It is important to bear in mind that, despite the incredible pace at which it has become a force in developed economies such as the United States, e-commerce has not risen from nothing. Indeed, there are a number of prerequisites that are required for e-commerce to develop successfully. These include a high degree of internet penetration amongst businesses and the general public; a sufficient level of education about e-commerce practices; secure and convenient payment channels for e-commerce transactions; fast and reliable distribution networks to deliver products that are bought online; and the provision of a legal framework for online transactions and contracts.

China has already made great progress in some of these areas. First and foremost, the number of people who have regular access to the Internet has skyrocketed in recent years. The January 2008 report of the China Internet Network Information Center ("CNNIC") stated that China's total number of internet users had reached 210 million as of December 2007; by February this year, Beijing based technology consultancy BDA claimed that this total had climbed to 217 million. This means that China has now overtaken the US to become the country with the largest number of online citizens. Moreover, this rapid increase shows no sign of slowing down - the figure is expected to reach 280 million by the end of the year.

Prospects for growth

Indeed, China's ever-expanding online population is one of the main reasons that people are so excited about the prospects for e-commerce there; the vast potential for online business becomes even more apparent when you consider how many more people in China have yet to get online. That said, statistics on current internet users in China have caused some observers to raise concerns about how realistic expectations are for e-commerce in China. CNNIC have reported that, as of June 2007, only 67.1 million people owned a home computer, and the growth rate of computer ownership has consistently lagged behind the growth rate of internet use. A significant number of China's internet users access the web at internet cafes, venues which are not secure for performing internet transactions.

Moreover, the CNNIC 2007 report further reveals that more than half of China's internet users have a monthly income of less than RMB1,000 per month. The question is, do these figures suggest that hopes for e-commerce in China are being inflated slightly? "Not so", says Zhan Fudong, an e-commerce expert who previously worked for the Asia-Pacific Economic Cooperation ("APEC") E-Commerce Business Alliance. "All internet users can participate in e-commerce at different levels. Individuals with a low- or mid-level income who use the internet for basic transactions will find the process both convenient and favourable, which in turn will encourage more e-commerce transactions, and also encourage the industry to improve their services and develop e-commerce further." And as Mei Shaozu, of University of Science and Technology Beijing, points out, these statistics take on a different light when it is considered that around 50% of China's internet users are aged 18-30, and a significant proportion of these users are students. "At the current rate of increase, China's internet users should number 400-500 million in five years time. By that point, at least some of these young, low-income users will have entered the middle-class; these people will become e-commerce's most active users."

Creating a secure environment

One area where China has made significant progress is in government legislation and policy. Since 2004, a number of important issues regarding the legal status of online transactions have been addressed by the Chinese government. As Gong Bingzheng, a researcher at the Department of Hi-tech Development and Industrialisation, explains, these measures are significant for the development of e-commerce: "Information security is something the Chinese government is taking very seriously. First, a number of rules and regulations have been established and enacted by relevant government departments, including the State Council's "Computer Information Network Security Protection Regulations", the resolution on maintaining internet security passed by the National People's Congress Standing Committee, the Ministry of Information Industry's "Telecommunications Regulations", and the Public Security Bureau "Method for the Management of Security for the Global Computer Information Network" and "Method for the Prevention of Computer Viruses". Secondly, the publication and promulgation of the "Electronic Signature Law", as well as the standards being put in place by the Certification Authority, the development and spreading of information security standards and security products, and the establishment of the "China Information Technology Certification Center", have all helped create a secure environment for the development of e-commerce."

At the same time, a number of government studies have been carried out to research and plan government policy for the development and implementation of e-commerce in China. That said, there are still measures that must be taken, on issues such as IP rights, in order to further facilitate the development of e-commerce whilst protecting businesses and individuals.

As a result of the improvements that have already been made, the past two years in particular have seen huge change and growth for China's e-commerce industry. Around the turn of the millennium, industry analysts were worried about the relatively slow growth of China's business to business (B2B) transactions, which in other countries have formed the backbone of the e-commerce industry. However, experts such as Mei Shaozu claims that B2B now accounts for over 90% of China's e-commerce activity, and is growing at a rate of 40% per year. The consumer to consumer (C2C) market has also grown significantly. Moreover, IT market research company CCID Consulting has forecast that China's e-commerce market will grow at an average of 50% per year over the next five years. Most encouragingly for China, it is native firms such as Alibaba and Taobao which are winning the battle for the B2B and C2C markets respectively, out-performing foreign giants like eBay.

