There is huge potential for growth in China's e-commerce market, but the current regulatory framework is uncertain, making investment in the sector risky.

By the end of 1999, the Internet population in China was estimated to be nearly nine million, compared with just over two million a year earlier. Minister Wu Jichuan expects this to rise to 20 million by 2003. Of an estimated 1,100 Chinese websites (a CCIDnet.com estimate given in April 2000), some 800 provide online shopping services. International Data Corporation predicts that the value of online sales in China will rise from US$40 million in 2000 to US$3.8 billion by 2003. E-commerce was recently described as 'critical to the future development of China's economy by the Director General of the Department of Informatisation Promotion of the Ministry of Information Industry (MII).

While each statistic is not individually significant, the trend is clear 'there is huge potential for further rapid growth in China's market. However, the wide reach of the Internet and the speed with which informal can be disseminated makes the authorities nervous. The current regulatory framework for e-commece uncertain. This makes investment in the sector risky. While 'comprehensive' new Internet rules are awaiting, early players in the e-commerce market must work cautiously within an evolving patchwork of rules. This article considers in broad terms how the Internet and e-commerce are regulated in China today and what drivers shape future regulation.

Regulatory Authorities

At present, a variety of government authorities exert different regulatory functions over Internet-related activities, based broadly on a delineation between service provision and content provision.

The MII is the most prominent regulatory authority The MII has responsibility for drafting policies which affect the telecommunications and Internet sectors and licensing telecoms operators. However, Chang Xiaobin of the MII's Bureau of Telecommunications Administration has recently admitted that the MII can no longer manage the growth of the Internet on its own.

Even before Mr Chang's admission, other government departments played roles in regulating the Internet including:

  • the State Administration for Industry and Commerce (SAIC) which oversees the registration of Internet Service Providers (ISPs) and Internet Content Providers (ICPs)
  • the Ministry of Public Security which is responsible
  • for network security, and
  • the State Secrets Bureau which is responsible for state secrets.

On the content side, each government department which has responsibility for a 'real world' sector continues to regulate Internet content in that sector. For example, the SAIC regulates online advertising (and has recently issued 20 online advertising licences) and the China Securities Regulatory Commission (CSRC) has issued guidelines in relation to online securities trading. Furthermore, city administrations are keen to retain a degree of control. For example, the Beijing Administration of Industry and Commerce (BAIC) has recently issued its own guidelines on Internet advertising which require companies operating in Beijing to obtain approval before designing, creating or displaying online advertisements.

Elsewhere, the position may be further confused by a city administration adopting a more relaxed approach than the state position. For example, the local government in Shanghai has activity encouraged foreign investment in the Internet sector in anticipation of it being allowed.

The fact is that many different parties want either to gain, or retain, some degree of regulatory responsibility and control, because with control comes political and commercial power.

Regulations Governing the Internet

Internet Access

There are various regulations that govern Internet access in China. The earliest and principal regulations are the Interim Regulations of the PRC for the Administration of International Connections to Computer Information Networks, which were issued by the State Council in 1996 and amended in 1997.

Under these regulations, Internet users must connect through 'connecting networks'. These are essentially domestic ISPs which have been properly approved and registered. The 'connecting networks' are in turn linked to one of five authorised 'interconnecting networks'. The 'interconnecting networks' must pass through international gateways controlled by the MII in order to gain access to the global Internet.

Presently, if new 'interconnecting networks' are to be established, they require preliminary approval by the MII and final approval from the State Council. Foreign investment in the management and operations of ISPs and ICPs in China is currently prohibited. Nevertheless, a number of instances of foreign investment, using Structures such as the Chinese-Chinese-Foreign business model previously employed by China Unicorn, are being tolerated.

Internet Content and Security

The Chinese government has also introduced a series of regulations to control Internet content and ensure Internet security. Generally speaking, these regulations prohibit the use of the Internet in any way that would breach public security, or provide harmful content. Under the regulations, every Internet company in China must register with its local public security bureau and regularly update information relating to the security and censorship systems of its websites. Recently, the BAIC issued regulations requiring all 'Internet business organisations' within its jurisdiction to register with it within 180 days from 1 April 2000. The regulations apply to all companies to which the BAIC has issued business licenses which undertake Internet business with the purpose of profit making.

