New rules just published by the PRC impose new licensing and censorship requirements on almost all internet content providers, including publishers and aggregators of news, advertisements, social media content and mobile games. There are new prohibitions on joint ventures, and the existing restrictions on VIE arrangements are tightened.
In February 2016, the PRC State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) and the Ministry of Industry and Information Technology (MIIT) jointly released broad-reaching new rules regulating the publication of virtually all types of internet content in China. The Online Publishing Service Management Rules go into effect on March 10, 2016. Although the practical effect of the new Rules remains to be seen, they mark another step away from the “opening” many have hoped for in China, and toward more complete control over the information available to Chinese internet users.
The internet has always been tightly regulated by the government in Beijing. Any person or entity using the internet for any commercial purpose is required to hold an “internet content provider,” or ICP, license issued by MIIT. License holders must engage in comprehensive self-censorship, maintain records and provide information on content and in some cases users to the authorities, and refrain from publishing over the internet any content which would be detrimental to national security, social stability or the moral well-being of the Chinese public. Certain sectors, such as news, chat applications, video- and file-sharing and the like are subject to additional regulation as they are seen to pose special risks to domestic harmony in China.
Foreign participation in the Chinese internet industry is even more restricted. For many years, ICP licenses could only be issued to 100 percent Chinese-owned enterprises, which meant that even a PRC subsidiary of a foreign company could not hold an ICP license. A few years ago, the law was relaxed to permit 49 percent foreign-owned joint ventures to hold ICP licenses, but only a handful of such licenses have ever been granted and only to major internet players.
Foreign companies using the internet for commercial purposes in China therefore were forced either to keep their servers outside of the PRC, which led to customer-experience issues; or enter into contractual tie-ups with 100 percent Chinese-owned ICP license-holders (so-called variable interest entities, or VIEs). These VIE structures are neither clearly legal nor clearly illegal in China but have been widely tolerated by the government for almost two decades. Even “Chinese” companies such as Alibaba and Sina must use these structures, since they are domiciled outside of the PRC.
As a political matter, Beijing is not blind to the power of the internet to contribute to popular discussion and even dissent. As the PRC economy contracts and pressure is put on the central government to maintain a rising standard of living, Beijing has become increasingly willing to exert its muscle to closely monitor, and where it deems it necessary, restrict the free flow of information over the internet. The new Rules can be seen as an expression of this trend.
The 2016 Online Publishing Rules
The 2016 Online Publishing Service Management Rules overtake and abolish provisional regulations promulgated jointly in 2002 by the General Administration of Press and Publications and the Ministry of Information Industry relating to online publications. The new Rules are much more restrictive.
Summary for foreign investors
Foreign companies publishing content over the internet in China must work through VIE structures, and the new Rules do not change this. VIE entities will have to obtain new permits and submit to additional registration and examination procedures, including approval of their relationships with their related foreign parties. Publishers of information and news should continue to be aware of official sensitivity to certain types of content. Publishers of games and apps may want to consider pre-approval of their content to reduce enforcement uncertainty in the future.
The 2016 Rules apply broadly to any “online publishing services provided within the borders of the PRC.” (Art. 2.) Presumably this continues the approach to jurisdictional nexus of existing internet regulation in China: if active content resides on or is provided through servers located within the PRC, the jurisdictional nexus is satisfied and the law applies. If the provider maintains its servers outside of China, the law does not apply. Hong Kong and Taiwan are technically outside the borders of China. As a practical matter many companies do not find this solution satisfactory, as latency problems and the Great Firewall can degrade the user experience. And, China can and often does cut off access to foreign websites.