China crackdown on overseas personal shoppers boosts ecommerce

Beijing’s move to sideline ‘daigou’ trade provides opportunity for foreign brands

Tom Hancock and Wang Xueqiao in Shanghai

China is cracking down on imports of consumer goods by overseas personal shoppers and seeking to replace them with imports via ecommerce websites that can be taxed, providing opportunities for foreign brands in a fast-growing $23bn market.

Chinese consumers have for years relied on compatriots travelling or living abroad to buy goods for them — from infant powdered milk to luxury handbags— due to a lack of availability at home, high tariffs and the perception that foreign goods are safer.

The scale of the “daigou”, or “buy on behalf”, trade is difficult to determine as those imports are often undeclared to avoid taxes, but analysts say it is worth tens of billions of dollars a year. 

A new law aimed at holding ecommerce platforms responsible for fraudulent goods sold by vendors on their sites, which is due to take effect in January, requires all daigou who advertise online to register with the government and pay full import taxes. In recent months, customs have stepped up airport checks, while Chinese courts have jailed several merchants for up to 10 years for tax evasion.

“In the past two months customs has been very strict; every package is checked,” said Fiona, a cosmetics daigou based in Russia who declined to give her last name. The profession often provides a sideline for airline staff, but “many people have stopped this year as the checks are tighter”, said one Chinese flight attendant.

The clampdown is deterring daigou traders and channelling customers towards cross-border ecommerce sites, which allow sales of imported goods at lower tax rates than conventional imports.

This shift has lured retailers such as Walmart in the US and the UK’s J Sainsbury to online platforms in China. The sector will generate $23bn in sales this year, according to consultancy iResearch, which projects that will more than double by 2021. The ministry of commerce estimated the trade at $14bn last year.

“The Chinese government’s crackdown on daigou is good for us,” said Jia Ming, general manager of cross-border platform Ecmoho, which primarily sells health products made by the likes of Nestlé, Unilever and Johnson & Johnson. “A lot of daigou is tax avoidance, in which case it would be cheaper than our products.” 

Since 2014, Beijing has allowed platforms such as Alibaba’s Tmall and to let consumers buy goods directly from overseas without paying tariffs, and at a lower rate of sales tax than regular imports — typically 11.9 per cent versus 16 per cent — on up to Rmb20,000($2,875) of goods per year.

In addition to lower prices, the platforms offer a wider choice of goods since exporters can skirt restrictions faced by Chinese retailers such as bans on particular ingredients.

Since such purchases are not subject to tariffs, they are insulated from China-US trade tensions. “We don’t see the US-China trade war having a significant impact on cross-border retail ecommerce sales,” said Shelleen Shum of eMarketer, a research group. 

At a trade expo in Shanghai this month designed to promote China as a key importer, Alibaba said it would import $200bn of goods from more than 120 countries in the next five years. Kaola, the most popular cross-border platform, run by tech company NetEase, estimates it will buy about $11bn of overseas goods over the next three years.

To speed up deliveries within China, etailers have built dozens of bonded warehouses where goods can be stored without being subject to customs checks and tax otherwise incurred. They also have overseas warehouses where goods can be collected and shipped in bulk. 

Average cross-border delivery times have shrunk from nine days in 2014 to four-and-a-half last year, according a report by Deloitte and Alibaba this month. Food and mother-and-baby products were the most in-demand overseas goods, it added. 

Xi Jinping, China’s president, praised cross-border ecommerce at this month’s expo, where officials announced they would delay new rules governing the sector for another year. 

Those regulations, initially proposed in 2016, would increase import taxes and ban any goods not on a specified list of approved products. This roiled shares in Australian vitamin makers and milk powder manufacturers that have come to rely on the channel, before officials delayed their implementation and signalled they would take a softer approach.

Beijing has to “balance any regulation with the real threat of channelling growth towards unregulated sectors like daigou,” said Paul O’Brien, a China-based analyst at consultancy Chemlinked. “I don’t expect any sweeping changes,” he added.

But analysts say there is still a risk the rules could tighten if authorities move to protect local consumer companies or retailers that import through traditional channels.

“The current openness of cross-border ecommerce is designed to buy China some time to develop or just purchase the technical capacity needed to manufacture the high quality and safe goods demanded by its citizens,” said Mr O’Brien. 

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