On October 1, 2000, China's State Council promulgated the Measures for the Administration of Internet Information Services (the "Measures"). The purpose of the Measures is to provide clear guidance on matters such as license applications, registration requirements, content censorship and administrative authority with respect to the operations of Internet information services.

Overview

Before the promulgation of the Measures, the regulatory landscape for the Internet sector was ambiguous. Various rules and procedures had been implemented by government agencies at both the ministerial and provincial level regarding the administration of the Internet industry and information distribution over the Internet. Some officials of the Ministry of Information Industry ("MII"), such as Minister Wu Jichuan, also occasionally made policy statements about China's Internet industry. On the other hand, the State Council had been silent with respect to the policing of China's Internet industry. The result was a great deal of gray area, mixed interpretations and inconsistent implementation practices affecting China's Internet industry - reflecting the transitional nature of the rules and procedures prior to the promulgation of the Measures. It was also commonly understood in the international business community that foreign investment in China's Internet industry was prohibited. The new Measures promulgated by the State Council underscore the central government's attempt to streamline the administration of Internet information services, as well as the government's attempt to shed light on some of the existing gray areas for Internet content providers ("ICPs"). The Measures clearly are of the highest legal significance among China's existing Internet-related regulations and rules. Presumably, to the extent that there are discrepancies between the Measures and previously enacted rules and procedures, the Measures should prevail.

Administrative Authority

Previously the MII had been the ad-hoc principal government authority regulating China's Internet industry. Promulgation of the Measures has legitimized the MII's role. Before the promulgation of the Measures, there was no official consensus among various government ministries on which ministry, department or bureau should be the primary watchdog for China's Internet industry, especially with respect to business activities involving Internet information services stemming from the convergence of telecommunication, Internet, broadcasting, cable, content and advertising activities. Now, regulatory authority for the Internet is firmly and unambiguously in the hands of the MII. According to the Measures, any Internet enterprise engaged in providing Internet content (commonly known as an "ICP") must obtain a proper ICP business license if the enterprise is engaged in commercial activities. If it is not engaged in commercial activities, it must still make a filing with MII or relevant local authorities as an ICP. Licenses will be issued by, or a filing process needs to be carried out with, MII directly or a local telecommunications administrative authority that has jurisdiction over the enterprise's operations (the "Local Authority"). In addition, MII's approval is required for an ICP to list on a domestic or an overseas exchange, establish a joint venture, or undertake co-operative activities with foreign investors to engage in any ICP business.

While the Measures recognize the leading role of the MII in regulating the ICP business, the Measures also provide that Internet companies that operate in sensitive and strategic sectors, including news, online publishing, education, medicine and pharmaceuticals, must obtain additional approvals from relevant authorities in charge respectively of those sectors as well. Clearly, obtaining approvals from these other relevant authorities is a precondition to MII's issuing an ICP license. However, the Measures fail to provide detailed procedures on to how to obtain approvals from these other authorities.

Licensing and Filing Requirement: Commercial vs. Non-Commercial

The Measures divide the services provided by ICP companies into two categories: commercial and non-commercial Internet information services. Commercial Internet information services are defined as any services that involve providing information or web page production services over the Internet to Internet users for fees, while non-commercial Internet information services are defined as any services that provide open and publicly shared information over the Internet to Internet users at no charge. The Measures require that an ICP company engaging in any commercial services obtain a proper ICP license from the MII or the relevant Local Authority, while non-commercial services are only required to make a filing with the MII or the relevant Local Authority. Whether an ICP company should apply for a license with the MII or a Local Authority depends on whether such ICP company's operations cover only one province-level jurisdiction or multiple jurisdictions. Failure to comply with these requirements gives rise to severe penalties, including shutting down of the concerned Web site.

The Measures fail to provide further guidance to identify what constitutes services for fees. For example, an ICP that requires its users to pay membership fees in exchange for access to its Web sites would likely be deemed to be a provider of the services for fees. With respect to a Web site to which Internet users have free access, it may be argued that the operator of the Web site and the related information services should not be deemed to be providing services for fees, but in practice, such a Web site may generate advertising income through advertisements placed on the site. The Measures are unclear on whether an ICP company in the latter scenario should be classified as a company engaging in commercial Internet information services subject to the licensing requirement.