With effect from 1 January 2000, the State Secrets Bureau issued the Administrative Regulations far the Protection of State Secrets for Computer Information Systems on the Internet (State Secrets Regulations). The State Secrets Regulations further control Internet content and security in China by prohibiting the storage, processing or transmission of state secrets via computer systems that are connected to the Internet.

The term 'state secrets' is not, however, defined in the State Secrets Regulations. Given its widest interpretation, therefore, 'state secrets' could include any information not officially approved by the Chinese government for publication. Furthermore, information provided to websites connected to the Internet must be viewed and approved by the relevant State department. The State Secrets Regulations also provide that all Internet users, interconnecting networks and connecting networks must put in place a management system for protecting secret information. The consequences of not complying with this requirement or failing to co-operate with the relevant government departments may result in the fending website being shut down.

Information security is another area in respect of which the Chinese government has issued regulations. The State Encryption Management Commission (SEMC) issued the Commercial-Use Encryption Management Regulations (Encryption Regulations) in late 1999. As published, the Encryption Regulations provide at the production, sale and use of products containing commercial encryption codes must be registered and approved by the SEMC. However, after strong lobbying from multinational companies producing such products, the authorities have clarified that the registration and approval requirements only apply to specialised hardware and software for which encryption and decoding operations are core functions. Other products which contain encryption codes, such as wireless phones, Windows software and browser software, do not fall within the scope of the Encryption Regulations.

Domain Name Registration

Domain name registration in China is regulated under the Provisional Administrative Measures on the Registration of China Internet Domain Names and the Detailed Implementing Rules on the Registration of Internet Domain names in China (together the Domain Name Rules) both used around mid-1997 .The China National Network formation Centre (CNNIC) is the designated agency) possible for domain name registration in China. Pursuant to the Domain Name Rules, if a foreign company wants to register a domain name in China, e applicant must be a subsidiary or representative office registered in China. Furthermore, the sale, assignment transfer of domain names in China is strictly prohibited. Therefore companies can only acquire an existing domain name after the existing registrant has cancelled it. The Domain Name Rules do not permit e registration of domain names in China by individuals.

China and WTO Membership

The US House of Representatives has approved the granting of Permanent Normal Trade Relations (PNTR) status to China. This, together with the recent agreement with the European Union, clears the way for China's accession to membership of the World Trade Organisation (WTO). Membership will formalise China's commitment to adhere to internationally accepted trade and investment practices. In the long term, this is likely to lead to significant foreign investment in sectors, such as telecommunications and the Internet, in which foreign investment was previously prohibited.

According to the US-China agreement:

  • Internet service provision: foreign investment up to 25 per cent equity will be permitted three years after China's accession to the WTO in Beijing, Shanghai and Guangzhou; up to 35 per cent equity in the above major cities and 14 other major cities five years after accession; and up to 49 per cent equity across China six years after accession.
  • Internet content provision: foreign investment up to 30 per cent equity in Beijing, Shanghai and Guangzhou immediately upon accession; up to 49 per cent equity in the above major cities and 14 other major cities one year after accession; and up to 50 per cent equity across China two years after accession.

Conclusion

There is little doubt that the overall prospects for e-commerce and the development of the Internet in China are very encouraging. However, questions and concerns remain. Principal among them are whether the anticipated new regulations will be sufficiently transparent and comprehensive to provide a stable foundation for future development of the Internet sector and whether, despite its WTO obligations, China will find ways of continuing to protect domestic players. There is a view that foreign players may continue to face restrictions because the Chinese government will want to secure the position of its domestic participants first. Moreover, strict control over the type of information disseminated on the Internet is likely to continue. However, until the government actually announces any new regulations, investors will have to work within (or at least close to the boundaries of) the current, continuously evolving legal framework.

First published in Company Secretary in July 2000 Volume 10 No. 7.