Domestic Consumers head overseas with online Shopping

LI YUAN

INTERNET shopping, the phenom- enon that has revolutionized the way Americans and Europeans purchase, is finally hitting China. Propelled by the young, Internet shopping is recognized by Chinas increasingly large middle class for what it has always stood for: convenience, choice and discounts, discounts, discounts.

Ouyang Weiping, a Beijing local, decided to take a virtual walk down a digital shopping isle recently. Drawn to cosmetics, she immediately discovered that Macys Department Store offered her favorite brand at a Christmas discount price far cheaper than at local stores. Three weeks later, her beauty bundle arrived at her office and included a bonus Christmas gift. Ouyang admits to being won over by her experience.

Digital Trump Card

An increasing number of Chinese consumers are taking to online shopping services provided by overseas retailers. For example, letsebuy.com, an overseas shopping forum in China, already has a registered membership of more than 30,000. Members gather online to share overseas shopping experiences, analyze customs policies and transnational freight prices, as well as compare favorite foreign discount websites.

Liu Yi works as an English translator at a magazine in Beijing. After fall- ing pregnant, she began to explore the shopping possibilities available to her on overseas websites. Although Liu possesses a solid command of English, she was still wary about making her first online purchase. She ended up picking out some products for her baby, commenting, “These are the same things I buy in my local supermarket, but the prices online are really great – just a third of what Id expect pay down the road.” Liu only bought lightweight items online due to expensive international freight rates –US $15 for the first kilogram and US $5 for every additional one.

At present, there are still a number of hoops consumers in China must jump through before hitting overseas digital malls. After obtaining a dual-currency bankcard, shoppers must register an account on paypal.com for overseas online bank payments. Having done this, some websites still do not deliver goods directly to them in China – buyers need to set up an account with a forwarding company, which will receive their goods from the retailer and send them on to China.

Value-added taxes, import tariffs and consumption taxes all contribute to the high prices of foreign goods on Chinese supermarket shelves. In some cases the accumulated tax rate on imported common household goods can be over 50 percent. Given this high tax burden, it is no surprise that people are turning to the Internet, by which means many of these taxes can be avoided.

With women leading the way in Chinas online shopping revolution, cosmetics is currently the number one product in terms of volume that Chinese shoppers order from abroad.

The huge profits generated globally by online retailers is encouraging overseas Chinese to set up websites that capitalize on the growing domestic appetite for online bargains.

Feng Wei, a native of Chengdu in Sichuan Province, now lives in the U.S. Three years ago he began work as an informal purchasing agent for his Chinese friends looking to buy Coach handbags. As more people sought his help, he decided to abandon his telephone and open an online store to display the bags and take orders. Nowadays, each month he sells around 40 bags, securing him a handy monthly income of about RMB 10,000.

“As shopping malls give big discounts more frequently than official websites, we usually buy bags from mall outlets during the discount season and make them available at the cheaper prices all year round,” Feng says. “Its all about price. Our goods are cheaper, so people buy from us.”

A resident of the Netherlands for the past five years, Fang Hong, originally from Beijing, purchases baby food and milk power for Chinese customers concerned about the domestic safety record of these products.

“According to local Dutch law, one can buy at most three cans of milk powder at any one time. But I get so many orders from the Chinese mainland that I have to go to supermarkets in nearby cities three times a week to buy enough to meet demand.” Fang took up this middlewoman role after the Chinese milk scandal in 2008. Lingering domestic caution keeps her in business.

In many Western European countries, the baby foods industry receives government subsidies. A can of Nutrilon milk powder costs only 10 euros in Amsterdam, the Dutch capital. Together with fees and tariffs, the same can will cost RMB 160 for a concerned mother in China. “I earn about RMB 30 per can, which is pretty good,” Fang admits.

“There are many people who do what I do in the Netherlands and Germany. The most successful earn tens of thousands of yuan per month.”

In order to attract Chinese consumers, a number of foreign shopping websites have launched Chinese-language versions and offer the choice of delivery companies such as Alipay and Direct Mail whose services reach the Chinese mainland.

The delivery forwarding business has in itself become a booming industry. In 2011, big express delivery companies like Global Courier and Buytong inaugurated forwarding services. “Every day we receive over 100 orders to deliver goods to China, most of which are sent to big cities like Beijing and Shanghai. The current amount of business our forwarding services division receives is nearly three times that of our express service,”a salesman from Global Courier said. “Of course, as more express companies catch on to the business opportunities in the forwarding service market, competition will become more intense.”

