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Setting up an online business on the Chinese mainland is subject to stringent regulations (photo: EPN)
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Middle-income Chinese mainland consumers between 20 and 44 are in a sweet place where it comes to shopping: they’re the median group particularly open to buying online.
To encourage consumption, the mainland government is also keen on driving online sales. Its target is to boost Internet sales as a share of retail sales from less than two per cent currently to more than five per cent by 2015. The result should be a massive uptick in the digital sales picture.
Foreign companies wanting to set up their own online sales companies are subject to higher entry thresholds than local firms. For smaller overseas companies, it is perhaps more realistic to sell from existing B2C websites such as Taobao.com than trying to do it alone.
Trading Operator vs Services Providers
On the mainland, enterprises involved in e-commerce or selling through the Internet are divided into online commodity trading operators and service providers. According to the Interim Measures for the Trading of Commodities and Services through the Internet (Order of the State Administration for Industry and Commerce, No. 49), online commodity trading operators are legal persons, other economic organisations or natural persons who sell goods through the Internet. Online service providers are legal persons, other economic organisations or natural persons who provide services for business operations, as well as the website operators who provide platforms for web-based transactions.
The former includes such merchants as those registered with Taobao, for instance; the latter includes websites such as Taobao.com, Joyo Amazon and Dangdang.com.
If a Hong Kong services provider offers sales through non-fixed locations such as the Internet, it will become an online commodity trading operator and would have to apply to set up a mainland trading company, according to the provisions of the Measures for the Administration of Foreign Investment in the Commercial Sector. It would also have to state in its scope of business the type of commodities it is engaged in selling through the Internet. The registered capital should comply with the relevant Company Law. Alternatively, one can register as an individually owned business under the provisions of the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the Chinese mainland. (For application details, please refer to the Guide to Selling in China, published by the HKTDC.)
Mainland regulations also require that goods and services traded online must comply with the legal provisions that apply to bricks-and-mortar shops. Goods and services prohibited from trading in the physical world are not allowed to be traded online. Just as for similar sales in stores, online sales involving such goods as medical apparatus, books, newspapers and magazines must apply for prior approval from the relevant authorities. Online sales of goods such as cosmetics, health products and medical apparatus, normally sold under special conditions, should also comply with the relevant provisions governing their registration and administration on the mainland.
Online Sales Obligations
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Online sales involving specific goods must apply for prior approval to relevant authorities (photo: EPN)
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A legal person, another economic organisation or individually owned business that has registered with an industry and commerce administration department and is engaged in the trading of goods and related services through the Internet, should display the content of its business licence, or provide a hyperlink to its business licence, in a prominent location on the home page of its website or the webpage where it conducts its business activities. A person should make an application with a web-based service operator by submitting his name and address. Those qualified for registration should carry out industry and commerce registration in accordance with the law.
Operators offering web-based services should develop rules and regulations on the administration of the online trading platform. They should verify the identity of the operating entity of each legal person, another economic organisation or individual applying for the provision of goods and services through the online platform. A contract (agreement) should then be signed with the duly vetted party. Records of the business licences or information on the actual identities of operators or transaction records of the operators should be retained for not less than two years following completion of the transaction.
In conducting their business, online commodity trading operators or services providers should provide consumers with such key information as the name, type, quantity, quality, price, shipping charge, delivery method, payment method and return and exchange policy of the goods or services concerned. They should ensure that transactions are secure and reliable. They should also offer the goods or services as promised. They have the obligation to provide consumers with sales or service receipts. They have an obligation to provide secure storage, reasonable use, limited retention and proper destruction of the consumer information they have collected, and they should not resell or misappropriate this information. In conducting online sales, the exclusive rights of registered trademarks or enterprise name rights of other parties must not be infringed.
Licence to Trade
Online services providers should apply for Internet information service value-added telecommunications business licences. As stipulated by the Measures for the Administration of Internet Information Services (State Council Order No. 292), any person engaged in commercial Internet information services – in other words, any person engaged in any compensated service activity whereby one uses the Internet to provide information, web-page design or other services to Internet users through the Internet – should apply to the telecom administration authority of the province, autonomous region or municipality or the State Council’s department in charge of the information industry for an Internet Information Service Value-Added Telecommunications Business Operating Licence.
M&A vs Newly Established Enterprises
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Online Business through CEPA
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Hong Kong services providers are allowed to set up joint venture enterprises on the mainland through the Closer Economic Partnership Arrangement (CEPA). Under the arrangement, Hong Kong companies can provide the following five types of telecom value-added services: Internet data centre services, storage and forwarding services, call-centre services, Internet access services and content services. In such joint ventures, the shareholdings of Hong Kong service providers must not exceed 50 per cent. There is no geographical restriction on this type of enterprise.
Eligible companies must fall within the following criteria:
1. Hong Kong services providers intending to provide value-added telecom services should have good business performances and experience in the operation of value-added telecom business.
2. The minimum registered capital for a joint venture enterprise is Rmb10 million for providing value-added telecom services across Chinese provinces; and Rmb1 million for providing value-added telecom services within a province.
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Hong Kong investors can set up a value-added telecom service joint venture and conduct online sales either by acquiring the shares of mainland shareholders or subscribing to the increased registered capital of a mainland company (equity merger and acquisition) or acquiring and operating the assets of a mainland enterprise (asset merger and acquisition). Following a merger and acquisition (M&A), the shareholding of a Hong Kong services provider in the joint venture must not exceed 50 per cent and the minimum registered capital requirement for the joint venture should be the same as that for a newly established enterprise. There is no shareholding restriction for the M&A of enterprises engaged in general trading (except for those dealing in special commodities such as books, newspapers, magazines and foodstuff, or those with more than 30 shops) and the minimum registered capital should be as prescribed by the Company Law.
If a mainland enterprise is merged with or acquired by a Hong Kong investor and if the mainland enterprise is already holding a telecom business licence before the M&A, it should voluntarily report the alteration of registration details to the original Ministry of Industry and Information Technology office within 30 days from the date the M&A decision is made.
It should also report the change of registration details to the industry and commerce administration department, in accordance with the Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors upon obtaining approval from the Ministry of Commerce. If transfer of state-owned assets of an enterprise or management of state-owned equity of a listed company is involved, the relevant regulations on state-owned asset management should be followed.
For more information on doing business on the Chinese mainland, please contact the HKTDC’s China Business Advisory Service team. The China Business Advisory Service provides free information to help companies doing business on the mainland. For enquiries and appointments, please call (852) 1830 668. Or visit http://tpwebapp.hktdc.com/sme/index.htm.
