By Jake Liddle
China is fast embracing the sharing economy, having come up with its own innovative resource sharing platforms to rival foreign counterparts such as Uber and Airbnb.
According to a report published by China’s State Information Center, the sharing economy is expected to maintain a 40 percent annual growth rate over the next few years, and is officially forecast to account for over 10 percent of the country’s GDP by the year 2020, and 20 percent by 2025. The sharing economy in China is expected to generate revenues of up to RMB 5.7 trillion (around US$915 billion) in 2017.
Many people see the sharing economy as a logical and positive development because it turns excess supply into revenue, and fits into the state’s larger initiatives to transform the country from an economy driven by manufacturing to one driven by services, by means of nurturing innovation.
Despite these advantages, China’s sharing economy still faces legal and regulatory hurdles, on top of issues with regard to consumer negligence, such as vandalism and hoarding of resources, particularly in the bike sharing industry. While established industry players are putting pressure on the government to regulate both sharing platforms and users, the Chinese market as a whole is increasingly willing to share.
Legal and regulatory environment
Presently, regulations pertaining to the sharing economy are largely industry-specific and implemented primarily by local governments and departments. Therefore, there is currently no uniform set of rules governing the sector, with entities operating in the separate sectors of the sharing economy sector with varying degrees of regulation.
As of 2016, there were reported to be around 10 million registered vehicles on car sharing platforms, with around 250 million users across 60 percent of Chinese cities.
Ride-hailing services were the target of administrative provisions issued by the State Council in November 1, 2016, believed to be the first national measures for car-hailing services in the world. The measures aim to reform traditional taxi services and standardize online ride-hailing services.
The basic standards stipulate that only qualified online ride hailing platforms could obtain a business certificate from local authorities, and that only qualified vehicles registered for such services could obtain a service license. It also requires drivers to have legal qualification for providing taxi services and for them to sign labor contracts depending on the nature of work hours and frequency of work.
It essentially means that there are higher standards for entry and operation in the industry than in many other countries, which will ultimately result in safer services and higher operating costs. It also sets out, in some cases, to protect local traditional taxi services, which often suffer at the expense of ride hailing, by requiring drivers to have local hukou.
In 2016, there were around 18.9 million bike sharing users in China, with this number expected to reach 50 million by the end of 2017, according to the website bike-eu.com.
Following many complaints of disorderly-parked bikes, and even piles of disused bikes that belong to the various bike sharing brands, the Ministry of Transport has drafted rules requiring local governments to manage bike parking and bike-sharing operations.
The ministry has request the establishment of supervised parking zones for public bikes around offices, shopping areas, and transport hubs. Bike users will be required to register on bike sharing apps with their real identities, to have insurance that protects against personal accidents and third person liabilities, and that they must be over 12 years of age. Furthermore, due to many complaints of negligent user behavior, illegal acts or ‘uncivilized’ behavior when using public bikes will be noted on users’ personal records.
The rules also require that bike-sharing companies introduce mechanisms to oversee the management of deposits paid by users, and strongly encourage companies not to require deposits at all.
Airbnb still competes in China with domestic online platforms such as Tujia and Xiaozhu, which currently have a combined total of 800,000 properties on offer for rent. The home sharing industry is the second most popular within the sharing economy after ride sharing, with expenditure estimated by eMarketer to reach RMB 12.52 billion (US$1.88 billion) by the end of this year.
Though home sharing services are popular in China, many users are currently left dissatisfied by fake listings, fake information, or last minute cancellation of bookings. Landlords, too, have similar complaints of stolen or vandalized property on the part of tenants. This is because the house sharing industry suffers from a lack of unified standards and regulations.
Landlords are only required to provide an ID card, ownership certificate or lease contract, and a few pictures of the property in order to list on house sharing platforms. Such credentials are not subject to strict authentication, and tenants are not required to provide any proof of identification whatsoever.
Industry leaders have called for stricter regulations, suggesting that health and safety rules should be implemented that ensure leased properties comply with fire safety and architectural integrity standards. The implementation of credit systems linked with banks, police, and third party payment systems within the industry would also add new layers of safety.
Opportunities for foreign investors
The regulatory environment of China’s sharing economy is fragmented. Though there are certain regulations in place covering the ride-hailing and bike-sharing industries, they are still incomplete while the housing sharing sector is still fairly unregulated. As the sharing sector is still emerging, regulations will have to evolve to keep up with the changing demands of consumers and the business models new competitors bring into the game.
The Chinese government welcomes the sharing economy, and so do major companies. They see the sharing economy as a way to provide the government, businesses and consumers with mutual benefits. That is why China sees itself as a forerunner in terms of the global sharing economy, setting the standards in both regulatory practices and infrastructure reform. Furthermore a recent consumer survey showed that 94 percent of respondents said they were willing to share resources.
China’s ‘Internet Plus’ strategy aims to integrate online business models with traditional industries, making it easier for startups to launch online enterprises. As apps play a large role in sharing platforms, penetration is direct, with an estimated 601.8 million Chinese citizens now regularly using smartphones.
While there are still many challenges facing investors including the lack of uniform regulation and personal credit reporting, these features will develop over time and form an effective and user-friendly sharing experience.
China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEAN, India, Indonesia, Russia, the Silk Road, and Vietnam. For editorial matters please contact us here, and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates is a full service practice in China, providing business intelligence, due diligence, legal, tax, IT, HR, payroll, and advisory services throughout the China and Asian region. For assistance with China business issues or investments into China, please contact us at email@example.com or visit us at www.dezshira.com
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.
This Dezan Shira & Associates 2017 China guide provides a comprehensive background and details of all aspects of setting up and operating an American business in China, including due diligence and compliance issues, IP protection, corporate establishment options, calculating tax liabilities, as well as discussing on-going operational issues such as managing bookkeeping, accounts, banking, HR, Payroll, annual license renewals, audit, FCPA compliance and consolidation with US standards and Head Office reporting.
In this issue of China Briefing magazine, we provide foreign investors with best practices for implementing internal controls in China. We explain what makes China’s internal control environment distinct, and why China-based operations need to prioritize internal control. We then outline how to execute an internal control review to gauge organizational resiliency and identify gaps in control points, and introduce practical internal controls for day-to-day operations. Finally, we explore why ERP systems are becoming increasingly integral to companies’ internal control regimes.