A United States congressman has introduced draft legislation that would make it illegal for mainland internet firms listed in the US to comply with Chinese government demands on censorship and disclosure of personal information.

The Global Online Freedom Act proposed by Republican Congressman Christopher Smith would also prevent US firms from maintaining servers and storing user and search engine data in the mainland, as well as a list of other "internet-restricting" countries.

The bill "to promote freedom of expression on the internet [and] to protect United States businesses from coercion to participate in repression by authoritarian foreign governments" follows a heated congressional hearing last week in which Google, Microsoft, Yahoo and Cisco Systems were accused by congressmen of suppressing human rights in China by complying with demands from Beijing.

The issue has garnered considerable media attention in recent months following the arrest and imprisonment of journalist Shi Tao as a result of information given to the Chinese government by Yahoo, Microsoft's decision to remove a "politically sensitive" blog from its servers at Beijing's behest, and the launch of a heavily censored service for Chinese users by Google.

A Yahoo-style decision to hand over user information would be the most heavily penalised under the proposed legislation, with a jail sentence of up to five years and a fine of up to US$2 million.

The bill also provides for foreign internet users to seek punitive damages in US courts if the victim of such actions.

However, extending the coverage to foreign internet companies listed in the US could have serious implications for leading Chinese search engine companies such as Baidu.com, Nasdaq-listed Sohu. com, Netease.com and content provider Tom Online.

It could also force other technology firms to look to alternative markets such as Hong Kong or Shanghai rather than risk financial penalties for violating laws in the US.

The full impact of any new legislation would also depend on the continued appetite among US investors for Chinese technology stocks, said Dick Wei, an analyst with JP Morgan.

"More than other markets in Asia, US investors have been enthusiastic towards Chinese technology firms, so companies may still continue to list in the US rather than seek alternatives," he said.

Fear of new restrictions could also have a negative impact on Chinese firms seeking venture capital funding.

Initial public offerings are the favoured means for venture capitalists to cash out of their investments, and while Hong Kong and Shanghai offer potential alternatives if the situation is unfavourable in the US, the market valuation in both markets is often lower.

Of the recent listings by key Chinese technology firms, only instant messenger service provider Tencent Holdings is listed solely in Hong Kong, and the firm has struggled to emulate the success of its Nasdaq-listed counterparts.

However, Mr Wei questioned whether the proposed legislation could impose punitive damages on Chinese internet companies given the complex corporate structures which often separate operations on the ground in China from the listing vehicle.

"Many internet firms contract the operations of their businesses to local Chinese companies, which adds another level of complexity and may make it difficult for this legislation to affect US-listed Chinese firms," he said.