Guest contribution by José Izquierdo Fernández, Robin Li Scholar at the Yenching Academy of Peking University. José is a certified Spanish lawyer specialising in corporate law and cross-border M&A
The Belt & Road Initiative (BRI) aims not only to be a process through which Chinese actors invest abroad; but through progressive opening up of the Chinese market, allows more foreign enterprises to invest in China. In his Belt and Road Summit Speech in May 2017, President Xi stated, “we should build the Belt and Road into a road of opening up. Opening up brings progress while isolation results in backwardness”
The telecommunications and e-commerce sector is a good example of a sector that has historically been considered sensitive by Chinese authorities, meaning that foreign entities wanting to enter the market faced significant restrictions. But over the last decade, the restrictions around the Chinese e-commerce sector have been liberalised gradually, allowing foreign investors to hold higher stakes. In 2015, landmark new regulations permitted 100% foreign ownership in “online data processing and transaction processing services (for-profit E-commerce)”.
On the face of it, these regulations allow foreigners to directly tap into one of the fastest growing sectors in China and indeed in the entire world. The 2017 November 11 “Single’s Day” (a major e-commerce sales event also called “Double eleven”), highlights the depth of the Chinese e-commerce market. Alibaba made USD 25.3 billion in gross merchandise volume just in one day, 39% more than a year before. This was more than the annual size of the Indian e-commerce market! And this was the sales of Alibaba alone, if paired with the results of Alibaba’s rival JD.com, the overall sales for 2017’s “Single’s Day” surpassed USD 45 billion.
The forthcoming Chinese e-commerce law also stipulates that China will endeavor to improve the speed of customs clearance; good news for foreign enterprises selling their goods via Chinese e-commerce channels. Moreover, electronic invoices will be given the same legal status as their paper versions, and hence reduces red tape and enables exporters into China to focus more on online-marketing and partnership-building rather than on troublesome bureaucratic procedures.
However, these reforms have not yet substantially increased the number of foreigners directly operating in the Chinese e-commerce market, as shown by the very low issuance e-commerce licenses. Instead, foreigners have continued to gain access to the e-commerce sector through informal channels, including access through setting up companies in FDI-permitted sectors, and then extending contractual arrangements with Chinese e-commerce companies.
The question then remains, why are foreign enterprises not choosing to set up their own e-commerce platforms, and instead opting for partnerships and complex investments in incumbent Chinese players? One reason might be risk aversion; China’s evolving e-commerce regulatory landscape presents a risk that a foreign enterprise may not be able to manage alone. Instead, it’s far safer, albeit at a lower return, to financially back one of the existing bellwethers of China’s e-commerce industry.
A more cynical view of the new regulations is that they are implicitly biased against foreign entrants. A second draft of the forthcoming E-commerce law issued on November 7, 2017 obligates foreign enterprises to comply with Chinese data protection standards and leaves open the possibility of the regulator controlling and utilizing the data held in the e-commerce space. Moreover, in order to operate a website in China, an Internet Content Provider license (ICP) is required, and for the latter, the company needs to be registered in China. ICPs are divided into commercial and non-commercial. The former is required when an entity wants to establish a company to sell its products through own website, while the latter is required for selling items on a third-party platform (e.g. Alibaba).
According to well-informed sources, currently foreign enterprise applications for commercial ICPs are rejected unless they have a Chinese partner with a majority stake – and even then, they are extremely hard to obtain. On the other hand, non-commercial ICPs are an option for companies wanting to sell their products without resorting to third-party platforms. Hence, the long-awaited Chinese E-commerce law does not seem to grant foreign actors much choice. It seems that for most foreign companies, the most viable option will still be to utilize third-party platforms including: Tmall, JD.com (B2C), Alibaba and Taobao. Consequently, China’s e-commerce market will remain being dominated by the incumbent Chinese players.
The case of e-commerce shows that even though China has outwardly shown warmth to the entry of foreign enterprises, the realities are that the sector remains tightly controlled and leaves foreign players at a disadvantage to their Chinese counterparts. To succeed, foreign enterprises need to enter the Chinese market on China’s terms, and that in some cases may mean compromising long established working practices, for example in data security. The example may well be generalizable for the Belt and Road Initiative as a whole, there exist similar stories of difficulty entering the Chinese market across a range of sectors. Therein lies a challenge for China as it seeks to gain widespread approval of the BRI and promote its inclusiveness. If China continues to invest aggressively abroad, yet market access at home is limited, then this asymmetry will invariably become a concern for the nations partaking in the initiative. If the Belt and Road Initiative is to be a two-way street, then China has to show greater commitment to the initiative’s ideals at home.