THE launching of a new kind of insurance for consumers is being discussed between the Shanghai Electronic Business Association (SEBA) and the Shanghai Insurance Association (SIA) to protect consumers' rights during online business transactions. The lack of a secure credit system has become a serious bottleneck hampering the booming Internet business.

As the watchdog of online business in Shanghai, SEBA expects a lot from the new insurance initiative.

"The new insurance system will promote online business by protecting consumers' rights and encouraging more people to engage in business online. It is a necessary precondition for any proper online credit system," said Yi Yong, secretary general of SEBA.

The proposal to launch the insurance system has received a positive response from SIA, who promised to work out a workable solution to the problem of online insurance.

"Four insurance companies in Shanghai have shown an interest," Yi told the Shanghai Star. "The only thing they are unsure about is how to properly assess the risk involved in online transactions".

According to Yi, websites engaged in online business will cover cost of insurance fees for their consumers.

The scheme means that consumers will be compensated if they find they have been cheated in online deals.

"The details of the new insurance scheme will be discussed and settled with the insurance association," said Yi.

The proposal received a mixed response from the dot-com companies providing online business in Shanghai.

Some think it could be a burden for small online businesses, still in their growth period with tight budgetary constraints.

Most of the online businesses welcome the new insurance plan, however, although they know they will have to contribute financially to realize it.

"The insurance will give our consumers a guarantee. They will not suffer a loss if they meet with a cheat online and are unable to track down the fraudulent trader to win compensation," said one manager from a website focusing on the consumer-to-consumer (C2C) business who preferred to remain anonymous.

Great potential

The once sluggish online business is enjoying a warm spring this year after first taking-off in 2003. Shanghai has witnessed a rapid increase in online business since then.

Business-to-business (B2B) online trade has doubled, while C2C transactions have increased by 35 per cent.

Take Bsteel.com, a website facilitating online steel transactions, for instance. Its monthly volume of online transactions reached 6,000 tons in March in 2003, compared with 700 tons in February. The transacted volume reached a record 5,000 tons in just five days from April 21 to 25.

Online providers of merchandise for ordinary use, such as Ego365.com or Ihok.com (a website founded by a Shanghai-based retail giant), have regularly seen their online business double since last year.

Shanghai's online businesses had increased to 160 by late-March, according to the SEBA.

Eachnet.com has become the biggest online business platform over the last few years, while other Shanghai-based online businesses such as bsteel.com, Ctrip.com and www.shmec.com.cn began to make a profit for the first time.

With 4.3 million registered users, Eachnet.com is China's largest cyber marketplace with 10,742 different sweaters and 2,771 T-shirts listed on line now. Ctrip.com, listed on the US Nasdaq at the end of 2003, has become the biggest airline ticket distributor in China, realizing a transaction volume of 110 million yuan (US$13.30 million) in the first four months of 2003.

But Chinese dot-coms have good reason to think big. More than 22 million new users piled on to the Web last year, bringing the total number of Chinese online to 80 million. That makes China second only to the US in Internet subscribers.

China is expected to overtake the US by 2006, with 153 million Chinese online, according to the SEBA.

Several factors have contributed to the surge, including a strong economy that is enabling people to buy PCs and the opportunity the Net allows for businesses to skirt China's sometimes obstructive bureaucracy.

Online fraud

"But the potential fraud when doing business with strangers on the Net is a major problem confronting online businesses," said Yi.

Yu Jing, a student at the Shanghai International Studies University, first began to engage in business online in 2003. Despite her initial enthusiasm, a bitter experience shattered her confidence. She bought a mobile phone on Eachnet.com, described as a new one, but the phone turned out to be old and worth less than half what she paid. She was unable to recover the money after the seller disappeared.

"Such fraud is not rare when doing business with strangers on net," said Zhen, CFO of Eachnet.

According to the Shanghai Consumer Protection Association, cases of online fraud increased by 186 per cent in 2003.

Quality problems, delivery delays and online fraud top the lists of consumers' complaints.

The goods often fail to reach buyers because the logistics system to support online business has not yet been constructed.

Fake products also remain a big problem.

"The government is pushing forward with the establishment of a secure online credit system in Shanghai. But relevant laws are still needed to resolve disputes and protect consumers," said Yi.

SEBA is planning to conduct credit assessments of online businesses in Shanghai to weed out those with dubious credit records.

"It is not very hard to receive certification to provide online business in Shanghai because the government wants to encourage the industry", said Yi.

"Eachnet has succeeded to build a good credit assessment system for its traders", he added. "It provides a good example for others to learn from."

Eachnet requires a real identity from those registering for online business, an identity card number supported by other information that can be checked by Eachnet.

"We keep a credit record of both sellers and consumers which can be used to assess their trustworthiness", said Eachnet's Zhen.