The CAC has recently released a “public comment seeking draft directive 征求意见稿” on “the implementation of the cross-border data transmission approval process 规范和促进数据跨境流动规定". This is a step towards reducing the administrative burden for companies that wish to engage in such activities. (Chinese Original Version, English Translation Version)
The previous law was not easy to implement and resulted in unintended consequences, which were interpreted by the mainstream media as blocking foreign access to China's data.
The missing piece: China is not blocking data. It aims to transform it into an asset. In 2019, data was categorized as a production factor. There have been significant developments on the ground, including innovative types of data, a growth-focused approach by the new Bureau of Data Management, government-led data exchanges, government subsidies for data trade, and the government's experimentation with monetizing personal data.
These developments have primarily focused on the domestic market and have not prioritized being foreign user-friendly. This is a problem. However, there is intense competition among domestic companies and local governments to take the lead, and that is their focus.
This is the first global effort to develop a nationwide data market from a top-down approach. The government is expected to continue developing this market, but we caution against expecting linear growth. It will be an iterative process of "crossing the river by feeling the stone."
[00:00:00] Mu Chen: The CAC just released a new draft regulations on cross border data transmission. We think this is a very important development. It confirms that China is not purposely creating an information black box. Why do we think so? Robert and I will talk through this in the episodes.
[00:00:17] First of all, our perspective is that China is constructing its data sovereignty and a data market framework.
[00:00:24] But The process is not pretty, so it creates many questions. That actually echoes to what you said in previous episode, right, on transparency versus pragmatism.
[00:00:34] So the document is called "Directives on Standardizing and Promoting the Cross Border Transmission of Data". It's a public comment seeking draft, which means that it's quite mature in the deliberating processes. Typically in this draft, they have already reflected the comments from key stakeholders, like experts, scholars, corporate leaders in the data industry.
[00:00:56] What's interesting also is this is , from our perspective, a corrective document to the "evaluation method on cross border data transmission securities". Which is the law that led to many confusing and chaotic phenomenon we observed earlier this year. As some of you may recall earlier this year, we published an article refuting Wall Street Journal's report about China creating a black box on information.
[00:01:23] Robert, can you remind our readers, what was the impact of the law?
[00:01:27] Robert Wu: Yes, as you said, China is in the process of... Building up a whole data regulation framework from almost zero. So since the last few years, there have been data security law, personal information law, and a bunch of measures that are designed to implement these laws. And in the process, there are many white spaces where there are undefined territories, and there are confusing parts.
[00:01:58] Earlier this year, there has been introductions of certain measures that make many companies, especially, Multinational companies to be really concerned about which part of the data transmission in their normal business could be seen as required to apply for data transmission. So it creates many questions. A lot of the data transmissions are happening within a conglomerate in a normal course of business. And if they have to apply for these kind of application, it will create a lot of headaches.
[00:02:33] Also at the same time, there is a very vague description of what they call the so called "important data". So for "important data", when you transmit to overseas, you have to go through some lengthy procedures. But the regulator has left open the definition of important data. Making a lot of companies also unsure about how to do with it, whether the data they have and are transmitting overseas are "important". So I think that whole environment creates a situation where different companies choose to essentially self- regulate based on their own understanding of the risk and reward within this undefined, uncertain regulatory framework. And that contributes to a lot of phenomenon that Western media may think that actually there is an intention behind the government to intentionally control data transmission.
[00:03:32] Definitely within that environment, it's easy for the outsiders to believe in that way, but I think this introduction of this new piece of regulation will answer the question that, in fact, we are really at an early stage of this formation of regulation and the government is listening to all type of voices to make this system work.
