Investing in Cross-border E-Commerce in China
- CW is pleased to announce that our firm is launching a new business division which provides cross-border e-commerce solutions to small and medium-sized firms. The new division is operating under a joint venture MHnCW Limited, partnering with Minihome Media, an omnichannel e-commerce and marketing service provider based in Hong Kong.
- Cross-border e-commerce has attracted a great deal of attention from overseas brands and retailers. The following article provides a general overview of how cross-border e-commerce works in China.
Chinese spenders seldom shy away from any opportunity to show off their purchasing power. According to the “China Cross-border E-commerce Market Research Report 2018-2019“, China’s cross-border e-commerce transactions have reached RMB 9.1 trillion in 2018 with over 100 million users. It is later reported that the market‘s transaction volume reached RMB 9.9 trillion in 2019, with a compound annual growth rate of 27%. It is projected to reach RMB 26.8 trillion in 2025, with a compound annual growth rate of 18.1%.
Although the term “cross-border e-commerce“ may be self-explanatory, it has become increasingly sophisticated in the past decades. “E-commerce“ is generally understood as advertising, sale, and distribution of products through electronic means. From consumers’ perspective, while domestic e-commerce offers products available within the country, cross-border e-commerce enables them to purchase products directly from overseas markets.
In recent years, the cross-border e-commerce business in China has attracted a great deal of attention from overseas brands and retailers. In terms of policymaking, China truly stands out in the global arena in fostering cross-border e-commerce. Of course, the country has gone through nearly a decade to formulate and adjust its cross-border e-commerce policies and regulations. It has managed to address many different aspects such as tax, logistics, electronic information, intellectual property rights, and data protection.
Cross-border e-commerce vs. general trade
To understand how “cross-border e-commerce” works in China, one should first distinguish this term from “general trade“.
General trade often refers to the import and export of goods by an entity legally established in China with an import/export permit. The Chinese entity undertakes the obligations as an importer or exporter. When importing goods, the Chinese entity, acting as an importer, must first buy the products from the overseas seller, handle the customs clearance and pay the duties and taxes on CIF price before the products are sold in the China market. After the customs formalities, the products are often sent to a warehouse or physical shops. Under the general trade model, foreign brands and retailers must either find a Chinese importer or set up a Chinese subsidiary to sell in the China market.
With the emergence of cross-border e-commerce, selling to China allows overseas brands to take a more direct approach. They do not need to find a trading partner who is willing to pay for imported products before selling them, nor do they need to apply for a Chinese business license to import on their own. Instead, the overseas company can set up an online shop on any cross-border e-commerce platform, so long as they meet the platform‘s requirements. However, the market seems primarily dominated by only a handful of platforms such as Tmall Global, JD Worldwide, and NetEase Kaola. These large platforms usually prefer working with well-known brands with a good reputation, high-quality products, and sound financial strength. There are other marketplaces that cost lower for SMEs. Some are specialty platforms that offer their specialty in selling to a niche market. Regardless, the intricacy in selling to China through cross-border e-commerce is that placing your products on any platform, big or small, doesn‘t guarantee success at all. New entrants must carefully study the Chinese market, the logistics solutions, the regulatory framework and be vigilant in the cost/benefit analysis before moving forward.
- Logistics models
On the logistics side, the sellers can choose the direct purchase imports model (B2C) or the bonded imports model (B2B2C).
If a direct purchase imports model is chosen, all individual parcels are packed and labeled overseas. The seller will then arrange to deliver the products to China via post or express delivery services. Prior to the arrival of goods in China, three documents must be sent to the customs network electronically: the online order, the payment transaction, and the logistics order. The package is then cleared if the information pertained in the three documents all match with each other. Finally, the local express company will handle the last-mile delivery to the buyer.
Under the bonded imports model, the sellers will first stock their products in a special customs supervision area (such as a bonded warehouse) in China without payment of duties. Upon confirming an order online, the products are picked, packed, labeled, and shipped to the buyer. Compared to the direct purchase imports model, the bonded imports model provides a quicker response in the logistics process. For one thing, the products are already located in China before the buyer places an order. For another, as China continues to extend the geographic coverage of the pilot scheme for cross-border e-commerce retail imports, more and more cities will ramp up efforts to enhance its capability and efficiency in handling cross-border e-commerce retail imports.
