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GC Agenda China: November 2016
Practical Law UK Articles w-004-7035 (Approx. 9 pages)
GC Agenda China: November 2016
by Brad Herrold, Consultant and Practical Law China
| Law stated as at 25 Nov 2016 • China |
A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.
China passes Network Security Law
On 7 November 2016, the National People’s Congress (NPC) Standing Committee enacted the Network Security Law of the People’s Republic of China 2016, which will take effect 1 June 2017.
The law was first circulated in draft form on 6 July 2015 (see Article, GC Agenda China July 2015: NPC circulates draft network security law). A revised draft was released on 5 July 2016 (see Legal update, NPC Standing Committee circulates second draft of Network Security Law).
The final version of the law includes some changes, but the core principles in the drafts remain:
- Network operators. This is broadly defined as "network owners, managers and network service providers" and could include any person in China from an internet service provider to the owner of a commercial website operated through a domestic network. Network operators are subject to a series of obligations designed to protect networks from disturbance, damage or unauthorised access and prevent network data from being divulged, stolen or tampered with.
- Critical information infrastructure (CII). These include public communication and information services, energy, transportation, water conservation, finance, public services, e-government and other important industries and sectors that could threaten national security, people’s livelihood and the public interest in case of damage, loss of functionality or data leakage. CII operators are subject to the obligations imposed on network operators and to a set of additional obligations, including data localisation requirements, national security review for procurement and annual safety and risk assessment and reporting.
- Critical network equipment (网络关键设备) and dedicated network security products (网络安全专用产品). These must conform to relevant national standards and undergo safety certification or safety testing by qualified institutions before sale or use.
- Personal information. The law imposes obligations in relation to personal information gathered by network operators. This refers to information that by itself or in combination with other information can be used to identify an individual, including name, date of birth, ID card number, biological identification information, address, and telephone number.
For more coverage of this development, see Legal update, China passes Network Security Law.
Market reaction
Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai
"The Network Security Law has potentially far-reaching consequences for CII operators as well as suppliers of network equipment and technology. But the devil is in the details, and, in relation to a number of the more key provisions of the law, the legislators have pushed key decisions to the State Council rather than making decisions themselves. Leaving the State Council to determine the precise meaning of CII is just one example."
Action items
The meaning and actual impact of many of these broad concepts and terms will be fleshed out in implementing rules to be formulated by the State Council, presumably before the law takes effect next June. In the meantime, GC for companies that own, operate or administer a computer information network or website in China should closely examine the data privacy requirements to begin assessing the potential impact on its business, network infrastructure and policies on data collection and storage. GC for companies that could be regarded as CII should also study the additional data localisation and other requirements as part of the impact assessment. Counsel for companies that manufacture and distribute network equipment and network security products should work with government relations colleagues in an effort to have these products included in the pending catalogue of qualified products.
CAC issues live streaming provisions
On 4 November 2016, the Cyberspace Administration of China (CAC) issued the Administrative Provisions on Internet Live-streaming Services 2016, which will take effect 1 December 2016.
The provisions apply to providers and users of internet services in China involving the continuous public release of real time information through videos, audios, images, text and other formats.
The provisions require internet live streaming service providers to:
- Have sound content verification, information security, on-duty inspection, emergency response, technical support and related systems.
- Possess the ability to immediately cut off live streaming services, and conform their related technical solutions to national standards.
- Refrain, along with users, from producing, duplicating and providing prohibited content and engaging in other activities prohibited by law.
- Authenticate the identity of users and refrain from disclosing, tampering with, destroying or illegally providing others with such information.
- Verify the identity of content releasers and submit this information to the local office of the CAC.
- Enter into service agreements which require users to follow the law.
- Take measures against users that violate the law, delete illegal content, maintain records of illegal conduct, and report illegal conduct to the local office of the CAC.
- Maintain and enforce blacklists of users who violate the law, and file black lists with the local CAC office.
- Archive users' published content records and information logs for 60 days.
The provisions also require internet live streaming content publishers to ensure that the source of news information is traceable and that the content is truthful, accurate, objective, impartial and complete.
For further information on the regulation of internet content service providers, see Practice note, Regulation of internet content services in China.
Market reaction
Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai
"The CAC once again demonstrates its responsiveness to new types of internet service with its issuance of the new live streaming provisions. They need to be read together with regulations applicable to online news service providers and providers of online audio-visual programmes. But they impose additional compliance obligations on operators of live streaming services in order to seek to control what is otherwise a free-wheeling online medium."
