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Is China Changing Its Thinking on Data Localization?

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Is China Changing Its Thinking on Data Localization?

What to make of new provincial cross-border data flow proposals.

Is China Changing Its Thinking on Data Localization?
Credit: Illustration by Catherine Putz.

Under pressure from the COVID-19 economic downturn, China’s authorities revealed mild interest in exploring less restrictive data localization measures. Global tech companies have long advocated for this approach, to no avail, and their Chinese counterparts have been only slightly more successful in getting the same message across.

Now, some emerging provincial proposals aim to allow cross-border data flow in free trade zones.

In January 2020, China’s Hainan provincial legislature discussed the regulatory proposal “Administrative Rules for International Internet Access for Enterprises and Individuals” and studied other aspects of cross-border data flow. A few months later China’s Cabinet, the State Council, published the “Hainan Free Trade Harbor Construction Plan,” which includes a pilot project for “secure cross-border data flow” and “measures to facilitate more convenient personal date outbound flow.”

This is not the first time the holiday island’s provincial government attempted to explore wider access to the free internet. In 2018, they briefly posted a three-year action plan on an official government website announcing that tourists entering Hainan’s special designated zones, Haikou and Sanya, will be able to access some websites blocked by China’s great firewall, namely Twitter, Facebook, and YouTube. It also planned to hire 50,000 English-speaking foreign workers and buy 2,000 minutes of advertising time a year on international networks, including the BBC, CNN and CNBC. The intent was to market this new feature of the free trade zone in order to boost tourism and spur economic growth.

In fact, Hainan is not the only provincial government trying to push the envelope on data localization in pursuit of commercial benefits. Also in 2018, the Hong Kong privacy commissioner for personal data, Stephen Kai-yi Wong, presented a cross-border data flow policy proposal, including a white list regulatory mechanism, in Beijing to advocate for the converging of data flow mechanisms across mainland China and Hong Kong. Such an alignment will shore up economic activities across the Greater Bay Area and enhance Hong Kong’s competitiveness as one of Asia’s financial hubs.

Unfortunately, these proposals appear to run counter to China’s long-standing censorship regime and stringent data localization principal as stipulated by the 2017 Cybersecurity Law. Is this a sign of provincial and local governments moving the needle on data localization policy in China, or is it simply a case of the central government’s failure to notice?

In the case of the Hainan legislative proposal, the Communist Party Politburo Standing Committee member Han Zheng visited the province in November 2019 and discussed the next steps for Hainan’s free trade harbor plan. At this meeting Han specifically mentioned further measures in opening data governance and cross-border data flow. So it appears that this recent round of data flow discussions in Hainan has been carried out in coordination with the country’s top decision makers.

In parallel with the Hainan effort, the Shanghai municipal government issued a new five-year guideline in April for its free-trade zone, which includes new experiments to explore cross-border internet governance and data exchange. It presents options for relaxing restrictions, such as setting up offshore data centers and generating a white list to explore how select companies can directly access the “international internet.” Unlike the Hainan three-year plan, which was removed from government website within hours, the Shanghai five-year guideline has been widely reported by Chinese media and is still available online, weeks after being posted.

One reason for the potential rethinking of data localization policy is the daunting economic pressure China faces post-COVID-19 pandemic. In the first quarter of 2020, the national GDP suffered an unprecedented 6.8 percent contraction. To revitalize the economy and get people back to work, Beijing authorities launched an ambitious $1.4 trillion digital infrastructure investment plan, calling on governments and private entities to forge ahead in 5G, artificial intelligence, the Internet of Things, and other emerging technologies development and deployment.

In March, Premier Li Keqiang told China’s State Council, “We must implement targeted policies to arrest the slide in foreign trade and foreign investment, to forestall damage to the wider economy.” Around the same time, Vice Commerce Minister Wang Shouwen held hours-long conference calls with the American Chamber of Commerce in China and the European Union Chamber of Commerce in China to answer questions about China’s economic outlook and policy response. At the National People’s Congress, in May, Li outlined three priorities for 2020: stabilizing employment, ensuring living standards, and winning the battle against poverty – all objectives that rely on economic recovery supported by foreign investment.

Following this guidance from the top, Chinese officials from the central, provincial, and local levels are going out of their way to help foreign investors revive supply chains and keep manufacturing jobs in China. As the political focus shifts to post-COVID-19 economic revitalization, these local government proposals for moderation of data localization rules are potentially back on the table.

Major global technology companies have been advocating for cross-border data flow liberalization for years. The U.S. government repeatedly raised this market barrier issue on behalf of companies like Microsoft, Google, Amazon Web Services (AWS), IBM, and Oracle at U.S.-China bilateral trade negotiation venues during the Obama years, as well as in the context of the Trump administration’s Phase One trade deal. Today, there are still indications data localization issues are in discussion related to Phase Two negotiations. However, most China observers don’t have much hope for Phase Two progress. After all, the Phase One deal itself is in danger as President Trump increasingly sees it as a political liability in an election year amid a sliding economy and climbing unemployment rate.

Yet global tech leaders never cease to work on this important issue through their local partners.  For example, last year Microsoft sponsored a legal research paper titled “Proposal for Hong Kong to be a Data Center Hub for the Greater Bay Area and China.” The study recommends a special pilot project of free data flow within the Greater Bay Area and describes related requirements and criteria for a gradual approach to liberalization depending on the nature of the data (e.g. non-critical information/non-personal data, pure commercial data, R&D data, personal data, and sensitive/national security data). It also analyzes the feasibility of the recommendations from both legal and policy perspectives.

More importantly, in addition to the advocacy efforts of Western tech companies, Chinese internet companies have also been quietly working to soften China’s draft data localization rules. As Chinese firms expand their presence overseas, these internal rules limit their ability to transfer and process data in locations that best serve business, operational, and data security purposes. Both Alibaba and Tencent have produced studies on the negative economic and innovation impact of data localization measures. Their representatives have argued at public forums that the overly burdensome General Data Protection Regulation regulatory model stifles the innovation of Chinese companies, making them less competitive vs. Google, Facebook, and AWS. Behind closed doors, they pressured Chinese regulators for a more lenient data localization model. As a result of these efforts, they were able to slightly loosen the tight restrictions proposed in the first draft of data localization rules and successfully delayed the completion of these rules for over two years.

These free trade zone data flow policy proposals present an interesting policy advocacy opportunity to tech and service companies that rely on data to operate and innovate. As data regulators become open to explore new models to manage cross-border data issues, companies could leverage their interest and shape the conversation on data flows policy in China.

Xiaomeng Lu is Access Partnership’s Senior Policy Manager and China practice lead. She holds a Master’s Degree in International Trade Policy from Middlebury Institute of International Studies at Monterey and a Bachelor’s Degree in International Economics and Trade from Renmin University of China.