3 Reasons That Helped China Dominate eCommerce
China is an eCommerce giant, if not the biggest giant, in this article we will examine the reasons behind this growth and how did China become the eCommerce shop of the world.
China’s e-commerce exports rose 14.5 percent year on year to 6.3 trillion yuan (1 trillion U.S. dollars) in 2017, according to a report released by the E-commerce Research Center (ECRC). source
1 trillion U.S. dollars in eCommerce, how is that possible ?
Ever wondered how an item you buy for less than 1$ from ebay or other eCommerce platforms is delivered to your doorsteps for free, and is still 2-3 times cheaper than a similar item in the shop next to your house?
Here’s the 3 reasons that make it possible:
1- Abusing the Universal Postal Union:
The main reason why you can get the items you buy from China with free delivery, or shipped to you cheaply. Is due to Chinese abuse of the international Post system.
Universal Postal Union was made in the 1800s to make it easier to send letters across the globe, removing the need to have stamps for all countries it passes through, or special agreements between every nation. The union states that all countries should handle mail from other countries without additional charge and that they should pocket the money they themselves charge for shipment to other countries.
Countries charge customers by item and weight and by distance the package needs to cross, China Post & Hong-Kong Post abuse the system and just charge a flat fee per gram, and nothing per item, as they won’t have the problem of distributing all the small packages to the address at the destination country.
This abuse make the package cost the same as sending it next-door, which is dirt cheap in China, and that would give a great advantage to Chinese companies over local businesses and companies. It even creates a huge financial loss for the Post offices in other countries. Which led the UPU members to try to find a solution.
In recent years UPU members have encountered serious problems triggered by the enormous increase in e-commerce originating from the Far East, where the terminal dues do not cover the unit costs of delivery in the destination countries, and the volumes are so big that the losses cannot be compensated by better terminal dues from other traffic. In 2016, a new remuneration system was implemented with a focus on e-commerce.but while the 2016 reform balanced the costs to the delivery services, postage costs for shippers are still asymmetric. As of 2018, US companies pay more than twice as much to mail an item from a US plant to a US customer than does a manufacturer in China to mail an item to a US customer.
2- Undervaluing it’s own currency – the YUAN:
Having a weak currency is good for exports, but a strong economy will push the currency upward, thus China maintain the Yuan weak by pegging it to the USD. Economists suggest the Yuan is undervalued by 15% to 40%, though it is hard to accurately conclude. The People’s Bank of China currently holds $3.2 trillion of foreign-exchange reserves.
By buying US currency and treasury notes on the open market, China keeps demand for the US dollar high. They can afford to buy and hold so much US currency due to their huge trade surplus with America, and they buy US currency roughly equal to this surplus. To keep the influx of dollars from increasing the Chinese money supply, China “sterilizes” the dollar purchases by selling bonds to Chinese investors like commercial banks. By boosting the dollar, still one of the most powerful worldwide currencies, the Yuan looks weak in relation. For the last few years China has maintained the value of their currency at just under 7 Chinese Yuan to $1. Today $1 equals 6.54 Yuan. Something close to 5 Yuan to the dollar might be a better valuation based on other market factors. source
3- Cheap and skilled labor in huge numbers:
Having a population of 1.3 billion is a huge human capital, but having a highly productive and cheap workforce is a win. Many countries have large populations but unlike China, these populations are usually under educated, with a much lower percentage of skilled workforce.
Wages are exceedingly low, productivity is high. These are the social realities of commodities “Made in China”, marketed Worldwide.
China is an advanced capitalist economy integrated into the World market. Wages for non-skilled labor in Chinese factories are as low as 300$ a month (or lower), a small fraction of the minimum wage in Western countries. source
These 3 reasons combined makes China the unbeatable eCommerce giant, if any of the 3 reasons is no longer applicable, China eCommerce would suffer greatly from a more honest competition.
eCommerce is starting to be in both ways, as rich Chinese are more and more interested in buying luxury goods from abroad, but China obviously is cracking down on that.