Christopher Niesche: Online sales rules confuse China trade

The speech by Blackmores CEO Christine Holgate in Shanghai last week should have been a celebration of the company's enormous success in China.

Instead, Holgate was trying to assure investors that the health food company's future in China was still strong, despite new e-commerce and product registration rules confusing investors and analysts so much over the past week.

Welcome to doing business in China.

The opportunities are well known: Australian goods exports to Shanghai were worth A$14.5 billion ($16.2 billion) last year - more than we exported to New Zealand. The value of international e-commerce in China hit US$650 billion ($939 billion) in 2014 and is growing rapidly, according to government figures.

But two changes over the past few days are a reminder of the risks.

First, the all-powerful Chinese Ministry of Finance announced it would increase tax on most foreign online purchases.

Until now, online sales into China weren't subject to the same level of tax as sales of imported goods through bricks and mortar stores.

Businesses also didn't have to jump through the many and complex regulatory hoops required to set up shop in China.

It is potentially a blow for Australian businesses trying to tap into the burgeoning Chinese appetite for safe and high-quality food, baby products and supplements.

It seems a tax of about 12 per cent will be applied to these products. Even after the tax, they should still be cheaper than the same products bought from traditional retailers but online sales will lose some of their advantage.

The trouble is, no one is really sure. Even the experts are confused.

Take the popular online category of cosmetics, for instance. China-based Lawyers at DLA Piper say the price of these goods will rise, potentially substantially. However, PwC's Hong Kong office says the price of cosmetics will drop.

Australia doesn't compete in cosmetics, and fortunately food and supplements are categories where Chinese consumers aren't so price- sensitive, so the changes might not be so bad.

The second change is companies selling baby formula online will have to apply for new product registration if they want to sell into China's 12 free trade zones. The tougher regulations were introduced as part of an effort to bolster food safety but the reaction was swift in Australia.

Shares in Blackmores, Bellamy's Organic and a2 milk plunged in response to the two changes.

But just as it is unclear what the effect of the tax changes will be, it is also unclear how the new product regulation requirements will affect these companies.

This sort of thing has happened before. In the wake of a contaminated imported infant formula that killed six babies, China introduced tougher regulations, whittling the number of permissible foreign formula brands from more than 800 to less than 100.

The producers are confident they'll be able to meet the new regulatory requirements but confess they don't yet have much detail.

And they only apply to cross-border e-commerce sales. Bricks and mortar sales will be unaffected, at least by this set of changes.

Blackmores' shares fell as much as 25 per cent last week, but the stock clawed back some of those losses as investors regained their composure after realising the changes might not be so bad.

Regulation in China works differently from most of our major trading partners. In the West, you can pretty much do anything you like unless the activity is specifically banned.

In China, only "approved" activities - such as which sort of foreign business can operate, what they can sell, where they can operate - are permitted. If a product or service is not on the country's many approved lists it is banned.

All sorts of licences and permits are needed and foreign businesses have to fulfil many reporting requirements. Regulations change by the week, with a stroke of a bureaucrat's pen.

A fiat from the Ministry of Finance or any of the dozens of regulators can render lucrative business line uneconomic or unprofitable. Other directives can open up new markets or opportunities.

None of this deters the many foreign businesses lining up for a piece of the action, because the potential rewards are so huge.

All of these changes and the uncertainty they have generated over the past few weeks come against a backdrop of increasing geopolitical tensions between China and Australia over China's role in the Pacific.

Australia is caught in the middle of a tug of war between the US and China and essentially being urged by both nations to take their side.

It's not clear whether these changes were deliberately timed to coincide with Malcolm Turnbull leading a delegation of 1000 businesspeople to China to highlight the opportunity for Australian exporters there. Regardless of the intent, the regulatory changes send a clear message from the Chinese: you need us.