Shanghai to allow faster data transfer from China for foreign firms-sources

[February 07, 2024]  By Xie Yu and Engen Tham

HONG KONG/SHANGHAI (Reuters) - Shanghai plans to accelerate approvals for foreign firms wanting to send their local data offshore, four sources with knowledge of the matter said, in what would be a major relaxation of China's stringent data rules unveiled more than a year ago.

The Shanghai government in recent weeks discussed the so-called fast-track approval initiative with representatives of some foreign firms operating in the commercial hub, including western banks and asset managers, said two of the sources.

The planned move comes as China is looking to woo foreign investors as the world's second-largest economy grapples with a sluggish post-pandemic recovery, a real estate slump, and a deepening markets turmoil.

Foreign financial firms have been lobbying the Chinese authorities to allow cross-border sharing of information, after Beijing tightened control of data generated within its borders in a national security drive.

The rules unveiled in 2022 require all "important" offshore transfer of data related to operations within the country to clear security reviews by the Cyberspace Administration of China (CAC).

They have caused indefinite delays in the transfers, confusion and concern among foreign firms.

Shanghai is likely to allow foreign firms to transfer data offshore by leveraging its sprawling free trade zones, which enable the local government to offer tax and other incentives to global companies operating there, said the two sources.

The Shanghai government's plan, details of which have not been reported previously, will be separate from the CAC's cross-border data transfer approval system, which will continue to be applicable to foreign firms in the rest of the country, they added.

One of the sources said the Shanghai government's initiative was likely to be implemented this year itself.

All the sources declined to be named due to the sensitive nature of the matter.

The Shanghai government and the CAC did not respond to Reuters requests for comment.

Shanghai plans to enable financial institutions to transfer operational data overseas under national data transfer security protocols, the Shanghai city government said in a statement on its website on Tuesday, without providing details.

'PRACTICAL DIFFICULTIES'

Foreign financial firms' interest in China could be curbed if the country's data regulations remain vague or stringent, the Asia Securities Industry & Financial Markets Association said in June last year.

People visit the Bund in front of Shanghai's financial district of Pudong in Shanghai, China September 28, 2017. REUTERS/Aly Song/File Photo

The financial lobby group, which represents global banks and asset managers, had said cross-border transfer of data such as investment outlooks, portfolio analysis, and shareholding and anti-money laundering information should be allowed.

The confusion and concerns about onshore data has added to foreign firms' souring mood on China.

Foreign direct investment into China shrank for the first time in over a decade in 2023, data released by the commerce ministry showed last month, underscoring the challenge Beijing faces in winning back foreign firms.

Since the CAC's data rules became effective in 2022, the process to review applications from foreign companies in China to export data has moved at a very slow pace, according to industry insiders and lawyers.

A Shanghai-based lawyer said they had filed more than 100 applications representing clients to the CAC for cross-border data transfer. So far, less than 10% of applicants have received approval from the regulator.

As part of the planned initiative, Shanghai is also considering guiding some companies to categorize data and export those that are deemed as "general" freely once certain management requirements are met, said the third and the fourth sources.

Besides foreign financial firms, western automakers are also expected to be included in the Shanghai government's fast-track data export approval plan, three of the sources said.

A European business lobby, whose members include BASF, Maersk, Siemens, and Volkswagen, said in November European firms "urgently" needed China to give clearer definitions of key terms in the cross-border data transfer rules.

During the recent weeks' consultation process, the Shanghai government told the foreign firms they were working on the new initiative to "solve some practical difficulties" of the local units of global firms, said the first source.

Beyond Shanghai, the CAC said in September that it was considering waiving data export security assessments for some activities such as international trade.

(Reporting by Xie Yu in Hong Kong and Engen Tham in Shanghai; Editing by Sumeet Chatterjee and Muralikumar Anantharaman)

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