Deng Xiaoping pioneered the policy of reform and opening up and opened the door to the world in 1978. China’s GDP grew from 367.9 trillion yuan in 1978 to 15.45 trillion yuan in 2020 and made to transform China from a third world country into a global economic superpower.
Over the past 40 years, China’s significant economic growth has increased its role in the world both as a trading and investment partner and as an international member institution of the United Nations (1945), the Trade Organization (2001) and World Bank (1980). China plays a more influential and important role in the world today than 40 years ago and has recently demonstrated a more mature and assertive position in the global arena.
Internationally, China has increased its activism and assertiveness in international institutions (“Institutions”) in recent years. By playing a proactive role in policy formulation, China is increasingly using these institutions as platforms to articulate its position. Likewise, today’s institutions represent a wider range of countries with different priorities, needs and interests than the founding members. Therefore, the institutions evolve from the post-World War II era, in which the United States played a primary role in the founding principles of the institutions.
Domestically, China has passed a set of laws to strengthen national sovereignty and interests, including:
- The Cybersecurity Law of the People’s Republic of China in force since June 1, 2017
- The Export Control Law of the People’s Republic of China in force since December 1, 2020
- Rules on Combating Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, Effective January 9, 2021
- People’s Republic of China Anti-Foreign Sanctions Law Goes into Effect June 10, 2021
- Data Security Law of the People’s Republic of China effective from September 1, 2021
For companies and individuals doing business in or with China, such legislation has a significant impact on 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 investing or planning to invest in the Chinese market cannot ignore national sovereignty and respect for interests in their business operations. Below, we outline three key areas of national sovereignty and respect for interests applicable to companies doing business in or with China.
Cybersecurity and data security
Cybersecurity for many countries is a top national priority to maintain secure networks and protect data from cyberattacks.
In China, cybersecurity centers around the security of data collected, and companies are required to ensure that networks collecting and processing data are secure, monitored, and must not endanger national security or sovereignty.
The Cybersecurity 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 laws governing cyberspace and affect all companies working with the collection, processing and management of data in China.
Cyber Security Law
The CSL establishes the compliance framework for network operators and is the basic law for cybersecurity.
Under CSL, the network operator is defined as the owners and administrators of the network and network service providers. Network operators are required to ensure that the servers and the data stored, transmitted or created on these servers are secure and protected against cyberattacks. In addition, the CSL describes a Critical Information Infrastructure (“CII”), which submits information crucial to national security and the economy to store the collected and produced personal information and important data within the territory of China. continental. All data to be transmitted on board must be carried out in accordance with the measures of the Cyberspace Administration of China.
Data Security Law
The DSL establishes a comprehensive framework to regulate data processing and management based on national sovereignty, security and development interests.
Under the DSL, the scope and definition of data includes any record of information in electronic or other form and requires extraterritorial application to the processing and management of China-related data.
Organizations and individuals must ensure and formulate data management policies, cooperate with public security and national security organs that need their data for national security or criminal investigations. Mishandling of data, especially those dealing with important data, could face significant liabilities for both the business and the individual.
Prior to the enactment of the Export Control Law of the People’s Republic of China (“ECL”), export controls were scattered across multiple laws. The ECL is the first comprehensive framework establishing export controls, a list of controlled items, and providing extraterritorial enforcement to individuals and organizations outside of China who endanger national security and interests.
Under the ECA, any export of controlled items from an individual or organization in mainland China to an individual or organization overseas is subject to certain obligations, including obtaining appropriate license from national export control authorities. Controlled items are defined in the OCL as follows:
- Dual-use items that may be for civilian and military purposes or contribute to enhancing military capabilities, in particular goods, technologies and design, development, production or application services used for weapons of mass destruction ;
- Military products including equipment, special production facilities and other related goods, technologies and services used for military purposes;
- Nuclear materials, including nuclear equipment, non-nuclear materials used for nuclear reactors and related technologies and services;
- Materials and technical data related to the items listed above.
For companies with an international supply chain or engaged in cross-border research and development, ESL has a significant impact on export operations. For example, foreign articles containing components assembled or manufactured in China could be considered controlled articles or cross-border research or technology transfer activities, activities such as research, business-to-business research (where the research center and development is located in China) or the technology sales to foreign companies could be classified as equipment and related technical data – thus subject to export controls.
Dealing with penalties
In 2021, China addressed the application of foreign laws and sanctions to Chinese natural and legal persons inside and outside China. Two main laws were enacted that established a tougher stance against foreign economic sanctions against Chinese organizations and individuals.
Rules on combating unjustified extraterritorial application of foreign legislation and other measures
Earlier this year, the Rules on Combating Unjustified Extraterritorial Application of Foreign Laws and Other Measures (“Rules”) were promulgated by the Ministry of Commerce. The Rules provide a working mechanism for Chinese companies and individuals affected by extraterritorial foreign legislation that prohibits or restricts the engagement in normal economic, commercial and related activities with a third State (or region) or its citizens, a legal person or other organizations. The persons or entities concerned are required to inform the Council of State within 30 days. The Council of State issues a prohibition order to oppose unjustified extraterritorial application of foreign legislation and other measures.
Foreign companies in China, especially multinationals, should note that the rules state that any Chinese entity that complies with the wrongful extraterritorial application of foreign law subject to a prohibition order may be prosecuted under justice.
The People’s Republic of China’s Foreign Sanctions Law
The Foreign Sanctions Law of the People’s Republic of China (“AFSL”) establishes the regulatory framework for foreign persons, both legal and natural persons, acting against China’s national interests. Under the AFSL, affiliated organizations, individuals and persons who participate directly or indirectly in the formulation, decision and implementation of discriminatory restrictive measures against China must be included in a Sanctions List (“List”). Individuals listed will be subject to sanctions, including visa restrictions, bans or restrictions on conduct in dealings, cooperation or other activities with Chinese organizations or individuals. Therefore, for foreign companies and individuals doing business in or with China, the AFSL has a significant impact on external conduct and communications, as well as public relations.
While some may view a more assertive China negatively, China’s international importance and role cannot be ignored. Specifically, in the business world, companies involved in the Chinese market need to assess all of their operations and relationships with third parties and update relevant policies or establish China-specific policies, or else they risk legal penalties and economic loss. Unless companies forego the Chinese market altogether, recent legislative moves to bolster sovereignty and national interests are likely to be reflected in corporate operations and policies. Companies generating business from China cannot ignore China’s principles regarding sovereignty and national interests.
Originally published September 14, 2021
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.