China's ad industry headed for self-regulation

Over the past 30 years China has gone from a third-world nation where nearly all businesses were either owned or controlled by the state, to a nation where a significant portion of the business activity in the country is in private hands or publicly listed companies. This dramatic shift from public to private ownership of businesses has driven the Chinese economy to where it is now: the world's second largest economy, with projections to overtake the US in the next decade and become the largest economy in the world.  Benefiting from this boom in activity, the China advertising sector has seen annual double-digit growth, with advertising and promotion of goods and services exploding throughout the country on every media channel and platform.

However, what has not kept up with such rapid growth is the legal regime that provides oversight of the advertising industry.

The current China Advertising Law was promulgated in the mid 1990s when advertisers promoted products using radio, print media, television and outdoor advertising. Even at that time, as China was starting to open up to private business, advertising law was lagging what was happening in the wider advertising sector.

Fast-forward to 2014, where internet and mobile devices have taken over as the preferred platform of choice for advertisers, with millions of advertisements being released annually, and the big issue is how best to regulate in order to ensure the integrity of the industry.

In most jurisdictions, oversight of the advertising industry is handled by a combination of  laws and industry self-regulation practices that are current and relevant to the sector. At this point in time, China has much work to do to catch up to countries with a more mature advertising governance regime, but there are strong indications from the Chinese government and the industry that changes are coming on both fronts.

In 2012 the State Administration of Industry and Commerce and several other China regulatory agencies released the Provisions for the Review of Advertisements Published in Mass Media ("Provisions"), that put the onus on mass-media organizations, such as CCTV, to ensure that advertisements being released by them met all legal standards. The requirements set out in the Provisions included establishing a dedicated team to train personnel in all legal standards applicable to advertising and to supervise the team producing the advertisements, for legal compliance. Although the Provisions focused on mass-media companies and were an important step to ensure minimum advertising standards were met, what is important is that implementation of the Provisions signaled that the government intended to move toward a comprehensive framework to provide oversight of the industry.

Over the past several years, SAIC has issued a number of significant redrafts to the advertising law for public comment. But in September 2014 it issued another redraft with a short response timeline, which could indicate that SAIC is close to finalizing the redraft for submission to the annual National People's Congress meeting later this year.

Based upon the latest draft revision, China is going to tighten up oversight of the industry, becoming more aggressive to stop advertising practices that do not meet the minimum legal standards.

Adding to the actions of the Chinese government on the regulatory side as noted above, in August 2014 China hosted the APEC Forum meeting concerning advertising standards and best practice advertising principles with a focus on 'self-regulation'. At the conclusion of the meeting, the China Association of  National Advertisers ("CANA")  signed strategic cooperation agreements with universities and institutions related to future research on establishing a self-regulation system in China and announced that it will establish an Advertising Standards and Self-Regulation Committee.

In addition to CANA's recent action, the China Advertisers Association ("CAA") has also over the years advocated that China needs to move to some level of industry self-regulation. Both CANA and CAA recognize that it is very difficult for SAIC to provide full oversight over the advertising industry due to the pace at which the industry is growing and the increase in the volume of advertisements that flood the country each day.

So what does this all mean for China's advertising industry going forward? 

Based upon China's recent regulatory action, the fact that the CAA and CANA, both quasi-government organizations, are advocating for some level of industry self-regulation and the exponential growth of the advertising industry in China, there is a very good possibility that some form of industry self-regulation will be allowed in the future.

That said, such action will not take place until SAIC, CANA and CAA have carefully considered how such a structure will work alongside China's long-established practice of regulating all aspects of business activity in China. Added to the mix is the overriding sensitivity of the Chinese government as to what is permitted to be distributed through media outlets to the Chinese public. To allow the advertising industry some degree of autonomy to regulate certain aspects of its activities would be a significant concession to business by the government.

Over the years China has become more pragmatic about how it regulates business sectors, inclusive of an industry sector as creative and free-spirited as the advertising sector, to sustain business growth in the country. Since China entered the WTO in 2002, there are many examples where China has adopted new ideas to facilitate business growth and to delegate some authority to business (i.e. banking) to handle some aspect of oversight.

We see this occurring in advertising sector. A comprehensive legal and industry oversight structure to sustain a dynamic advertising industry cannot be achieved without some element of industry self-regulation. This development will not be welcomed by all, including some advertisers and agencies, who would prefer to meet only the minimum government standards and not 'good advertising practices', but it is our opinion that such companies will find themselves on the wrong side of the argument on this issue if they persist with such a position.

The process to achieve some degree of self-regulation in the advertising sector may be slow and deliberate, with many challenges. But at this time there does appear to be resolve by the key players involved to succeed. The final result may not be what is followed in other countries, but it will be distinctively Chinese in approach, attempting to meet the competing interests of government control and the industry's inherent creative nature in this rapidly changing country.  

Richard Wageman is partner and head of IPT Asia. Belinda Tang is senior associate with IPT Asia.