Electronic Commerce Liberalization in China

3020 words (12 pages) Essay in Ecommerce

08/02/20 Ecommerce Reference this

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1           Introduction

Electronic commerce or e-commerce is defined as the activity to conduct electronic business by using the internet or intranet. Commonly, e-commerce is a modern tool used by businesses to connect with consumers without barriers in accommodating physical stores. Given China’s large land area, e-commerce is useful to reach out to more customers in multiple areas as well as serving international customers.

1.1              E-Commerce in China

As one of the world’s largest e-commerce market, it is not surprising that China’s vast number of online users accumulate to 688 millions of users (Zhang & Cao, 2018) and this number is predicted to keep on growing. China’s newly introduced policy that changed its investment-driven growth to consumption-driven growth plays a great role in the development of e-commerce in the country. As said by Premier Keqiang Li, he suggested that China’s e- commerce has become a new growth point for China’s economics (as cited in Zhang & Cao, 2018).

Figure 1 The relationship of total retail transaction volume of e-commerce and residents’ consumption expenditure per capita from 2004 to 2016.

 

Additionally, a senior forecasting director at eMarketer presented that the increase in consumption could be the results of rising in incomes amongst middle class that increases their

purchasing power (as cited in eMarketer, 2019). This leads to increased spending per person. Thus, in response to Figure 1, the graph shows the increase in consumption expenditure is parallel to the increase of sales in e-commerce in China. This might indicate a positive relationship between the increase in income could significantly affect the growth of e-commerce in China.

This is the results to the convenience e-commerce offers including user-friendly mobile applications, merging of social media and e-commerce platform as well as efficient mobile payments have contributed to the growing number of online shopping customers. The innovation of merging multiple functions such as messaging, mobile payment, games as well as various other services into an app make it easier for users to keep everything on track without leaving the app (Kharpal, 2019). This innovation can be seen on a widely-used mobile application in China, WeChat. In this way, WeChat aims to keep users connected to its server by providing various services within one application. Also, according to World Economic Forum (2018), 25% of mobile internet users in China during 2013 has grown into 68% in the span of 3 years due to its heavy usage of mobile payments that totals up to 731 millions of internet users.

Furthermore, China has a strong internet penetration at 73.9% according to Statista and expected to increase up to 81.8% by 2022 (as cited in eShopworld, 2018). This prediction of increasing internet penetration means that larger consumers are willing to participate in online business transactions or e-commerce. Thus, this could help China in increasing its market share inside or outside of the country. Linearly, this would contribute to China’s government’s aim to become a consumption-driven economy.

Thus, this proves that China has started a new era of development which might be highly dependent on its e-commerce market that has reached an outrageous number of consumers domestically and internationally. Nationally, China’s numerous policies involving trading or international relations could both, directly and indirectly, affect the e-commerce market. This could also be seen in the global market where China will play a significant part in regulating its policies to satisfy the newly consumption-driven growth. Thus, this paper will focus on how the liberalization of e-commerce policies affect the growth of China.

2           Government Policies

2.1              The Accession of China into World Trade Center (WTO)

In 2001, China became one of the World Trade Center members which gave a big impact on its trading and businesses as China is obligated to comply with the rules and regulations given. The policies include reducing its trade barrier into their domestic market to international companies, intellectual property rights, (Agarwal & Wu, 2002), and giving 50% foreign ownership to international companies for restricted sectors and lifting geographic restrictions (Wen & Haimes, 2001). This 50% ownership is combined with a local partnership called Joint Venture (JV).

Figure 2 China’s GDP Performance during 2001 – 2010

Figure 2 gives an overview of a significant increase in China’s GDP growth after joining WTO. From the graph, it can be assumed that the accessed of China in WTO gave a positive effect on their economy. In 2001, the GDP is around $1200 billion USD which later had nearly five times of value in 2010. This consistent rate of growth could be the results of the improved but limited competition local and foreign businesses. To add, international companies were more likely to relocate their factories or expand their businesses to China (Tiam, 2015). The domino effect these policies have on China could be the main reason for their sustainable growth over the years.

However, the Chinese tradition of guanxi, the act of using connections or personal networks for individual gains is common throughout the country (Wen & Haimes, 2001). This limits the effectiveness of the policy enforced by WTO. Additionally, despite the positive growth seen on the effectiveness of WTO policies, this could be stunted by the restriction of internet usage by the government towards its citizens (Wen & Haimes, 2001). The ability for cross- border e-commerce to grow is limited as well as limiting the competition in the domestic market. The low competition limits local companies to grow nor improve their services or products.