[00:03:57] Mu Chen: Yeah, I remember that, like, earlier this year, hundreds of companies are filing for their permissions, right? So, they created a lot of buzz, and when you mentioned cross border transmission, many of the cross border multinational consumer brands have to file their cross border data transmission permission because they have to collect data and run the analysis in the headquarter, on a day to day basis. And then this actually is exempted to in this new directive draft. But then the collateral damage like you said was interpreting it as China purposely controlling it but that's not the right logic, this document definitely, bring us back towards the main logic. It's definitely a move towards the opening up of the market. Right. Previously, it's broad and tight. A guideline that promoted not just data company, but all the cross border company to self regulate. But this directive seems to create a lot of exemptions. Can you walk through [what] the directive is about?
[00:05:01] Robert Wu: The general direction of this is loosening up and creating explicit stipulations where you do not have to file the approval for data transmission. So for example, when it comes to this controversial idea of "important data". They explicitly said if only this data is explicitly decided and announced by the regulator as important data, it's only in that case you have to apply for important data transmission. Otherwise, it's not, you don't have to. So that gives a lot of ease for the companies. Because now they don't have to guess whether their data is "important data" or not. And also, when it comes to personal data, there are many clauses that are exempting certain part of personal data from the application or approval process.
[00:05:53] If you are a, for example, a kind of travel agency, that in the process of, executing the agreement between you and the individuals, you have to use their personal data. Then that's not part of the data security framework. So I think the great thing about this new piece is that it creates a lot of what we call white lists. So actions that are explicitly green lighted, that can be allowed, as opposed to, previously, it only, you know, give some situations where you have to apply, but that in many white space of actions, you have to guess. Now it becomes much clearer.
[00:06:34] Mu Chen: I don't dive into detail because we will share a link to the documents but I would love to also point out two things about the white list.
[00:06:42] Recently I got interviewed by the China project talking about partly , "data lockdown of Beijing", right? One of the questions they were asked they were asking was about academia cooperation, right? CNKI, one of the biggest research paper database being made unavailable earlier this year to global users.
[00:07:00] I was trying to separate the issue on the quality of data management by CNKI, and the permission to allow CNKI to provide their information and data to global users. My point was that it's mainly because CNKI wasn't managing their personal identifiable data properly, not because they don't want to provide the data globally and cross border, and actually one of the exemption in these new directive specifically say that data transmissions across borders during academia cooperation, do not have to file for approval.
[00:07:41] That actually points to my point and that also covers cross border manufacturing cross border shopping, cross border wiring. It's also exempted from filing for permission. So, again they are trying to build the data sovereignty, but they are not trying to block data from going overseas.
[00:08:00] Robert Wu: Yes, one thing that the outside world has to be mindful is when it comes to data, there's really not just the security aspect, there's also the economic development aspect in China, the Chinese government, when they think of data, they are both regulating it, but also promoting it.
[00:08:17] So there's another interesting clause in this new regulation, which explicitly said that if this personal data, but collected overseas while only processed in China, then its re-transmission overseas will not need to apply for approval, right? So this is also quite interesting because by allowing this type of "import and export of data" is actually promoting certain businesses, industries, where such kind of you know, import and export of data is necessary. It's written in one line, but also creates a lot of opportunities for cross border data innovation. Right.
[00:08:59] So I think that's something that we have to be careful or be mindful about there are always these two aspects within the China data regulation framework,
[00:09:08] Mu Chen: We will talk more later about the creation of data markets and commercialization of data. So, another interesting thing is that actually Free Trade Zone can set their own rules. That's very open minded, I would say. So echoing you, I think the main problem is the lack of context on China's intention to create its data markets. We, because of our data company, have witnessed this whole process of creating the data market.
[00:09:38] Starting from 2018, 19, the government categorized data as a production factor. After that, there's a lot of fascinating developments. So first of all really recently we saw that there's a agent created to regulate data specifically, the National Bureau of Data, and that Bureau is assigned or established under National Development and Reform Commission, which is a development and growth focus agency within the government. That signifies that the government wants to develop data market, not just to regulate it. It's a green light direction. In China, we have this green light, red light approach. Right? So we saw the red lights from CAC and simultaneously we also saw the green lights from NDRC.
