Red Tape For China Web Firms

China published sweeping new regulations on Internet companies on Monday that limit foreign investment, require strict surveillance against "subversive" content and threaten to close down any unlicensed firms.

The rules, passed by China's cabinet two weeks ago and published in the official Xinhua Daily Telegraph on Monday, are sure to send shockwaves through the country's fledgling Internet industry, which is heavily dependent on foreign capital.

By holding companies responsible for blocking vast categories of illegal content on their Web sites and chat rooms, the rules also illustrate the Communist Party's determination to contain the spread of ideas deemed dangerous to its rule.

The regulations ban any content that subverts state power, that supports cults, that "harms the reputation" of China or that hurts reunification efforts with Taiwan, to name just some.

Internet content and service providers must keep records of all the content that appears on their Web sites and all the users who dial on to their servers for 60 days, and hand the records to police on demand, the rules state.

Existing commercial Internet content providers have 60 days from October 1 to provide information on their businesses to the Ministry of Information Industry in order to obtain licenses.

Companies without licenses and those exceeding their stated business scopes will be fined or shut down, the rules state.

The clause on foreign investment poses an immediate threat to many commercial Web sites.

It states that Internet content providers must win the approval of the Ministry of Information Industry before they can receive foreign capital, cooperate with foreign businesses, or attempt domestic or overseas stock listings.

"The proportion of foreign investment must conform with relevant laws and administrative regulations," the rules state.

China last year announced a total ban on foreign capital in Internet content providers (ICPs).

But because so many Chinese ICPs are funded almost entirely by overseas investors, Beijing has refrained from enforcing the ban except when companies seek overseas stock listings.

The new rules appear to extend the investment ban even to firms that lack ambitions for stock listings and could spark a scramble to move businesses off-shore or restructure.

Beijing has pledged to allow 49 percent foreign stakes in Internet content providers when it joins the World Trade Organization, but that could be several months away.

The new rules also introduce a formidable -- and expensive -- dimension to running an Internet business in China: police work.

"Internet content providers that conduct news, publishing or electronic bulletin board services must record the information content they provide and the times they publish it," the rules state.

Internet service providers, the ompanies that connect people to the Internet, must "record the times users log on to the Internet, users' account numbers, Internet addresses or domain names and the phone numbers users dial in from," they state.

The records should be provided to police investigators upon request, and Web sites should censor and report any illegal content that is posted, they state.

If enforced, the rules could impose heavy costs on Internet start-ups, such as extra computers to store data and personnel to monitor content, said Duncan Clark, managing partner of Beijing-based Internet consultancy BDA China.

"This creates a system that would require such a scale of enforcement that it could potentially occupy the whole efforts of ICPs," Clark said.

The rules also make surfing the Internet a far more dangerous proposition for Chinese Web users.

Definitions of illegal content are vague, such as "spreading rumors," "disrupting social stability" and gambling and pornography.

The rules also forbid "harming ethnic unity" and "advocating cults and feudal superstition" -- terms often invoked to prosecute suspected Tibetan independence activists and members of Falun Gong and other spiritual movements.

"To get online is dangerous," Clark said.

"Technology will respond," he said. "It will give rise to a whole new generation of encryption techniques."