Recent policy developments prompted by the PRC government suggest that "private enterprises" are encouraged to participate in monopolised industries. Li Yizhong, the Minister of the Ministry of Industry and Information Technology (MIIT), stated in an interview in September 2010 that the MIIT is currently looking into the involvement of "private enterprises" in the telecom industry. Could this mark the beginning of further liberalisation in the telecom market in China?

What are the developments?

In the hope of fostering greater input from "private enterprises" in various sectors and industries, China's State Council issued a set of opinions on 7 May 2010 entitled "Opinions on encouraging and guiding the healthy development of private investments" (Guofa [2010] No. 13). The construction of telecom facilities is one of the key sectors highlighted in the opinion. The opinion specifically encourages:

  • equity investment or equity participation in basic telecom business (BTB); and
  • the setting up and development of value-added telecom business (VATB).

Subsequently, the State Council also issued the "Opinions on the enhancement of mergers and acquisitions of enterprises" (Guofa [2010] No. 27) on 6 September 2010. This set of opinions aims at eliminating the impediments to mergers and acquisitions through several key implementations, and in particular relaxing the market entry for private enterprises and promoting mergers and acquisitions in the infrastructure sectors.

The Minister of the MIIT further wrote in the Economic Times on 14 September 2010 that the Ministry is devising policies through which private enterprises are encouraged to participate in monopolistic industries such as, specifically, the telecom business.

What are the key business implications of this policy development?

From the perspective of Chinese private investors, this is essentially good news. The China Financial Times reported that until 2009, SOEs capital was permitted to enter 72 of 80 industries in China while private Chinese capital acquired access to 41.

Not surprisingly, the telecom facilities market is dominated by State-owned enterprises (SOEs). As such, the significance of the two opinions and the remark made by Minister Li is telling in that the PRC government explicitly referred to the entry of private enterprises into the telecom facilities market. This train of events seems to suggest that policy-wise, for the first time since the limited liberalisation permitted in VATBs, private enterprises could engage in basic telecom business (which essentially involve the construction and operation of telecom networks and facilities).

Will foreign investors benefit from this development?

Nevertheless, a notable caveat is the definition of a "private enterprise" in the PRC. This is only a reference to a domestic enterprise in China, i.e. a Chinese company with no foreign or state-owned equity participation. In other words, a foreign investment enterprise does not fall within the remit of the developments described above and on the face of it, foreign investors are very likely to be precluded from benefiting from these policy measures and any related relaxation.

Accordingly, since foreign investments do not benefit directly from the above policy developments, the existing restrictions on foreign investment in the PRC telecom business, set out in the "Administrative Regulations on Foreign Investment in Telecommunications Enterprise" (State Council Order no. 333 of 2001) (the Administrative Regulations) remain applicable: a foreign investor may hold (i) no more than 49% direct or indirect equity interest in a PRC company which holds a BTB telecom licence; and (ii) no more than 50% direct or indirect equity interest in a PRC company which holds a VATB telecom licence.

As noted above, the telecom networks and facilities market (BTB) is still dominated by SOEs. Notwithstanding the provisions set out in the Administrative Regulations which in theory permit foreign investment in BTB, according to the MIIT's released statistics, the number of approved equity joint ventures established between Chinese and foreign investors to operate telecom business (FITEs) is very limited: since 2002, only 27 FITEs have been approved, and of which none is involved in the operation of BTB.

Any other signs for liberalisation?

Despite the seemingly bleak outlook for foreign investors, there has been some developments in the PRC telecom regulatory regime relating to foreign investments. Most conspicuously, on 10 September 2008, the Administrative Regulations have been amended to reflect, amongst others, the following key changes since 2009, as illustrated in Box 1:

  • the minimum registered capital of a FITE for (i) nationwide or Inter-provincial BTB is halved from RMB 2 billion to RMB 1 billion; and (ii) for Intra-provincial BTB is halved from RMB 200 million to RMB 100 million; and
  • the requirement to submit a feasibility study as part of the application for establishing a FITE is removed.

Click here to see table

Mirroring this legislative amendments, on 2 February 2009, the MIIT issued the new "Administrative Measures on Telecommunications Business Operation Licences" (Order of the MIIT no. 5 of 2009) (the Telecom Licence Administrative Measures). The Telecom Licence Administrative Measures govern the application of telecom licences to operate telecom business in the PRC and repeal in its entirety the previous set of regulations adopted in 2001.

Despite the above changes, the existing minimum registered capital of VATBs and equity restrictions for FITEs to engage in BTB are still applicable. Without being able to benefit from the policy developments relating to private enterprises as outlined above, foreign investors are still required to comply with the prescribed equity ceiling of 49% in a FITE that engages in BTB, with at least 51% equity interest being held by the state (i.e. SOEs).

What to expect?

Thus far, no concrete measure has been promulgated. It would be interesting therefore to see the form of relaxation which the MIIT ultimately adopts: whether the policy in the telecom industry will simply be implemented through internal policy guidelines, or through legislative amendments further lifting the restrictions, including capital requirements and qualification requirements, which private enterprises are subject to insofar as BTB is concerned.

As for foreign investors, whether encouraging private enterprises will result in any cooperation between foreign investors and domestic PRC enterprises or other form of innovative structure remains to be seen.