IN FOCUS6-8 min read

China e-commerce: is it time to look beyond regulatory pressures?

Regulatory pressures have dominated the headlines for Chinese e-commerce in the past 12 months. We think the focus is now shifting.



Thomas Dykes
Deputy Head of Emerging Market Research

Nothing showcases China’s love of e-commerce better than Singles’ Day, or 11.11. This unofficial holiday, initially founded as an anti-Valentine’s Day for singletons, is held annually on the 11 November. In 2009, an e-commerce company CEO seized on the idea of turning the day into a 24-hour shopping extravaganza, and it has now become the largest online shopping day in the world.

Last year, two of the largest e-commerce companies in China, Alibaba and JD, reached a new Singles’ Day sales record of Rmb889 billion, equivalent to around US$133 billion. This was despite a weak macroeconomic backdrop and a regulatory push towards “Common Prosperity”, both of which discourage excessive consumption.

Singles’ Day is illustrative of how large China’s e-commerce market has become. Given this scale, it is worth examining why it developed as it did, and where it might go from here.

How did China’s e-commerce market become the biggest in the world?

China is now a clear global leader in e-commerce, having overtaken the North American market in 2016.


One might be forgiven for attributing this to China’s size; its population is now over 1.4 billion and almost four times the size of North America. However, this is not the full story. China is on average much poorer than North America, with per capita national income less than a fifth of the size.

Rather, the size of China’s e-commerce reflects the enthusiasm with which China’s population has moved online. E-commerce penetration has reached close to 30% of retail sales, and 6% of GDP. This is much higher than North America where penetration has only recently exceeded 20% of retail sales, and 3% of GDP [Source: IMF / Euromonitor, 2021].

Why did the Chinese e-commerce market grow so rapidly?

The success of e-commerce in China was not always this visible. Until 2010, e-commerce activity barely registered, despite growing adoption elsewhere in the world. China’s lack of fixed telecommunications networks and low PC penetration prevented the market from developing.

After 2010, the availability of smartphones using 3G and 4G cellular networks allowed for the rapid expansion of online activity. There are a number of reasons why China was particularly susceptible to e-commerce, once broad internet access across the population was available.


Can e-commerce industry growth be sustained?

While China leads the world in online retail penetration, analysts have limited benchmarks available to predict future performance. One thing is clear though: future penetration increases will be more difficult than those already achieved. E-commerce growth in China is therefore likely to be slower going forward.

Chinese National Statistics suggest that online retail sales grew at a 22% compounded growth rate between 2014 and 2021. Though online retail penetration is expected to continue to increase, China’s 14th Five Year Plan, which runs from 2020 until 2025, anticipates this growth in online retail sales to slow to 7.5%. While this may be cautious, with Euromonitor for instance expecting 12% growth over the same period, it is clear that the industry’s golden period has come to an end.

Two reasons behind slowing e-commerce growth

Longer term, heightened competition and increasing regulation are pressuring companies already contending with slowing growth. At the same time, while but not subjects for this piece, short term macroeconomic uncertainty resulting from Covid disruption is have a significant impact, as are other factors such as US de-listing concerns. This has created a challenging environment for stock performance.

Over the last 18 months, Alibaba has seen a -65% total return, PDD -74% and JD -34%, as at 5 August 2022.

1. Domestic regulation

In the past there was perhaps a feeling that the rapid growth of online activity had outpaced the ability of regulators to keep up. Given the increasing size of the industry, this divergence had become an increasingly pressing concern. This is a concern relevant in other markets too, and is not unique to China.

The introduction of China’s E-Commerce Law in 2019 indicated that the authorities were determined to close this gap. The extension of China’s Anti-Monopoly Guidelines to the online economy in 2021 further indicated a desire to adjust certain aspects of the e-commerce market. Since these policies were introduced, the authorities have made significant progress. Restrictions have been placed on anti-competitive exclusive agreements, and related fines have been issued to Alibaba and Meituan. Market distorting product subsidies have been limited in certain areas. Support has been directed towards delivery personnel and small-to-medium sized enterprise merchants. Oversight has been tightened in critical areas such as cybersecurity and data protection.