Restrictions on Foreign Investments

Foreign companies have not been allowed to invest in Internet businesses in China. According to the US-China Bilateral WTO Agreement (the "Agreement"), China has promised to lift such restriction gradually once China joins the WTO. As an indication of the Chinese government's willingness to honor this promise, the Measures, for the first time, clearly provide that Chinese ICPs may be allowed to set up joint ventures with foreign investors - subject to applicable laws and regulations. The new Telecommunications Regulations that were promulgated by the State Council simultaneously with the Measures (the "Regulations"), on the other hand, provide that any foreign investment will be subject to a separate set of regulations to be formulated by the State Council. The Regulations also classify ICP services as value-added telecommunications businesses, which are required to obtain an appropriate license. Although the Regulations fail to provide a timetable for lifting of the ban on foreign investment in China's telecommunications industry, the Regulations indicate that the State Council does contemplate the future opening of China's telecommunications markets to foreign investment. However, in the absence of any specialized regulations governing foreign investment in China's telecommunications industry, for the time being, it is less likely that MII will take any initiative to approve any foreign invested ICPs.

Content Censorship

 

The Measures impose tight censorship requirements on the content carried on Web sites and re-emphasize that ICPs are prohibited from producing, copying, publishing or distributing any information that violates the constitution, subverts state power, advocates separatist activity, supports cults, spreads rumors or disturbs social stability. Operators of Web sites are required to censor and report any such content, keep copies of all content that appears on the web sites for 60 days and submit the record to the authorities on demand. Any ICP in violation of these requirements will face penalties including, but not limited to, revocation of the business license.

Grace Period for License Applications of Existing ICP Companies

All existing ICPs have a 60-day grace period commencing September 25, 2000 during which they are permitted to apply for a proper ICP license and comply with the Measures. This directly affects all existing ICPs. Among these existing ICPs, many are either wholly or partially foreign owned and operate in China without licenses or with a license issued by a local government. To avoid penalties and the closing-down of their businesses, these foreign-invested ICPs must comply with existing restrictions on foreign investments in China's Internet industry before the actual introduction of the regulations governing foreign investments in this field. This requires foreign investors having Internet operations in China that are not compliant with the Measures, the Regulations and the existing policies, must carry out a corporate reorganization and spinoff the ICP portion of their businesses from their other operations in China. In practice, carrying out this process within 60 days constitutes a stiff challenge to these foreign investors, given the complications of the reorganization process. Furthermore, it will be interesting to find out how MII and local governments will coordinate to eliminate any discrepancies that exist among different local practices in light of the new nation-wide license application requirements under the Measures. We understand that some local government agencies, such as the Information Office under the Shanghai Municipal government, have granted ICP licenses to wholly foreign-owned enterprises and Sino-foreign joint ventures pursuant to local regulations, notwithstanding the restrictions on foreign investment in the field. Under the Measures, the legality of the ICP licenses not in compliance with the contemplated new regulations regulating foreign investments in ICPs is called in question. Holders of these local ICP licenses may eventually need to re-apply for new licenses issued by MII or a proper Local Authority once the contemplated new regulations regarding foreign investments are in place. Given that ICP licensing authorities at the local level operate pursuant to local regulations that may differ significantly from the Measures, it would not be a surprise if conflicts arise between the Local Authorities and those local authorities that previously issued ICP licenses.

Unresolved Issues

In addition to the issues mentioned above, there are a number of other issues left unresolved under the Measures. For example, ICP services are defined as services providing information to users over the Internet, which may be too broad. Under this definition, a Web site will be deemed to be an ICP, subject to either a licensing or a filing process under the Measures, regardless of whether the Web site engages in any commercial activities. This will increase the legal compliance and administrative burdens of a Web site operator, as well as of the government, which may negatively affect the pace of the development of China's Internet industry. Furthermore, the geographical application of the Measures is unclear. Under the Measures, anyone engaging in provision of Internet information services in China is required to comply with the Measures. However, the Measures fail to specify what constitutes the provision of Internet Information services in China. Usually, to make a determination in this regard, people would focus on whether the servers of an ICP are located in China and whether the Web site content is in the Chinese language. However, some ICPs which target the Internet market in mainland China locate their main servers outside of China. Some of these ICPs provide China-related content in English. The Measures do not provide a clear answer on whether the operations of these ICPs should constitute "the provision of Internet information services in China" and whether these ICPs would be equally required to comply with the Measures.

Because of the generality of this newsletter, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.