What are the business implications of DSL compliance?

China’s Data Security Law (DSL), effective from September 1, 2021, is a foundational law regulating how data is processed, classified, and protected within and outside China.

It introduces a risk-based, tiered classification system, particularly emphasizing “important data”, and places stricter obligations on both domestic and foreign companies handling data tied to China.

The DSL also requires security assessments for cross-border data transfers and mandates sector-specific compliance measures. Non-compliance can result in significant penalties, operational disruptions, or reputational damage. Businesses engaging with China choose to integrate DSL compliance into their broader data and digital strategies.

Disclaimer: This guide is intended for informational purposes only and does not constitute legal advice. Chinafy is not a legal or corporate advisory entity. Given that legal obligations vary by business type and context, we recommend consulting with qualified legal counsel for advice specific to your organization. If needed, Chinafy can connect you with one of our experienced legal partners.

What is the Data Security Law (DSL)?

China’s Data Security Law (DSL) is one of the core pillars of the country’s data governance regime, alongside the Cybersecurity Law (CSL) and Personal Information Protection Law (PIPL). It was enacted on June 10, 2021, and came into effect on September 1, 2021.

The DSL is administered primarily by the Cyberspace Administration of China (CAC) and aims to:

Regulate data lifecycle activities, from collection to storage and export.

Safeguard national data security.

Promote public interest and economic stability.

At its core, the DSL treats data as a strategic resource, introducing a classification system that tailors regulatory requirements based on the sensitivity and importance of the data involved.

What does the DSL regulate?

The DSL applies a broad lens to data processing activities, focusing on the following key areas:

Data classification and grading: Data is categorized based on its relevance to national security, public interest, or economic order. “Important data” receives heightened protections, although specific definitions vary by industry and region.

Data security requirements: the DSL encourages technical and organizational safeguards, such as periodic vulnerability assessments and incident response protocols.

Cross-Border Data Transfers: Exports of “important data” (i.e. a type of sensitive high-risk data referenced in the CSL) must undergo security assessments, in line with CSL and PIPL requirements. Unauthorized transfers may be restricted or penalized.

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Risk monitoring and management: Entities are required to perform internal risk assessments, maintain oversight of processing activities, and report incidents promptly.

Sector-specific rules: Industries handling sensitive data, such as finance, healthcare, telecommunications, must adhere to additional obligations and may face more stringent scrutiny.

Who does the DSL apply to?

The DSL applies to a wide array of actors, both within and outside Mainland China:

Domestic organizations - This includes businesses and individuals processing data in China, across sectors like e-commerce, banking, education, or platform operations.

Foreign businesses - This applies extraterritorially to companies located outside China if they:

Process data on Chinese users or entities

Handle “important data” linked to China

Engage in cross-border transfers or provide services to users in China

Critical Information Infrastructure Operators (CIIOs) - CIIOs are operators in sensitive sectors (e.g., energy, transport, telecom) that, if disrupted, could affect national interests. CIIOs are subject to stricter data storage, protection, and transfer controls under both the DSL and CSL.

How is the DSL enforced?

The CAC, in collaboration with agencies like the Ministry of Industry and Information Technology (MIIT) and Ministry of Public Security (MPS), enforces DSL compliance through a variety of mechanisms. Different industries have different kinds of requirements, but some of these include:

Security assessments: Mandatory for companies handling large volumes of data or transferring specific categories of data defined as important and sensitive abroad.

Audits and inspections: Regulators may conduct surprise inspections or request documentation on data protection practices.

Penalties: Including fines up to ¥10 million, suspension of services or even criminal liability for severe violations.

Recent enforcement actions highlight the CAC’s focus on unauthorized data collection, insecure system architecture, and unapproved cross-border transfers.

What are the business implications of DSL compliance?

For businesses engaging with the Chinese market, DSL compliance involves both operational transformation and strategic planning. Some of these implications include:

Operational adjustments: DSL compliance may involve the re-engineering of IT systems to support local data storage, data minimization, and localized processing. Many organisations address these requirements by adopting hybrid cloud models or partnering with China-based infrastructure providers.

Cost considerations: Risk assessments, audits, and secure data architecture can lead to higher compliance costs. However, this is balanced with the cost of risk for non-compliance or lack of a clear strategy in this area.

Reputational and legal risks: Breaches or non-compliance may result in public scrutiny, customer distrust, or regulatory penalties.

Strategic opportunity: Demonstrating compliance, especially verification in the context of China compliance, can serve as a competitive differentiator.

Businesses must adopt a cross-functional approach to DSL readiness, bridging legal, IT, compliance, and executive functions.

Chinafy collaborates with specialized partners, such as Lianwei Pancloud and MS Advisory, who can offer insight into specifics related to your company, regulatory trends and compliance considerations, including DSL.

Get in touch with Chinafy today to better understand the next steps for your company’s website and data in China.