While China’s e-commerce market presents a huge opportunity for foreign-invested enterprises (FIEs), there are a number of often complex restrictions that FIEs should be aware of.

Daniel Albrecht, Director, Starke, provides an overview of the rules that they need to abide by, including those pertaining to enterprises that utilise mobile Apps as part of their business model. Of particular importance, he says, is the way that foreign enterprises are structured if they are to operate in China’s e-commerce sector and remain compliant.

China’s e-commerce market

The China Internet Network Information Centre (CNNIC) reported 710 million Internet users in June 2016, and according to analysis by digital marketing researcher eMarketer, cross-border e-commerce in China was due to hit USD 85.76 billion in 2016, up from USD 57.13 billion in 2015. Notably, 40 per cent of China’s online consumers are buying foreign goods.

eMarketer further estimated that each of China’s digital shoppers would have spent an average of USD 473.26 in 2016. Its projections that cross-border e-commerce will have a compound annual growth rate of 18 per cent through to the end of the decade—reaching an estimated USD 222.3 billion—would mean that China’s e-commerce market will become larger than those of the US, Britain, Japan, Germany and France combined by 2020.

Internet Service Standards

All internet service providers (ISPs), whether foreign-invested or domestic, are subject to the provisions under the Supervision of the Market Order of Information Services, introduced in December 2011. It prohibits ISP enterprises from certain practices that are harmful to other ISPs, such as defaming other ISPs or making its platform incompatible with those of another ISP. Practices that are harmful to Internet users are also prohibited under the provisions.

On top of these provisions came the addition of the guidelines Services Norms for E-commerce Trading Platforms, which were issued in April 2014. These set out basic rules for the operation of trading platforms and requirements relating to the collection and retention of data, the verification of user’s identities and fair trading practices in general.

Participants in this sector should keep in mind that the government will take a harder line on policing and taking action against ISPs and Internet businesses for non-compliant behaviour.

Moreover, ISPs will be held more accountable for supervising their users’ activities, which is also a feature of the National Copyright Administration’s draft amendments to the PRC Copyright Law. Under the draft law, ISPs would be jointly liable for copyright infringement when they have been notified of an infringement but have failed to promptly delete, block or disconnect the offending content. The draft amendments also stipulate that ISPs would face joint liability if it is proved that they know, or should have known, about the infringement but have failed to undertake the necessary steps to stop it.

Telecommunications

Foreign participation in a range of Internet and e-commerce activities comes under the far-reaching PRC Telecommunications Regulations. While the establishment of a foreign-invested value-added telecoms services (VATS) enterprise is possible, with up to a maximum 50 per cent foreign investment, few joint ventures have emerged in this sector.

However, the now well-known variable interest entity (VIE) structure has been repeatedly used to support foreign participation in PRC e-commerce businesses. Under the VIE structure, a complex contractual arrangement is put in place under which the required VATS licence is held by a Chinese company, which is owned by a domestic company under the ownership of PRC nationals, who pledge their ownership of the domestic company to the foreign party and allow the VATS licence to be used for the foreign party’s benefit.

There are strict measures surrounding the devisal of any telecoms company in China and all must abide by the strict rules and regulations laid out in the Measures for the Administration of Telecom Business Licensing if they are to successfully operate in China and remain compliant. In order to even apply to operate a telecoms business, the criteria laid out in the Telecommunications Regulations must be adhered to, and all required documentation must be submitted to the China’s Ministry of Industry and Information Technology (MIIT) to apply for a basic telecoms business permit. Even after the permit has been awarded, it must still be renewed every five years.

While the VIE structure appears to be broadly tolerated by the Chinese Government and is widely used in the e-commerce sector, the highest level official pronouncement by the MIIT, the 2006 Circular on the Strengthening of the Administration of the Provision of Value Added Telecommunications Services Involving Foreign Investment, states that FIEs must receive foreign investment approval to participate in VATS, and that VATS licencees are prohibited from lending their VATS licences to foreigners.

This circular was followed more recently by the publication of the government’s provisions on the national security review, effective as of September 2011, which set out that a foreign investor cannot use contractual control arrangements ( i.e. the VIE structure) to avoid the government’s national security review and approval requirements.

The VIE structure raises risks for investors, including the ultimate risk that government authorities may require the structure to be unwound. If the government were to issue a comprehensive ban of the VIE structure altogether, it would have a significant impact on the e-commerce sector in particular.

It should be noted that some Chinese regulators appear to be more overtly concerned with the VIE structure than others. Although FIEs that only engage in online sales of their own products and do not provide Internet services or platforms to third parties over the public switched telephone network do not require a VATS licence, they must still apply for an Internet content provider (ICP) approval or filing from the MIIT if the relevant content of their website is stored on a server located in China.

An ICP approval is required if the website directly generates revenue. If the website does not generate revenue, only an ICP filing is needed. However, it is important to note that the applicant for an ICP filing must be a Chinese entity with a local address, which in practice means that foreign businesses that do not have a presence in China often engage their local Chinese business partners or hosting service providers to apply for the ICP filing on their behalf.

In addition, the foreign business must obtain approval to establish its entity in accordance with the foreign investment laws that apply to its business sector, and the products and services it offers must be approved by, and registered with, the relevant state department.

Mobile Apps in China

Developing an App is an excellent way to utilise China’s thriving mobile technology. However, as of 2016, the rules and regulations surrounding Apps in China became more stringent. The Rules on the Management of Mobile App Information Services (App Rules) were passed by the Cyberspace Administration of China (CAC) and came into effect on the 1^st August, 2016.

Regulating the rapidly growing App market and addressing corresponding data privacy issues are the primary objectives of the App Rules. Among other things, they impose cybersecurity, data privacy and content monitoring requirements on App and App store providers. According to Article 7, App providers are required to authenticate the identities of their users. Furthermore they are required to obtain “relevant qualifications” (Article 5), a term that is not specified but can be interpreted as ‘licences’ required under other laws and regulations that especially regulate the type of service rendered by a given App. Moreover, providers have the duty to adhere to certain data privacy rules and establish systems for monitoring content on their platforms (Article 7).

Starke was founded by Daniel Albrecht, a German attorney at law and Guest Professor of the China University of Political Science and Law. Starke operates in Beijing and in six cities in Germany through cooperation with its partner, Jordan Fuhr Meyer. Core competencies are legal advisory and IP. Starke is a Trademark Agent licensed by the State Administration and Commerce. With several years of experience in Asia we customise our advisory activities to the requirements of international companies and individuals who require advice on corporate, IP, contract and labour issues.