China: China Looks To Tighten The Regulation Of Cloud Services

Last Updated: 6 February 2017
Article by Gordon Milner, Chuan Sun and Paul D. McKenzie
What You Need to Know:

China has issued a new draft law tightening the regulation of cloud services. The draft:
  • covers onshore hosted SaaS and PaaS (but possibly not IaaS)
  • imposes new restrictions on cross-border partnerships that may render some current arrangements unworkable
  • imposes obligations on cloud service operators to monitor and police users of their platforms
  • increases data security and breach reporting requirements
While the law is only in draft form, its key components are consistent with other recent Chinese Internet-related regulation and seem unlikely to change materially. In order to minimize potential business impact when the final form of the law is enacted, participants in the space should start reviewing their current operating structures and practices now.


The market for cloud services in China has seen substantial growth in recent years. Homegrown services such as Aliyun have been joined by well-known international service providers, which have set up Chinese-hosted operations in conjunction with local partners.

As a relatively novel industry, cloud services were not specifically addressed under Chinese law until December 2015 when the Ministry of Industry and Information Technology (MIIT) updated the Telecommunication Catalogue (the "Catalogue") to include "Internet resource collaboration services" (IRCS) as a new subcategory of Internet Data Center services. While clarifying that the provision of cloud services requires a value-added telecoms license, the Catalogue did not provide detailed guidance regarding how cloud services would be regulated.

On November 24, 2016, MIIT issued a draft Circular on Regulating the Operations of the Cloud Service Market (《关于规范云服务市场经营行为的通知》, the "Draft") for public comment. While the final formal circular has not yet been issued, the Draft clearly indicates MIIT's intent to impose strict restrictions on the ability of foreign cloud service providers to participate in the Chinese market.

Definition of Cloud Services and License Requirements

In defining "cloud services," the Draft adopts the concept of IRCS from the Catalogue. The Catalogue defines IRCS rather broadly as:

[the use of] equipment and resources installed in a data center to provide users with data storage services, development environments for internet applications, and deployment and operation management of internet applications via the Internet or other networks, using sharing of resources to allow users to scale as fast or as much as needed.

In this note, we refer to the operators of IRCS as "Operators".

This definition is somewhat broad and would almost certainly capture most platform as a service (PaaS) and software as a service (SaaS) offerings. As such, an Operator of PaaS or SaaS hosted in China will require an Internet Data Center value-added telecom service license ("IDC License") specifically covering IRCS.

On its face, this definition would arguably not include pure infrastructure as a service (IaaS) offerings and the applicability of the Draft to such services is therefore uncertain at this stage. To the extent that they are not covered by the Draft, it seems likely that MIIT will treat IaaS offerings hosted in China as falling within the broader category of Internet Data Center services. As such, operators of IaaS will still likely require an IDC License (although perhaps without specific coverage of IRCS).

The Draft prohibits telecommunications companies from providing network infrastructure or services to any cloud services Operator lacking the necessary IDC License.

Tighter Restrictions on Foreign Participation

Investment and Partnership Models

Foreign investment in the telecommunications industry is restricted under Chinese law. The Administrative Provisions on Foreign-Invested Telecommunications Enterprises (amended in 2016) (《外商投资电信企业管理规定》(2016年修订)) provides that an onshore foreign invested telecommunications enterprise (FITE) is eligible to hold an IDC License only if the foreign investor's equity share does not exceed 50%.2 In practice, so far as we are aware, MIIT has not issued any IDC Licenses to FITEs regardless of whether they meet this requirement. The Draft does not affect these restrictions on foreign investment.

Foreign cloud service providers have implemented a variety of structures in order to participate in the Chinese market notwithstanding these restrictions. Typically, the foreign party:

  1. licenses its brand and provides specialist cloud technology and other resources to a local telecoms value-added license-holding Operator;
  2. exerts a degree of contractual control over the cloud service (for example, the service packages offered, marketing, quality control, hardware and software platform used, and data); and
  3. extracts value from the Operator through license, rental, and/or consulting fees.

The net effect of these partnership models is to produce a business which, from a customer-facing perspective, is essentially indistinguishable from the foreign service provider's offering outside of China.

New Restrictions on Partnership Models

While the Draft does not per se prohibit cloud service partnership models, it does set out several requirements aimed at regulating and limiting the scope of such arrangements, including (inter alia):

  1. Operators are required to proactively report cloud services cooperation arrangements to MIIT;
  2. an Operator's foreign partner must not directly enter into any contract with any user (this could include agreements couched as software licenses as well as service subscription agreements);
  3. the relevant cloud services cannot be branded solely with the foreign partner's trademark;
  4. an Operator must not illegally provide its foreign partner with users' personal information or network data;
  5. an Operator must not provide any resource, site, facility, or other assistance to its foreign partner facilitating any illegal telecoms operations; and
  6. an Operator must not lease or transfer its IDC License to its partner in any form.

