Apple’s iTunes and Disney’s DisneyLife websites have reportedly become early targets of China’s internet regulators who are beginning to enforce new rules restricting the publication of online content. The new rules, the Online Publishing Service Administrative Rules, were jointly released by the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) and the Ministry of Industry and Information Technology (MIIT) and came into effect in March 2016. Apple and Disney had their websites closed down shortly afterwards in April.

The closures of these high-profile sites offer an early answer to media companies and others who were waiting to see how the rules would translate into reality.

New Approval Requirements

Under the new rules, publishers of online content must obtain an Online Publishing Services License from the SAPPRFT before offering online publishing services in China. In order to obtain this license, applicants need to meet certain requirements. For instance, applicants must maintain a unique domain name, locate their servers in China, and have a legal representative who is a Chinese citizen and a designated “person in charge”, at least one of whom must have obtained a specialist publishing technology qualification recognized by SAPPRFT. The publisher must also have at least eight full-time editing and publishing staff who hold the same level of qualification, although it remains unclear what precise form such qualifications will take.

Prohibition on Foreign Investment

FDI in Online Publishing Sector

These new rules reinforce an existing prohibition on foreign direct investment in the online publishing sector in China. Foreign companies, including wholly foreign-owned enterprises and joint ventures, are prohibited from publishing a wide range of content online, including text, maps, games, audio and video.

Keeping Servers Offshore

The rules apply to any e-publisher with a presence in China, even if they only use servers offshore. Foreign publishers without a China presence that use servers outside the borders of mainland China are beyond the reach of the new rules. But operating a China-focused website from outside the mainland of the People’s Republic presents its own set of problems. The need to cross the “great firewall of China” can result in slow download speeds, difficulty for Chinese customers seeking to make online payments overseas, and the possibility of access to a website being blocked in China entirely.

Impact on VIE Structures

Perhaps the biggest impact of these new rules will be on so-called variable interest entity (VIE) structures. Before these new rules, many foreign companies adopted VIE structures to gain de facto control over Chinese companies providing online publishing services in China, getting around the restrictions on foreign participation in the sector. It appears that these kinds of arrangements will now be difficult and risky to implement. Under the new rules, a Chinese company must submit the details of its cooperation with any foreign-invested company, or offshore entity or individual, to SAPPRFT for examination and approval. The new rules add that online publishing enterprises may not transfer, rent out, or sell their online publishing licenses.

Whether the authorities will now act to close down the hundreds of companies using VIE structures which already exist in China remains to be seen. But there is no doubt that the new rules mark a significant increase in the government’s oversight and regulation of VIE structures in particular, and internet content in general.

Broader Application?

The definition of “internet publishing services” in the new rules is broad enough to catch anyone posting content online. As only entities which obtain an Online Publishing Services Licence may provide “internet publishing services,” it is arguable that no one without such a licence may post any content on line in China. By logical extension, the rules would appear to apply to any knowledge-based business, such as law firms and accountancy firms, that publish content on line. It remains to be seen whether, or when, law firms, accountancy firms and other professional service providers join Disney and Apple in having their China websites taken down.

The rules grant various powers of interpretation to the SAPPRFT. Until clarification is forthcoming, anyone within mainland China posting content on the internet should exercise appropriate caution. Or bite the bullet, apply for an Online Publishing Services Licence, and await a response.