Overview and Current Market Trends
China is the world’s largest eCommerce market and is projected to reach $1.6 trillion in two years. Over 40 percent of total global eCommerce spending comes from China. In 2015, China’s online retail transactions reached $622.5 billion. In 2016, the number of digital buyers in China reached over 460 million and continues to increase, with the total number projected to surpass 650 million by 2018. By 2020, China’s eCommerce market is predicted to be larger than those of the U.S., the UK, Japan, Germany, and France combined, according to Dezan Shira & Associates. Research firm iResearch China forecasts that China’s eCommerce market will grow 27 percent annually over the next four years.
Reasons to Shop Online
Aside from the general readiness of Chinese consumers, there are a number of reasons why there is a preference to purchase goods online:
- Choice – The traditional brick and mortar retail sector is significantly underdeveloped due to the country’s size and highly fragmented market. E-commerce provides consumers with significantly greater choice in terms of available products.
- Convenience – Delivery services have evolved differently from more developed countries. In most cases, online purchases are delivered within one to two days for a relatively inexpensive fee.
- Price – Competition online tends to be greater and the real price tends to be more transparent to consumers. Furthermore, online retailers are not likely to be paying full duties and VAT. This usually results in consumers getting a better price than they would at traditional brick and mortar stores.
- Trust – When purchased on a marketplace, retailers are required to accept returns and exchanges, no questions asked, which is uncommon for small brick and mortar retails stores. Furthermore, a marketplace will usually attempt to ensure that goods sold are not counterfeit. 
Domestic B2C E-commerce, Cross-Border E-commerce, and B2B E-commerce
The eCommerce space in China is dominated by domestic platforms, namely Alibaba’s Taobao and Tmall and JD.com, which hold 57% and 25% of the market share, respectively, according to Dezan Shira & Associates. Other platforms such as Suning, Vipshop, Gome, Yihaodian, Dangdang, Amazon.cn, and JMei make up for the majority of the remaining market share. Cross-border eCommerce is experiencing significant growth. China’s Ministry of Commerce (MOFCOM) projected that cross-border eCommerce transactions would increase to RMB 6.5 trillion by 2016.
U.S. companies targeting to sell products on China’s eCommerce platforms can choose either to establish a firm presence in China or use cross-border eCommerce to sell products directly from abroad. A presence in China can be a subsidiary company, a JV, a wholly-owned entity or a local distributor/agent. However, within the massive growth of eCommerce, American firms can take advantage of China’s cross-border eCommerce bonded warehouses. These special bonded zones create a streamlined pathway which makes it easier for China Customs to manage and potentially easier for buyers and sellers to conduct cross border eCommerce transactions. There are more than a dozen cross-border eCommerce bonded zones in China and growing. Through this channel, Chinese consumers can purchase no more than 2,000 RMB per sales transaction and no more than 20,000 RMB per year. American companies seeking to sell through one of these special zones will need to partner with local authorized partners who have integrated systems to record transactions with China Customs. The eCommerce landscape is rapidly changing hence it is of the utmost importance for companies to stay current with the newest rules and regulations. 
Domestic and Preferred Card Schemes
While credit card usage is rising exponentially in China, only 24.5% of the Chinese recently had credit cards with 330 million users in 2012. With total population of over 1.35 billion, this penetration rate is relatively small (and there is usually only one card per user in China).And while only 1 in 4 may own a credit card, Chinese users do not tend to use their credit cards frequently, thus credit cards are not the most commonly used payment method online. Instead, the top payment methods for ecommerce are Alipay, Tenpay, Union Pay, 99Bill and China PnR.1 But in reality China payments online are really a duopoly between the dominant Alipay and up-and-coming Tenpay.Alipay is by far the most trusted payment method used by more than half of the population in China due to the dominance of its parent company Alibaba, the ecommerce giant that hosts the Alipay system. Tenpay is the major online payment platform competing heavily with Alipay but has limited reach due to Alipay being the payment platform for Alibaba’s hugly popular Tmall and Taobao ecommerce marketplaces.The Chinese do not frequently use credit cards to leverage consumer spending due to their historically high personal savings rates (currently 30% compared to 5% in the UK), so such credit has historically not been needed. However, as China continues to increase personal standards of living and consumption, ecommerce is taking off, and so are card payments. Thus China is on its way to becoming a more consumer-oriented society and brand-driven economy and the accompanying credit card usage has and will continue to increase. For these reasons it is estimated that personal credit cards in China may reach as many 1.1 billion users by 2025. 
