An Analysis of the Application of E-Commerce (MSP) in China and its Policy Implications

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1 An Analysis of the Application of E-Commerce (MSP) in China and its Policy Implications Rong Han TANG, Yau Sum CHAM Abstract: Physical wholesale markets have helped to promote economic growth in many regions of China. With the increasing role of the market economy and the impact of information technology, the dominance of physical wholesale markets will be reduced in the future. The key to future economic growth lies in the development of e-commerce and the need for Marketplace Service Providers (MSP). As a MSP for e-commerce, Rubber Net China ( offers various functions, including online trading, online auction, online tender, electronic clearing as well as goods delivery. This serves to meet the needs of modern business, which demands different methods of trading. Its full range of supporting services helps to protect the completion of trading over the Internet. This represents a perfect integration of the traditional economy and the New Economy. It is proposed that the government should amend and improve laws on contracts to recognize electronic signatures and e-contracts as equivalent to original signatures and written contracts. At the same time, regulations on value added tax should be reformed in order to provide better legal protection for the development of e-commerce. Key Words: Rubber Net China, RNC, rubber99.com, Shanghai New Vision, MSP I. The Function of E-Commerce (MSP) in China With the progress of economic reforms in China, a number of specialized physical wholesale markets have emerged in the coastal areas of China since the 1980 s. Zhejiang is a province of many markets. In the north, there is the construction materials market in Huzhou City and the leather market in Haining. In the east, there is the textile market in Shaoxing and the plastic market in Yuyao while in the south, the small merchandise market is located in Yiwu and the hardware market in Yongkang. On one hand, these physical wholesale markets are the result of commercial production and the market economy. On the other hand, they have in turn promoted the development of our market economy. This has increased the rate of growth in the local economy. It was often said that, To build a market means to promote an industry. In turn, this will enrich the local population. However, in the late 1900 s, such catalyst effect of the physical wholesale markets to 1

2 the local economy tends to decline with the growth of the market economy, the improvement of information communication as well the changes in the pattern of distribution. First, this decline is caused by the limitation of time and space inherent in a physical wholesale market, which prevents the maximum use of its distribution function. Second, the information exchange mechanism in a physical wholesale market is incomplete. It is neither continuous, nor effective, nor responsive. Third, price competition is restricted only to a one-to-one basis. It is not fully competitive. Hence, a physical wholesale market cannot lead to a further reduction in cost. Thus, it is necessary to look for a new operation model to induce physical wholesale markets to perform their functions of promoting growth in the economy. The application of Marketplace Service Provider (MSP) in e-commerce will overcome the limitations of space and time, the demand for better information dissimulation and more competitive pricing. Furthermore, it meets the needs of better trade credits and the globalization of the world economy. In view of this, we believe that although physical wholesale markets have played an important role in the initial stages of the market economy in China, MSP in e-commerce will become the driving force behind economic growth in the future as the market economy continues to develop with improved information dissimulation. II. The Application of MSP in China A Case Study of Rubber Net China( In September 2000, Rubber Net China (RNC) was launched by the China Rubber Industrial Association in conjunction with Shanghai New Vision Network I.T. Co. Ltd. as a Marketplace Service Provider (MSP) in e-commerce. This has been well received by the rubber industry in China. Despite the cruel adjustments to the network industry in the past 6 months, applications for membership in RNC have been encouraging. Towards the end of February 2001, over 1,500 applications have been received for membership with RNC. A total of 990 members have been approved with about 300 members actively using our site every day, issuing messages and prices for their products or trading online. This has been widely reported by the China Central Television (CCTV), People s Daily, Jie Fang Daily and the Hainan Daily. RNC has combined trading, information dissimulation and supporting services in its operations. Hence, it is advanced in technology and economically practical. Its supporting services also help to safeguard trading. Its application software, LEADER, not only provides platforms of one-to-one, one-to-many and many-to-many, it also encompasses electronic clearing, goods delivery and administrative support. The major functions of RNC includes the following:- 1. Online trading Buyers and sellers can place competitive bids and offers to trade 2

3 interactively over the Internet. After the application and approval of membership, a company can place buy and sell orders online. Trades are matched competitively on a many-to many basis. 2. Online tender members can issue tenders over RNC for a limited or unlimited time period according to its needs. It can select a combination of quantity and price to conclude trades based on one-to-one or one-to-many formats. 3. Online auction members can conduct auctions over RNC for a limited or unlimited time period according to its own requirements. It can also choose a mix of quantity and price to finalize the auction on a one-to-one or one-to-many basis. 4. Internet transactions RNC provides other means for transacting business over the Internet. These include buy or sell messages, corporate quotations and company markets. 5. Electronic clearing Clearing is conducted based on 3 principles security, honesty and individual transactions. RNC implements a membership deposit system. Through its agreements with Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, China Merchants bank, accounts are placed in trust together with Internet clearing. Banks will be monitoring the transfers of funds in order to expedite settlement with security, thus guaranteeing the clearing process. 6. Physical settlement RNC has established Goods Handling Centers in Shanghai, Qingdao, Haikou and Kunming. They offer warehouse facilities for members. This includes the speedy storage, quality inspection arrangements and withdrawal of goods. For physical goods traded in bulks, these centers provide uniform and standardized goods management as well as compliance with the grading requirements as specified in the invoice. In addition, RNC provides members with specialized information, professional consultation and tailor-made services according to the needs of individual rubber companies. With its application, RNC has implemented the MSP model in the following 3 aspects:- 1. RNC has a number of trading platforms with different bases- one-to-one, one-to-many and many-to-many. This is in line with commercial activities in real life, which requires a variety of trading methods according to varying needs. Internet trading is able to overcome the barriers of space and time. Prices are more 3

