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UPDATED: June 18, 2015 NO.25, JUNE18, 2015
The Consumption Conundrum
China wants to bring purchasing power back home
By Deng Yaqing

Li Yu, a 28-year-old young mother who lives in Beijing, has joined the ranks of overseas online shoppers since her son was born last summer.

"Almost everything my son eats, wears and uses is purchased on overseas shopping websites like Amazon," said Li, explaining that cheaper prices and higher quality are major selling points for foreign products bought online.

"A package of diapers branded Goon, which is sold at about 120 yuan ($20) on Japanese shopping websites, can carry a price tag of 200 yuan ($32) in a Beijing shopping mall," said Li, who has to place an online order to buy six packages every two months.

Increased income, convenient travel conditions and the appreciating yuan have pushed the Chinese people to purchase foreign products both in overseas physical stores and on overseas shopping websites, and the range of goods they buy has already spread from luxuries to daily necessities.

From 2005 to 2014, the Chinese people's consumption in foreign countries witnessed an average annual growth of 25.2 percent, doubling that in the domestic market; in 2014 alone, more than 100 million Chinese tourists spent over 1 trillion yuan ($160 billion) in overseas markets, accounting for at least 10 percent of the global overseas consumption, according to Wu Guohua, Deputy Director of the Department of Circulation Industry Development under the Ministry of Commerce.

In stark contrast, flagging domestic consumption is still a concern on the minds of policymakers. According to statistics from the National Bureau of Statistics, China's retail sales of consumer goods in the first quarter totaled 7.1 trillion yuan ($1.14 trillion), up 10.8 percent after adjusting for inflation, a slowdown of 0.1 percentage point from the same period of the previous year.

Wu called for the backflow of overseas consumption and exploration of growth potential.

If 30 percent of current overseas consumption can flow back to the domestic market, China's total retail sales of consumer goods will rise 1 percentage point, said Zhao Ping, an expert on consumption economics with the Chinese Academy of International Trade and Economic Cooperation (CAITEC).

Everything may turn around because the Chinese Government earlier this year decided to diversify domestic consumers' shopping lists by reducing import tariffs on some daily consumer goods, perfecting the consumption tax policies concerning popular consumer goods such as clothes and cosmetics, opening more duty-free arrival shops and facilitating imports by cross-border e-commerce companies.

In its latest effort, the Ministry of Finance on June 1 lowered the import tariff for suits, fur garments, short boots, sports shoes, diapers and skincare products by an average of 50 percent.

In the view of Zhao, the policy adjustment targeted popular consumer goods, which have much to do with people's daily lives.

Once "luxuries" for Chinese consumers, those imported products have gradually become affordable.

Zhao said the adjustment of tariffs on daily consumer goods may also be conducive to curbing the overwhelming overseas shopping activities, such as the "milk powder shortage" caused by Chinese consumers in overseas markets, and the spending sprees that frequently occur in Japan and South Korea when Chinese tourists binge-buy cosmetic products.

Tax cuts on the way

Since China's entry to the World Trade Organization in 2001, China has continued lowering its import tariffs. Two sharp tariff reductions took place in 2012 and 2013, covering imported infant formula, skincare products, cardiac pacemakers, etc.

However, the prices of imported goods remain high. Compared with overseas markets, the price variance is shocking. In a study on the development of China's consumer market in 2015, the CAITEC found that a total of 20 high-end consumer goods brands encompassing watches, suitcases and bags, clothes, wine and electronic products are priced roughly 45 percent, 51 percent and 72 percent higher than those in Hong Kong, the United States and France, respectively.

On most occasions, imported goods are levied value-added taxes, consumption taxes and tariffs. In fact, consumption taxes affect the prices of imported prices most. Take cosmetic products for example. Their import tariff rate, consumption tax rate and value-added tax rate are 10 percent, 30 percent and 17 percent, respectively, which add up to as high as 57 percent. It's easy to find that tariffs only account for a portion of the price structure.

Zhao suggested authorities consider lowering or even eliminating the consumption tax.

Consumption taxes on popular consumer goods such as cosmetics and clothes have been included into the framework of the policy adjustment, as the Chinese Government decided to perfect the consumption tax policies by adjusting the scope, rate and procedures of taxation concerning clothes and cosmetics.

More duty-free shops

The government also plans to boost duty-free shopping on arrival, expand the variety of commodities enjoying tax exemption and lift the upper limit of tax-free shopping.

When the first offshore duty-free shop was opened in south China's tropical island Hainan in 2011, due to the limited range of products eligible for tax exemption and the short supply of hot commodities, tourists' shopping demands couldn't be met.

As the tax-free shopping quota was raised to 5,000 yuan ($800) in 2012 and further to 8,000 yuan ($1,290) in 2015, and the categories of tax-free goods were significantly diversified and purchasing restrictions on hot sellers were relaxed, things have changed a lot. By the end of April, the sales of duty-free stores in Sanya and Haikou of Hainan had amounted to 13.47 billion yuan ($2.17 billion).

Duty-free stores at the airports of metropolises are also an option for travelers. However, most of them are departure stores. Only airports in Beijing and Shanghai have duty-free arrival stores, but the selection is quite limited.

For international airports in regional hub cities such as Chengdu Shuangliu Airport and Chongqing Jiangbei International Airport, duty-free arrival stores can well be sustained by the passenger flow, said Zhao.

Cross-border e-commerce up

Owing to lower prices, guaranteed quality in combination with convenient transportation, cross-border e-commerce has played an increasingly vital role in satisfying the growing demand of Chinese consumers for overseas products.

The Chinese Government said it will make inspection and quarantine-related policies favorable to the import of cross-border e-commerce companies, and eliminate unreasonable charges on imports.

Cross-border e-commerce shops have already found its way in the Shanghai free trade zone (FTZ), where they are entitled to lower taxes and simplified procedures. Those sellers can directly send packages from their warehouses in bonded areas to the residences of consumers.

According to the Shanghai Customs, from January to April, the transaction volume of cross-border e-business through Shanghai Customs totaled 161,000, with a value of 46.7 million yuan ($7.53 million), showing a trend of steady growth.

Kuajingtong, the first overseas online purchasing website in the Shanghai FTZ, is putting hundreds of thousands of commodities on offer. Yan Jing, Vice President of Kuajingtong, said it's vital to keep an eye on the rigid demand of consumers.

"Currently, we focus on mother-and-baby products, skincare products and cosmetics, healthcare products and foods. In the days to come, clothes, household items, bags and suitcases will also be enrolled," said Yan.

Amazon also cemented a cooperative relationship with the Shanghai FTZ in August 2014 and unveiled its own cross-border channel in China, through which Chinese consumers can buy the same products as Americans do on their local Amazon website.

Domestic online retailers have also joined in on the action. Chinese e-commerce website Yhd.com just opened an independent channel, which delivers commodities from the bonded area of Shanghai FTZ and overseas market to the residences of domestic consumers by direct mail.

Expanding the variety of tax-free commodities will also facilitate the scouting of goods supply sources on a global scale, said Ji Wenhong, CEO of Xiu.com, a global online department store.

Cross-border e-commerce companies have also set up stores in the newly established FTZs in Guangdong Province, Fujian Province and Tianjin, as well as bonded areas in inland cities like Chongqing and Zhengzhou of Henan Province.

Consumers like Li, then, will hopefully shop more in their own backyards.


Copyedited by Kylee McIntyre

Comments to yushujun@bjreview.com


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