Who are the primary regulators of the telecommunications, broadcasting and Internet sectors in China?

China has yet to enact an overarching “Telecommunications Law,” and regulation of the sector is based on various administrative regulations, the telecom catalogue, notices and judicial interpretation. China’s Ministry of Industry and Information Technology (MIIT, formerly known as the Ministry of Information Industry until June 29, 2008) is the primary regulator of the telecommunications industry. China’s State Administration of Radio, Film and Television (SARFT) is the primary regulator of the broadcasting industry. The convergence of the telecommunications industry and the broadcasting industry in the form of Internet television and mobile television over 3G networks creates potential regulatory conflicts and business uncertainty. The worldwide trend is to merge communications authority with the broadcasting association (e.g., the merger of the Australian Broadcasting Authority (ABA) and the Australian Communications Authority (ACA) into Australian Communications and Media Authority in 2005, and the merger of the UK Office of Telecommunications (Oftel) and its broadcasting, television and radio commissions and authority into the Office of Communications (Ofcom) in 2003).  

What are the top three legal issues and challenges affecting the IT sector in China?

The convergence and explosive development of technologies and business models in the field of broadcasting, communications, Internet and information technologies have out-grown the current regulatory constraints and led to legal uncertainty and business risks when conducting triple-play, quadruple-play, Internet broadcasting and social networking business in China.  

Content regulation has impeded or otherwise cast doubts on the commercial longevity of otherwise very viable business models.  

Foreign ownership restrictions and homegrown technological standards have made it more difficult for foreign operators to enter in a big way and introduce offerings riding on VoIP, VPN, mobile TV and data center services.  

What are the foreign ownership restrictions and geographic restrictions for investors who wish to enter China’s telecommunications market?

The restrictions are 49% for mobile operators and fixed network operators, and 50% for value added services providers. All geographic restrictions have been removed. Some specific services such as domestic IP-VPN services are still not open for foreign participation. Other lucrative services (e.g., Internet data center operation and call center services) are only open for foreign investment via a Hong Kong company that is certified under the Closer Economic Partnership Agreement (CEPA) entered into between the Hong Kong government and the mainland Chinese government.  

Can foreign investors obtain economic benefits from a joint venture beyond the permissible foreign ownership percentages?

Yes, but with some limitations as the parties could establish variable interest entities (VIEs) (Financial Accounting Standards Board Interpretation No. 46) and enter into a series of offshore and onshore agreements. Typically such offshore and onshore agreements may include some form of a loan, a cooperation or services agreement, the creation of certain nominee/trust structures and a power of attorney and pledge agreement. The type of structure required would depend on the particular services and infrastructure the operator requires/provides, and the more regulated the industry, the more complex the structure and the more documentation it would likely entail.  

Do you foresee any additional laws or regulations in the pipeline that impact the IT sector?

We presently expect that new telecommunications legislation will be introduced in 2010. The legislation is expected to further regulate the sector through giving more power to the MIIT and related authorities.

Do you see opportunities in the IT sector in the second- and third-tier cities? If yes, what challenges do foreign investors have in these areas that they might not have in the major cities?

The first-tier cities in China are definitely experiencing slower growth and bigger competition compared to second- and third-tier cities. The benefit of second- and third-tier cities is not only the lower cost of operation, but also local governments’ greater leniency and stronger support for the growth of niche services to compete with neighboring cities.

It is important to note that second- and third-tier cities’ infrastructure is still being developed, and their business practices on contracting and servicing and local governments’ processes for approving/regulating new technology and communications offerings are relatively immature compared to first-tier cities. The extra effort and investment needed should be considered and weighed with the savings due to the lower cost base.