In mid-May, the Lin-Gang Area of the Shanghai Free Trade Zone (“FTZ”) issued trial measures to allow eligible companies in the area—criteria used suggest that Tesla is eligible—to export certain data without going through China’s complicated approval system.  Similar measures were adopted by Tianjin’s FTZ in early May, while other FTZs in China are expected to follow suit.  These measures can benefit foreign investors in China significantly.  Yet, the fundamental goal of their issuance is not a mere increase in domestic foreign investment, but rather the implementation of China’s plan to develop its digital economy globally.

“[…] the fundamental goal of their issuance is not a mere increase in domestic foreign investment, but rather the implementation of China’s plan to develop its digital economy globally.”

China’s Rapidly Evolving Regulatory Structure on Data Transfers

Following China’s adoption of its Cybersecurity Law, Data Security Law, and Personal Information Protection Law, the Cyberspace Administration of China (“CAC”) issued in 2022 the Measures for the Security Assessment of Outbound Data Transfers (“Measures on Data Transfers”) to establish a foundation for the country’s regulatory structure on outbound data transfers.

According to the Measures on Data Transfers, any “data processor” planning to transfer to another country “important data” or “personal information” collected and generated during the data processor’s operations within the territory of China must follow a process through which the CAC (together with relevant departments or specialized institutions, if necessary) decides whether the data processor has passed the security assessment.

The burden created by the Measures on Data Transfers is quite onerous because, among other reasons, failure to comply with these rules could lead to criminal liability and the definition of the key term “important data” is unclear: “data that may endanger national security, economic operation, social stability, public health and safety, etc. once it is tampered with, destroyed, leaked, illegally obtained, or illegally used”.

To reduce the burden, the CAC issued in March 2024 the Provisions for the Promotion and Regulation of Cross-Border Data Flows to, inter alia, authorize FTZs in China to formulate “negative lists”.  As such, any data processor in a certain FTZ seeking to export data outside the scope of the FTZ’s negative list is exempted from the above-mentioned security assessment system.

“Negative Lists” of Free Trade Zones

• The Tianjin Free Trade Zone

The FTZ of Tianjin, which is, like Shanghai, a provincial-level municipality, took the lead to release in early May China’s first negative list on outbound data transfers.  This negative list has identified 13 “categories” (e.g., the “Natural Resources and Environment” category, the “Industries” category, and the “Finance” category) of data, the cross-border transfer of which is subject to China’s security assessment system, as described above.  Each category is divided into several subcategories and, as a result, the list has a total of 46 “subcategories” of data.  The negative list also describes the characteristics of the data in each subcategory and provides related remarks, if applicable.

For example, under the “Industries” category is a subcategory titled “Rare Earths”.  The description of the characteristics of such data is as follows:

Data concerning production technologies, such as mining and smelting of rare earths, uniquely mastered by China. Examples include details about the storage and development of rare earth resources as well as [related] international cooperation.

The above description is accompanied by a brief “Remarks” section: “Except for data generated by enterprises during business negotiations and general commercial activities, such as import and export trade [of rare earths]”.  In other words, any cross-border transfer of data related to rare earths as described in the above “characteristics” paragraph requires prior approval unless the data fall within the scope stated in the “Remarks”.

• The Lin-Gang Area of the Shanghai Free Trade Zone

The Lin-Gang Area of the Shanghai FTZ has used an approach different from the Tianjin FTZ by releasing three “Positive Lists” covering three key areas—“intelligent connected automobiles”, “public funds”, and “biomedicine”—to specify types of data that eligible enterprises can export without approval.

For example, the list regarding “intelligent connected automobiles” describes a scenario titled “Global R&D Testing”.  The scenario covers various categories of data, including “Testing Data”, which is accompanied by the following explanation:

Data related to the testing of the performance, quality, and reliability of materials, substances, and equipment obtained in factories, laboratories, and closed test sites, as well as data related to the testing of equipment, components, systems, and entire vehicles regarding their reliability, safety, human-computer interaction, and software […].

Any cross-border transfer of the above testing data needs to meet the following requirements:

1. [the data transferred] shall not cover key core technologies, undisclosed intellectual property, or other information that needs to be kept confidential [obtained from] major national research projects undertaken by the enterprise.

2. [the data transferred] shall not cover data regarding the research and development of automobiles that affect the autonomy and security of national key technologies; and

[…]

The above lists formulated by the authorities in Tianjin and Shanghai are expected to be updated on a regular basis.  China’s 20 other FTZs will likely release their own “negative lists” or “positive lists” in the coming months to regulate cross-border data transfers conducted by enterprises located in their FTZs.

“China’s 20 other [free trade zones] will likely release their own ‘negative lists’ or ‘positive lists’ in the coming months to regulate cross-border data transfers […]”.

Data Transfers & Digital Economy

None of these developments regarding the removal of certain data transfer restrictions is a coincidence, considering China’s strong interest in joining the Digital Economy Partnership Agreement (“DEPA”), whose member countries include Chile, New Zealand, Singapore, and South Korea.  As described by the Singaporean government, the DEPA “establishes new approaches and collaborations in digital trade issues, promotes interoperability between different regimes, and addresses the new issues brought about by digitalization”.

In November 2021, China filed a formal application to join the DEPA.  A working group was set up in August 2022 to conduct negotiations between China and DEPA member countries and the group’s latest meeting was just concluded in early May.  Last November, during another meeting between China and DEPA member countries, China’s Vice-Minister of Commerce WANG Shouwen emphasized, “the Chinese government attaches great importance to joining DEPA, […and] steadily expanding institutionalized openness in terms of rules, regulations, management, and standards [emphasis added]”.

Such commitment provides an important context for China’s progress in improving its regulatory structure on outbound data transfers.  More progress is expected in the near future because the DEPA does not allow member countries to “impose restrictions on transfers of information greater than are required” to “achieve a legitimate public policy objective”.

With its digital trade value reaching nearly USD 400 billion in 2022 and the growing importance of such trade, China has great incentives to develop more “institutionalized openness” in this area.  Accomplishing such openness without delays is more important than ever, as current and prospective investors’ fervent responses to China’s removal of some data transfer restrictions should signal to the Chinese authorities that removal of many more such restrictions could tremendously improve China’s foreign investment and, thereby, economy.

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• The citation of this article is: Dr. Mei Gechlik, Tesla, Data Transfers, & China’s Digital Economy, SINOTALKS.COM^®, In Brief No. 44, May 29, 2024, https://sinotalks.com/inbrief/202405-english-data-transfer-digital-economy.
  The original, English version of this article was edited by Nathan Harpainter.  The information and views set out in this article are the responsibility of the author and do not necessarily reflect the work or views of SINOTALKS^®. ↩︎

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