Alternative Payment Methods
In lieu of credit cards, two major online payment systems have emerged as China’s major facilitators for m-commerce transactions: Alipay, owned by Alibaba, and mobile messaging platform WeChat’s mobile wallet, WeChat Wallet.
“There’s a battle between Alibaba and WeChat to make the easiest, most integrated payment system in the world,” said Buchwald. “Alibaba’s advantage is being the world’s largest marketplace. It was around before WeChat, but it’s a desktop-first product. WeChat was built with a mobile-first mentality.”
To compete with Alibaba, WeChat has been stitching together a mobile marketplace for service and product-driven companies. According to Zhang, the mobile checkout process can be as simple as scanning a QR code, a prominent facilitator for transactions in WeChat. Retailers like Yoox and Zalora have fully functional mobile stores built into the app. Taxis can be booked, bills paid and products purchased with a few taps. 
Most Chinese purchase items from Taobao and pay using AliPay. These services strongly resemble eBay and Paypal, respectively. 
Alternative payment methods are dominant in China as there are about 200 million credit cards versus 2 billion debit cards. Alipay (with more than 650 million account holders), Tenpay, Union Pay and UPOP (Union Pay Online Payment) jointly make up almost half of all payments online. 
Other Payment Methods
Alipay 48.8% Tenpay 19.8% Union Pay 11.4% 99Bill 6.8% China PnR 5.3% YeePay 3.2% Huanxun IPS 2.7% Others 2.0%
Alipay Alipay is an online payment service that belongs to the Alibaba group, supported by Alibaba, Taobao, Tmall and an increasing number of independent online stores.
Alipay, different than PayPal, handles online payments in escrow and values buyer protection very much. A typical purchase process using Alipay goes as follows:The buyer chooses a product and makes the payment to the seller via Alipay;Alipay, instead of transferring the money to the seller’s Alipay account immediately, keeps the money as escrow and informs the seller that the buyer has made the payment. At the time the money is neither directly controlled by the buyer nor the seller;The seller sends the product to the buyer;The buyer receives the product, and makes confirmation in their Taobao or Alipay account;Alipay receives the buyer’s confirmation, and sends the money to the seller.You may be wondering what if the buyer is the evil one, and doesn’t confirm the receipt? Taobao and Alipay do have a solution. They track the No. of the express delivery to monitor the status of the product, and if the buyer takes no actions in 7 days, or 14 days in some cases, counting since the status of the product becomes “signed and received”, the product will be automatically confirmed by the system and the money will be sent to the seller’s Alipay account.
To get an Alipay account – If you don’t have a valid ID card or business certificate issued by the Chinese government, getting an Alipay account is a little harder. You need to upload a digital copy of your passport to verify your own identity, an entry permit, a Chinese bank account, and a native Chinese guarantor that needs to provide his/her own ID card number to verify his/her own identity.Moreover, Alipay has enterprise solutions for overseas companies that need to collect payments from their Chinese buyers in RMB. 
China is going to extend its electronic invoice system to nationwide coverage in 2016 to better regulate taxation of online businesses. That is what the Economic Information Daily has reported. The e-invoices will serve as an equivalent to paper ones that provide proof of transactions and taxation. It’s expected to help curb tax evasion by users of C2C platforms, where individuals can easily open virtual shops. Zhang Bin, a research director at China’s Academy of Social Sciences, cited the example of Alibaba’s Taobao, which has over 11 million registered e-shop owners. The platform will generate at least 5 billion yuan in sales tax a year. The e-invoice system has been under trial operation in 22 provincial regions since 2012. Amid China’s booming innovation drive, which involves the rise of millions of Internet-based start-ups, taxing these small businesses has become a delicate issue. China’s two leading ecommerce operators Alibaba and JD.com have all voiced support for the policy. A Taobao shopkeeper says the e-invoice system won’t be a burden if it doesn’t generate extra fees. 
The People’s Bank of China implemented a non-bank payment regulation to limit paying with the balances of third-party payment systems. The regulation divides the third-party payment accounts into three categories: those verifying their identity through one “external channel”, including binding bank cards and uploading identification card information, those through three identification channels, and those through five channels.
