- New rules clearly enacted to give Chinese better control of foreign companies
- Chinese Internet giants employing variable interest equity structures may be caught up in net of regulation
In yesterday’s part one of this series, I talked about China’s new online publishing rules. Today, I focus on the potential impact those new rules are likely to have on foreign companies doing business in China that involves anything (i.e. anything on the Internet) likely to be covered by those new rules.
As we read the new rules, we found ourselves asking the following questions?
- How will these new rules impact Baidu and Sina and other variable interest entity (VIE) publishers of online news and commentary?
- What will these new rules mean for foreign magazines and other foreign media outlets that use VIE “alternatives” for publishing in China?
- What will the new rules mean for a foreign-owned training school that wants to publish its training materials online in China?
- How will the new rules impact a wholly foreign-owned enterprise (WFOE) that simply wants to publish manuals or support and promotional materials for its products?
All the above gets further complicated by the rules on commercial Internet Content Provider (ICP) licenses that currently do not require an online publishing license. Take the example of a VIE that is not involved in online publishing but that is involved in online sales (Taobao/Amazon/JD) or that is involved in online media (Tencent/Youku). Given that the basic thrust of the new rules is that evasion of the foreign ownership provision will no longer be tolerated, can we reasonably conclude that all these giant businesses are NOT under threat?
Or take the position of foreign companies who seek to tap the huge opportunity for Internet of Things (IoT) products in China. A manufacturer wants to sell its IoT product or device in China. The product uses a smartphone for control. It uses the Internet (or Wi-Fi or Mobile Phone or Bluetooth or Zigbee) to communicate with the IoT device. These are all networks. Will access to the network be permitted? No money flows back and forth, so it is not “commercial” — or is it? Data is being transferred back and forth on a network, collected, and then accessed. By whom and for what purpose? Is that permissible? Is a foreigner involved when an IoT coffee pot or door bell does all of this autonomously? Where is that data stored? What is done with the data? Does anyone have any inkling of how this works under the PRC’s closed networking model? Or about how it works under the Chinese government’s claim to have a monopoly on the personal data of its citizens?
Clearly the government enacted these new rules to better control foreign companies. At this point, all that remains to be seen is how far that control will reach, and over exactly what sort of foreign company and over exactly what activities.