China to Probe U.S.-Listed Shopping App Over Fake Goods

(Bloomberg) -- Chinese regulators announced an investigation into widespread reports of counterfeits sold through Pinduoduo Inc. just a week after the e-commerce operator's high-profile U.S. initial public offering.

On Wednesday, the State Administration for Market Regulation ordered Shanghai authorities to look into the reports and vowed “serious” punishment if it uncovers violations. Known as PDD, shares of the online bazaar soared 41 percent on its first day of trading in New York after raising $1.63 billion in the fourth-largest U.S. IPO this year. The shares plummeted as much as 15 percent Wednesday.

The investigation comes amid a torrent of accusations about trademark infringements on Chinese social media, including on Twitter-like Weibo and messaging giant WeChat. Screenshots of alleged knock-offs mimicking Samsung TVs or Xiaomi phones have prompted brands including Hisense to warn of the potential legal consequences for platforms that infringe on their trademarks. PDD comment declined to comment Wednesday.

“Regardless whether it's a third-party platform or the platform's own operation, so long as there's been a violation of law, it will be treated seriously,” the administration said in a statement on its website.

Read more: Ex-Google Engineer Huang Catapulted to 100 Richest by PDD's IPO

Founded by ex-Google engineer Colin Huang, Shanghai-based PDD carved out a slice of the country's massive e-commerce market by popularizing a format where people spot deals on products from fruit and clothing to tissues, then recruit friends to buy at a discount. But the startup has itself pointed out the risks from counterfeits on its site -- an endemic problem that's plagued e-commerce operators such as Alibaba Group Holding Ltd., which in 2016 rejoined the U.S. Notorious Markets list.

PDD has been touted as a challenger to much larger Alibaba and second-ranked JD.com Inc. in China's e-commerce market.

Policing knock-offs requires an army of personnel and technology to spot fakes, a burden on a fledgling operation such as PDD's. While Chinese users have long complained about shoddy goods, posts on social media about PDD have accelerated since its highly publicized IPO. It's also attracted at least one lawsuit, according to Chinese media.

The products available as of Wednesday on PDD, which is now trading at about 19 percent above its IPO price, include a 350 yuan ($51) iPhone X -- a fraction of its retail price tag -- and 849 yuan “Shaasuivg” 4K TVs (the logo resembles Samsung on a quick glance).

“If you open the app on PDD you see all kinds of obvious fake goods with funny names,” said Eric Wen, founder of the Blue Lotus Research Institute. “They're so obvious they will have to be removed. I'm not saying this will reduce PDD's valuation to zero but once you remove these goods, it will impact on” transactions.

Wen said big-ticket items such as electronics made up a relatively small portion of the site's sales. “But their top categories like food and baby products are even more at risk. If something goes wrong with those categories, the consequences will be catastrophic.”

--With assistance from Gao Yuan.

To contact Bloomberg News staff for this story: David Ramli in Beijing at dramli1@bloomberg.net

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan

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With assistance from Editorial Board