Action items
Though the provisions do not expressly prohibit foreign investment in the live streaming sector (where the business is a for-profit internet content service), the regulations governing providers of related services such as online news information and audio-visual services do expressly prohibit foreign investment. Counsel for domestic live streaming services should take immediate steps to put in place mechanisms to ensure compliance with the provisions, including required technical measures as well as changes to user agreements (if applicable).
State Council releases online finance rectification plan
On 13 October 2016, the State Council released to the public the Plan to Implement Special Rectification Work on Internet Finance Risks (互联网金融风险专项整治工作实施方案), which was circulated internally on 12 April 2016.
The plan follows the Guiding Opinions on Promoting the Healthy Development of Internet Finance 2015 (see GC Agenda July 2015: Ministries publish internet finance guidelines), issued by the State Council in July 2015, and seeks to standardise the regulation and supervision of the online finance sector by balancing the often competing goals of protecting consumers and encouraging financial innovation.
Specifically, the plan addresses the following regulatory issues:
- Online peer-to-peer (P2P) lending and crowdfunding. The plan prohibits P2P and crowdfunding platforms from various activities including engaging in a range of illegal fundraising activities, selling debt or equity, marketing high-risk securities, making false and misleading claims, and (unless they are qualified and licensed) providing asset management services. (For more information on P2P regulation, see Legal update, Four agencies issue final version of P2P agency measures.)The plan also requires these platforms to segregate client funds in third party depository institutions.
- Real estate developers and brokers. The plan prohibits these entities from engaging in online fundraising activities unless they are qualified and licensed.
- Third party payment service providers. The plan calls for the development of common standards for payment and settlement activities in the online finance sector and prohibits non-bank online payment companies from conducting payment settlement across multiple industries and banks. Instead, they are required to use the People's Bank of China (PBOC) or other authorised commercial bank to settle payments.
- Group companies. The plan prohibits conglomerates that offer a range of online financial services from violating rules on related party transactions and requires them to establish internal firewalls in a manner similar to traditional financial businesses.
Market reaction
Harvey Lau, Partner, Baker & McKenzie, Shanghai
"The new plan is aimed at eliminating fraud and reducing risks to participants in the internet finance sector. It pinpoints the activities that have given rise to the highest financial risks and sets out boundaries that participants must not cross. It also calls for inter-departmental cooperation involving not only the major financial regulators, but other government authorities, such as the State Administration for Industry and Commerce and the Ministry of Housing and Urban-Rural Development. We see the plan as evidence of the government’s commitment to encourage financial innovation, by putting things back on track, rather than putting a brake on the development of the sector."
Action items
The plan does not create specific action items for traditional financial institutions. GC for companies engaged in those business activities specifically addressed by the plan should review their operations to ensure full compliance with the current rules. Counsel for all participants in the internet finance sector should watch for new implementing legislation in the near future.
SAIC issues guiding opinions on opening up enterprise name databases
The opinions call on SAIC’s subordinates at all levels to open their enterprise name databases to the public as an initial step toward eliminating the current enterprise name pre-verification procedure and giving enterprises the right to choose their own names.
County and district level AICs must open up their databases by 1 December 2016. Municipal and provincial level AICs should open up their databases by that date if possible.
The following enterprise names must be opened to the public:
- Pre-existing enterprise names.
- Original enterprise names that were amended in the previous 12-month period.
- Enterprise names where the establishment registration was revoked or the business license suspended, but the enterprise is not yet deregistered.
- Enterprise names where deregistration due to revocation or suspension was carried out in the previous three-year period, or deregistration due to other reasons was carried out within one year.
- Enterprise names where an application is already filed but the name is not yet verified.
- Enterprise names that are verified but where the enterprise is not yet registered and the verification remains valid.
The databases will be organised to permit search services to provide applicants with a reference to apply for an enterprise name and to allow applicants to process enterprise name registration directly. The name enquiry and processing systems must contain applicable rules, forms, guidance and other information to facilitate the application process, and, if possible, should contain enterprise name restrictions, name enquiry and comparing services.
For more information on business registration in China, see Practice note, Establishing a China business.
Market reaction
Thomas Man, Professor from Practice, Peking University School of Transnational Law, Shenzhen, China
"The SAIC opinions represent another step at the practical level to further liberalise the procedures for incorporating business entities in China. Once implemented, they will eliminate the existing pre-establishment enterprise name checking procedure, which typically takes several working days to complete and can be a prolonged process if the proposed candidate names always fail to pass SAIC's internal name screening system. In addition to improving efficiency, the new procedure will also likely enhance transparency in business registration information."
