Background

Data, as a new type of production factor and the foundation of digitalisation, networking, and intellectualisation, has profoundly changed the way of production, life, and social governance, which makes the development of data basic systems a matter of national development and security. To fully realise the value of data factors and promote the sharing of development dividends of the digital economy, China has released a number of national policies to support development and governance in the data sector in recent years. We set out the main policies promulgated by the central government in relation to data factors as follows:

• In 2019, the 4^th Plenary Session of the 19^th CPC Central Committee, for the first time, defined data as a factor of production.
• In 2020, the CPC Central Committee and the State Council issued the Opinions on Building a More Improved System and Mechanism for Market-oriented Allocation of Factors to emphasise the importance of data factors and accelerate the cultivation of data factor markets.
• In January 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the Action Plan for Building a High-standard Market System, to 'establish basic systems and standards for data resource property rights, transaction and circulation, cross-border transmission and security'.
• At the end of 2021, the national '14th Five-Year Plan' for the development of the digital economy clearly stated that it is necessary to accelerate the establishment of data factor market rules, cultivate market entities, improve governance systems, and initially establish the data factor market system by 2025.
• In March 2022, the CPC Central Committee and the State Council issued the Opinions on Accelerating the Construction of a National Unified Market to accelerate the cultivation of data factor markets, establish and improve basic systems and standards, such as data security, transaction, and circulation, carry out in-depth investigation of data resources, and promote the development and utilisation of data resources.

It is against this backdrop that the Opinions were deliberated and adopted on the 26^th meeting of the CPC Central Committee for deepening the overall reform in June 2022 and released on 2 December 2022.

Key-takeways of the Opinions

The Opinions intend to explore institutional innovations from the point of views of data property rights, data factor circulation and trading, data factor income distribution, and data security and governance systems.

The four basic systems in relation to data factors are:

• the data property rights system;
• the data factor circulation and trading system;
• the data factor income distribution system; and
• the data security and governance system.

Data property rights system

China explores a data property rights system characterised by structured rights. According to data sources and characteristics, the Opinions divide the data property rights into the right to hold data resources, the right to process and use data, and the right to operate data products, which recognise the efforts and legal rights of all parties participating in the process of data production, circulation, and use.

According to the Opinions:

• for the right to hold data resources: efforts should be made to protect the rights and interests of the party with data sources to acquire, copy, or transfer the data generated due to its contribution.
• for the right to process and use data: on the condition that public interests, data security, and the legitimate rights and interests of the party with data sources can be well protected, the right to process and use data obtained in accordance with laws or contractual agreements for commercial purposes shall be recognised and protected, with appropriate consideration of the labour and other contribution that data processors make in data collection, processing, and other aspects.
• for the right to operate data products: the right to operate data or data derivatives produced through data processing and analysis or otherwise shall be protected so that data processors may license others to use data or data derivatives in accordance with laws or contractual arrangements.

The Opinions also urge to establish a layered right ascertainment and authorisation system for public data, corporate data, and personal data.

Public data

The Opinions define public data as the data generated in the process of performing duties according to law or providing public services by party and government organs at all levels, enterprises, and public institutions.

For public data, the Opinions focus on the data convergence, sharing, and open development to break 'isolated data islands'. The Opinions also encourage public data to be provided to the public in the forms of models, verification, and other products and services on condition that personal information and public security are properly protected. According to the different sub-categories of the public data, the Opinions provide corresponding measures as summarised below:

Corporate data

For corporate data, the Opinions explicitly allow market players to enjoy the rights to hold, use, and commercialise the data they have collected and processed in production and operation activities, where such data does not involve personal information or public interests. This is to ensure a reasonable return for their input of labour and other contributions, and to strengthen the incentives for the supply of data factors. State-owned, industry-leading, and internet platform enterprises are required to play a leading role in promoting data circulation.

Personal data

For personal data, the Opinions reiterate that data processors should collect, possess, manage, and use it within the scope of data subjects' authorisation and in accordance with laws and regulations. A mechanism whereby an entrusted party acting on behalf of data subjects supervises market players' personal information collection, processing, and usage activities is put forward to address the issue of fragmented power of data subjects.

