In this article, we will first introduce you to the rules of cross-border e-commerce, and in a second, the three main cross-border e-commerce platforms in China.
What will you learn from reading this article?
We hope this article will help you get the most out of the thriving cross-border e-commerce market in China!
The essential rules of cross-border e-commerce in China for foreign players
- What products can be shipped to China?
- How can my products be shipped?
- How is currency conversion handled in the context of cross-border trade with China?
- Are there rules and regulations for cross-border e-commerce with China?
The three main cross-border e-commerce platforms with China
- Tmall: The biggest player supported by Alibaba;
- Kaola: Direct sales of “authentic” products at a discount;
- XiaoHongShu: Instagram-style content platform.
The essential rules of cross-border e-commerce in China for foreign players
What products can be shipped to China?
The first and main question you need to ask yourself is: is it legal to ship and sell your products in China through cross-border e-commerce?
13 Chinese ministries and commissions, including CFDA, MOF, GAC, etc. jointly published the updated version of the “Positive List for cross-border e-commerce products”.
It generally includes product categories such as:
- Fashion and clothing (shoes, accessories, dresses, etc.);
- Food and drink (seafood, fruit, dairy products, coffee, juice, etc.);
- Furniture and machinery (keyboards, fans, laser printers, chandeliers, etc.);
- Supplements (coenzyme Q10, vitamin C and its derivatives, linolenic acids, etc.);
- Sports and activity equipment (basketball, fishing rods, skateboards, etc.).
How can my products be shipped?
Two large shipping models:
- A bonded warehouse: it is a secure area in which goods subject to customs duties can be stored, handled or undergo manufacturing operations without payment of duties. This shipping model is advantageous because the tax is only paid after the sale of the goods;
- Direct shipping from abroad to China : It is a profitable method for traders who would like to test the market with a small number of products.
To have your products shipped to China, you can either develop your own logistics network (which is extremely difficult), or use third-party logistics suppliers or e-commerce platforms with which you cooperate.
How is currency conversion managed in the context of cross-border trade with China?
With the rise of online payment, several payment institutions have flourished in China. The most notable are Alipay (Alibaba) and WeChat Pay (Tencent).
It is strongly recommended that merchants use these two payment platforms to exploit the potential of their user base on a large scale.
How do cross-border payments work?
Chinese customers pay in RMB. Payment companies (Alibaba, Tencent, etc.) collect payments in RMB and buy foreign currency at the spot exchange rate.
The amount will be sent to overseas accounts of payment companies. A transfer will be made to the recipient merchant’s bank account when paying.
To request a WeChat Pay / Alipay cross-border payment account, merchants must have:
- A valid operating license;
- A valid URL / application for implementation;
- Basic information on your company (sector of activity, company name, country / region of registration, address, contact person and contact details, etc.);
- Identity certificates of the legal representative and the shareholder;
- New pilot cross-border e-commerce zones in China.
Are there any rules and regulations for cross-border e-commerce in China?
The Ministry of Finance, the General Advisory Council and the National Tax Administration (SAT) have also published the circular on improving tax policies relating to cross-border imports of retail products through e-commerce, which carries the limit cross-border tax-free purchases from RMB 2,000 to RMB 5,000 for a single transaction, while the annual limit per person will drop from RMB 20,000 to RMB 26,000.
Within these limits, orders can benefit from a tariff of 0%, 70% of value added tax (VAT) on imports and 70% of consumption tax (also called integrated tax for CBEC).
The integrated tax formula for the CBEC:
[(Taux de la taxe à la consommation + taux de TVA) / (1 – Taux de la taxe à la consommation)] x 70%
If the taxable value of an item exceeds RMB 5,000 for a single transaction but is below the annual limit of RMB 26,000, it can still be imported through the standard Chinese cross-border e-commerce retail channels.
The item will be subject to import duties, VAT and consumption tax at the standard rate and the transaction value will be taken into account in the annual limit.