Lingering Concerns

While affordability, choice and convenience continue to attract shoppers to the online option, there has nevertheless been some domestic concern in recent times about the quality of products sold through the digital medium.

In the first half of 2011, Chinas entryexit inspection and quarantine bureau randomly inspected 665 batches of unqualified imported foods and 36 batches of unqualified imported cosmetics.

“In September 2010, Similac milk powder was found to be contaminated with beetle remains. The company recalled its baby milk powder in the U.S. and Puerto Rico. The powder bought from overseas websites, however, could not be recalled,” Liu Yi explains, giving a reason why she had never bought milk powder from overseas websites.

In online shopping forums, netizens complain about their experiences, which include receiving expired products owing to lengthy transport time, receiving damaged goods or having difficulty in returning goods for refund.

Many also worry about the risk of credit card fraud, pointing out that revealing sensitive personal information along with credit card details is a prerequisite to purchasing goods online.

Limited English proficiency has also led netizens to buy wrong products and be too embarrassed to return them.

Risky Bargains

Online shopping has become a hot topic of complaints, according to one Beijing consumer complaints hotline. By their very nature, online shopping websites registered overseas are outside the scope of domestic supervision. The goods are delivered directly to the purchaser and are not inspected thoroughly in quarantine: there are no product safety guarantees. If problems with the products do arise, consumers have nowhere to turn and complain to except the website itself.

According to Bai Chongen, vice dean of the School of Economics and Management at Tsinghua University, overseas online shopping affords consumers the comfort of shopping without ever leaving their homes, and a chance to sample international product brands not available in domestic supermarkets. This is all good news for domestic consumers. But, says Bai, the online shopping craze is definitely not good news for domestic producers. Many are only just recovering from the global financial crisis and ensuing weak demand for consumption goods. Bai argues that the authorities should formulate measures to ensure local businesses are not forced out of business by having significantly higher taxes than their online competitors.

T hrough the Loophole

According to a report on Chinas emarket released by the China e-Business Research Center, direct online purchases from overseas sites by Chinese consumers totaled RMB 12 billion in 2010, with cosmetics, milk power and handbags the top three products transacted. Overseas online shopping has become the major channel for domestic consumers to buy from abroad. This phenomenon has come to the attention of the Chinese government, which has taken steps to alleviate erosion of its tax base through customs loopholes.

Since September 1, 2010, China customs authorities have reduced the duty exemption cutoff on entry of personal postal articles from RMB 500 to RMB 50. But this has by no means dampened enthusiasm for buying foreign products. According to Fang Hong, the price of her milk power has risen RMB 20 to 30 per can because of the policy, but parents are willing to keep buying imported powder at higher prices to ensure the health of their young ones.

Zhou Shijian, a senior adviser at the Ministry of Commerce, says high customs duties for bulk imports result in steep prices for medium and high-end goods on the Chinese market. “Smaller, personalized packages ordered by individuals online avoid these duties, and domestic outlets cannot compete.”

Chinese ministries are talking about reducing import duties on luxury goods to level the playing field for domestic businesses.

Lowering import tariffs should encourage more Chinese to buy high-end products in the domestic market rather than from overseas, Bai Chongen says.“And to boot the move shows Chinas commitment to tariff reduction as stimulated under WTO principles.”

Since Chinas entry into the WTO in 2001, average import tariffs have dropped from 15.3 percent to 9.8 percent, but tariffs on imported luxury goods have remained at 30 percent.

Recently, the Chinese government announced it would boost imports in order to achieve a trade balance and relieve upward pressure on the RMB. The government is considering slashing import duties on luxury products such as cosmetics, cigarettes and alcohol.

According to Zhou Shijian, high-end products aside, tariffs on daily necessities should be cut as well. He says the authorities should first clarify what is meant by the phrase “luxury good.” He gives the example of an American hair dye product deemed “luxurious,” which sells for US $3.5 in the U.S., or roughly RMB 23, RMB 25 in Hong Kong but for RMB 59 on the Chinese mainland. “This remarkable price variance results from import duties,” Zhou points out, adding that a major rethink of “luxury” is needed and that tariffs should be cut across the board.

Wu Hangmin, a well-known current affairs commentator, maintains online overseas shopping cannot be considered a tax dodge. As Chinas increase rate in tax revenue is much higher than its GDP growth rate, this issue must be considered from the perspective of relieving the middle class tax burden and improving peoples lives through giving them greater access to the world market. Wu is for reducing import duties, but, as he says, the age of Internet shopping has arrived and is here to stay.