China's e-commerce market

China's e-commerce market is significantly growing with online retail transactions touching $622.5 billion in 2015 depicting an increase of 33.3% from 2014. This stands at 12.9% of total social retail sales. China’s e-commerce market is estimated to be larger than those of the U.S., the UK, Japan, Germany, and France combined by 2020. Meanwhile, China’s cross border e-commerce sector is also reported to grow in leaps and bounds with first half 2015 e-commerce transactions reaching RMB 2 trillion accounting 17.3% of China’s total import and export trading volume. The global trade pattern report released by Ministry of Commerce (MOFCOM) estimates China’s cross border e-commerce transactions to increase to RMB 6.5 trillion by 2016.
 

Feb. 2016 Preliminary Statistics for Exports and Imports (Source: Central Bank of the Republic of China-Taiwan)

 
Boosting import export market

While China's traditional import and export market has been shrinking, the government has released several preferential policies for encouraging cross border e-commerce. In March 2015, The State Council of China officially announced its plan to establish a "Comprehensive Pilot Zone of Cross Border E-Commerce" in Hangzhou. There are plans laid down to expand the program to 12 new cities: Shanghai, Guangzhou, Tianjin, Chongqing, Hefei, Zhengzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen and Suzhou. The government believes that this would attract businesses, create jobs and nurture new business models that will boost foreign trade and stimulate the economy. At a time when China is experiencing sluggish foreign trade, this expansion is expected to support the falling export and import value.
 

New tax policy

According to official data, cross border e-commerce transactions in 2014 exceeded four trillion yuan, while the tax collected on personal mail packages was less than one billion yuan highlighting the big loss in tax revenue. With the new policy, the government believes that tax losses would be curbed.  The Ministry of Finance sometime back announced about levying new taxation policies on the imports in cross border e-commerce trade in April 2016 (effective from May 01, 2016). This step comes to ensure fair competition between cross-border e-commerce and traditional retailers.
 

China Exports and Imports (Source: Thomson Reuters)
 

Policy details and impact

As per the details available, buyers of all imported goods purchased online will be required to pay most of a 17% value-added tax and a consumption tax. This is higher from the earlier postal articles tax with rates ranging from the most common 10% to 50%. Additional tariff would be levied on goods imported in bulk through other channels. The new rules are said to eliminate the duty-free exemption for goods whose tax payable does not exceed 50 yuan. Packages exceeding 2,000 yuan and goods mailed to one person in excess of 20,000 yuan every year will be taxed more heavily as general trade items. Tax on luxury goods would be increased to 60%, while tax on personal mail packages will also be increased. Imported goods priced under 500 yuan will be most affected as they were not taxed before. This new tax policy is expected to increase the cost of many items such as food, health care products and low-price cosmetics thereby forcing Chinese citizens to buy domestic goods. Overall, goods brought from cross-border e-commerce platforms would be subject to tariff, value-added tax and consumption tax.
 

Impact on Australia and other Countries

Australian market pulse indicates that the new tax which China plans to levy on goods bought from foreign websites (expected to be about 11.9%) seems to have an impact on sales growth for companies in sectors such as food and healthcare including market darling vitamin producer, Blackmores Ltd (BKL). In fact, BKL share price already plunged 18.38% in the last three months and 13.82% in last five days (as at April 12, 2016) at the back of the news on new tax regulations in China. However, we also saw slight respite in stock prices as of April 13, 2016 and April 15, 2016 (2.31% up). Nonetheless, Australia’s companies (including vitamin and dairy companies) have been trying to seek clarification with regard to the regulatory changes. Particularly, it is now being highlighted that healthcare products must have approval from Beijing before being sold in China, and will not be allowed entry at the border without such an approval and potentially be sent back to Australia. What we understand is that the new law can jeopardize the advantage leveraged by offshore websites up till now. On the other hand, some experts believe that the price rise may not be much and flow of goods would hardly be impacted.
 

BKL Daily Chart (Source: Thomson Reuters)
 
At the same time, the recent updates from China have boosted stocks such as Bellamy's Australia Ltd (ASX: BAL) which surged 5.5% on April 15, 2016 at the back of the news that all the infant formulas that are sold in China need to get accredited with a formulation registration certificate by China Food and Drug Administration (CFDA) starting from January 2018. Primarily, the group’s infant formula is under 'Positive List’ which could enter China under its free trade zones as per the new tax policy recently issued by the government. It has been clarified that infant milk formula imported through online channels may not need to have registration documents temporarily. In fact, Trade Minister, Steven Ciobo revealed that new rules are consistent with the free-trade Agreement. Based on these updates, experts now believe that the new changes may not significantly impact sales of Australian companies.
 
It is also noted that Korean companies accounted for a good percentage of China's imported cosmetics in 2015 coming close to the French rivals. Driven by strong cross border retail, in the first seven months of 2015, China's imports of foreign cosmetics products increased 36.1% to $1.67 billion as reported. With the new regulations, the impact on cross-border trading between China and Korea would also be under watch.
 
At this point it may still be difficult to predict the consumer spending trend in China post the new regulations and the exact scenario for entry of Australian products into the attractive China market. A close watch will unveil the extent of implications in the coming months.

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