Deng Xiaoping initiated the Reform and Opening Up policy and opened the door to the world in 1978. China’s GDP rose from 367.9 billion yuan in 1978 to 15.45 trillion yuan in 2020 and lifted China from a third-world country to becoming a global economic superpower.
In the last 40 years, China’s significant economic growth has increased its role in the world both as a trade and investment partner and as an international institution member in the United Nations (1945), World Trade Organisation (2001), and World Bank (1980). China holds a more influential and significant role in the world today than 40 years ago and more recently demonstrating a more mature and assertive stance in the global realm.
Internationally, China has increased activism and assertiveness within international institutions (“Institutions”) in recent years. Taking a proactive role in formulating policies and China is increasingly utilising such Institutions as platforms to articulate its’ position. Equally, today’s institutions represent a broader range of countries with different priorities, needs, and interests than the founding members. Therefore, Institutions are evolving from the post-second world war era, in which the USA played a primary role in the founding principles of the Institutions.
Domestically, China has adopted a collection of legislation to strengthen national sovereignty and interests, including:
- The Cyber Security Law of the People’s Republic of China effective from 1 June 2017
- The Export Control Law of the People’s Republic of China effective from 1 December 2020
- Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and other Measures, effective from 9 January 2021
- The Anti-Foreign Sanctions Law of the People’s Republic of China effective from 10 June 2021
- Data Security Law of the People’s Republic of China effective from 1 September 2021
For companies and individuals doing business in or with China, such legislation significantly impacts business operations – especially cross-border activities in several areas.
With a rapidly growing middle-class in China, the Chinese market for many companies is an important and growing market segment. Therefore, companies either invested or planning to invest in the Chinese market cannot disregard national sovereignty and interests’ compliance within their business operations. Below, we highlight the three key areas of national sovereignty and interests’ compliance applicable to companies doing business in or with China.
Cyber and data security
Cybersecurity for many countries is a top national priority to maintain secure networks and protect data from cyber-attacks.
In China, cyber security is centred on the security of the collected data, and companies are obliged to ensure networks collecting and processing the data are secure, monitored and shall not endanger national security or sovereignty.
The Cyber Security Law of the People’s Republic of China (“CSL”) and Data Security Law of the People’s Republic of China (“DSL”) are two primary legislation governing cyberspace and affect all companies working with data collection, processing, and management in China.
Cyber Security Law
The CSL establishes the compliance framework for network operators and is the overarching law for cybersecurity.
Under CSL, the network operator is defined as owners and administrators of the network and network service providers. Network operators are obliged to ensure servers and data stored, transmitted, or created on such servers are secure and protected from cyber-attacks. Furthermore, the CSL outlines a Critical Information Infrastructure (“CII”), which subjects information crucial to national security and economy to store the collected and produced personal information and important data within the territory of mainland China. Any data required to be transmitted aboard shall be conducted under measures of the Cyberspace Administration of China.
Data Security Law
DSL sets forth an overarching framework to regulate data handling and management accordingly with national sovereignty, security, and development interests.
Under the DSL, the scope and definition of data include any record of information in electronic or other forms and imposes an extraterritorial application to China-related data handling and management.
Organisations and individuals are shall ensure and formulate data management policies, cooperate with public security and national security organs that require their data for national security or criminal investigation. Mismanagement of data, specifically those handling important data could face significant liabilities for both the company and individual.
Prior to the adoption of the Export Control Law of the People’s Republic of China (“ECL”), export controls were scattered across several laws. The ECL is the first comprehensive framework establishing export controls, a list of controlled items, and provisioning extra-territorial application to individuals and organisations outside of China who endanger national security and interests.
Under the ECL any export of the controlled items from an individual or organisation within the territory of mainland China to an overseas individual or organisation is subject to certain obligations including obtaining the relevant license from the State Export Control Authorities. Controlled items are defined under the ECL as the following:
- Dual-use items which can be for civil and military purposes or helping to improve military potentials, especially goods, technologies, and services in design, development, production, or application utilised for weapons of mass destruction;
- Military products comprising of equipment, special production facilities, and other related goods, technologies, and services utilised for military purposes;
- Nuclear materials, including nuclear equipment, non-nuclear materials used for nuclear reactors, and related technologies and services;
- Technical materials and data related to the items listed above.
For companies with an international supply chain or engaged in cross-border research and development, the ESL has a significant impact on exporting operations. For example, foreign items containing components assembled or manufactured in China could be deemed as controlled items or cross-border research or technology transfer, activities such as research, inter-company research (where the research and development centre are in China), or technology sales to foreign enterprises could be classified as related technical material and data – thus subject to export control.
In 2021, China addressed the application of foreign legislation and sanctions to Chinese individuals and legal entities both within and outside of the territory of China. Two main legislation were enacted and established a stricter stance against foreign economic sanctions against Chinese organisations and individuals.
Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and other Measures
Early this year, the Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and other Measures (“Rules”) were promogulated by the Ministry of Commerce. The Rules provision a working mechanism for Chinese companies and individuals affected by extraterritorial foreign legislation that prohibit or restrict engagement in normal economic, trade, and related activities with a third State (or region) or its citizens, legal person, or other organisations. Affected individuals or entities are required to such matters to the State Council within 30 days. The State Council shall issue a prohibition order to oppose an unjustified extra-territorial application of foreign legislation and other measures.
Foreign companies in China especially multinationals should note the Rules stipulate any Chinese entities who comply with the unjustified extra-territorial application of foreign legislation subject to a prohibition order can be pursued in court.
The Anti-Foreign Sanctions Law of the People’s Republic of China
The Anti-Foreign Sanctions Law of the People’s Republic of China (“AFSL”) establishes the regulatory framework for foreign persons, both legal entities and individuals, acting against China’s national interests. Under the AFSL, organisations, individuals, and affiliated individuals who directly or indirectly participate in formulating, deciding, and implementing discriminatory restrictive measures against China shall be included in a Sanctions List (“List”). Those included in the List shall be subject to penalties including visa restrictions, prohibitions, or restricted conduct in transactions, cooperation, or other activities with Chinese organisations or individuals. Therefore, for foreign companies and individuals doing business in or with China, AFSL significantly impacts external conduct and communications, and public relations.
Whilst some may view a more assertive China negatively, China’s international significance and role cannot be disregarded. Specifically, in the business world, companies involved in the Chinese market should evaluate their full operations and third parties’ relations and update relevant policies or establish China-specific policies, otherwise risk legal penalties and economic losses. Unless companies forgo the China market completely, the recent legislative movements in strengthening national sovereignty and interests should be reflected in company operations and policies. Companies generating business from China cannot disregard China’s principles around national sovereignty and interests.
If you would like to discuss investing in China, please contact Horizons at email@example.com and our Partner in charge will be in touch.