[00:10:32] So that's on government level. At the practitioner level, we also see a lot of new data sources emerging. I remember we saw Satellite data, credit card data,
[00:10:44] Robert Wu: I think there, there has been a lot of collaborations between the data owners and the data vendors or companies.
[00:10:52] There are many innovations, for example the Southern Grid the second largest electricity company in China. They're partnering with some data vendors to develop company credit data. For example, if a company goes to the bank to apply for a loan in order for the bank to understand the credit worthiness of the company, they can ask Southern Grid to call for data through API and to see exactly how much electricity a company or factory are consuming, and base their credit or loan decisions on those kind of data. And all these actors, both state owned enterprises and private companies and governments, and now more increasingly, the Internet platforms are all, coming to this market and, and, and, and try to figure out a way for data to be used both compliantly, but also to get the maximum value extracted.
[00:11:44] Mu Chen: Yeah, it's fascinating when we look at what types of data can be used nowadays versus 10 years ago in China. So, We put it into a longer time frame, then we have the full picture, which is that the amount of data that can be used in China has grown significantly since 10 years ago.
[00:12:06] Let's talk more about the construction of data market, right? There's more and more data types becoming available, and the government also are pushing the developments on two aspects.
[00:12:17] One, we saw that many local government are creating not just data regulating body, but also state owned company at a local level that's surrounding data. So a lot of local data company created by local government. I remember in Nanjing, Suzhou different cities, Guangzhou, right? Their mandate was to collect data from government's day to day operations and productize it, make available to public, either for a fee or for free. That's one initiative. Another initiative is data exchanges. Oh my god, there's a lot of data exchanges. How many do we get invited? I think it's like 5, 10?
[00:13:01] Robert Wu: Yeah. Something like that.
[00:13:03] Mu Chen: So our data firm got invited to be in the data exchanges across multiple locations.
[00:13:09] All these local government are trying to be the largest data exchanges in China. One example I can recall is that when I talked to the Shenzhen Data Exchanges Management, they said their goal is to promote 5 billion RMB worth of data trading for this year. And the government is planning to subsidize 500 million RMB for the trading. So like 10 percent subsidies for data exchanges. That's really, really generous, we think about it, in stock exchange, you actually have to pay fee to the government, but that's the other way around.
[00:13:44] Robert Wu: I mean, it could run the danger of oversupply of the data exchanges, but that's, I think, how the things work in China.
[00:13:52] When there is something new, different local governments, they rush to work on it. There could be oversupply of these, but in general, it helps to promote the industry and that people realize this is really something valuable and something that needs to be developed.
[00:14:06] There's always both the regulator side as far as the economy promoter side of the Chinese government. Now since data has been already defined as a production factor, it's just a matter of time before they develop more sophisticated, both legal framework, as well as the market for this production factor.
[00:14:26] Ultimately, what all of us understand is. Data is valuable and it cannot be locked to extract the value. It has to be changed and it has to invite different parts of the industry value chain to cooperate and develop it. That's really behind a lot of what we are seeing now, you know, both the introduction of different pieces of regulation, as well as this new data exchanges and and a new measures aimed at developing the market.
[00:14:53] Mu Chen: Adding to what you said, fundamentally, the logic is that if the government can successfully create a asset class based on data, that will ,over a few years, create a huge amount of wealth. That's the upside. But the upside of regulating data and blocking data of transmitting to overseas is very limited.
[00:15:17] You always mentioned that Chinese government philosophy is pragmatic. So if we apply that mindset, they definitely will choose commercializing a market and creating a market around data rather than blocking it.
[00:15:28] Robert Wu: Provided that some red lines are not crossed, right? So there is no leak of state secrets or like really important data that could be detrimental to the operation of societies, provided that kind of data is clearly defined and also provided personal data is not infringed upon illegally, right?
