CHINA | Increasing National Security and It’s Implications

Today’s China plays a more influential and significant international role than 40 years ago. It has started to assert more power internationally and increased national security.

In 1978, Deng Xiaoping initiated the Reform and Opening Up policy and opened China’s door to the world. As a result, China’s GDP rose from 367.9 billion yuan in 1978 to 15.45 trillion yuan in 2020, and China rose 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 as a global trade and investment partner. For example, China became a member in the United Nations (1945), World Trade Organisation (2001), and World Bank (1980).

Increased Activism and Assertiveness

In recent years, China started to take a more proactive role in international institutions by formulating policies and articulating its position on international matters. Equally, today’s international institutions represent a broader range of countries with different priorities, needs, and interests than their founding members. Institutions are evolving from the post-second world war era, in which the USA played a primary role in its formation. 

Strengthened National Sovereignty and Security

Domestically, China has adopted a collection of legislation to strengthen national security, 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 working in or with China, such legislation can significantly impact their business operations.

With a rapidly growing middle class, the China market for many companies is an important and growing market segment. Therefore, companies invested or investing in China cannot disregard complying with national sovereignty and security – especially within their business operations. Below, we highlight how the national security legislation applies to companies working with or in China.

Cyber and Data Security

Cybersecurity for many countries is a national priority -especially maintaining secure networks and protecting data from cyber-attacks.

In China, cyber security is focused on the security of the collected data, 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 the 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 the owners and administrators of the network and network service providers. Network operators shall 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 requires information crucial to national security and the economy to be stored, collected and handled within the territory of mainland China. Transmitting required data aboard shall adhere to measures adopted by the Cyberspace Administration of China.

Data Security Law

DSL sets forth an overarching framework to regulate data handling and management accordingly to 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 shall ensure and formulate data management policies and 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, can face significant liabilities for the company and the individual.

Export Control

Prior to the Export Control Law of the People’s Republic of China (“ECL”), export control regulations were scattered across several laws. The ECL is the first comprehensive framework establishing export control, a list of controlled items. It also provisions an extra-territorial application to individuals and organisations outside of China that 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 obligations such as 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.

Company Implications

For companies with an international supply chain or engaged in cross-border research and development, the ESL significantly impacts their 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.

Addressing Sanctions

In 2021, China addressed the application of foreign legislation and sanctions on Chinese individuals and legal entities within and outside of the territory of China. China enacted two laws to establish a stricter stance against foreign economic sanctions on Chinese organisations and individuals.

Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and other Measures

Foreign companies should note that the Rules stipulate any Chinese entities that 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 (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 will be listed in the Sanctions List (“List”). Those listed shall face penalties such as visa restrictions, prohibitions, or restricted conduct in transactions, cooperation, or other activities with Chinese organisations or individuals. Therefore, AFSL significantly impacts external communications and public relations for those working in or with China.

Whilst some may view such changes negatively, companies cannot disregard China’s international significance and global role. Specifically, companies involved in the China market should evaluate their operations and third parties’ relations and update relevant policies, otherwise risk legal penalties and economic losses. Unless companies forgo the China market totally, companies shall reflect the recent legislative movements in strengthening national sovereignty and security. Companies generating business from China cannot disregard this movement.

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