Over 40% Of Chinese Goods Sold Online Are Counterfeit

Following a recent report documenting the surge in empty malls littering China, many suggested that this is indicative of a shift to online shopping and migration to platforms such as Alibaba. That may well be the case, but unlike in the US where one is assured at least some quality control and has a rational expectation that what was ordered online is what will be delivered, in China the reality is far different.

According to China's official news agency, Xingua, more than 40% of goods sold online in China last year were either counterfeits or of bad quality, illustrating the extent of a problem that has bogged down the fast-growing online sector.

According to the report, which was delivered to China's top lawmakers on Monday, just under 59 percent of items sold online last year were "genuine or of good quality", Xinhua said as cited by Reuters.

China has been trying to shake off a notoriety for pirated and counterfeit goods, long a major headache for global brands targeting the Chinese market from iPhone maker Apple Inc to luxury retailer LVMH. Chinese e-commerce giant Alibaba Group has been lobbying to stay off a U.S. blacklist for fakes after coming under renewed pressure this year over suspected counterfeits sold on its shopping platforms.

As Reuters adds, the report called for "accelerated legislation in e-commerce, improved supervision and clarification of consumers' rights and sellers' responsibilities". It added these were needed due to the rapid emergence of online sales, which grew 40 percent last year to 2.8 trillion yuan ($441.84 billion).

China wants to boost protection for consumers online, where there is still a lot of uncertainty about how consumers can claim compensation or hold online vendors to account. The report added customer complaints about online orders hit 77,800 last year, a steep jump of 356.6 percent against 2013.

That said, the above is based on one key assumption: that the Chinese consumers continue to have substantial disposable income to spend - whether online or in bricks and mortar stores. That is challened by the latest data out of Hong Kong where as ISI Evercore reports October luxury sales plunged 23% Y/Y as the city that has historically been synonymous with opulence "is still losing out as a Chinese luxury shopping destination."

The data is modestly better on a 3-month average basis but at -12.1% Y/Y it still suggests there is a significant weakness with Chinese luxury consumption...

... which while not directly flowing through to total online sales, may explain why as we reported yesterday one of Apple's key Taiwanese suppliers, Pegatron, had halted hiring new workers citing "weak Apple sales."

So why is AAPL stock not sliding, and has instead pushed above its 200-DMA? Perhaps the hope that the latest rate cut by the PBOC and the surge in credit creation (as we reported last night, Chinese SOEs unexpectedly saw $1 trillion in new debt in September) and the ongoing gradual rebound in housing will lead to a local wealth effect offsetting the ongoing spending slump. It remains to be seen if the Chinese monetary plumbing is still functioning unlike that of the US where even JPM now admits that ZIRP has been a failure.