China's new Cyber-security law overreaches.
“If you want to stay in China, you have to go all in.” So says James Fitzsimmons of Control Risks, a consultancy, of the impact China's new cyber-security law will have on multinational companies (MNCs).
These firms have moaned for months about the law's intrusive and vague provisions and asked for a delay in its implementation, but to no avail. It came into force on June 1st, and foreign firms are now scrambling to figure out its implications.Mr Fitzsimmons, for one, is convinced that they must take the costly step of separating their local IT systems from their global networks. At first blush, the law seems a reasonable effort at tackling two areas of policy in need of reform.
The first is cyber-security.Companies in industries deemed to be critical must now ensure that their technology systems are “secure and controllable.”They must store important data locally, and will be subject to audits by official inspectors. Susan Ning of King & Wood Mallesons, a Chinese law firm, thinks that foreign firms should be familiar with such rules since, on her firm's analysis, European regulations on cyber-security are tighter than those found in the new law.
The other neglected area taken on by this law is data privacy. Firms in China have long amassed and manipulated consumer data as they have pleased. And as Ronald Cheng of O'Melveny, an American law firm, observes, online fraud, malware and mobile-phone scams are rife. Under the new rules, companies must be much more careful with data about, or acquired from, individuals in China. They are required to maintain such data on local servers, and must obtain permission before sending bulk data abroad.
However reasonable these goals seem, two big worries linger.
First, the law is overly broad and mischievously vague. It provides little guidance on what constitutes “critical information infrastructure” (though impact on “social or economic well-being” is a criterion) and which firms are “network operators” (so even individuals with multiple computers could fall foul of the law).
Kenneth Jarrett, head of the American Chamber of Commerce in Shanghai, argues that the law's far-reaching restrictions could harm both foreign firms and cross-border trade. The law's ambiguity is forcing MNCs in many industries to reconsider how they hold data, and Chinese consumers may pay the price. A foreign firm used to monitor its energy turbines in China from its headquarters, using its real-time global data to optimise operations; it now keeps the Chinese information on the mainland, efficiency be damned. A provider of global online education was sending data on Chinese users overseas to allow them to access its courses abroad; it is now rejigging its IT system to keep such data inside China and may have to curtail its offerings.
The second big worry about the new law is that it may be a Trojan horse designed to promote China's aggressive policy of indigenous innovation. This push has already led Microsoft, an American software giant, to enter into a local joint venture and reveal its source code to officials in order to sell a local version of its Windows 10 operating system. Other foreign technology firms fret that they will be forced to divulge intellectual property to government inspectors, with no guarantees that such secrets will not be passed on to local rivals.
They are right to worry, say legal experts. Officials may also decide that certain foreign services do not pass the nebulous test of being secure and controllable. This uncertainty is already boosting the fortunes of such local vendors as Huawei and Lenovo, makers of servers and other hardware, as well as Tencent and Alibaba, both of whom are making a big push into cloud services. Informed sources say these firms have had a hand in crafting the new law.
The local champions should not celebrate quite yet. As Mr Cheng observes, China's best technology companies are increasingly active abroad, and so they too will need to harness international flows of consumer data in the future. A law that seems rigged in favour of locals ultimately may end up harming both Chinese firms and consumers.