President Barack Obama said in an interview with Reuters on March 2 that he had raised concerns about the law directly with Chinese President Xi Jinping.
"They have decided to suspend the third reading of that particular law, which has sort of put that on hiatus for the moment," White House Cybersecurity Coordinator Michael Daniel said, according to a webcast of a discussion at the Information Technology and Innovation Foundation.
"We did see that as something that was bad not just for US business but for the global economy as a whole, and it was something we felt was very important to communicate very clearly to them," Daniel said.
It was not clear whether the bill would proceed or not.
China Central Television reported on March 9 that Wang Aili, a senior official with the Chinese National People's Congress Standing Committee's legislative affairs commission, said the bill was not on the schedule for the NPC's annual session, which began last week. A third reading and vote would be scheduled in "due time," he said.
The law would require technology firms to hand over encryption keys, the passcodes that help protect data, and install security "backdoors" in their systems to give Chinese authorities surveillance access.
One industry source, who requested anonymity, said the move gave companies "some breathing room, but not complete relief" because the bill could be picked up again at any point as only the standing committee — not the full parliament – was needed to pass a law.
But another was optimistic that was the end of the matter.
"The Chinese are not ready to kick out all foreign companies, and because they weren’t ready to take that step, they backed off," said a US technology industry expert, who asked not to be identified to avoid complicating his employer's dealings in China.
"You can bet that the next steps will be something that tightens up somewhere but doesn’t cause this level of pain."
The initial draft, published by the NPC late last year, requires companies to also keep servers and user data within China, supply law enforcement authorities with communications records and censor terrorism-related Internet content.
Last month, a parliamentary body read a second draft of the law, which would go beyond a set of financial industry regulations pushing Chinese banks to purchase from domestic technology vendors.
The rules would affect major US companies, including Microsoft Corp and Apple Inc.
Although the law would apply to both domestic and foreign companies, officials in Washington and Western business lobbies complained that the combination of that law, the banking rules and anti-trust investigations amounted to unfair regulatory pressure targeting foreign companies.
The tensions come at a sensitive time because in early 2015 the United States and China are due to exchange offers detailing which industries would remain off-limits under a Bilateral Investment Treaty.
A spokeswoman for the US Trade Representative said the Chinese offer was expected "relatively soon," although no firm date had been set. — Reuters