Chinese law has required real-name registration for app users. The payment limit on the first category is a non-renewable, lifelong cap of RMB 1,000 (USD 150). The limit on the second category is RMB 100,000 per year, and the limit on the third is RMB 200,000 per year. That is to say, the highest amount for users of third-party payments, including Alipay and WeChat, is RMB 200,000 per year, even if they have gone through the complex process of real-name verification.
The regulation will most likely have little impact on average users, since their online banking transactions probably will not reach RMB 200,000 a year. However, the story is totally different for businesspeople whose payments are mostly made through Alipay. According to a report by Chinese news website zol.com, if the payment amount per order is over RMB 200, or the aggregate amount per day is over RMB 5,000, users will have to pay with their bank cards.
However, a report by Sina Tech said that Alipay users can evade the limit problem if they transfer the balances of their Alipay account to their bank cards, and then pay with that same bank card. But, if a WeChat user fails to verify his indentity information, he will probably not be able to send or receive red envelops in WeChat! 
It is not a requirement to set up a local entity in China to sell to shoppers in the market. 
China remains one of the most attractive online retail markets in the world. The world’s most populous country (nearly 1.4 billion people) is active online—more than one-third of those who go online at least once a week are “continuously connected,” according to the Connected Consumer Study, and another 58 percent check the Internet two to four times per day. China’s online buyers are sophisticated, with well-developed brand awareness for and trust in the biggest names, including domestic leaders Alibaba, Tmall, and JD.com as well as international players such as Amazon and eBay. Chinese shoppers have also embraced ecommerce as something of a cultural phenomenon, particularly on Singles Day (November 11), which has become much like the U.S.’s Cyber Monday. Alibaba reported $9.3 billion in sales on Singles Day 2014—equivalent to about 7 percent of the country’s total-year sales. The market for ecommerce players is rapidly evolving as it continues to grow. Some domestic leaders, including Alibaba and Tencent, have been active in M&A to build their online capabilities and market share, a trend that should continue in coming years. Domestic business-to-consumer (B2C) sites such as Tmall and JD.com (formerly 360Buy) are growing faster than C2C players like Taobao, as more buyers seek high-quality products and services that can be better guaranteed by larger-scale retailers. Many B2C sites have embraced the Amazon-like model of selling goods to buyers, a contrast to Alibaba’s role as a middleman between buyers and sellers. Online reviews heavily influence customers’ purchasing decisions—for example, 40 percent of online shoppers in China want instant “buy or don’t buy” advice and reviews, a much higher rate than in other countries. Online retailers, notably Taobao, have review systems for users; dianping.com has become a popular online review site for Chinese consumers. Social media may hold the key to the future of ecommerce in China. Nike, for example, has multiple accounts on Sina Weibo (a Twitter equivalent), helping to promote the company on a wide scale and driving increased growth. WeChat, a mobile text and voice messaging service, has expanded into ecommerce on its popular site. China continues to have distinct regional differences, which makes ecommerce a challenge. For example, consumers in tier 1 cities are doing far more luxury shopping—buying more big-ticket items such as cars—and are developing brand loyalty much more than shoppers in the tier 4 cities, where shoppers have less disposable income. Logistics also poses difficulties. Shipping and distribution conditions are often vastly different depending on the destination, especially when it comes to the last mile. Retailers have also been slow to meet consumers’ expectations for refunds and returns, although this is improving in the fashion market, where returns are crucial for driving sales. One company succeeding with its logistics is JD.com, which operates more than 80 warehouses in 34 cities, allowing it to process orders and make deliveries faster than competitors. 
Mobile eCommerce, Popular Mobile Platforms, and Social Media
Online wallets are the top payment method of choice, with 33 percent of Chinese shoppers utilizing the technology to complete transactions. Roughly half of all China’s eCommerce sales are made on mobile devices, nearly 16 percent more than the global average, according to the U.S.-China Business Council.
There are dozens of mobile eCommerce platforms, but in 2016 Taobao had the most monthly active users at 253.2 million, according to Walkthechat.com. Other platforms like Meituan, JingDong, WeiPin, Tmall, eLeMe, Baidu NuoMi, and DianPing all play an active role in the market, but none are nearly as popular as Taobao in terms of active monthly users.