[00:15:49] Yeah. Then everything else is up for development. That's a global
[00:15:52] Mu Chen: standard, right? They're trying to step by step. Managing those red lines. We talk about the narrative and then one thing that caused the misunderstanding again, is the lack of transparency. Emphasizing is we cannot emphasize it as enough that, you know, even for this data market creation, it's not easy to understand from outside of China.
[00:16:17] Think that's why what's happening is feeding to these conventional narrative that China is blocking the information outflow
[00:16:30] Robert Wu: I think they definitely should do a better job of explaining these. The, the, the still as we emphasize again and again, there's a lack of right PR talents in these agencies, especially to the foreign
[00:16:43] Mu Chen: market.
[00:16:43] Because their specialty should be on understanding data, prioritizing data. monetizing data, regulating data securities. None of them is pr.
[00:16:52] Robert Wu: Right? Yeah.
[00:16:54] Mu Chen: When I was interviewed by the China project, I also mentioned that there's no English website for many of the data sources we work with. Very few of them that have English website for data exchanges, local data companies, and then when we have to use them, you need a Chinese cell phone to register. That's always the blocking point.
[00:17:17] On one hand, I'm like, come on, build website, build English translation already, accept global cell phone already. But on the other hand, it's a prioritization issue. I have this broad market that I need to work on? As a local data exchanges, I have to compete with the, fellow exchangers in other cities, in other provinces, that's my priority.
[00:17:43] They all want to be the number one data exchanges in China. I can't spend enough energy on that. Why do I need to spend energy on creating a data website for foreign users that represent a smaller market compared to the domestic market? At least in the short term. It's hard. But that's reality.
[00:18:05] Robert Wu: Yeah, I think that's something that we have to bear in mind always, is that the whole data market, the whole data industry, regulation, they are really young. They're just barely a few years, all of this. So I would just say let's be patient. Let's don't, you know, look at some change today and extrapolate 10 years of future.
[00:18:29] Let's just be patient and hold the belief that the market is going to get mature and and all participants of this industry will get more sophisticated.
[00:18:37] Mu Chen: Yeah. So in terms of going forward, the other thing that we want to note is, as we're patient, we should expect there are going to be new regulation that's promoting the growth and development of the data market.
[00:18:53] And it might not be mature at the time of publishment. There might be some collateral damages in those regulations. And then we will see a correction in the direction. Actually, it's pretty fast. Six months from the implementation of the previous law, now they have a new regulation that's a step on the other directions.
[00:19:14] So I think you'll be not a linear growth in either way, but definitely, it will be a direction towards growing the data market. We want to emphasize is it's the upside. I think the government knows the upside. It can contribute huge amount of wealth. It can contribute to creating wealth even for the individuals, because every individuals has data assets that is waiting to be commercialized and monetized. So think about it, there was this initiative on creating common prosperities, right? What better than assigning a new types of asset class to every individual that can create it.
[00:20:04] Robert Wu: Yeah, add to that, I heard that a kind of operational guideline for exactly the type of use case that you mentioned, individuals capitalizing their own data. So a lot of our data on the individual level in the hands of big Internet platforms.
[00:20:21] And according to the law, every individual has the right to get those data downloaded from these platforms. They are have the right to transfer those data. But however, in actual implementation it's often very hard for individuals to realize, to do that. So there has to be a standard operational guideline for how to deal with this kind of situation.
[00:20:47] And what I heard is that guideline is also being formulated, and we really are very excited about this new prospect. Just think about in the future for any individual, you can have a single button that, you click yes or approve and you can get your data out of the platform and you can commercialize your own data with all kinds of third parties that you approve. That's also one of the exciting aspects of this industry going forward.
[00:21:15] Mu Chen: That's fascinating. Yeah, we are all very excited and we should expect to talk more about it in the future episode about the development of China's data market.
[00:21:25] Bear in mind, it's the first top down approach to create a data market globally. So we definitely will keep an eye on this.