If the total value of transactions in a given year exceeds the annual limit, this matter will be dealt with according to the general terms and conditions for importing trade.
The new measures came into effect on January 1, 2019, which opens the cross-border market to luxury retailers who sell high-end products.
In March 2019, the Ministry of Finance, the GAC and the SAT published the Announcement on policies to deepen the VAT reform, announcing a series of new fiscal policies which took effect from April 1, 2019, including the latest updates:
- Reduction of the VAT levied on imported goods from 16% to 13%;
- For goods on the positive list and ordered via CBEC platforms, the integrated tax rate has been reduced from 11.2% to 9.1%.
The government has not reduced the consumption tax, which means that consumers still have to pay the consumption tax on products imported via CBEC platforms, including skin care and high-end cosmetics (15 %), luxury jewelry (10%) and red wine (10%).
In April 2019, the State Council issued the Circular of the State Council Customs Tariff Commission on matters relating to the adjustment of the import tax on personal effects, which affects the tax on items personal postal as below:
- The tax rate has been reduced from 15% to 13% on imports of food and medicine;
- 20% to 25% reduction on goods such as textiles and electrical appliances.
The tax reduction strongly encourages cross-border e-commerce transactions in China, as it benefits both goods purchased through local CBEC websites and other foreign e-commerce websites.
The introduction of new CBEC policies facilitates further growth and development of the market.
With increased business support and more flexible regulations, foreign traders should seize the opportunity to explore China’s thriving consumer market.
The three main cross-border e-commerce platforms with China
Tmall Global: Market leader supported by Alibaba
Tmall (in Chinese: 天 猫), introduced by Alibaba, is a website for business-to-consumer (B2C) / wholesale (B2B2C) online retailing in China.
Tmall specializes in the sale of branded products from international brands.
Companies with overseas licenses (including Hong Kong, Macao and Taiwan) can take advantage of Tmall Global, a market for cross-border e-commerce.
As one of the largest cross-border e-commerce platforms in China, Tmall Global currently hosts more than 20,000 brands in more than 4,000 categories from 77 countries and regions.
To launch a store on Tmall Global, brands can choose from 3 main business models, which are Tmall Overseas Fulfillment, Tmall Direct Import, and Tmall Global Flagship store.
Brands and suppliers can participate in Tmall Global’s new centralized import supply (CIP) program, which relies on six warehouses around the world to supply merchandise to all online and offline stores of the ecosystem.
Like the TOF, this program is another effective way for international brands to enter the Chinese market.
Another option is direct import of small quantities (TDI), which works like a wholesale model (B2B2C).
Under this model, the TDI team would buy products from brands / suppliers and sell them at Tmall’s direct import store.
The latest business model is the Tmall Global Store (TMG).
Participating brands can manage their own flagship store on Tmall Global with the help of a Tmall partner (3rd partner, Tmall approved professional services company).
The TMG model is attractive because it is a flagship, self-managed company where the brand can use the store to promote new products and attract traffic to its best sellers.
Among the three business models, the TMG offers greater autonomy, because brands can co-manage their sales and marketing efforts on Tmall with their Tmall partners. While for the TOF and TDI models, sales and marketing are handled by the TOF category team and Tmall’s TDI operations team.
In the Tmall Global Stores, there are also a few categories.
Now let’s review the different types of stores:
- Flagship shop: Tmall Global allows foreign traders to sell directly to consumers without going through a Chinese business entity. A brand can open its store within 4 to 8 weeks after contacting an authorized service provider;
- Specialized shop: This type of store exists for traders who have received distribution rights from foreign brands to sell their products in China;
- Authorized shop: Authorized stores are often called “multi-brand stores”.
Authorized stores can sell multiple products in a series of different categories, but must receive the selling rights of the brand owners.
Kaola: Direct sales of authentic products
Kaola, launched in 2015 by Nasdaq-listed company NetEase, is another of the big cross-border e-commerce platforms in China.
It focuses on the direct sale of high quality and authentic products from around the world to Chinese customers.