Zhan Fudong is very confident for the development of e-commerce in China.

Another significant change that will take effect in the next few years will be in China's distribution networks. During the early days of e-commerce, China's logistics industry was not very advanced, and foreign logistics companies such as UPS had yet to make any real impact in the China market. As a result, local companies often relied on fairly antiquated methods such as delivery by bicycle, at least for local deliveries. However, recent preparations for the 2008 Beijing Olympic Games have seen vast improvements in China's logistics infrastructure. This in turn should have a positive effect on the speed and reliability of deliveries, an important factor for the growth of e-commerce.

As the situation for e-commerce improves in China, more and more companies are taking advantage of the possibilities for trading online, and making the process more convenient for customers as well. In December 2006, retail giant Carrefour launched an online shopping service for customers in Beijing, Qingdao and Wuhan. The service has since spread to Chengdu, Shanghai and Tianjin. Online travel agent eLong issued its first e-ticket in 2005, and recently began to accept online payments for transactions.

Room for improvement

Advances such as these are essential to push forward the development of e-commerce in China. Unfortunately, they also serve to highlight some of the areas which are as yet underdeveloped.

First of all, online payment remains a rarity in China - most internet sellers rely on alternative payment methods such as cash-on-delivery. Banking practices remain fairly backwards in China, with few people making use of internet banking or credit cards. By the end of 2007 there were 75 million credit cards in circulation in China; this number may seem large, but it accounts for just 5% of China's population. However, banks are beginning to take notice of the potential of e-commerce, and are increasingly offering services to take advantage of its opportunities. As Zhan Fudong explains, "Today, banks in mainland China are incredibly interested in online transactions. For example, China Merchant Bank and COFACE China are collaborating on a credit grading scheme which will allow users to check the credit status of potential business partners worldwide, providing an added layer of security for companies who are preparing to do business online." Actions like this will certainly help to promote e-commerce in the future.

Secondly, internet security remains a somewhat overlooked problem. eLong was recently forced to ask for signed authorisation forms from customers paying with foreign-issued credit cards, after concerns were raised over possible fraudulent activity. Security concerns lead, in turn, to a general lack of trust in the internet. According to a 2007 CNNIC survey, only 29.2% of Chinese internet users are satisfied with internet security in China. Moreover, the survey results showed that there was little trust in the internet, with only 35.1% of respondents claiming that they believed what they read online. These statistics are worrying, as without a decent level of trust in online security and the validity of information, internet users will be less likely to engage in online transactions.

However, as Zhan Fudong explains, perhaps the single largest problem which is holding back the development of e-commerce in China is the lack of a unified platform for e-commerce transactions. "Under the current situation, businesses are forced to use different platforms or third party service providers for each different aspect of e-commerce. Because of this, they need to use many different forms of online security certification, adapt to many different methods of online payment, visit many different sites, and purchase a lot of hardware in order to make use of the different systems they encounter... this not only reduces the impetus to engage in online transactions, it has also held back the development of e-commerce as a whole."

This is one area in which Hong Kong can share its experience with the mainland. According to APEC's classification, China remains in the second 'Shaping Period' stage of development for paperless trading. Hong Kong is one of only two markets in the world to have reached the fifth 'Advanced' stage. Hong Kong has reached this level through a succession of successful policies and measures, which Zhan explains have created a suitable environment for e-commerce to flourish. "For example, in 2000, the Hong Kong government passed the Electronic Transactions Ordinance ("ETO"), which established legal protection for e-commerce and established a legal framework for electronic and digital signatures. On the practical side, the Digital Trade and Transportation Network ("DTTN") was established, which has provided a community platform for digital information exchange at all stages of the supply chain, forming a synthesised operational environment for all parties."

Market of the future

e-Commerce in China is still in its infancy. Despite recent progress, total e-commerce transactions remain relatively low: in 2006, online transactions came to a value of US$127.5 billion, just slightly more than total online retail transactions (which account for a mere 5% of total e-commerce transactions) in the US for the same year. However, the huge potential for e-commerce in China cannot be denied. Significant progress has been made in improving the market conditions for e-commerce, progress which has led to significant growth in e-commerce transactions. And this growth is likely to continue.