A new report from Bloomberg claims to provide details on a whitelist of Chinese tech suppliers from which enterprises and government bodies in China can choose companies to provide core technology products and services, citing government insiders. The tech whitelist is supposedly being prepared by the Information Technology Application Working Committee (known as the ‘Xinchuang Committee’). China’s Ministry of Foreign affairs has denied the existence of such a whitelist.
According to the report, there are strict limits on foreign ownership for companies to be eligible to feature on the list, leading to questions over the motives of this move and the impact it could have on foreign technology companies in China.
In this article, given the lack of concrete information, we do not wish to make a judgment on the existence, or lack thereof, of the whitelist, but rather take this opportunity to look at the Information Technology Application Working Committee and explain its functioning and composition. We also discuss China’s current relationship with foreign technology.
A Bloomberg report published on November 16, 2021, stated that China was planning on creating a ‘whitelist’ of suppliers of key technologies in ‘sensitive areas’ with the aim of replacing US and European technology, citing anonymous sources.
The report states that the Xinchuang Committee, is planning on implementing an “IT Application Innovation” plan through which it will create a whitelist of vetted companies that are permitted to supply key technologies to sensitive industries, such as cloud services and data centers for government data.
Perhaps the most contentious point of the alleged plan is that companies can have at most 25 percent foreign ownership to be included on the list, which could greatly limit foreign companies’ participation in these lucrative sectors.
After the publication of the Bloomberg report, the Spokesperson of the Ministry of Foreign Affairs Zhao Lijian said in a press conference that the Bloomberg report was “false” and that “China has not formulated and implemented plans to replace American and foreign technologies, let alone authorize the Xinchuang Committee to conduct local supplier reviews and establish ‘whitelists’”.
The Xinchuang Committee was originally set up in March 2016 as a non-profit social organization to act as an advisory body to the government. It is a branch of the China Electronics Standardization Association (CESA), which jointly oversees the committee with the Ministry of Industry and Information Technology (MIIT).
The Bloomberg report references a report by iResearch, which states that the US’ so-called ‘chokehold policies’ on Chinese tech companies, such as the inclusion of Chinese companies on the US’ ‘entity list’, were a direct catalyst for the creation of the committee.
The banning of US companies from selling components to any company on the entity list has had a devastating effect on Chinese companies that rely on key technologies from the US, in particular semiconductors, telecommunications equipment, and software. We discuss this issue in more detail below.
According to ‘work regulations’ published on the official website, the Xinchuang Committee is funded by a combination of donations, membership fees, profit derived from activities and services carried out within the committee’s working scope, interest, and government funding, among other sources.
According to its official website, the committee conducts strategy research on the development of key technology fields, supports the development of software design, researches standard-setting and development routes, and carries out work related to talent cultivation, among other duties. It also regularly holds forums and conferences on various fields and industries, which are often attended by major Chinese tech companies.
The committee’s reports may help to guide government policy, although the extent of the committee’s sway over the government’s decisions is unclear.
The Xinchuang Committee is open to participation by industry figures as either a director on the board of directors or as a member.
Members and directors must be from a domestic enterprise, institution, higher learning institute, or social organization and be legally approved to engage in fields, including scientific research and development, manufacturing, integration services, consulting services, and marketing in the field of information technology application innovation.
For a company to be a member, it must also have products or services with independent intellectual property rights.
In addition to the above, both the controlling shareholder and legal representative of a company must be a Chinese national, and the proportion of foreign capital in the company cannot be above 25 percent.
Members and directors of the Xinchuang Committee can enjoy certain privileges and rights within the organization.
In addition to having the right to participate in board of directors’ meetings and having voting rights on issues pertaining to the committee, directors also have priority access to the committee’s resources, such as technology, capital, and standards.
Members, on the other hand, can obtain services such as the committee’s materials, publications, and information services, receive technical support from the committee and recommendations on cooperation with other members, and have the right to participate in the committee’s various events and activities, such as seminars, exchanges, and training sessions.
