China to adopt new rules for Human Genetic Resources Regulation

Key takeaways for international cooperation

On 22 March 2022, the Ministry of Science and Technology of the People's Republic of China ("MOST") published the Implementation Rules For the Human Genetic Resources Regulation (draft for public comments) ("Draft Implementation Rules"). The Draft Implementation Rules intend to contribute on implementing the Regulation on Human Genetic Resources ("HGR Regulation") in China following the adoption of the Biosecurity Law and Data Security Law, both of which took effect in 2021. 

It is our observation that the Draft Implementation Rules may have direct impact over international cooperation with respect to Chinese HGR, mainly from the following aspects. 

Approval authority

Currently all HGR related approvals need to be submitted to the MOST instead of its provincial level branches. Although the Draft Implementation Rules continue to maintain this approach, it has introduced a mechanism to allow MOST to designate certain qualified public affairs institutions to carry out the substantial work, such as acceptance of application, technical review and supervision. This means MOST may significantly increase its capacity and efficiency in processing HGR applications. 

Foreign entity recognition

Under current HGR Regulation, foreign entities / individuals and entities under actual control by such foreign entities / individuals are restricted in collection, preservation, utilisation and cross-border transfer of Chinese HGR. They must cooperate with a Chinese partner in conducting relevant activities.  However, the HGR Regulation does not elaborate on the requirements of 'actual control". The Draft Implementation Rules specify the scenarios of "actual controls" in recognising foreign entities, which includes: 1) where foreign entities or individuals, either directly or indirectly, holding more than 50% of equity, voting power or similar rights; 2) where foreign entities or individuals may have major influence over the decision making or internal management of an entity although the foreign shareholding percentage falls below 50%; 3) where foreign entities or individuals may have major influences via contractual or other arrangement and 4) other scenarios that MOST may determine.

Especially for the recognition of "contractual and other arrangement" as one form of "actual control", this means that a foreign entity or individual cannot use the commonly seen "Variable Interest Entity" or "VIE" structure to avoid HGR approval or filing. For completeness, VIE structure refers to a contractual control (instead of direct equity control) over a PRC domestic company by foreign shareholders. Such a structure is often used in industries where there is foreign investment restriction. However, under the Draft Implementation Rules, the domestic company under the VIE structure may need to file HGR application as a foreign controlled entity even though it is registered as a domestic company from corporate registry perspective.

By the definition of "actual control", it seems some PRC entities with certain foreign investment (but do not meet the requirements in the definition of "actual control" in the Draft Implementation Rules) may not be subject to the restrictions otherwise applicable to foreign invested entities. However, to what extent MOST will make such findings remain to be tested in actual applications. 

It is not clear at this stage whether Hong Kong, Macau or Taiwan based entities or individuals will be treated as foreign parties for the purpose of the Draft Implementation Rules. However, based on the general principle for other foreign related laws and regulations in China, Hong Kong, Macau or Taiwan based entities or individuals are often deemed as foreign parties. Therefore, it is unlikely the Draft Implementation Rules will be an exception. 

Notable changes regarding filing and approval

Under current HGR Regulation, there are different filings/approvals subject to the nature and substance of international cooperation projects. The filing is a much simplified procedure compared to an approval. In general, scientific researches and studies and overseas transfer of Chinese HGR are subject to approval, while use of Chinese HGR for the purpose of drug or medical device market authorisation in China (without any overseas transfer of HGR) is subject to filing. The notable changes in the Draft Implementation Rules include the following.

• For projects that meet certain conditions, the parties only need to make international cooperation filing to the MOST instead of an application for approval. The key conditions to qualify for such a filing include: 1) for the purpose of market authorisation of drugs or medical devices in China; and 2) HGR materials will not be exported from China. Further, the Draft Implementation Rules specify scenarios for filing instead of approval, which include: 1) the collection, detection, analysis and residual sample processing of HGR involved are carried out in clinical institutions; 2) the HGR are collected in clinical institutions and tested, analysed and the remaining samples are processed by domestic units designated by the clinical trial scheme of the clinical trial of the market authorisation of relevant drugs and medical devices. These two scenarios were not elaborated on the current HGR Regulation.

• In the process of scientific research and studies using Chinese HGR in international cooperation, non-material changes may not need separate approval from the MOST, which include: 1) a cumulative number of cases that do not exceed 10% of the approved number provided that the research and studies plan remain unchanged; 2) official name changes of the participants and changes of participants not subject to approval by the MOST in the original application; 3) although the research and studies plan are changed, but such changes do not involve the change of the type, quantity and use of HGR, or the content after the change does not exceed the approved scope. For projects meeting such non-material changes, the participants only need to make a statement or record filing instead of approval. These carve-outs to the approval were not elaborated on the current HGR Regulation.

Data security

The Biosecurity Law specifically states that China has sovereignty over HGR, which may be a matter of national security concern. Data related articles are introduced in the Draft Implementation Rules, for example, data as a standalone asset may be subject to contractual agreement regarding its use, transfer and profit sharing, etc. According to the Data Security Law, China will implement a categorised and hierarchical data protection system. Although the implementation rules are still under discussion, it is very likely that HGR data will be recognised as important data which will be subject to enhanced protection under the Data Security Law. Therefore, parties involved in HGR may not only observe biosecurity laws but also data security laws in terms of compliance. 

Security review

The Draft Implementation Rules have specified the thresholds of security review when providing HGR to foreign parties, which include: 1) HGR of important genetic families; 2) HGR in specific areas; 3) exome sequencing and genome sequencing of more than 500 people; and 4) other information that may affect China's public health, national security and social public interests. In the past, there has been no public media coverage or official releases on actual enforcement of security review. In light of the specified thresholds above, it is likely that MOST will implement security review over HGR applications. 

Calculation of illegal income

The illegal income from illegal participation in international cooperation and illegal provision of HGR to foreign countries shall be calculated at the value of HGR or the amount of invested funds. The Draft Implementation Rules does not specify how to determine the value of HGR, which may leave open doors to attach a huge cash amount to certain HGR and thus increase the overall penalty significantly for non-compliance. 

Procedures for administrative penalties

The Draft Implementation Rules have used a full chapter to address the procedures for administrative penalties, which include jurisdiction, case initiation, hearing, review and decision making, delivery of decision, enforcement, etc. In essence, contrary to prior approvals that need to be submitted to the MOST or its designated public affairs institutions, the MOST has delegated its provincial level branches to be in charge of matters such as daily compliance supervision, investigation and administrative penalty, etc. This means the provincial level MOST branches will have more specific guidelines to conduct compliance review, especially in the case of complaints. It is widely expected that MOST will strengthen HGR related law enforcement campaigns.