2.2              The MIIT Circular in Effect: The E-Commerce sector open to full foreign ownership

In early January 2015, a new foreign investment regulation was introduced within the Shanghai Free Trade Zone (FTZ). The limitation of ownership for foreign companies has been lifted up and being replaced with full ownership (Tiam, 2015). This means the expansion of equity ratios in e-commerce for foreign companies has been raised to 100% compared to half of the ownership in the previous policy. This action was aimed to enhance the development of cross-border e-commerce and extending Chinese E-commerce companies to the international

market (Tiam, 2015). As an extension to Shanghai’s Free Trade Zone policy, in June 2015, the full rights of ownership to foreign companies have been approved nationally (Agarwal & Wu, 2002). The Ministry of Industry and Information Technology (MIIT) issued Circular 196 or the Notice on Opening up the Limitation on Foreign Ownership in Online Data Processing and Transaction Processing Services. This gives international companies the freedom to operate with their own online data processing as well as transaction processing services.

Although some may argue that this policy will create vulnerable positions for domestic market such as an increase in competition, it actually brings positive externalities. For instance, companies might continuously improve their quality of services or products to be on par with other competitors. This can be seen as beneficial especially to consumers. In contrast, the drawbacks involve risking domestic companies to lose their businesses due to the loss in market competition. The results of this might be risky to the country such as increasing unemployment rate. This could cost the Chinese government at least $18 billion to create job markets for its citizens as well as the drop in consumer spending will worsen the economy (Wen & Haimes, 2002).

3           Impacts on International Economy

3.1              Cross-border E-Commerce

The Circular 196 was further supported by another policy, Opinions on Guiding Healthy and Smooth Development of Cross-border E-commerce, who was issued by the state council (Tiam, 2015). Statistically, eMarketer (2017) reported that consumer in China will spend an average of

$882 per cross-border order. According to the World Economic Forum, China accumulated

$78.5 billion of cross-border retail e-commerce sales in 2016 which is expected to double by 2021 (Fan & Backaler, 2018). The positive accumulation of sales further stresses the importance


of cross-border e-commerce by the government. They encourage domestic business to extend their business to the international market by providing monetary aids (Tiam, 2015). Customs, inspections and tax policies were also improved as well as encouraging currency internalization of RMB.

Figure 3 Cross-Border Retail E-Commerce Sales in China 2014-2020

 

Figure 3 shows a significant growth of cross-border e-commerce sales in China from 2014 to 2020. From the graph, the spike positive growth from 2014 to 2015 can be assumed to relate with the liberalization of policy in 2015 which helped to encourage both outgoing and ingoing foreign e-commerce market. This may due to the increased awareness of the overseas brand in China which holds the assumption of providing better quality. However, although the sales continued to grow gradually, the negative growth starting from 2015 to 2016 onwards, might suggest customers’ preference in local products. As fashion is one of the biggest e-commerce categories in China (Daxue Consulting, 2015), consumers’ preference in local vendors might affect the drop of cross-border e-commerce in this industry. Additionally, the raised awareness in the quality of products and services among consumers encouraged local vendors to improve their products (eMarketer, 2017). This could also influence China’s customers to buy local produce again.

4           Impacts on Domestic Economy

The Opinions encourage services from multiple sectors such as agriculture, tourism, traditional trading, and public service sector (Lovells, 2016). Hence, this liberalization of e-commerce helps in promoting domestic economic development.

4.1              Rural Village

Inland regions have tremendous room for growth and focusing on rural areas could be beneficial for China’s overall e-commerce performance (Fan & Backaler, 2018). In 2009, Alibaba established Taobao Village which helped the development of e-commerce in rural areas. This enables products to reach customers in rural areas as well as encouraging rural produce to be sold throughout the country. China is also known to have an unstable growth of economy between urban and rural areas. This may be due to the fact that living in a city has benefits which include housing and social aids as well as the care from state enterprises (Tobin, 2011). Hence, Alibaba’s initiative to accelerate the expansion of rural area by encouraging rural netizens to participate in online business could solve the imbalance economic growth between

Figure 4 Percentage of Total Chinese Netizens in The Rural Areas and Chinese Rural Netizens Engaged in Online Shopping

 

With an average netizens growth throughout the years, the steadily increase of netizens who participate in online shopping from Figure 4 proves that Taobao villages does encourage


consumption from rural netizens. The higher consumption can be linked to the increase of personal wealth that encourages them to spend more.

Figure 5 Number of Taobao Villages in China

 

Figure 5 shows a drastic increase in Taobao villages in a span of only 4 years. Thus, the growing numbers of Taobao Village have helped rural areas to achieve its expansion. One distinct impact it delivers include lowering the income gap between urban and rural citizens.