Committee members are required to contribute their technologies, solutions, and knowledge in the field of information technology application and actively participate in activities organized by the committee, among other obligations.
The Bloomberg report states that the whitelist will be a list of vetted and certified companies from which companies operating in sensitive industries can choose for their key technology needs. For example, if a bank is looking for a new cloud services provider, it could request bids exclusively from companies included on the list, thereby excluding companies not on the list from competing for the contract.
According to Bloomberg, 1,800 companies have been invited to join the committee, including the electronics giant Huawei and cloud provider Alibaba Cloud.
As we have seen, the Xinchuang Committee requires that its member companies have maximum 25 percent foreign ownership. This places the bar for foreign ownership far higher than is the standard for market entry into China, and as Bloomberg pointed out, would bar multinationals, such as Microsoft and Intel from participation.
China’s desire to reduce reliance on foreign technology is nothing new.
The fallout from the US-China tech war has put a number of Chinese tech industries in jeopardy and has hamstrung entire business units as companies are barred from obtaining core tech components and services.
The sanctions against Chinese companies have also specifically targeted industries that are integral to core infrastructure, as well as sensitive fields, such as telecommunications equipment (Huawei), semiconductors (SMIC), AI and software (iFlytek, Megvii, SenseTime, Yitu), consumer electronics (DJI), and even shipbuilding (CSSC). This has put significant pressure upon industries that are indispensable to China’s continued growth and development and hampers China’s long-term goals of transforming into a high-tech economy and society.
In addition, the iResearch report referenced by Bloomberg further pointed out that national security is becoming an issue of great concern for China. The report cites several international security incidents over the past decade that have caused alarm in the country, such as the US’ infamous PRISM surveillance program that was exposed in 2013 and the ‘Meltdown’ vulnerability in some Intel and IBM microprocessors exposed in 2018.
Developing and strengthening home-grown alternatives to foreign technologies is therefore an inevitable development for China to both mitigate the risks of further sanctions and defend against perceived threats to its national security.
Many of the companies that Bloomberg stated were members of the Xinchuang Committee, operate within these sensitive industries and provide components and services for critical infrastructure. Inspur, for example, provides high-end servers to data centers, Huawei is a key supplier of 5G equipment, software, and cloud services, and Qi-ANXIN Technology Group provides cybersecurity and anti-virus software.
However, it is unlikely that China will become technologically self-reliant in the short term – if it ever does. There are still several fields in which it relies on foreign technology, and the government is unlikely to shut out these foreign companies if their services are needed to keep industries going. The microchip industry, for example, is still being led by multinationals like Intel and TSMC, with the latter planning on expanding production in China.
Although the existence of the whitelist is unclear, we know from the Xinchuang Committee’s own published regulations that there are some benefits for companies to join – benefits that are off-limits for most foreign-invested companies. However, the benefits of joining the committee don’t appear to be as extensive as those purportedly offered by the whitelist, and so it is unclear how much of an impact this really has on competition.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
Previous Article « Learning from China’s Double 11 Shopping Festival: Marketing, Retail, Consumption Trends
Next Article China Sets Up New Anti-Monopoly Bureau »
Dezan Shira & Associates´ brochure offers a comprehensive overview of the services provided by the firm. With its team of lawyers, tax experts, auditors and...
Doing Business in China 2022 is designed to introduce the fundamentals of investing in China. Compiled by the professionals at Dezan Shira & Associates in...
With the scope and penalties of China’s social credit system being further clarified in 2021, legal and regulatory compliance has become more important than...
As a legitimate tool for reasonable tax planning and cost saving, tax incentives play an important role. Companies also use tax incentives as a useful...
A firm understanding of China’s laws and regulations related to human resources and payroll management is absolutely necessary for foreign businesses in...
Over the last few months, China has been quickly expanding the pilot program on electronic special value-added tax (VAT) fapiao (hereafter special VAT...
Dezan Shira & Associates helps
businesses establish, maintain,
and grow their operations.
Stay Ahead of the curve in Emerging Asia. Our subscription service offers regular regulatory updates,
including the most recent legal, tax and accounting changes that affect your business.