The Great Wall

By Martha Heller, CIO |  Business

When e-commerce executives hear the word China, their mouths begin to water. Don
DePalma, vice president of corporate strategy at Idiom, a web globalization company,
predicts that China will have 33 million internet users and will produce $11.7 billion
worth of e-transactions by 2003. With China almost certain to join the World Trade
Organization by the end of this year, the country presents a potentially lucrative
marketplace for most e-businesses.

It's no wonder, then, that China's latest round of regulations regarding internet
activity is causing some consternation among many dotcoms. Late last month, China
announced that Chinese internet companies must receive approval from at least three
state agencies before they issue any shares of stock. A week later, the government
declared that users who post or discuss "state secrets," that is, any information of
national interest that has not been officially released by the Chinese government, risk
arrest or some other form of censure.

While these regulations reveal a government that is reluctant to embrace a free-
market internet economy, they are less troubling to e-commerce companies than a
regulation issued in October with a compliance deadline of January 31. The regulation
requires that any company doing internet business in China must register its commercial
encryption software-including the "key" that provides access to consumer information
and transaction data-with the Chinese government.

"What we're talking about is proprietary information," says Michael Kurtz, Asian
Strategist for Ideaglobal.com, an independent economic research and market forecasting
firm. "A lot of Chinese companies are state run, so the line is blurry between the
local security apparatus and your direct competitor. Just who is really getting access
to your data?"

While the ramifications of refusing to comply with China's encryption policy may be
severe-prohibition from doing business in a juicy young market-most major companies,
the experts say, will take that risk. "China is walking a fine line between the desire
to build its economy and the urge to control information," says DePalma. "Big U.S.
companies have the leverage here, because they're investing in the Chinese economy in a
major way."

That doesn't mean all companies should simply blow off the encryption policy. Most
experts are advising companies to weigh the pros and cons of registering. "China
doesn't have the manpower broadly to enforce its policy, so you're probably going to
get selective enforcement from Beijing," says Kurtz. "But do you want to be held up as
the example? Installing new encryption technology six months from now is a whole lot
better than running afoul of commercial law in China."

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