I hear more and more from companies wanting to enter the Chinese market. Companies see the vast population and look at China as a new frontier.

Unfortunately for the multi-level marketer, that frontier is mostly closed. China as a general rule is not multi-level marketing friendly.

At the end of 2005, China passed a law entitled the “Regulation of Direct Sales and Regulation on Prohibition of Chuanxiao”. Chuanxiao basically translates to multi-level marketing. This law codified the rules in China and made them clear to all. The crux of the law is that direct sales in China is legal and multi-level marketing in China is illegal. The law also required a business license for a company to participate in direct sales.

The law states that Direct Sales is legal and explains the rules which a direct seller must follow. The law is very clear that in order to be legal a company may only pay out on one level of commissions. It also states that individual direct sellers must go through extensive training by the company and obtain a license. They must wear a badge at all times that sales are being conducted which identifies them as a direct seller (this aspect of the law has seemingly been ignored in general practice). The law further relieves the company of the previous burden of only selling from a fixed brick and mortar location; now direct sellers may sell from any acceptable location. The law further caps the commissions of an individual direct seller at 30% of his/her sales, this amount is inclusive of bonuses, commissions, and any other economic benefit received.

The law goes on to discuss the prohibitions on Chuanxiao, defining multi-level payouts as illegal pyramid schemes. This definition is inconsistent with definition used in the rest of the world. In Article 7 of the law, the Chinese use the terms multi-level cheating and Illegal pyramid schemes interchangeably, when discussing any structure that pays out on a multi-level basis. The law does not provide for any loopholes, simply stating that any commission payouts of more than one level may be met with legal action, including but not limited to arrest or forfeiture of assets.

It is interesting to note that as of today, there are many companies operating in China legally as direct sales companies, with some such as Avon operating continuously since the early 1990’s. There are also many companies operating under a multi-level commission structure, which while technically illegal, has not seemed to stop them.

In neighboring Taiwan and Hong Kong, multi-level marketing is legal, which further lends to the confusion in the Chinese marketplace with sales representatives from these countries coming in and doing sales in China or Chinese nationals using Taiwanese or Hong Kong addresses and banking to become sales reps in these jurisdictions while at all times living and working in mainland China. This level of corruption with the laws and enforcement of the laws leaves a lot of confusion as to the future of multi-level marketing in China.