The Chinese government wants a data trading market, but it may never happen

This week, the Shaanxi Provincial government released new regulations on the management of data that will come into force on January 1 next year. The regulations encourage enterprises to “open up” data resources, and develop a data service industry in which data can be traded and exchanged. The new rules are just the latest set of government encouragement and guidance to the market intended to make data trading a reality in China.

The fifth factor of production, or empty hype?

Factors of production are the resources and inputs required to produce outputs, i.e., finished goods and services. They are the basic building blocks of the economy, and have traditionally been divided into four categories: land, labor, capital, and entrepreneurship. While technology is not listed as an independent factor of production, it plays a vital role in the productive process. In the information age, big data technology, artificial intelligence (AI), and algorithms are now undertaking a wide range of productive activities such as autonomous driving, smart city services, and industrial robots.

Yet all these functions operate on data, and if data becomes a factor of production, its circulation in the economy will, in theory, release huge impetus for productivity and development. Hence, by government logic, a data circulation and trading system is crucial to ensuring China’s future development. This depends on clear data ownership and usage rights, as well as low transaction and compliance costs.

China is producing a lot of data. Some estimates expect global data generation to reach 174 zettabytes (ZB) by 2025; one ZB being equivalent to 1,000 exabytes. Chinese data has the fastest growth rate and is expected to increase to 48.6 ZB by 2025, accounting for 27.8% of the global total.

In early September, during the World Artificial Intelligence Conference that took place in Shanghai, Wáng Jiàndōng 王建冬, an official from the Big Data Development Department at the State Information Center (affiliated with the powerful National Development and Reform Commission, NDRC), announced to the media that the era of data trading 2.0 — a “multi-level and three-dimensional data trading market system and service ecosystem” — had arrived in China. Wang said that an important development was the government’s release in June 2022 of a planning document, “Opinions on Building a Basic Data System,” which provides guidance for the construction of the data infrastructure system and the data trading system.

The idea of a data trading market is still rather speculative. According to the World Economic Forum, other countries such as India, Colombia, and Japan are also experimenting with data marketplaces, but the concept is in its earliest days.

The challenges

Even Wang, the Chinese official who talks of data trading 2.0, concedes that the system in China still faces big challenges in four major areas:

• A lack of data coordination from the highest levels of government and between regions and departments, and a lack of coordination mechanisms and unified data circulation rules, leading to phenomena such as closed networks, information islands, and data chimneys.
• A lack of clear data property rights, pricing mechanisms, circulation mechanisms, and data allocation and income distribution mechanisms.
• A lack of connectivity mechanisms for data trading venues and professional third-party service ecosystems, which complicates data registration, compliance, data brokerage, security audits, asset evaluation, and dispute arbitration.
• A complex international data environment featuring data governance and data protectionism. Indeed, in China itself, in July, the Cyberspace Administration of China issued measures with strict security regulations for data exports, and government regulators have found that data operators still face many problems in terms of adhering to the necessary security compliance requirements.

Data trading centers

The concept of developing a data trading market has been mentioned in government documents since 2020, and is a core component of the Big Data 14th Five-Year Plan issued by the Ministry of Industry and Information Technology in November 2021. In theory, in China, the data trading system consists of data suppliers, which are government departments, data enrichment companies, and data collection vendors, as well as data trading centers and data brokers, which operate trading systems for data users and clients.

Data trading centers are a vital component of Wang’s purported data trading 2.0 system. As of August 2022, one Chinese newspaper has counted at least 46 such centers that have been established or are planned to be established across China (although this number may be an overestimation; see below). On September 30, the Guangzhou Data Exchange center was officially launched in Guangdong Province, and on the first day, over 200 data elements operated on the exchange, focused on finance, transportation, construction, IT, and other industries with an accumulated transaction volume exceeding 155 million yuan ($21.70 million).

In August, China’s first pilot project of district and county-level data market brokers commenced in Guangdong Province. The data brokers are intended to coordinate data transactions between the provincial, city, and district levels, and will initially focus on ecommerce, electricity, and financial data. Their essential roles are as matchmakers for data supply and demand, as mediators for data transactions, and as resolvers of data rights conflicts.

Bedeviled by the black market

In practice, however, China’s data trading system is bedeviled by high compliance and transaction costs, and a rampant data black market. A research group at the National School of Development (NSD) at Peking University recently made a detailed study of China’s data trading system, and came up with three basic observations:

China’s output of data is large, but the data trading market is small.

According to an industry report published in 2021, from 2017 to 2021, China produced 9.9% of the world’s total data output, ranking second overall. Yet despite the establishment of data trading centers, they have so far hardly made an impact, accounting for 4% of the overall trading market in 2020, and 5% in 2021.

Data trading centers are hardly making an impact.

As a result, these centers are struggling to remain open: As of August 2022, the NSD found only 30 data exchanges with an active operational status, and some centers have already closed down.

Black market data transactions are rampant.

The NSD estimates that in 2021, the scale of China’s data black market will exceed 150 billion yuan ($21 billion), with a fully operational black market industrial chain.

On the data supply side, government departments face high demand to release public data, but this has high operating costs and potential risks, and such departments often have insufficient technical capabilities. China’s Personal Information Protection Law, promulgated in 2021, requires consent from data subjects, and data-rich companies often dare not release the data or even share it within different departments in the same company. On the demand side, the lack of standard data products means that data users are often not clear on which type of data they require, and there is as yet no clear system for pricing, rights protection, and compliance.

The takeaway

The best that can be said of China’s data trading system is that it is still at an initial stage, and China is still far from harnessing the full growth potential of the fifth factor of production. But the Chinese government seems determined to be ahead of the curve if data trading becomes a real industry.