CIBEL Lunchtime Talk: Direct Selling in China Given by Professor Vai Io Lo on 9 March 2017

Author
Dan XIE (Ph.D. Candidate, Faculty of Law, UNSW Australia)

Professor Lo broadly provided an oversight into the development of direct selling and the prohibition of pyramid selling in China, especially after the accession to the WTO in 2001.

The Background of the Issues
Upon its accession to the WTO in 2001, China made a commitment to opening its market to firms engaged in the direct, person-to-person sale of goods to consumers without the involvement of wholesalers and retailers who have a fixed place of business. With the expiration of the WTO fifteen-year protection period in 2015 and the rise of free trade agreements between China and its trading partners, the Chinese market is now widely accessible to enterprises from overseas. In an increasingly competitive market environment, Chinese enterprises must act innovatively to remain viable. Thus, it is likely that more foreign direct selling firms will enter the Chinese market and more domestic enterprises will engage in direct selling.

The Distinction between Direct Selling and Pyramid Selling
It is not always easy to distinguish between the practices of direct selling and those of pyramid selling. Direct selling generally refers to the direct, person-to-person sale of goods or services to consumers without the involvement of wholesalers and retailers who have a fixed place of business. Accordingly, the direct salesperson derives income from product sale commissions, which is lawful in many countries. In contrast, pyramid selling refers to a scheme where a salesperson recruits additional salespeople and derives income primarily from the initiation fees of new recruits, which is forbidden by many countries.

Statutory Regulation of Direct Selling
To fulfill the WTO commitments, China has promulgated Regulations on the Administration of Directing Selling; Measures for the Administration of Information Reporting and Disclosure of the Direct Selling Enterprise; Measures for the Administration of the Establishment of Service Networks in the Direct Selling Industry and Measures for the Administration of the Payment and Use of Guarantee Deposit.

Measures to Protect Consumers
To protect consumers, the threshold for entering a direct selling business arrangement is comparatively high, with prerequisites including a good credit record, related business experience, fully paid registered capital, the guarantee deposit, an information reporting and disclosure system and a sound system of replacement and return for all products.

Further Reforms on the Administration of Direct Selling and the Prohibition of Pyramid Selling
At present, the list of products eligible for direct selling only includes cosmetics, health food, cleaning products, exercise equipment and small kitchenware. It is proposed that the range of directly sold products should keep up with the pace of the development of the direct selling industry and the demands of consumers. In addition, it is increasingly more difficult to clarify the standards of real pyramid selling as new recruitment models arise, especially with the increase in the use of electronic commerce and social networking software. Therefore, it is suggested that more explicit standards of pyramid selling should be issued in the future combined with criminal sanctions.