Confidence rising that China will dilute new IT rules

Chinese authorities could backtrack on restrictive IT rules for banks in response to criticism of the new regime, the head of a European business chamber said.

An international outcry greeted the rules announced in January, which are expected to hit multinational financial institutions especially hard.

The requirement to buy locally-made IT equipment has been predicted to cause chaos in the future as global companies attempt to coordinate their systems with new Chinese hardware.

Under the guise of improving China’s information security, the China Banking Regulatory Commission laid down rules in January that will force institutions under its supervision, including banks, asset managers, trust companies and other deposit-taking financial institutions, as well as foreign banks, to buy “secure and controllable” information technology equipment.

The rules that started to be implemented on March 15 also require the filing of source codes to the government and the local purchase of 75% of equipment, amongst others. The controversial nature of the rules have shocked foreign firms operating in China to respond.

“To give you a feeling [of how big of a change this will be], European banks currently have local content of 5% [in their IT equipment] and they tell us they cannot operate internationally in China without the Oracles, IBMs and so forth,” said Jörg Wuttke, president for the European Union Chamber of Commerce in China.

“So how does China want to implement this? By forcing banks operating in China to have a totally different systems from their global operations? So does China want to be an intranet? Does it want to be two systems – does someone have to have a system in China that is very different and has to have an interface with the global system?” asked Wuttke, who spoke at Credit Suisse’s Annual Investment Conference on Tuesday.

Wuttke noted that his business lobby group, alongside its US and Japanese counterparts, have all written to their respective governments to plead for action. The groups have pointed out the urgency for action, as other sectors could be affected in the future.

Wuttke said a key concern was that the new regime was merely the thin end of the wedge before similar rules were rolled out across a number of sectors. He added that the trend went against the spirit of China’s liberalisation policy.

“The good news about China is sometimes they are very flexible on a couple of things and realise it’s a mistake,” quipped Wutke, who has spent 25 years in China.

The issue over IT “controllability” has fed into wider issues foreign businesses face in mainland China, including the speed of the internet, which the EU Chamber of Commerce has previously spoken up against.

Citing its own survey, it found that 30% of European businesses named the constraints of the internet, including speed bottlenecks and banned websites, as a reason for not setting up R&D operations in China.

China may have kept up its rhetoric for greater openness, most recently with the release of a new 2015 foreign investment guidance catalogue outlining new sectors foreigners can invest in, but Wutke said that “it frankly made no difference.”

Wutke, who is also chief China representative for German-based chemical producer BASF, cites the example of deregulation in refineries, which under the new catalogue will allow foreign investors to 100% own refineries in China, as opposed to being a minority shareholder.

But he noted the indifference oil companies have expressed to the new rules, given existing overcapacity in the sector and liberalisation only affecting a small subsector of a wider industry: “Why should I add another refinery to a second which has overcapacity and I don’t have access to gasoline stations. At the end, you still have this missing link to end consumer, which they feel like they don’t really [have access to],” noted Wutke.