China and Hong Kong: Two Systems, One Internet

With Wednesday’s vote in the U.S. House of Representatives paving the way for China’s entry into the World Trade Organization (WTO), there is growing anticipation about the opening of trade with China.

Doing business on the Internet is going to change the way China does business. The recent European Union agreement, for example, requires China to open its Internet industry to foreign investment, changing Chinese laws that had banned foreign investments in Internet content providers.

China, however, has highly restrictive views on Internet usage which will make trading on the Web with China different from Net trade elsewhere, at least for the time being. Hong Kong, because of its long history with China, has already started to sense that tension.

One Country, Two Systems

When the British returned Hong Kong to the Chinese in 1997, Hong Kong entered a “one country, two systems” policy, designed by the late Deng Xiaoping. The goal of the policy was to allow Hongkongers access to “Western pursuits” — such as capitalism, freedom of speech and the rule of law — while operating under the communist Chinese roof.

china-deng.jpgDeng Xiaoping created the “one country, two systems” policy.

Under the “one country, two systems” formula, Hong Kong and China have taken very different paths when it comes to regulation of the Internet.

Hong Kong, for its part, has taken a progressive approach. In January 2000, the Hong Kong legislature passed the Electronic Transactions Ordinance, which recognized the validity of contracts formed online. The United States, by contrast, has yet to pass a digital signatures law.

Hong Kong’s Electronic Transactions Ordinance is based on similar legislation in Singapore and Australia. All three have legal structures that are based on the English legal tradition, and emphasize such principles as freedom of contract and economic liberty.

The Chinese, on the other hand, have been slow to enact e-commerce laws, and quick to restrict the Internet. The ban on Internet commercial business licenses for foreign companies was a severe blow to Boston, Massachusetts-based International Data Group (IDG). IDG, an information technology publishing and research company, had planned to invest $100 million in Chinese software and telecom companies through a fund partially backed by the Chinese government.

In January, China issued regulations that required all foreign and Chinese companies or individuals using encryption technology to protect e-communication from eavesdropping to register with the government.

In March, the Chinese National People’s Congress announced its intention to draft a comprehensive e-commerce law. Meanwhile, government agencies in Beijing have issued edicts regarding “control of state secrets,” putting the onus on Internet users and Internet service providers to prevent sensitive information from being disseminated — inside or outside the country.

For example, Chinese police recently shut down a news Web site, China Finance Information Network, for 14 days, and the Wuhan-based company was fined $1,807 (US$) for publishing what police called a false media report. Chinese Web sites, except for one site operated by the government, cannot gather their own news and must rely on reports from other news outlets.

International Harmony?

If Hong Kong and China continue adopting different e-commerce laws, the lack of harmonization is likely to cloud the effective conduct of e-commerce between the two. Nevertheless, under the “one country, two systems” formula, each is entitled to promulgate its own laws — except for certain matters relating to the interests of the country as a whole, such as foreign affairs and national security.

E-commerce, of course, is not restricted to one country or one jurisdiction. The cross-border nature of the Internet means that activities in one country or jurisdiction have instantaneous and simultaneous results in other countries.

This “new world” order was driven home to U.S.-based Web site Yahoo! recently when it was ordered by a Paris court to block online auctions of Nazi-related items in France, where such sales are illegal. Yahoo! is still figuring out how to block French residents who can access the auctions using foreign ISPs.

No Borders

Given the no-border nature of cyberspace, it is likely that online activity between Hong Kong and China businesses will have legal implications in both jurisdictions. Resolving conflicts of laws in cyberspace is not going to be easy. An e-mail sent from someone in Country A (using a Web server in Country B) to a recipient in Country C (using a Web server in Country D) arguably has multi-jurisdictional ramifications, and in many instances it is still unclear which law prevails.

Any effort to harmonize regulatory standards to facilitate Hong Kong/China e-commerce will pose challenges to the well-intentioned “one country, two systems” principle. Which standard or legal culture prevails? Taking the Hong Kong approach might be seen by the Chinese leadership as endangering its national security. Conversely, taking the Chinese stand could result in stifling the economic freedom that Hong Kong has been enjoying.

Apparently when Deng devised the “one country, two systems” policy, he was thinking in terms of geographical boundaries: that the communist system rules China and the capitalist system governs Hong Kong. Deng most likely did not anticipate the world being re-mapped by a virtual entity called the Internet — where national boundaries no longer work as the basis for determining policies. Ultimately, the Hong Kong/China dilemma demonstrates how e-commerce is re-drawing the societal map in every possible way.