Understanding how to utilize the advantages of social media can raise your company or product’s profile and accelerate your company’s ability to sell online. The three biggest social media players are WeChat, micro blog Weibo, and social network QQ Zone. WeChat allows retailers to feature online stores and has a convenient third party payment function. It also features push messages to introduce new product lines or deliver promotions. U.S. companies interested in exploring social media avenues and working with these sorts of social media players should seek working with a local marketing partner to develop a strategy and support execution.
China’s mobile payment ecological environment has become more mature; mobile payment penetration rate among China internet users reached 64.7% according to Caohan Ping, deputy general manager of the internet finance department in Bank of China, at a finance forum last week. China users in 21 to 29 age group from the first-tier and the second-tier cities are the main mobile payment users, accounting for 43%, followed by users in 30 to 39 age group (30%) according to eMarketer. The number of mobile online shoppers in China reached 448 million; and, mobile accounts for over 70% of total online shopping transactions. China proximity mobile payment users doubled in 2015 and there will be 195.3 million smartphone users using proximity mobile payment in 2016, an increase by 45.8%, according to eMarketer. 
Major Buying Holidays for eCommerce
“Singles Day”, November 11, is the busiest online shopping day of the year when huge discounts are offered. For some brands, up to 80% of revenue is generated on that day. In 2015, Alibaba recorded sales of about $9 billion on Singles Day, with shipments of 278 million orders, 43% of which were placed on mobile devices. In 2016, approximately $14.3 billion was spent on Alibaba as the company beat its own record by selling 36 billion RMB in one hour. Other holidays such as Valentine’s Day and Chinese New Year are also aggressive online shopping periods.
ECOMMERCE INTELLECTUAL PROPERTY RIGHTS
Intellectual property rights infringement across eCommerce platforms is common in China. Registering your intellectual property is essential. The registration process for a trademark can take up to 18 months, and can only be protected once the application process has been completed. U.S. companies should conduct due diligence to see if similar trademarks have already been registered. Current trademarks can be found in the China Trademark Office’s official database. U.S. companies experiencing serious eCommerce IPR concerns should consult with the U.S. Department of Commerce’s Patent & Trademark Office who has offices in Beijing, Shanghai, and Guangzhou.
China is often perceived as a lawless country where ‘anything goes’ regarding intellectual property (IP). China has laws that offer a great deal of protection for intellectual property, a condition of its accession to the World Trade Organization in 2001; effective enforcement, however, is lacking.
China’s enforcement of its IP laws is weak, but it does exist. Companies that formally register their IP with the appropriate authorities have a chance to prevent third-party infringement. Companies that do not register their IP have no recourse when it comes to infringement. 
China employs a “first-to-file” system for trademark registration and affords no protection to unregistered trademarks. This is different to the Anglo-American system, by which a company gains common law rights by virtue of using a brand in commerce.
In China, it is possible for a third party to both register “your” trademark and prevent you from using it without selling a single product themselves. Such trademark squatting is common and when it occurs the options are to pay a licensing fee to the trademark squatter; buy the trademark outright; or to change your trademark.
Companies doing business in China should give serious consideration to trademarking any distinctive phrase or logo used on their products or packaging. Additionally, it is important to register both the English-language trademarks as well as Chinese-language trademarks, including potential future trademarks.
Chinese law protects copyrighted material in much the same way as the West. The problem is not the lack of laws, but the lack of enforcement. Although a creative work first published in another country automatically gains copyright protection in China upon its creation, it is advisable to register copyrights in China, as doing so provides better evidence of ownership and stronger enforcement options. 
REGISTERING WITH CHINA
Registering your IP alone will not limit the spread of counterfeit goods. Registration merely gives you the legal capacity to enforce your rights to that IP, and should properly be seen as one of the pieces in an overall strategy.
For any company concerned about counterfeit goods, the next step after registering IP should be registering that IP with China customs. This is not a legal requirement but a practical one. Although customs officials have discretion to check every outgoing shipment for trademark, copyright, and patent infringement, in reality they only check against the customs database. Therefore, if you have not registered with customs, there will be no enforcement.
Foreign companies entering China should not leave common sense at the border; it is important to exercise the same due diligence, if not more, as you would in your home country.
Once you or your product enter the Chinese market, continue to monitor it closely. Pay attention to what your partners are doing and how your IP is being used. You cannot rely on your Chinese partners to provide you with accurate market information and the onus is on you to monitor what is going on with your brand. Your Chinese partners are likely to have their own agenda that may not coincide with yours, just as in any other part of the world.
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