Donald Clarke: Who Owns the Chinese Internet?

In an article in Caixin, George Washington University Law Professor Donald Clarke looks at the contractual role of foreign IT companies operating in China:

An article recently published in Xuexi Shibao (Study Times), an organ of the Central Party School, has drawn a lot of attention (see here and here). The authors, from the Chinese Academy of Social Sciences, assert (a) that foreigners (“foreign capital” in the article’s terminology) have come to control the Chinese internet, and (b) that this is a bad thing. I’m not going to address the second point here; among other things, if the first point is false, then the second point is irrelevant.

I argue here that the article is fundamentally wrong in its understanding of who controls China’s internet companies. First, it is wrong in thinking that the contracts subjecting Chinese internet operators to the control of foreign companies are robust and enforceable in China. Second, even if the contracts were robust and enforceable, the “foreign” companies exercising the control may in fact be controlled by Chinese individuals – sometimes the same Chinese that are on the other side of the contracts.

Foreigners may hold at most 50 percent of certain specified value-added telecommunications businesses. And this is only in theory; in practice, it’s even more difficult than the rules suggest.