Business lobby gets China to soften software law

Foreign companies last week saw the fruit of their protests against strict encryption rules.

In a move that shows the growing power of foreign companies and the telecommunications market in China, the government this month backed down from laws that would have limited the use of everything from laptops to cell phones.

A clarification issued on regulations covering the use of encryption said they did not apply to most commercial applications such as cell phones, computer operating systems, and Internet browsers.

The episode highlights the government's challenge in trying to control the fast-evolving technologies necessary for so much of today's businesses. Telecommunications is the hottest sector of China's economy. Cellular phone subscriptions have topped 40 million, and in the past six months the number of Internet users doubled to 9 million and is expected to double again this year.

Dissidents and the banned spiritual group Falun Gong have used the Internet to organize protests despite harsh crackdowns, and the initial ban on imported encryption software was apparently sparked by security concerns. Analysts say the government is worried by the growing chorus of critical voices on the unregulated and anonymous Internet. In late January, the government issued a ban on leaking state secrets over the Internet. The government also banned the online publication of any news not first printed by official media.

The regulation on encryption was likely aimed at protecting China's information security system, says Jay Hu of the United States Information Technology Office, a trade group in Beijing. "China is not confident about using imported products for mission-critical things like banking," Mr. Hu says. "They're worried about back doors in some software and hardware."

In a regulation first publicized last November in the back pages of the People's Daily, the Communist Party mouthpiece, the government said all users of encryption would require permission, and that all sales of imported encryption software were banned. Encryption is coding used to keep electronic communications secure. Now, government says the regulation will only be enforced for software or hardware whose main purpose is encryption. Still unanswered: which applications will be covered, though analysts said they would likely include defense and banking.

Had the regulations been enforced, they could have crippled nearly all foreign business in China. Sales of standard e-mail programs like Eudora or Microsoft Outlook would have been illegal and even sales of Microsoft's Windows 2000, launched yesterday in China, would have been barred. Cell phone makers and other companies would have been required to hire Chinese firms to provide encryption technology. The State Encryption Management Commission had said that all users - even travelers - would have to register their software before entering China.

The regulations said secret codes should be handed over to the state, which would act as an keeper of all keys, able to monitor all electronic communications. But some Western companies said they would rather kill their China operations than hand over proprietary information. In fact, few companies bothered to register by the Jan. 31 deadline.

"The initial regulations weren't workable," says Ted Dean of the Beijing-based consulting firm BDA. "What we've seen now is some clarification that amounts to backtracking."

The clarification seems to be a result of the concerted lobbying effort by business groups that met with officials on a nearly weekly basis. "Relevant departments in the Chinese government realize the attention certain countries' businesses have paid to these regulations," said the clarification in an oblique reference to the lobbying groups. "This is proof that they will respond to an organized lobby," says a Western diplomat.

The ham-handed handling is typical of China's attempts to regulate its markets, analysts say. Apparently, different ministries were unaware of the initiative, which seemed tailored to please the government's security apparatus. Adds the Western diplomat, "This is the consultation process that most countries go through before they issue legislation."

But there are signs of changes in the way the government is conducting its business. Foreign accounting firms recently were consulted during the drafting of a new tax law, and the American Chamber of Commerce was also brought on board for discussions on a new contract law. "The Chinese see the foreign businesses that have been here a while as people who have been here though thick and thin," says American Chamber of Commerce executive director Mike Furst. "They see we have a mutual interest in China's development."

(c) Copyright 2000. The Christian Science Publishing Society

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