4 transparent. Information becomes open while prices are more competitive. This is conducive to the formation of a large nation-wide rubber market in China. 2. To complement the various trading methods, RNC has established a series of sub-systems of clearing and delivery services. This serves to expedite the completion of contracts concluded over RNC. At the same time, it enhances commercial reputation and the integrity of transactions. Currently, the Chinese economy is in a process of transformation, as an early stage of a market economy under socialism. This is reflected by a lack of confidence between companies and insufficient standardization of products. As a result, triangular debts are common. Inferior, pirate-labels become prevalent. These problems severely restrict the distribution of goods and the normal development of commercial activities. In view of this, RNC provides funds clearing and goods delivery services in support of its trading activities. On one hand, it guarantees payment to the sellers. On the other hand, it offers protection to the buyer in terms of quality and quantity as specified on contract. 3. RNC provides professional and specialized information as its founders include the national industry association in China as well as a professional information technology company. Its staff is experienced in the management of electronic markets, both nationally as well as internationally. This enables the integration of the best of both traditional and international practices. The information service of RNC provides up-to-date market information, industry news, company news, convention news and technology exchanges. Furthermore, RNC has constructed a data bank consisting of company and product information. It can, therefore, provide timely market research, technical consultation and project planning according to members tailor-made requirements. It has become a bridge of communication and interchange between companies in the New Economy. Indeed, it is an ever-present secretary as well as a policy advisor. III.Policy Implications for the Development of MSP in China Just like other MSPs, we have encountered problems of low level of use of information technology in traditional companies, deficiencies in network facilities and the slow process of legislation for e-commerce. Undoubtedly, it takes time to overcome these problems. However, we have come to realize that 2 areas of government reforms are required for e-commerce in China. It requires the legalization of e-contracts and e-signatures as well as the problem of issuing invoices for the value-added tax. The essence of B2B e-commerce lies in the commercial activities between purchasers and suppliers. These encompass the negotiation of transactions, placement of orders, 4

5 signing of contracts, exchange of funds and bills as well as goods delivery and after-trade services. These functions include supplier management, warehouse management, sales management, information management, transaction document management and payment management. Currently, e-contracts and e-signatures are not acceptable by law in China. If transactions entered into by contract concluded over the Internet cannot be enforced legally, there is no mechanism to avoid the breach of contract and to ensure the completion of contract. All contracts entered into online over the Internet have to be signed and endorsed off-line. This defeats the purpose of e-commerce, which serves to reduce intermediate procedures, reduce transaction costs and improve efficiency. We would therefore propose to the relevant government departments to legislate, amend or expand the existing law of contracts in order to legalize the use of e-contracts and e-signatures so as to give them the same status as original hand signatures and paper documents. This will provide the legal protection for e-commerce in China. On the subject of Value Added Tax, existing tax regulations require the seller who delivers the goods to issue an invoice to the buyer. In turn, the buyer pays the seller who issues the invoice. In this way, payment is directed against goods delivered. This is simple when only two parties are present in the transaction. Yet in order to protect the integrity of the transaction in e-commerce, the B2B operator needs to open establish trust accounts with the clearing banks. In this way, clearing funds between buyers and sellers can be monitored. At the same time, goods are centrally managed by designated Goods Handling Centers. This means that payment to the buyer is made through a third party account to the seller while the physical delivery of the goods is made by the Goods Handling Center to the buyer. Apparently, this is not in line with present tax regulations. Hence, we would propose that the relevant government departments should consider adjustments to the relevant value-added tax regulations in order to promote the development of e-commerce. At present, e-commerce appears depressed around the world. However, the development of the cyber-economy, for all its merits, must remain the unavoidable trend. We would therefore call on our community as a whole and the media in particular to be concerned and support e-commerce, as they did in the past. We hope the government will also take positive steps to support the healthy development of e-commerce in the future. 5

6 Curricula Vitae of the Representatives from Shanghai New Vision Network I.T. Co. Ltd. About the authors: Dr. Rong Han TANG, Doctor of Economics (China Academy of Social Sciences) Dr. Tang is the current Chairman of Shanghai New Vision Network I.T. Co. Ltd.. and President of Sinocore (Holdings) Limited. Formerly, he was Deputy Officer of the Market Establishment Co-ordination Committee, Ministry of Commerce in China. He has also served as President of China Commodity Futures Exchange, of Hainan, Inc.(CCFE) He designed the Trading Rules of CCFE, together with some commodity contracts listed at CCFE. He has also headed and organized the real-time electronic trading system across China. He has also led the establishment of a stock -brokering firm. He is very knowledgeable about the commodities and securities market, especially in the development and management of a large electronic trading system. Dr. Yau Sum CHAM, M.B.A.(Queen s University, Canada) Ph.D.(Bath University,U.K.) Dr. Cham is currently Chief Advisor in Shanghai New Vision Network I.T. Co. Ltd. He was the former Head of the Department of Management Studies of the University of Hong Kong. He was also the former Chairman of the Hong Kong Commodity Exchange (later re-organized as the Hong Kong Futures Exchange). He developed and introduced the Hang Sang Index Futures contract, which has remained the most actively traded futures contract in Hong Kong. He was also former Director and Chairman of the Trading Committee of CCFE. He is experienced in commodities trading both internationally and in China. 6