Balancing Cross-Border E-Commerce Against Capital Outflows

Late last year, the Ministry of Commerce, the National Development and Reform Commission, the Ministry of Finance, the General Administration of Customs, the State Administration of Taxation and the State Administration for Market Supervision, jointly issued a Circular on Improving Supervision of Cross-Border E-Commerce Retail Imports, which took effect on January 1, 2019. The General Administration of Customs also issued a separate circular, effective from the same date that, collectively with the previous circular, has become known as the New Cross-Border E-Commerce Regulations, or CBE Regulations.

The New CBE Regulations reflect the government's intention to better manage the fast growing cross-border online retail sector. A key element was to clamp down on cross-border e-commerce sales through unregulated channels such as “daigou” in which an individual or a group of exporters outside China purchase goods for customers in China, and these individuals may use loopholes to circumvent import tariffs imposed on overseas goods. The new rules also strengthen protection for consumers, improve after-sales service, and promote product safety by various procedural measures and by holding all participants liable for compliance in the supply chain—including the overseas sellers.

Incentives were also given by extending the waiver of the pre-importation registration requirements on specified categories of products; and increasing the value limit for each shipment of goods from Rmb2,000 or $293, to Rmb5,000; and upping the annual quota from Rmb20,000 to Rmb26,000.

The changes enacted by the new law are timely. E-commerce sales in China accounted for 23.8% of all retail sales in the country, and are expected to increase by nearly 10% this year. Chinese consumers have also become increasingly drawn to purchasing foreign brands via e-commerce platforms. Last year, the value of cross-border e-commerce transactions jumped 50% to Rmb134.7 billion. In the first half of 2018, 67% of Chinese e-commerce consumers said that they had a cross-border purchasing experience, up from just 34% in 2017.

At the same time that China is seeking to better regulate and develop its online e-commerce sector, however, it also wants to rein in large capital outflows. The State Administration of Foreign Exchange, or SAFE, has made major efforts to bring foreign capital back into the domestic market by increasing the quotas for the stock and bond connect programs. It also had laid out a set of provisional guidelines to manage online cross-border foreign currency transactions, that it announced on April 29 had become mandatory.

The new rules require all cross-border payment businesses (which mainly provide services for individuals and corporations using e-commerce platforms), to register with local authorities, and to report client information to regulators when the cumulative monthly transaction value exceeds $200,000. The rules also require that one single payment shall not exceed $50,000. E-commerce platforms must also protect intellectual property rights and respond to a report of violations in a timely manner. Companies that fail to respond will face significant penalties.

The introduction of the rules is to facilitate cross-border e-commerce settlement, promote healthy development of foreign exchange business, and prevent foreign exchange payment risks, according to SAFE. However, the rules covering the online cross-border foreign currency transactions also reflect the government's concern about the possibility of large capital outflows developing. The local stock market collapse in 2015 subsequently triggered huge capital outflows and a sharp depreciation of the renminbi against the dollar. Since then, the central government has been keen to retain tight capital control, as well as curbs on what it calls “irrational outbound investment.”