Compared to Tmall, which focuses more on established, high-end brands with difficult entry conditions, Kaola is more “Brand Friendly” because it accommodates more ordinary brands.
Kaola is currently cooperating with more than 5,000 brands from 80 countries covering maternity and infant care, personal care, healthcare, home appliances and other categories.
How is Kaola different from other big competitors like JD and Tmall?
The first differentiator is the emphasis it places on authenticity and quality assurance.
Kaola works on a direct sourcing model, which means the company has established overseas offices in countries like the United States, Japan and Australia, to ensure that its products come directly from the source!
This bypasses the intermediaries and minimizes the risk of selling counterfeit products, while reducing the cost and therefore the selling price.
Customers can even go up the supply chain to where the product comes from using a QR code placed on the product.
Kaola is so confident in her model that it offers anyone who receives a counterfeit ten times the value of their refund.
In addition, you can choose to return the product and be refunded within 30 days of purchase.
In addition, Kaola is committed to operating with a preferential postage and tax policy, for example by having warehouses in free trade areas, which is “cheaper than abroad” .
To accommodate such a large number of goods, Kaola has more than 150,000 square meters of bonded warehouses in Hangzhou, Zhengzhou, Ningbo and Chongqing, making it the leading site in the industry.
In the future, Koala will open bonded logistics centers in southern China, northern China and southwestern China.
In addition, Kaola is also committed to the trend of social e-commerce by creating an online community called “种草 社区”. (Zhǒng cǎo shèqū).
Since the Chinese rely heavily on the advice of their peers, it is beneficial for e-commerce platforms to create an online community to increase conversion rates.
There are mainly three modes of entry:
- The POP Merchant model is to create a third-party store on Kaola. With this model, traders can use the Kaola website and sell directly to Chinese consumers.
- The “Exclusive Supplier” and “Factory Store” cooperation process works like a direct sourcing model.
In September 2019, Alibaba acquired NetEase Kaola for $ 2 billion. At the end of the operation, NetEase Kaola changed its official name and is now called Kaola Haigou. The platform will be integrated into the department of small import and export companies, but the Kaola brand will remain separate and will be managed independently.
XiaoHongShu: Content-focused e-commerce platform for beauty lovers
Launched in 2013 by Miranda Qu and Charlwin Mao, XiaoHongShu, literally the “Little Red Book”, is a social e-commerce application with more than 250 million registered users in 2019.
Focused on beauty and fashion, it serves as a platform for internet users to publish and share shopping tips, product reviews and life stories.
Noting user demand for purchasing foreign products, XiaoHongShu launched its own cross-border e-commerce platform in China, the “RED store”, in 2014.
Since then, XiaoHongShu has formed strategic partnerships with many foreign brands, including Lancôme, Swisse and Innisfree.
In 2017, the platform had reached a turnover of 6.5 billion yuan.
XiaoHongShu has successfully created a User Generated Content Community (CGU).
- Read purchase guides / product reviews of other users;
- Make a purchase via the application;
- Post product reviews;
- Communicate with other users about their shopping experience.
With the slogan “the best lifestyle in the world at hand”, XiaoHongShu has ensured a high conversion rate by seamlessly integrating its online community into its e-commerce business.
To grow the business and attract more partners, XiaoHongShu launched several marketing initiatives by providing traditional advertising and introducing an influencer marketing platform to boost KOL marketing.
To open a store on XiaoHongShu, companies can choose between two operating models: open a third-party brand store or be an independent supplier.
XiaoHongShu provides comprehensive customer service and logistical support for partner brands. It has developed a vast logistics network made up of 7 order processing centers, 10 transport centers and 9 import customs clearance centers in 29 countries.
Cross-border e-commerce platforms have grown rapidly and have gradually replaced traditional models such as haitao and daigou.
They set lower entry standards for foreign brands to benefit from the Chinese market, as platforms help them develop marketing strategies, sales channels and product mix based on their better understanding of Chinese consumers .