The Chinese government has renewed the licence under which Google runs its local website, a decision that reassures investors over the legal basis for foreign internet companies’ business in the country.
“We can confirm that the government has renewed our [internet content provider]licence,” a Google spokesperson said. The announcement comes less than a week after a set of new regulations took effect which appeared to put the legal structure of many foreign and overseas-listed Chinese internet companies at risk.
The rules, spelling out how the Chinese government will review acquisitions of Chinese companies by foreign investors for national security implications, say that foreign investors shall not avoid a review through techniques such as contracts that give them control over a domestic company.
Lawyers have warned that this phrase targets so-called variable interest entities, structures used over the past decade to circumvent foreign ownership restrictions in the internet sector.
Typically the VIE owns the licence necessary for operating a business such as running an internet search engine or an e-commerce site in China. Instead of directly owning a majority stake in that company, which Beijing prohibits in internet content services, the foreign company secures control of that company through contracts.
Industry executives and legal experts say it remains unclear exactly how the new regulations will affect the industry, but warn that they give the government more discretionary power in a sector already seen to have significant regulatory risk.
Google’s China business is also organized under the VIE model, with a locally incorporated company as the technical owner of the ICP licence.
Lawyers said cases such as Google’s should not be affected by the new rules because its local partner company was set up for the sole purpose of holding the licence, and the relationship between the two should therefore be judged as a “greenfield investment”.
However, the case is significant because Google, having had a major falling-out with the Chinese authorities, is seen as particularly vulnerable to regulatory risk.
In January 2010, the company threatened a retreat from the Chinese market due to concerns over censorship and a hacking attack, and said it had decided to no longer censor Chinese search results. In March last year, it followed up by moving its mainland China web search services to its unfiltered Hong Kong site and redirecting Chinese users there.
The company’s share of web search revenues in China has since dropped from a high of 35 per cent to below 20 per cent, according to Analysys, a Beijing-based research company, with most of the difference being snapped up by Baidu, the Chinese market leader.
Beijing had extended Google’s ICP licence last summer for another year, but this year’s annual extension had been delayed since the end of June.