It’s also important to note that cross-border e-commerce is not applicable to all commodities. In 2016, China introduced the first version of the “List of Imported Commodities for Retail in Cross-Border E-Commerce”, which is widely known as the “Positive List“. The list provides transparency and guidance on items allowed to be imported into China through cross-border e-commerce. It was later updated respectively in 2018 and 2019, covering a total of 1,413 items that are in great demand by Chinese consumers.
- Payments,duties, and taxes
Another key difference between cross-border e-commerce and general trade is the payment of duties and taxes. Importing goods to China generally involves import tariffs, value-added tax (VAT), and consumption tax. General trade requires the importer to pay for the import tariff, VAT, and consumption tax during import. Under the cross-border e-commerce scheme, the consumers are the taxpayers. When an individual customer places an order online, the e-commerce platform will calculate the applicable duties, taxes, and logistics costs. The customer then pays the total amount via an e-payment system which can be integrated into the e-commerce platform.
China imposes single and annual transaction limits per person under the cross-border e-commerce scheme. Currently, the tariff-free quota on a single transaction is RMB 5,000, and the annual quota per person is RMB 26,000. Under these limits, even though the import tariff is set at 0%, the VAT and consumption tax are levied at 70% of the standard rate applicable to the type of goods, which is generally referred to as “cross-border e-commerce integrated tax“. Online shoppers who have not exceeded their single and annual transaction quota are subject to an integrated tax rate of 9.1% for most products. For high-end cosmetics, the integrated tax rate is 23.5%. Over these limits, the consumers will need to pay full import tariff, VAT, and consumption tax. Considering that the integrated tax is added to the e-commerce retail price, overseas sellers should be careful in their pricing strategy.
Selling to China via cross-border e-commerce is indeed an attractive business model for many overseas brands. Yet, it is not without challenges, such as trademark infringements, identity fraud, payment fraud, and counterfeit goods. China is determined to address these issues and even introduced the E-Commerce Law in early 2019.
Under the new law, consumers who buy fake goods through cross-border e-commerce can hold direct accountability to either the overseas seller or the platform. As the platform needs to bear joint and several liabilities, the sites must carefully review and supervise the merchants and products to avoid liability for compensation caused by counterfeit goods. Furthermore, new policies on safety, taxation, logistics, after-sales, and other aspects of imported goods are brought upon to ensure strictly following of rules, protecting consumers‘ rights and interests.
Notable platforms and online marketplaces for cross-border e-commerce
After implementing the E-Commerce Law, the China market has been more welcoming to foreign companies that wish to sell cross-border. With improved standards and structure over the sector, e-commerce continues to be a competitive market ground for brands to sell in China. Here are a few notable platforms and online marketplaces:
- TmallGlobal tmall.hk – This is the sister website of Tmall.com and is currently the largest cross-border B2C platform, owned by Alibaba Group.
- JD Worldwidejd.hk – This is the cross-border platform of jd.com. JD is known to be a major competitor of Tmall.
- NeteaseKaola kaola.com -NetEase Kaola, launched by NetEase in 2015, is one of the market leaders in the CBEC sector. On 5 September, Alibaba announced to fully acquire NetEase‘s cross-border e-commerce (CBEC) platform NetEase Kaola for about US$2 billion.
- Xiaohungshu小紅書or Little Red Book xiaohongshu.com – Xiaohungshu is a fast up-comer in China‘s cross–border e-commerce business. Over 70% of the users as post-90s. The site focuses on the use of media in promoting various areas in lifestyle, such as beauty, travel, food, and entertainment.
- Ymatouymatou.com – Ymatou was founded in 2009 in Shanghai, focusing on high-quality foreign products and discounted sales.
The global consumption habits under the pandemic has increased users’ demand and transactions in high-quality cross–border e-commerce. With the favorable substantive policies successively promulgated in China, cross–border e-commerce is forecasted to enter a new stage of development and growth. In no time, China will become the world’s largest and fastest-growing market for cross–border e-commerce.
On a final note, CW is pleased to announce that our firm is launching a new business division focusing on providing cross-border e-commerce solutions to small and medium–sized firms. The new division is under the operation of a joint venture, MHnCW Limited, partnering with Minihome Media, an omnichannel e-commerce and marketing service provider based in Hong Kong.
If you are interested in joining our platform, please contact our Delilah Li via email@example.com.
Written by Delilah Li, China Consultancy Team, CW CPA