Data factor circulation and trading system

With regard to the data factor circulation and trading system, the Opinions urge the improvement and standardisation of data circulation rules and call on the establishment of a trusted trading system that promotes use and circulation, combines exchange and over-the-counter ('OTC') trading, and also has the security capacity in terms of data source identification, source tracking, usage scope definition, and risk detection and prevention. Like many other industrial policies, the Opinions are open to cross-border data circulation and trading, but also highlight the orderly manner.

To improve the data full life cycle compliance, the Opinions further require the formulation of standards and rules for access to the data circulation market, the development of a data quality standardisation system, the exploration of diversified pricing models, and price formation mechanisms.

To build a trading system that promotes data usage and circulation, the Opinions propose the development of data exchanges at national and regional levels and industry data trading platforms. Also, data circulation infrastructure should be built to provide a low-cost, high-efficient, and reliable circulation environment for centralised exchange transactions and decentralised OTC transactions.

The establishment of standardised and efficient data exchanges follows three steps:

• national data exchanges:
  • highlighting the compliance supervision and basic service functions;
• regional data exchanges;
  • regulating the establishment of a multi-level market trading system;
  • promoting the circulation and use of regional and industry data; and
  • promoting the interconnection with national data exchanges;
• industry data trading platforms:
  • regulating the establishment of a multi-level marked trading system;
  • promoting the circulation and use of regional and industry data; and
  • promoting the interconnection with national data exchanges.

The Opinions require the cultivation of data brokers and other third-party professional service providers who will collectively constitute an eco-system that can promote compliant, efficient, safe, and orderly circulation and trading of data factors.

Please note that the data broker under the Opinions is slightly different from that under the US legal framework. For example, the U.S. Federal Trade Commission ('FTC') provides that 'these data brokers collect personal information about consumers from a wide range of sources and provide it for a variety of purposes, including verifying an individual's identity, marketing products, and detecting fraud in its report titled 'Data Brokers: A Call for Transparency and Accountability', focusing on the processing of personal information. However, the data processed by the data brokers under the Opinions is much broader than personal information.

Two categories of marker players to be cultivated exist:

• data brokers provide data product development, release, underwriting, and data asset compliance, standardisation, and value-added services, to promote data transaction efficiency; and
• third-party professional service providers provide professional services, such as data integration, data brokerage, compliance certification, security audit, data notarisation, data insurance, data hosting, asset evaluation, dispute arbitration, risk assessment, and talent training, to improve the service capabilities for the entire process of data circulation and trading.

To build a mechanism that promotes safe, compliant, and orderly data cross-border circulation, the Opinions mainly focus on openness and cooperation, and cross-border supervision.

• Openness and cooperation:
  • carrying out international exchanges and cooperation in data interaction, business interoperability, regulatory mutual recognition, service sharing, and other areas;
  • actively participating in the formulation of international rules and digital technology standards for data flow, data security, certification and evaluation, and digital currency; and
  • supporting foreign investors to enter open areas of the market in accordance with laws and regulations.
• Cross-border supervision:
  • coordinating the data development and utilisation with data security protection, and exploring the establishment of a mechanism for classified and hierarchical management of data to be transferred across the border;
  • conducting national security reviews in accordance with laws and regulations with regard to such activities as data processing, cross-border data transmission, overseas mergers and acquisitions, and other activities that affect or may affect national security; and
  • explore the establishment of a multichannel and convenient regulatory mechanism for data cross-border flows.

Data factor income distribution system

Under the data factor income distribution system, the Opinions emphasise the role of both the market and the Government:

• the market gives full play to the decisive role of the market in resource allocation; and
• the Government gives better play to the role of Government in guiding and regulating the distribution of gains arising from data factors.

According to the Opinions, the principle of 'whoever invests and contributes shall reap benefits' shall apply in the primary wealth distribution to incentivise the creators of data value and ensure sustainable investment in the data sector.

Besides, a system and mechanism highlighting the fair distribution of gains from data factors shall apply when it comes to public data and the data of mega companies. More attention shall be paid to public interests and relatively disadvantaged groups, so that various risks and challenges emerging during the course of digital transformation can be addressed.

