China eases back on plans to regulate bank technology

China has suspended plans to heavily regulate technology in the banking industry that would favour domestic producers at the expense of foreign imports, according to a notice issued to banks.

The move follows protests by US officials and businesses who said it would exclude them from the Chinese market. Washington has been lobbying Beijing on the issue and a raft of other new cyber security rules, including a draft counter-terrorism law, as well as new data transfer restrictions.

A notice sent to banks this week by the China Banking Regulatory Commission and the Ministry of Industry and Information Technology said the regulations would be revised and reissued after soliciting feedback, according to two people who have seen the notice.

On Tuesday the Chinese foreign ministry said the banking rules were being reviewed. "Chinese authorities are amending the rules after seeking advice from various parties," the ministry said.

The rules, revealed earlier this year, would give banks operating in China until 2019 to ensure that 70 per cent of their IT products qualify as "secure and controllable" under Chinese law.

Foreign companies and diplomats fear this could be used to require them to install "back doors" in their hardware and hand over encryption keys, and that similar rules will be applied to industries such as telecommunications.

The CBRC and MIIT initially told banks to provide information about their compliance plans by March 15 and to begin implementing them by April 1.

Meanwhile, the new draft law on counter-terrorism, also announced earlier this year, would require internet and telecoms companies to store data on servers in China and provide public security authorities with encryption keys.

Last month China's foreign ministry denied suggestions by a White House official that this counter-terrorism law had been suspended after it was not submitted to the National People's Congress, the rubber-stamp parliament.

A steady stream of US officials have been putting pressure on China over the new rules - most recently Penny Pritzker, US commerce secretary, who travelled to Beijing this week.

"The impression and the perception of some companies is that China is really preferring its indigenous companies, and that it is making it harder for foreign companies to participate in the economy," she said. "They've heard the reaction loud and clear."

Last month US President Barack Obama said he had raised the issue with Chinese President Xi Jinping, while Treasury Secretary Jacob Lew also travelled to Beijing to deliver the same message.

Reuters quoted "a senior US Treasury official" following Mr Lew's meeting with Prime Minister Li Keqiang on March 31 as saying the Chinese had agreed to delay the banking rules.

James McGregor, Greater China Chairman of Apco, the business consultancy, said the row-back on the banking rules was probably because Chinese technology companies were not yet capable of filling the shoes of US counterparts.

"This is likely a tactical retreat as the Chinese authorities take another look at what is do-able and what is not in replacing foreign technology," he said. "The goal will still be 'secure and controllable' and it will take enormous efforts by governments and global tech leaders to figure a way forward."

A previous attempt to force Chinese banks to use domestically developed systems foundered a few years ago.

Chinese banks have quietly lobbied against the efforts out of fear that being forced to adopt inferior encryption, credit-card chips and other technologies will expose them to data loss and theft or hinder their integration with the international banking system.

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