Restrictions (5) and (6) are couched in very broad language. This reserves considerable latitude to MIIT and creates uncertainty as to how the restrictions would be applied in practice. There is, for example, no bright-line test as to the circumstances in which MIIT would view an IDC License as being leased or transferred to a foreign partner. That said, the language is similar to the wording used in the 2006 Notice of the Ministry of Information Industry《信息产业部关于加强外商投资经营增值电信业务管理的通知》). Based on our experience with the earlier notice, there is at least some risk that if the cloud services are substantially provided by the foreign partner and the Operator is merely providing an optical and contractual front end to the business, MIIT will take the view that the Operator has leased or transferred its IDC License to the foreign partner.3 on Strengthening the Administration of Foreign Investment in Value-added Telecommunications Services (

Taken together, these restrictions will present difficulties for the more extreme "thin operator" models which may need to be restructured to clarify branding and provide a more substantial role for the local Operator. That said, the Draft does at least provide a much-needed degree of certainty as to what types of model can be safely operated in China.

Monitoring and Policing Obligations

The Draft imposes a raft of obligations on Operators to monitor and police customers who use their cloud service to host websites and/or applications. These include, inter alia:

  1. implementing real-name customer registration protocols;
  2. actively supervising the use of the platform in accordance with the terms of customer agreements;
  3. reporting any unlawful use of the platform to MIIT and taking steps to rectify such use; and
  4. censoring, keeping records of, and reporting to the authorities, any distribution via the service of information deemed unlawful under Chinese law.

These requirements echo similar stipulations in the more generally applicable Cyber Security Law (《网络安全法》) and Anti-Terrorism Law (《反恐怖主义法》) and appear designed to make clear that the recently evolved censorship and control regime also applies to the dissemination of material through cloud service platforms. Given the wide-ranging nature of material hosted via cloud services, cloud service providers may find such active supervision obligations challenging.

Once MIIT publishes the final form of the circular, Operators will need to review and update their policies and customer agreements in order to accommodate such requirements. Given the lead time inevitably required to implement the necessary changes with customers and the likelihood that the administration requirements set out in the Draft seem unlikely to change materially in the final version, we recommend that Operators start reviewing their policies and user agreements now.

Security of Network Data and Personal Information

The Draft requires that Operators locate network data in China when providing services to domestic users and comply with relevant rules and regulations when undertaking cross-border data flows. The Draft also requires Operators to establish robust data management systems to ensure the security of network data and personal information. Specifically, Operators must:

  1. establish and notify users of rules for collecting and using personal information;
  2. implement protection standards to protect network data and users' personal information against data theft and tampering (note that the Draft is silent as to the specific standards required);
  3. report any data beach to MIIT, notify users immediately, and take mitigation measures;
  4. stop collection and use of personal information after users cease using the service; and
  5. provide at least three months' notice to MIIT and all users before ceasing to provide the services, and accommodate users' requirements regarding data storage.

These requirements are generally consistent with the Cyber Security Law and the 2013 Regulation on Protecting Personal information of Telecom and Internet Users (《电信和互联网用户个人信息保护规定》). Operators should already be in the process of reviewing their policies and customer agreements for compliance with the Cyber Security Law and should consider addressing the additional requirements from the Draft as part of that process.

System Requirements and Internet Gateway

The Draft requires that Operators host the cloud service platform in mainland China when providing services to domestic users.

The Draft requires each Operator to establish several systems to support its cloud services business, including (inter alia) a service quality guarantee system, a user complaint handling mechanism, a network information security management system, a security assessment system for new technologies and new business operations, and an emergency response system.

In the event that it needs to connect a server to an overseas network, an Operator must utilize an international business Internet gateway approved by MIIT. The use of other methods such as leased private lines, VPN, or other self-established or third-party channel for international networking is prohibited. The net effect is that international connections will need to traverse China's Golden Shield national firewall. This will typically have a material adverse effect on latency and may need to be taken into account when planning cross-border integration of cloud services.

We will continue to monitor the progress of the Draft and will provide further updates in due course when MIIT issues the formal circular in final form.


1. The authors thank Shanghai consultant Liwen Zhang for her assistance in preparing this client alert.

2. An exception exists under the Closer Economic Partnership Agreement between mainland China and Hong Kong/Macau (CEPA) pursuant to which qualifying Hong Kong or Macau incorporated data center providers are able to hold up to a 50% equity interest in a FITE that is eligible to hold an IDC license. In practice, such arrangements remain relatively rare and it is unclear whether such a joint venture would be eligible to hold an IDC License specifically covering IRCS, as would be required to operate SaaS and PaaS.

3. This is the name of the predecessor of MIIT.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Gordon Milner
Paul D. McKenzie
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.