Internet in China is notoriously difficult for foreign businesses due to centralized controls and complex regulations. China Briefing looks at how companies can develop an effective internet strategy for doing business in China.
China’s cyberspace environment is a notoriously difficult area for foreign businesses to navigate, due to the country’s strict internet controls and complex cybersecurity regulations.
Finding the right internet provider for your region, getting an internet control provider (ICP) license, setting up a website, and handling VPNs are all crucial to your operation’s feasibility in the China market. Understanding the relevant laws regulating how devices, software, and networks are used is equally as vital.
The Cyberspace Administration of China has regular crackdowns on entities that fail to comply to relevant regulations, so being conscious of your legal liabilities is essential for making sure daily operations run smoothly.
Internet providers and connection speeds
There are three telecom and Internet Service Providers (ISPs) in China: China Unicom, China Telecom, and China Mobile. They are all state-owned entities (SOEs) and each of them acts essentially as a monopoly within their respective markets.
Connection speeds tend to vary according to location. China has three submarine optic fiber entry/exit points for all internet traffic. They are located in Qingdao, Shanghai, and Shantou.
Since there are only three entry/exit points for international internet access, this creates a bottleneck for all users within China connecting to foreign hosted sites. To avoid low connection speeds, it is ideal to operate with the highest speed provider in your location.
Generally speaking, China Telecom is the most reliable ISP for international internet access in south China, China Unicom in the north, and China Mobile in central/eastern China.
The process for setting up a website in China
For accessing websites and web services within China, domestically hosted sites tend to be more reliable than sites hosted outside of China.
This is partly due to the bottlenecks noted above. However, there are other factors that may cause slow speeds besides the quality of the provider, such as poorly optimized images, poorly written code, low quality hosting (whether inside or outside of mainland China), or using services blocked in China (such as Google, Facebook, etc.), which can all contribute to a poor user experience.
To register a website in China, you will need the following registration documents:
- Business license for company/ID for individual;
- Internet content provider/ICP license; and
- Application for a ‘.cn’ domain (some names are blocked if deemed inappropriate).
The above three points are listed in the order that they should be executed. If you do not intend to host your website from within China, the following section on getting an ICP license can be ignored.
Getting an ICP license in China
An ICP license is provided by the Ministry of Industry and Information Technology (MIIT). The license allows you to host your site from within China, which means network speeds will be faster and more reliable than the equivalent site hosted abroad. You must have a physical presence in China to apply for this license.
Outsourcing this process to an experienced consultant is advisable as the ICP license application procedure can be convoluted and time consuming. Also, business operations conducted under the ICP license must accord to PRC laws – which strictly regulate cyberspace – and so thorough due diligence is highly recommended before even beginning the application process.
What is ‘The Great Firewall’?
Many websites and online services in China are blocked by the internet censorship system popularly known as ‘The Great Firewall’.
These include Google, Gmail, Facebook, YouTube, Twitter, Instagram, WhatsApp, Reddit, and many foreign news websites, such as the New York Times, the Washington Post, Bloomberg, the Wall Street Journal, and the South China Morning Post. Some foreign services are not formally blocked, but occasionally do not work properly because of the Great Firewall, especially if they are reliant on tools, plugins, and other services that are blocked.
Detailed lists of blocked sites and services are available through a quick Google or (more conveniently) Baidu search.
The concern here is to determine that none of your business’ core functions are predicated on any one of those services whose use is blocked in China. Even if a business operating in China does not have a website, many need to use Cloud services for intra-company communications and social media services for marketing that may be blocked in China.
New entrants to China are advised to undertake a comprehensive audit of their exposure to the Great Firewall in the early stages of their market entry studies.
Making use of VPNs (Virtual private networks)
The Great Firewall, of course, can be jumped using a virtual private network (VPN). The use of VPNs in China is somewhat of a legal grey area, but in practice they are commonly used by both foreign and domestic companies.
Businesses with a smaller presence in China may opt to purchase the services of an established VPN provider, while larger businesses or those transferring highly sensitive material may look to set up their own in-house VPNs.