While implementation of these policies is ongoing, there are perhaps indications that pressure may be easing. In March 2022 Vice Premier Liu He, Xi Jinping’s closest economic adviser, made a rare public intervention to reassure investors. In comments to China’s Financial Stability and Development Committee, Liu called for a ‘standardised, transparent and predictable’ approach to internet regulation and suggested that relevant departments should actively introduce policies that are favourable to the market. The comments were taken by the market as an indication that China’s tumultuous crackdown on internet platforms was nearing an end.

Another concern for investors in China is Xi Jinping’s recent adoption of “Common Prosperity” objectives, and the uncertainty this brings to China’s market-based economy. While implementation guidelines for this policy remain unclear, there will be concerns about the ‘allowed’ profitability for large internet platforms. Xi himself has indicated that under Common Prosperity “legal income should be protected, but China should reasonably adjust excessive incomes”. Again, Liu He has attempted to ease concerns, suggesting that “guidelines and policies for supporting the private economy have not changed”. Perhaps more instructive has been China’s recent decision to moderate this policy in response to a slowing economy and Covid disruption.

Although regulatory pressure may be easing, investors would be well-served by remembering a key lesson from recent events. Under China’s market-based socialism, private economy is encouraged but only within the bounds of national policy objectives.

With this in mind, the continued growth of the internet economy supports China’s ongoing development and improving living standards and should therefore be supported. But industry participants will need to remain careful to stay within the policy guidelines proposed by the Chinese Communist Party.

2. Increasing competition

Competition in e-commerce in China is intense and dynamic. However, it has also exhibited a number of similar characteristics to international markets, most notably high concentration, a desire for scale and clear periods of growth of new business models. There is a feeling though that this pressure has increased during recent times. There are a number of important reasons why this has been the case, laid out in the table below.


It is clear from these trends that competition in the e-commerce market is being driven by 1) a desire to monetise existing ecosystems as internet activity matures, 2) a desire to gain a entry into the e-commerce market by meeting unmet needs in lower-tier cities and existing categories, and 3) ecosystem innovation to better meet consumer needs. As overall market growth slows, there is a broad perception that prospects to exploit these opportunities will reduce, driving aggressive competition.

The impact on e-commerce incumbents is clear. To prevent new competitors gaining a foothold in the market, existing players have had to respond.

This has led to significant losses in strategic initiatives which have weighed on profitability. For example, Alibaba has expanded activities such as Taobao Deals, Taobao Live, Taocaicai, Taoxianda and, incurring significant losses as a result. At the same time it has updated its ecosystem to introduce recommendation feeds and discovery engines. Similarly, JD is expanding activities such as Jingxi.

However there are indications that competitive intensity may be beginning to rationalise under the weight of expanding losses and regulatory interventions. Management Alibaba, JD and Meituan have all committed to reducing losses from such strategic initiatives as the industry works towards stable and inclusive growth.

For example, Alibaba has expanded activities such as Taobao Deals, Taobao Live, Taocaicai, Taoxianda and, incurring significant losses as a result. At the same time it has updated its ecosystem to introduce recommendation feeds and discovery engines. Similarly, JD is expanding activities such as Jingxi.

What does all this mean for investors?

Beleaguered Chinese e-commerce investors may take heart from indications of improving regulatory and competitive trends - the worst may be behind us. However, continuing macroeconomic weakness is likely to continue to pressure the industry, especially given Covid uncertainty, and this will need to pass before there is a return to the underlying growth trend.

At the same time delisting risk for US-listed Chinese entities may continue to be an issue. And while there are hopes that a compromise might be reached between the Public Company Accounting Oversight Board (PCAOB) and Chinese authorities, the eventual outcome remains highly uncertain.

Even with both these remaining issues resolved it is likely investors will need to resign themselves to a slower sustainable growth rate as e-commerce penetration begins to mature.


Thomas Dykes
Deputy Head of Emerging Market Research


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