NDRC circulates draft negative list for internet market access
On 21 October 2016 the National Development and Reform Commission (NDRC) circulated for public comment the Negative List for Internet Market Access (First Batch, Pilot Version) (互联网市场准入负面清单（第一批，试行版）).
The draft marks a partial next step in China’s evolving regulatory system for market access (see Legal update, State Council initiates negative list approach to market access). Under the new system, businesses only need to obtain pre-establishment regulatory clearance if they seek to operate in certain industrial sectors subject to special management measures, which will be set forth in two lists commonly referred to as negative lists:
- A negative list for market access. This will apply equally to market access for both domestic and foreign investors.
- A negative list for foreign investment. This will set out additional limitations that apply only to foreign investors.
Chinese regulators are still in the process of compiling these lists. The final version of the draft negative list for internet market access will comprise the internet-related sections of the negative list for market access.
The draft is essentially a compilation of those internet-related market access restrictions scattered under a variety of existing legislation, for example:
- A telecoms licence is required for providing telecoms services (Measures for the Administration of Telecommunication Business Operation Licence 2009).
- A network taxi reservations operating licence is required for operating an online tax reservations platform (Interim Administrative Measures for the Business of Online Taxi Booking Services 2016).
For more coverage of this development, see Legal update, NDRC circulates draft negative list for internet market access.
Market reaction
Ren Qing, Partner, Global Law Offices
"By compiling the prohibitions and restrictions that are already in effect in China, this list enhances the transparency of internet market access. Another message that the list conveys is that restrictions in certain sectors such as online taxi reservations, internet-based audio-video program services and internet information search services, which are now contained in department rules, will be codified into laws or administrative regulations. This means these restrictions will not be liberalised in the near future."
Action items
As the current draft represents a compilation of internet-related market access restrictions found in existing rules, it does not offer new opportunities to investors or require urgent action on the part of counsel for telecoms or internet-related businesses. However, GCs for companies in these businesses should monitor this sector negative list to see if the government will impose any additional requirements in the final version.
NPC revises law on private schools
On 7 November 2016, the NPC Standing Committee adopted the Decision to Revise the "Law of the People's Republic of China on the Promotion of Privately-run Schools" (全国代表大会常务委员会关于修改《中华人民共和国民办教育促进法》的决定), which will take effect 1 September 2017.
The decision includes two essential changes:
- Dividing private schools into the category of either for-profit or non-profit, and prohibiting for-profit private schools from providing the nine-year compulsory education.
- Deleting a provision that allows sponsors of private schools to earn a "reasonable profit return" on their investment.
Other significant amendments include:
- Requiring non-profit private schools to determine tuition fees in accordance with local government regulations.
- Permitting local governments to give favourable financial treatment to non-profit private schools, including preferential treatment involving land allocation, government subsidies, fund incentives and other donor support measures, and tax preferences equivalent to those of public schools.
- Increasing the employment protection of the teachers and staff of private schools.
- Requiring the Ministry of Education to establish a private schools information disclosure and credit file system.
- Increasing the sanctions for running a private school without government permission.
- Deleting a clause that enabled private training institutions to register with China's company registrar under separate rules.
The decision requires private schools registered before the decision to revise their articles of association, execute financial settlement and assets clearance and re-register as a non-profit or profit-making private school to continue operating schools.
Market reaction
Xu Liang, Partner, Hogan Lovells, Beijing
"This amendment was expected to come out together with decisions on revising the Education Law and the Higher Education Law in December 2015, but its release was postponed due to disagreements on the details of the new classifications of private schools, such as tuition standards, applicable preferential policies and transitional issues. The most critical change is to officially permit for-profit schools, though in a surprising move, the NPC Standing Committee chose to preclude for-profit schools from providing compulsory education. The amendment thus contains a mixed message, raising questions about the extent to which the changes will bring about a broadening of the education base."
Action items
GC for entities already registered as private schools will need to revise their articles of association, carry out financial settlement for the existing entity, and re-register as a non-profit or for-profit private school before 1 September 2017. Counsel for sponsors interested in establishing a new private school should consider with business colleagues the structuring opportunities presented under the revised law, as well as the economic viability of the non-profit and for-profit private school options.