Data security and governance system

In order to integrate security into the whole process of data governance, the Opinions promote the establishment of a multi-party governance model coordinated by the Government, enterprises, and society.

Government

The Government should give full play to orderly guiding and regulating data development, keep the bottom line of safety, define the red line of supervision, and create a data factor market environment that is safe and reliable, inclusive and innovative, fair and open, and effectively supervised. Measures to be taken include:

• establishing systems of compliance notarisation, security review, algorithm review, monitoring, and early warning for the entire process of data factor production, circulation, and use;
• establishing a sound regulatory system for data circulation and developing a negative list on data circulation and trading defining data items subject to prohibition or strict restriction of trading;
• increasing efforts to combat monopoly and unfair competition, enhancing law enforcement and judicial efforts in key areas, strengthening review of concentrations of undertakings in accordance with laws and regulations, investigating and dealing with, under laws and regulations, monopoly agreements, abuse of market dominance, and illegal concentration of undertakings; and
• comprehensively enhancing the protection of data security on the basis of implementing the system for multi-level protection of cybersecurity and improving the network and data security protection system.

Enterprises and society

• Business operators are encouraged to actively participate in the construction of a data factor market. Data brokers and other third-party professional service providers are required to make representation and undertaking regarding data sources, data property rights, data quality, and data use.
• Industry associations and other social forces are encouraged to actively participate in the development of the data factor market, support the development of security technology research and development and services related to data circulation, and promote the safe and trusted circulation of data factors in different scenarios. A credit system for the data factor market and the channels for reporting, filing complaints, and dispute arbitration are also to be established. National standards for data management maturity and specifications on data factor management will be further implemented. Various departments and industries should also further improve standard systems for metadata management, data desensitisation, data quality, and value evaluation.

Outlook

Following the release of the Opinions, the General Office of the State Council approved the request of the National Development and Reform Commission on establishing an inter-ministerial joint conference system for the development of digital economy in July 2022. In the 2^nd Plenary Session of the First Session of the 14^th National People's Congress which happened on 7 March 2023, China announced that the national bureau of data will be established to coordinate and advance the establishment of basic data systems and promote the integration, sharing, development, and utilisation of data resources. The joint conference system, consisting of the National Development and Reform Commission, the Cyberspace Administration of China ('CAC'), 18 other central government agencies, and the national bureau of data administered by the National Development and Reform Commission are believed to further promote the formation and development of the data transaction and circulation market.

Responding to the national policy requirements, local governments have already taken actions to promote data sector development via various regional policies. Currently, 21 provincial governments have released the public data opening platform and around 50 data exchanges have been established; in legislation, around 20 provincial governments have released or plan to release local data rules, paving the path towards orderly and free flow of data and cultivation of data factor market.

Besides, local governments, like Beijing, Shanghai, Guangdong, and Guizhou, are pioneers in institutional innovation. For example, Beijing released the List of Key Tasks in the 2023 Municipal Government Work Report in January 2023, providing that Beijing will promote the construction of the Beijing Data Special Zone and carry out pilot demonstrations of the data basic systems. Shenzhen is trying to set the pace for implementing structured data property rights by issuing the Shenzhen Municipal Interim Measures for the Administration of Data Property Rights Registration (Draft for Comments) in February 2023 and the Shenzhen Municipal Interim Measures for the Administration of Data Transactions and the Shenzhen Municipal Interim Measures for the Management of Data Vendors and Third-Party Service Institutions for Data Circulation and Transactions in March 2023. Beijing and Shanghai have also taken action to cultivate various kinds of market players, such as data vendors, data hosts, and data brokers.

The development of basic data systems is defined as a matter of national development and security. With the release of the Opinions, China takes a step forward in system innovation, but still needs to accumulate experiences and overcome various difficulties. However, it can be expected that China will try to take full advantage of massive data and rich data application scenarios, as the concept of data factor is regarded as a new driving force for economic development and a new foundation for competitive advantages of China in the digital economy.

Dr. Annie Xue Partner
[email protected]
Yang Chen Senior Lawyer
[email protected]
GEN Law Firm, Beijing