. It requires businesses to keep records of all their transactions and the information they provide about products and services for at least three years.
Businesses engaging in online commerce in China should familiarize themselves with the new law and make sure their systems are compliant.
Critically, the law strengthens intellectual property protections and threatens to penalize both the sellers of counterfeit goods and the websites that host them — if the sites fail to “take necessary measures” to stop the fraud. Though the law doesn’t specify procedures for identifying or suppressing the sale of fake goods, it says violators can be fined up to 2 million yuan.
The law also bans fake reviews, which have been a persistent problem in China.
Controlling a Sprawling Market
China says the law’s aim is to protect Chinese consumers from fraud, but it may also be responding to longstanding pressures from the West. According to the OECD, China is the top culprit in the world’s counterfeit market, which produces half a trillion dollars in fake goods every year, ranging from luxury fashion to machine parts and chemicals. Companies have also accused the country of forced technology transfers.
These problems form the backdrop for the current tariffs and ongoing trade talks with the Trump administration. The Obama administration also raised concerns about intellectual property protection, and press accounts have provided detailed examples of company complaints. A recent survey found that one in five members of the American Chamber of Commerce in Shanghai say they have been pressured to transfer their technology.
Time will tell whether the new law has teeth. If China does intend to enforce it, controlling the country’s sprawling $1.53 billion e-commerce markets will be a challenge.
Ten years ago, China’s online sales accounted for less than one percent of global e-commerce; today, they comprise 42 percent, according to the World Economic Forum. The country now handles more online transactions than France, Germany, Japan, the United Kingdom and the U.S. combined.
By 2022, Chinese e-commerce is expected to balloon to $1.8 trillion, according to Forrester. Already, e-commerce currently accounts for about 33 percent of Chinese retail sales, compared to just 9.1 percent in the U.S.
The internet sales clean-up isn’t just a government affair. Over the past couple of years, Alibaba has begun removing fraudulent listings on its own. While it now has few obvious fakes listings, it still carries messages from off-site merchants offering to complete transactions for unbranded items privately. Going after these sellers could be tough.
China will also need to monitor a growing number of new e-commerce platforms, including social media and discount and group-buying sites. While giants like Alibaba and JD.com still control 85 percent of the market, platforms like WeChat, Duovin and Pinduoduo, where small merchants as well as larger companies can list their wares, are quickly gaining ground. The new law applies to these sites, but enforcement could be difficult. Merchants who use the platform could disappear overnight or pop up as a new business with a different name.
Opportunities and Pitfalls
Pinduoduo (pronounced “ping-daw-daw”), an app where merchants sell low-cost products and offer group discounts, illustrates how it’s possible for an online company to succeed despite legal challenges and security pitfalls.
Begun in 2015, the platform now has nearly 350 million users — more than the entire population of the U.S. Many companies have accused the site of selling counterfeit goods. It was sued by a diaper manufacturer in July and removed the offending products, but they soon popped up again. Despite the suit and the company’s uneven reputation, Pinduoduo was listed on the NASDAQ soon after the diaper company incident, and continues to be publicly traded.
In addition to potential fraud, online commerce carries security risks. The new law is supposed to provide protection for consumers.
In November, Apple removed Pinduoduo, along with 700 other Chinese apps, from its app store, citing technology bugs. Hackers recently stole $1.5 million worth of discount vouchers from Pinduoduo. The company said it has fixed the bug and reported the incident to police.
Though questions remain about the e-commerce law’s implementation, its passage marks a new chapter in China’s growing online empire. On paper, at least, the law raises the standards for e-commerce. If it is enforced, it could create an environment of greater trust, facilitating international trade.