There are just as many ‘free’ VPNs available on the internet, but they should generally be avoided. As with any ‘free’ online service, your personal or company data is usually taken as the value proposition in the transaction. Be aware that any ‘free’ VPN is likely only free in the sense that there is no up-front cost, but personal information may be at risk.
Even the most highly regarded VPNs may be subject to temporary ‘drop-off’ periods over the course of the year. These periods are typically marked by sensitive political events and anniversaries, and other moments where access to the foreign internet is viewed by authorities as undesirable.
During these periods, connection speeds over VPNs may be slowed considerably or even cease entirely. This interference can also occur on standard, non-politically sensitive days, so it is hard to predict exactly when a disruption will take place.
Businesses reliant on VPNs for important business functions should make sure they have contingency plans in place in the event their normal VPNs malfunction. All businesses that use VPNs, however, must suffer the losses in productivity that occur as a result of having to deal with the slowdowns and inconveniences associated with their use.
China’s cybersecurity law
Globally, IT laws provide a framework for the collection, storage, and dissemination of electronic information. IT laws apply to anyone dealing with electronic information and personal data in any line of work, and is not restricted solely to those in the IT industry.
China’s Cybersecurity Law outlines the obligations and liabilities that all individuals and companies operating in China are subject to. Two entity types exist in China under this legislation.
The first is network users, which according to the law includes entities that require international internet access for their own business purposes. The leading obligation for network users is to maintain security measures.
The second type is critical information infrastructure operators (CII Operators) and owners and managers of networks. These entities have more serious responsibilities, including stricter controls on data collection and storage. More tightly regulated cross-border data transfer and data localization rules are among the sensitive compliance issues for these entities.
To transfer data abroad, those subject to restrictions must undertake a security review, proof of commercial need for the data, and finally gain clearance for the transfer of data. Without clearance, all data generated within China must remain within China.
Because of restrictions contained in the Cybersecurity Law, foreign tech firms like Apple have had to set up China-based data storage facilities, which come with their own privacy and security concerns.
Penalties for not complying with the Cybersecurity Law include warnings, demands to make a correction, fines, public announcements of the misconduct, negative national credit recordings, civil liability, closing of websites, and revocation of the business license, depending on the severity of the infraction.
ERP systems refer to software that collect and coordinate company data for automation of business processes. If implemented properly, an ERP system complements the roles of the human staff by subtracting the time spent on rote business processes where human error may occur, allowing them to undertake tasks better suited to analytical thinking and problem solving.
Increasing efficiency is the main purpose of an ERP system. The provision of oversight and real-time analytics for senior management makes it possible to identify, and potentially prevent, productivity and capital leakages in existing business processes. ERP systems are particularly useful for SMEs where senior staff is located outside of China, as it allows them to have a greater real-time view of how the company is functioning.
ERP systems customized for China offer further benefits. For accounting processes undertaken in China’s jurisdiction, China’s generally accepted accounting principles (GAAP) must be adhered to. Many Western ERP systems and tax software, however, do not offer functionalities for China’s tax and accounting system.
Moreover, ERP systems in China also must comply with the Cybersecurity Law, since such systems often handle sensitive personal data. Chinese cloud-based ERP services, for example, would comply, whereas foreign cloud services would render you responsible for ensuring compliance.
How to create a China internet strategy
Before entering the China market, foreign investors should undertake comprehensive studies of the IT-related issues they may encounter in the country. Because of the sensitivity of the internet in China – and therefore the intense scrutiny it is given by censors and regulators – a well-thought out IT strategy can be the difference between life and death for some companies.
These challenges are compounded for tech companies whose main product is an internet-based service. Many foreign apps that would not immediately appear politically sensitive, like Tinder and Pinterest, have found their services blocked in China.
For many modern businesses, IT infrastructure forms the backbone of the company. Foreign investors establishing a presence in China should accordingly view their IT strategy in the context of their global operations rather than isolated to the China market.
China Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Dalian, Beijing, Shanghai, Guangzhou, Shenzhen, and Hong Kong. Readers may write firstname.lastname@example.org for more support on doing business in China.