China's top market watchdogs called for PDD (NASDAQ:PDD) to address concerns regarding its refunds-first policy. The policy, which allows consumers to claim refunds without returning goods, has been criticized by merchants for negatively impacting their profits.

Shares fell 2.2% on the news.

Officials from the State Administration of Market Regulation and Ministry of Commerce met with PDD executives to discuss the "refunds only" practice, which has been a cornerstone of PDD's business model.

The practice, designed to prioritize consumer satisfaction, has been pivotal in PDD's growth, enabling it to surpass competitors like Alibaba (NYSE:BABA) Group Holding Ltd. and JD (NASDAQ:JD).com Inc. in the market.

During the meeting, regulators conveyed that the policy places an undue strain on small merchants. While the regulators refrained from providing specific recommendations or banning the policy outright, they emphasized the need for PDD to amend this approach.

PDD's platform Pinduoduo has been a bridge connecting hundreds of thousands of small shops with Chinese consumers. However, the company withholds payments to merchants if they do not meet customer expectations, which can range from delayed deliveries to discrepancies in product quality.

The refund policy has faced increasing backlash, particularly in the context of the economic downturn in 2024. Merchants have argued that the policy unfairly favors consumers and withholds their payments even after products have been delivered. 

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