China Introduces New Consumer Protection Law

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SHANGHAI – Among the many days of international observances recognized globally – Earth Day, Women’s Day, World Health Day, and so on – World Consumer Rights Day is not as commonly known in the West. But in China, the March 15 celebration is a much promoted event, known as san yao wu (Three-One-Five).

Every year, in a public airing of consumer grief, the illegal business practices of foreign and domestic companies are paraded and condemned in a CCTV special. The threat of this to one’s reputation is so great that companies targeted in previous years, including Apple, Volkswagen and Nikon, have issued public apologies and initiated recalls in direct response to their inclusion in the event.

This year’s observance was marked as particularly significant, however, as it was accompanied by the activation of new consumer protection laws.

The new law introduces a number of important reforms to the Chinese retail environment:

  • In allegations of counterfeiting, the onus of proof is now on the retailer to prove their innocence for the first 6 months after the sale, rather than the consumer to prove wrongdoing all the time, as previously;
  • Penalties for fraud and false advertising have been increased;
  • Class-action lawsuits against retailer malfeasance have been made easier to file (though limited to state Consumer Associations and their local branches);
  • Retailers are now required to accept goods for return within 7 days of purchase unless agreed otherwise;
  • For online and other types of delivery purchases, consumers are not required to provide a reason for returns; and
  • Greater restrictions now apply to retailers’ collection and use of consumer data.

Necessitating these reforms is China’s ongoing state of rampant consumer fraud. According to the State Administration of Industry and Commerce (SAIC), which oversees consumer protection, RMB 3.8 billion of poor quality goods were sold between 2010 and 2012.

This month’s reforms are the first major overhaul to China’s consumer protection law in two decades. As with many recent legislative reforms, this was in part motivated by China’s long-term goal of boosting domestic consumption. It is thought that measures such as these will help to repair consumer trust in Chinese companies, especially in light of a string of product safety scandals in recent years.

RELATED: China Steps Up Efforts to Protect Personal Information

The reforms also come in the wake of explosive growth in China’s online shopping and automobile sectors, where poor aftersales service (e.g. repair, replacement, and returns) has resulted in a wealth of complaints.

The new law, however, is not without its critics, some of whom have pointed out its gaps, such as the specifics of how consumer data may be used and the measures retailers must take to ensure the accuracy of product information.

Additionally, because lawsuits may only be initiated by state-controlled Consumer Associations, there are concerns over the possibility of governmental interference in the process.

Lastly, some have expressed fears that the new regulations may be disproportionately enforced against foreign businesses, much as in the annual CCTV specials.

One unexpected outcome of the reforms has been the emergence of a cottage-industry of profiteering on consumer protection violations. Under the new law, businesses caught selling counterfeit goods must compensate consumers threefold, up from twofold under its predecessor. This has motivated a number of individuals, sometimes contracted by the product’s original manufacturer, to investigate and purposefully buy counterfeit goods, expecting to cash in on them later following a successful lawsuit.

For foreign investors eager to learn how the new law will impact their business, a compliance review of one’s aftersales services with the updated regulations is recommended, especially for businesses involved in the online sales and automotive sectors. Other factors, such as how consumer protection lawsuits against foreign companies will unfold, will require time for the establishment of precedent.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as liaison offices in Italy and the United States.

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