Shanghai | Australian companies are unprepared for a dramatic tightening of China’s e-commerce regulations and licensing rules, which could shut down cross-border sales of infant formula and vitamins unless they are able to comply in time.
There is also speculation China’s move to more closely regulate the flow of imports into the country could effectively end the network of personal shoppers known as daigous, which underpinned the rise of exporters such as vitamins makers Blackmores and Swisse and infant formula companies Bellamy’s and a2 Milk. China is attempting to use the new rules, which are due to start in January, to crack down on tax avoidance and ramp up food safety.
Confusion surrounds China’s new cross-border e-commerce rules, less than two months before they are due to be introduced. Executives at key Australian exporters admit they remain in the dark about exactly how the new regulations and licensing process will work. Many hope China’s President Xi Jinping will use a major trade fair in Shanghai to announce a delay in the implementation of the new regulations to give them more time to comply.
“Most of our clients are now concerned about the absence of announcements from the Chinese government in regards to a possible extension of the grace period – not only infant formula but supplements and cosmetics,” says Mette Knudsen, CEO of KnudsenCRC, a Shanghai-based consultancy that helps companies seeking to sell in China.
“If the grace period is not extended within the next two months, it will have huge implications for Australian businesses with cross-border sales into China,” she said. “Companies that are not yet able to fully comply with the new Chinese regulations may wake up to a new reality where export to China is closed off until they are able to comply with the new, strict laws.”
While the Australian companies arriving in China over the weekend for the country’s first import expo played down the uncertainty surrounding the latest shake-up in Chinese regulation, lawyers, compliance experts and analysts based in China told The Australian Financial Review the situation remained a serious risk for importers.
China’s National People Congress announced plans in August to tighten cross-border e-commerce rules but did not provide details. New regulations designed to give consumers greater protection apply mainly to dairy, vitamin supplements and cosmetics sold into China via e-commerce channels. But there are also implications for the personal shopper networks as they will be more closely regulated and subject to tax, which will reduce their profit margins.
It is not the first time there has been confusion around changes in China’s regulation. Hundreds of millions of dollars was wiped off the combined market value of China-focused stocks in 2016 over proposed e-commerce rule changes.
“The reality is no-one knows anything, as usual, in terms of what the Chinese regulators will do,” another source said.
One senior executive at a major Australian exporter affected by the changes said the new rules could result in more stringent tax collection or filling in forms to register products. However, the most draconian scenario is that goods would have to be produced at a Chinese government-registered facility. At the moment, importers can register locally with a Chinese label or sell imported products without Chinese labelling through online channels like Tmall or the daigou network.
Austrade said on its website that the new rules covered topics such as intellectual property protection, e-commerce promotion, contracts and dispute resolution, packing and waste management and consumer rights. After January, merchants selling online in China would have to register for an online selling certificate, it said. But details of that registration process have not been published.
Bellamy’s told shareholders last week it was still waiting for a licence to sell China-labelled products in China. It submitted its application to China’s State Administration for Market Regulation(SAMR) in December.
The a2 Milk Company’s chief executive Jayne Hrdlicka, who met with Chinese officials at a conference in Beijing last week, said the new rules would improve the country’s food safety and protect its young consumers and legitimate companies able to comply with measures by China to better protect its citizens would only benefit. A2 has its China certification.
“We don’t have a crystal ball but we are not concerned,” Ms Hrdlicka told the AFR.
“We have a strong local channel modelled into China. The product we provide to the youngest citizens of China is an important part of their nutritional development and we are really respectful of the responsibility we have. We have been working for years to ensure that the product we produce that is sold into Australia makes it way into China that is fit for regulation.”
China’s increasing focus on the health of its 1.4 billion citizens is expected to be one of the focus of Mr Xi’s import-focused trade fair in Shanghai, which is being attended by 150 Australian companies. Some believe this could open the door for the import of more Australian products due to their clean and green reputation.
But many experts said China’s opaque regulation remained a huge risk for exporters. A shake-up in the Chinese government departments responsible for food safety and regulation this year has also added to the confusion. “It is very difficult for foreign organisations to cope with this given the difficulties in dealing with China regulations, drafts sitting out there for ages, uncertainty etc. but that’s the reality of the market and one which has plenty of upside if you get it right,” Michael Wadley, a Shanghai-based lawyer and business adviser to Australian exporters, said.
Ms Knudsen said many Australian companies were behind their US and European competitors when it came to keeping up with Chinese regulatory changes.
“If you compare Australia and New Zealand with the United States, the US companies are used to the fact they need to invest in compliance because it is such a big risk they are running,” she said. “I think Australian companies have been hesitant to use their resources on compliance in China, simply because we come from well-regulated markets.”
Lawyer John Dong, who specialises in e-commerce and law from the Yida Shanghai Law Firm said the new rules would restrict the number of daigous coming into the market because they would need more administrative approvals but there was still a lot of uncertainty.
“This brings a lot of uncertainties to the e-commerce operators. In the initial stage, the law will be implemented strictly.”
Beijing-based dairy analyst Song Liang said the new rules would create uncertainty for Australian importers, which relied heavily on online sales into China.