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Tuesday, 24 September, 2002, 07:37 GMT 08:37 UK
China's baby steps in e-commerce
High school students surfing
Internet use is growing but the banks can't cope

If you believe the hype, the internet has revolutionised China's shopping habits.

It's hard to talk of pure online stuff... there'll be a lot of offline involvement in any transaction

Duncan Clark, BDA China analyst

In countless identikit ads, a smiling Chinese girl searches the web, zeroes in on the firm's logo, finds her purchase in seconds and receives it in days.

The reality is somewhat different.

"E-commerce is practically non-existent" in China, says Ken DeWoskin, a partner in the Beijing offices of accountants PricewaterhouseCoopers.

Where it does exist, Chinese e-commerce is a world away from the smooth, all-over-in-seconds transactions imagined in corporate promos.

Even a projected growth rate of 243% in 1998-2003 leaves e-commerce in China lagging South Korea and Australia.

The latter country's population would fit into the city of Shanghai.

California dreaming

The reasons for this tardy take-off are many and complex - few Chinese have credit cards, the banking sector lacks a national clearing system and potential customers are suspicious of being cheated.

I've visited online shops but I didn't use them because I didn't have a credit card

Liu Hong

Only 2.1% of China's 45 million web users have bought online, according to official figures released in January by CNNIC, the official data collector.

About 40% of the sellers using online auction site Eachnet pick a buyer in their home town so that they can swap the goods for cash face-to-face, says Mark Fagan, the site's chief financial officer.

In such cases, the website acts as an electronic advertisement, with bidding taking place online but markets remain localised.

About 80% of deals between users of Eachnet's site used to be done this way, so things are improving.

"Trust is the fundamental issue that we face," says Eachnet's Mr Fagan, whose firm is allied to US online auctioneer Ebay.

Building trust

And it is not just sellers who are wary.

Liu Hong, a fashion-loving government official from western China who browses the web for hints on clothes and make-up, told BBC News Online her acquaintances remained suspicious of shopping online.

"They were even suspecting mail order," she says.

Beijing shopping mall
Shiny new shopping malls are popular haunts

Web firms globally are trying to jump this hurdle.

In China, many shoppers still remember the early days of market reform when ruthless peddlers conned people into parting with their savings for what often turned out to be a box of bricks, or sawdust.

Liu Hong is willing to give e-commerce a try, but has another problem.

"I've visited online shops but I didn't use them because I didn't have a credit card," she says.

Only about 20 million Chinese have credit cards out of a total population of 1.3 billion, says Duncan Clark, an ex-investment banker who runs BDA China, an IT analysis firm based in Beijing.

Banking hurdles

Getting a card depends on having a well-paid friend who can guarantee repayment.

But even those who do have credit or debit cards may be unable to use them far beyond their home town.

Grocery delivery boy for e-trader
Online stores are a mix old and new

In China, credit and debit cards are individually issued by different banks with little or no co-ordination.

"If you have a debit card issued in Beijing and you have a Shanghai account, it doesn't work," says Mr Fagan.

Online merchants like Eachnet have to spend hours setting up payment systems with different banks, often placing a pool of money in hand.

Effective e-commerce also requires national credit card clearance, Mr DeWoskin points out, especially since profits in the sector tend to depend on high volumes and low margins.

Chinese financial regulators are trying to solve the problem but "there's a lot of talk and not a lot of action," in Mr Fagan's view.

As China's currency is not internationally convertible, buying goods abroad remains a cumbersome process by any method.

What's more, China's foreign exchange counters do not accept invoices from online transactions.

Manufacturing powerhouse

American corporate visions of millions of Chinese consumers buying goods across international borders remain a dream.

A minority of privileged Chinese who have worked abroad and have US dollar bank accounts and credit cards can readily shop online from the likes of Amazon.com, but most buyers are ex-pats.

Analysts see much greater hope for online trading to take off in the business to business (B2B) sector.

Rather than China's huge population buying foreign goods online, it seems the boom may come from foreign firms purchasing made-in-China goods to sell back home.

A 100 yuan note
Money for most deals must still change hands offline

Edward Zeng is the founder of Sparkice, which sources everything from traditional ladies fans to footballs, hiking clothes and office supplies from a database of Chinese manufacturers.

It quality checks suppliers before allowing them to bid for contracts online.

In July, Sparkice says, it found suppliers for more than $1m of office equipment for a US firm in just two hours.

"China is the new centre for sourcing globally," says Sparkice founder Mr Zeng.

Business-to-business

Whereas EachNet had annual sales of $7m in 2001, Sparkice is projecting turnover of $100m next year, though Mr Zeng is more reticent about current sales volumes.

But it too does most of its payments offline.

"It's hard to talk of pure online stuff... You might find a supplier, but there'll be a lot of offline involvement in any transaction" says BDA China's Mr Clark.

The B2B sector faces other hurdles.

To work well, B2B needs broadband, but turf wars between government ministries are dampening take-up. China has only 2 million broadband connections, according to CNNIC.

EachNet believes its online auctions are breeding new entrepreneurs, as traders start small and get bigger. "They can use our sales listings and start businesses they wouldn't be able to offline," says Mr Fagan.

Huge numbers and even bigger predictions abound.

The value of e-commerce will rise from $479m in 2000 to $26bn by the 2004, says IT analysis firm IDC, using a generous definition that includes any purchase where the internet was used to find out about a product.

See also:

23 Sep 02 | Business
12 Sep 02 | Technology
12 Sep 02 | Technology
03 Sep 02 | Technology
03 Sep 02 | Technology
31 Jul 02 | Technology
02 Sep 02 | Technology
23 Jul 02 | Business
28 Jun 02 | Asia-Pacific
31 Dec 01 | Business
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