Regulation Could Mean E-Commerce Slowdown in China

China’s unruly e-commerce sector could be set for some big changes in the year ahead, with executives from both inside and outside the industry calling for moves to bring order to an unruly space that has been plagued by cutthroat competition. Perhaps most significantly, a top executive from the traditional retailing sector is calling for e-commerce firms to pay more taxes, a move that could make online purchasing more expensive and less attractive to cost-conscious consumers. Other executives are calling for tighter regulation of the sector, which has evolved into a free-for-all due too much investment and lack of government oversight.

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China’s unruly e-commerce sector could be set for some big changes in the year ahead, with executives from both inside and outside the industry calling for moves to bring order to an unruly space that has been plagued by cutthroat competition. Perhaps most significantly, a top executive from the traditional retailing sector is calling for e-commerce firms to pay more taxes, a move that could make online purchasing more expensive and less attractive to cost-conscious consumers. Other executives are calling for tighter regulation of the sector, which has evolved into a free-for-all due too much investment and lack of government oversight.

Many of the latest calls for change are coming in Beijing at the National People’s Congress, China’s legislature that meets once a year. Numerous new laws are discussed at the venue, and e-commerce appears to be a hot topic among representatives this year. One of those was a top retail executive calling for e-commerce companies to pay their fair share of taxes.

Wang Tian, chairman of Bubugao Group, estimated such firms evade more than 100 billion yuan, or about $16 billion, in taxes each year. Not surprisingly, Wang’s company is a traditional retailer that is probably losing billions of yuan in revenue each year to e-commerce firms. Bubugao operates more than 200 stores nationwide, including supermarkets and department stores, and is aiming to more than double its revenue between 2012 and 2015. Clearly it could have some problems reaching that goal if e-commerce continues to grow at its current rapid pace.

In fact, this kind of tax issue for e-commerce firms isn’t unique to China. The U.S. used similar tax exemption policies to promote the development of e-commerce in its early years. But as the industry has matured and e-commerce companies reaped big profits, many U.S. states have started to impose traditional sales taxes on e-commerce transactions as well.

Meantime, another major executive at the NPC, Suning Chairman Zhang Jindong, was also calling for tighter oversight of the e-commerce space. Like Bubugao, Suning is also a major traditional retailer that rose to prominence through its national chain of electronics and home appliance stores. But unlike Bubugao, Suning has also made a major recent push into e-commerce through its Suning.com website—a move that has sharply eroded its profits.

Zhang has submitted his own proposal to the NPC on tighter regulation of the e-commerce sector—a move some say is directed at reining in leading firms Alibaba and Jingdong Mall, both of which are pure e-commerce firms without any traditional retailing presence. So what do these proposals mean, and how will they affect development of the sector?

At the end of the day, I agree that China’s e-commerce space is quite overheated and needs some major adjustments. But I’m less certain that government oversight is the answer to the problem. The main source of the problem is the presence of too much cash in the sector, with both foreign and domestic investors dumping billions of dollars into the space over the last 2 years. For that reason, the competition probably won’t cool until most of that cash gets burned up, much the way the situation evolved during the U.S. dot-com bubble of the late 1990s.

At the same time, I do agree that Chinese e-commerce firms need to play on a level playing field with traditional retailers, which includes paying taxes. At the end of the day, we can probably expect to see some new efforts to better enforce tax collection on the sector and Beijing may even attempt to roll out some new rules to oversee the sector. But such rules will probably be largely ineffective until e-commerce firms finally burn through their big cash piles and have to start focusing on more basic matters like earning profits.

Doug Young lives in Shanghai and writes opinion pieces about tech investment in China for Techonomy and at www.youngchinabiz.com. He is the author of a new book about the media in China, The Party Line: How the Media Dictates Public Opinion in Modern China.

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