- Foreign entities already absolutely prohibited from publishing activities in China
- Only role of the new rules is to ban schemes to evade existing restrictions
- Variable interest entity and contract partner structures fall out of favor
On March 10, 2016, the PRC government will impose new rules to govern online publishing in China. These are the Online Publishing Service Administration Rules (OPS Rules), promulgated by the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) and the Ministry of Industry, Administration and Technology.
Under the rules, all entities that intend to publish online in China must first obtain an Online Publishing Service Permit from SAPPRFT. The OPS Rules set out the conditions for obtaining the required permit. The Chinese government strictly regulates both traditional print publication and online publication in China and any publication done without the required permit or in violation of the terms of the permit is subject to severe sanctions.
The OPS Rules are primarily directed at controlling Chinese entities that publish online in China and only indirectly address the activities of foreign entities. The reason for this is that foreign entities are already absolutely prohibited from any publication activities in China. I repeat: wholly foreign owned enterprises, joint ventures, and foreign entities are already absolutely prohibited from carrying out any kind of publication in China. As a result, the only role of the OPS Rules is to prohibit schemes designed to evade the existing restrictions.
Foreign commentators have consistently misunderstood the OPS Rules and the consequences that will flow from those rules. The purpose of this article is to make clear the current status of foreign publication in China.
- The OPS Rules are primarily focused on regulating Chinese entities. The treatment of foreign entities is limited to measures intended to eliminate various schemes that have been used by foreign owned entities to evade application of the prohibition. The basic tactic employed by foreign entities has been to split ownership of the publishing license (held by the Chinese entity) from ownership and control of the technology and infrastructure required to carry out the publishing work (held by the foreign entity). These are the well known schemes of variable interest entity (VIE) structures and contract partner models. The new rules prohibit these evasive schemes.The OPS Rules do this by imposing two new requirements: (1) The entity that holds the publishing license must have complete ownership and control of the publishing platform and technology; and, (2) any cooperation agreement between a Chinese entity and a foreign entity must first be report to and approved by SAPPRFT.
- The new OPS Rules do not change the basic prohibition against publication in China by foreign-owned entities. The OPS Rules merely confirm what has always existed by making absolutely clear that “publishing” includes publishing “online.”
- The effect of these rules will be that VIE and contract partner schemes will be illegal going forward unless they have prior SAPPRFT approval. How this will affect existing entities using this sort of structure is not clear. Under the terms of the new rules, existing online publishing entities must apply for a new license, so it’s doubtful that any existing VIE structures will survive this process.
- The rules vaguely broaden the definition of online publishing content, making it unclear how far the new rules will extend. However, the intent of the new rules is clear. Any material that would traditionally be published in print form is clearly included. The unclear area applies only to new forms of publishing developed solely for the Internet and with no traditional print analog. It is also unclear whether the new rules will apply to publication online that is little more than the standard company brochure and promotional materials. Simply because these publications are far more commercial than informational, we think they will survive.
The main issue with the new rules is the clear prohibition of VIE and contract partner schemes designed to evade the foreign investment requirement. Though the new rules apply only to online publication, we see them as further demonstrating the PRC government’s dislike of VIE and contract partner structures everywhere, including other online businesses in China.
For example, the OPS Rules are not directed at online media publication such as film, TV and music because they are limited to the online provision of what traditionally would have been offered in print form. Though similar prohibitions on foreign investment already exist in film, TV and music, the target of these newest rules is The New York Times, not CBS or Metal Blade Records.
It appears VIEs such as Taobao will not be directly impacted by these rules. On the other hand, Baidu and Sina may be since they publish news and other content that would traditionally be offered in print by newspapers or magazine. If Baidu and Sina are somehow exempted from the new rule, that would raise international trade rule concerns about the intent of the new program.
The issuance of the OPS Rules shows the PRC government is serious about eliminating the influence of foreign entities in China’s publishing and online media. In assessing the impacts of these new rules, it is important to note that bulk of Internet businesses in China are foreign owned through VIE structures. If the Chinese regulators are now serious about eliminating the VIE structure, what will that mean?
Part 2 of this series will discuss the impact of the new OPS Rules.