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Posted on: October 27, 2016

in Blog

Unplugged: What China’s Internet and Data Restrictions Mean for U.S. Companies and China’s Economy

This blog was originally published by Insight,, and was posted with the permission of AmCham.

Internet access, restrictions and quality is a growing challenge for U.S. companies operating in China. In AmCham Shanghai’s 2016 China Business Report, this issue was named by 81 percent of respondents as a top business challenge, ahead of unfair regulatory treatment, intellectual property rights protection and investment restrictions. 

Requirements for local data storage and proposed regulations mandating the use of “secure and controllable” technologies in certain industries – banking, insurance and healthcare – are also a concern. Collectively, these limitations and restrictions limit the ability of American ICT companies to expand in China and hurt the productivity of small and large American companies.

Chinese companies and China’s economic development also suffer. Becoming a more innovative economy is a high priority for the Chinese government. Innovation dominates the 13th Five Year Plan, the country’s development blueprint for 2016-2020. China has spent billions of dollars on special investment funds, subsidies, and incubators to spark domestic innovation. 

However, slow internet speeds, blocked access to important websites and resources, and restrictions on where data can be stored and on what equipment, impede innovation. China wants to exploit the power of the internet, but government policy limits how China can benefit from it.

Business barriers

E-commerce and digitization have transformed the Chinese economy and made the internet a core issue for American companies doing business in China. Companies need the internet to access information, connect to their offices around the globe, engage with customers, and access innovative programs and software to improve productivity. 

The impact on large companies may be limited as they often have dedicated trunk lines that ensure unfettered internet access. However, internet restrictions can limit these companies’ ability to provide seamless service to customers.

American ICT companies also play a large role in China’s massive ICT market. In the past few years, however, the Chinese government has increased its scrutiny of the internet and introduced many draft regulations and restrictions on internet content as well as the hardware that supports the internet. New draft regulations and rules also affect how companies manage data.

For many member companies, China’s internet restrictions are more than an inconvenience. Often they pose significant barriers to doing business in China. The impact on large companies may be limited as they often have dedicated trunk lines that ensure unfettered internet access. However, internet restrictions can limit these companies’ ability to provide seamless service to customers. Most small businesses cannot afford dedicated trunk lines and are more vulnerable to internet limitations. 

Some cannot use popular software programs based outside of China that require the use of a VPN. While there may be equivalent Chinese programs, companies should have access to cloud-based solutions on a global basis, no matter where those solutions are hosted or headquartered. Companies should be able to make these decisions based on business needs and not because of government mandates. After all, Chinese companies operating in the United States can freely use cloud-based solutions based in China.

Development challenges

AmCham Shanghai supports the Chinese government’s efforts to develop its economy. American companies are active in China and benefit from a strong, innovative Chinese economy. Many American companies conduct R&D in China and all seek to improve productivity. But a restricted internet interferes with these goals and is harmful not just for American and Chinese companies but also for China. A freer and more open internet can support and accelerate China’s economic development.

Current internet restrictions also hamper Shanghai’s goal of becoming an international financial center by 2020 and a science and innovation center with global influence by 2030. Financial, science, and innovation centers require the free flow of information. Banks are investing heavily in financial technology and Singapore and Hong Kong are becoming hubs for innovation in this area. For Shanghai to play a similar role, it needs a fast and open internet. 

Companies also rely on accurate and balanced information. Important sources of financial news and analysis include The Wall Street Journal, Bloomberg, The Economist, Reuters, and The New York Times, yet all are blocked in China. Shanghai will struggle to compete with cities like Hong Kong, Tokyo, and Singapore that have faster and more open internet systems.

Recommendations

To improve the business climate and support innovation, we recommend that the Chinese government take the following actions:

  1. Eliminate “secure and controllable” requirements for procurement of IT infrastructure products. Instead, ensure a secure cyber economy through policies that encourage competition and customer choice, are open to non-indigenous technologies, and involve dialogue between industry and government.
  2. Reconsider data localization requirements.
  3. Continue to solicit input from the private sector on draft regulations.
  4. Eliminate restrictions that block access to information on the internet. This policy can first be introduced in the Shanghai FTZ and then extended throughout China.

This is an excerpt from AmCham Shanghai's Viewpoint of the same name. To read the full report, visit AmCham Shanghai's website.


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