This could indirectly help to alleviate poverty amongst rural citizens in China (CEFC, 2017). E- commerce could also remove the barrier between the urban-rural divide by providing internet facilities as well as equipping rural netizens with training to improve their standard of living (Li, 2017). This added human capital should prepare rural netizens to have a better job standing then previously.

As one of the main income sources for rural areas involves farming, it is hard for them to have a stable income. This further widens up the game of income inequality between rural and urban areas in China. However, the platform e-commerce offers help to narrow the income gap between these two groups (Qi, Zheng, & Guo, 2019). Furthermore, Taobao villages had created various job opportunities for its rural netizens. This includes becoming the entrepreneur itself,

handling the distribution of packages or the training center for rural netizens. In addition, as income grows, the tax base for local governments also increases (Qi, Zheng, & Guo, 2019). This gives the government the opportunity to collect more tax revenue that later benefits them too.

Such examples include improving infrastructure and public services. Thus, the persistent divide in urban and rural populations in terms of growth and income inequality could be overcome by the incentive of Taobao village.

4.2              Consumers Behavior

The effect of liberalization in e-commerce has helped China to provide multiple platforms and various products for consumers to choose from. Considering China’s netizens that have 802 millions of internet users (McCarthy, 2018) and 788 million that are frequent online shoppers, this further supports that e-commerce growth is rapidly increasing. The domino effect it has on e- commerce sales could directly influence the consumption rate of China’s consumers. Given the consumption-driven growth aimed by the government, the liberalization of e-commerce indirectly contributed to this. Moreover, the World Economic Forum (2018) also reported that consumers in China no longer are price-sensitive but instead, they strive to have premium ends on their consumption.

5           Conclusion

In conclusion, the two biggest liberalizations of e-commerce in China, accessing WTO and Circular 196, has helped China to grow its e-commerce market. World Economic Forum (2018) reported that China’s share in global e-commerce is 42% in comparison to less than 1% a decade ago. This significant change should indicate how the liberalization of e-commerce has helped shaped the economy of the growing sector up until today. Such examples include encouraging international consumption as well as domestic ones.

Figure 6 China’s Percentage of Total Retail E-Commerce Transaction Value and Mobile Payments

 

Additionally, the liberalization of e-commerce indirectly supports the consumption-driven growth that is targeted to improve China’s economy. Figure 6 shows a comparison of China with the United States and the global measure in terms of e-commerce sales transaction and the usage of mobile payments. China leads the chart in both categories as at 2016 and this again supports the assumption of liberalization of e-commerce in China helps the economic growth.

6           Bibliography

  • Agarwal, J., & Wu, T. (2002, September). China’s entry to WTO: Global marketing issues, impact, and implications for China. Retrieved from https://emeraldinsight.com/doi/abs/10.1108/02651330410539620
  • Clark, D. (2019, January 23). 2019: China to surpass US in total retail sales. Retrieved from https://www.emarketer.com/newsroom/index.php/2019-china-to-surpass-us-in-total-retail- sales/
  • Daxue Consulting. (2017, May 11). Fashion industry in China. Retrieved from https://daxueconsulting.com/fashion-industry-in-china/
  • EMarketer. (2017, November 14). Cross-border ecommerce spending in China to top the $100 billion threshold in 2017. Retrieved from https://www.emarketer.com/Article/Cross- Border-Ecommerce-Spending-China-Top-100-Billion-Threshold-2017/1016697
  • EShop World. (2018, May 15). China e-commerce insights. The biggest eCommerce market in the world. Retrieved from https://www.eshopworld.com/blog/china-ecommerce-insights- 2018/
  • Fan, Z., & Backaler, J. (2018, September). Five trends shaping the future of e-commerce in China. Retrieved from https://www.weforum.org/agenda/2018/09/five-trends-shaping-the- future-of-e-commerce-in-china/
  • Kharpal, A. (2019, February 04). Everything you need to know about WeChat – China’s billion- user messaging app. Retrieved from https://www.cnbc.com/2019/02/04/what-is-wechat- china-biggest-messaging-app.html

  • Li, A. (2017). E-commerce and taobao villages: A promise for China’s rural development.
  • Wen, F. H., & Hames, I. B. (2002). Chinas accession to the WTO and its effects on electronic commerce, the Internet, and digital piracy under the agreement on trade related aspects of Intellectual property rights. Retrieved from https://scholarlycommons.law.hofstra.edu/cgi/viewcontent.cgi?article=1004&context=jibl
  • Zhang, X., & Cao, G. (2018, April). Educational structure of resident, e-commerce transactions and residents’ consumption. Retrieved from http://www.estp.com.tr/article/educational- structure-of-resident-e-commerce-transactions-and-residents-consumptionempirical- analysis-based-on-synergistic-and-mediating-effects/
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