On March 1, 2009, the Ministry of Industry and Information Technology of the People’s Republic of China (MIIT) promulgated the Administrative Measures for Telecommunications Operations Licensing The New Measures, which replace their predecessor promulgated on December 26, 2001 (the Old Measures), took effect on April 10, 2009. Compared with the Old Measures, the New Measures make the telecommunications sector more accessible to investors by lowering the market access threshold. In addition, the New Measures enact specific operational requirements and incorporate new rules for exiting from the telecommunications market.  

  1. Background Information

In China, telecommunications services are classified into two major categories: basic services and value-added services. China has not enacted a statute governing the telecommunications industry, and the Regulations on Telecommunications of the PRC a set of administrative regulations issued by the State Council, serve as the overarching law in this regard. Under the Telecom Regulations, basic telecom services cover the provision of public network infrastructure, public data transmissions and basic voice communications services, while value-added telecom services include telecom and information services through public network infrastructure. The Telecom Business Classification Catalogue (the Telecom Catalogue, as amended in 2003) was issued under the Telecom Regulations.

The Telecom Catalogue further categorizes basic telecom services into two types, and the MIIT and its local branches, which oversee the telecom industry in China, treat each type of service differently. The reason is that the two types of services carry different weight in the national economy and bear differently on national security. Class I basic telecom services includes landline communication services, cellular mobile communication services, Class I satellite communication services, and Class I data communication services. The telecom authorities have explained that Class I basic telecom services involve the construction of nationwide network infrastructure, impact a wide range of users, and affect state and economic security. Therefore, the telecom authorities have adopted a policy of “moderate competition and effective control” of Class I basic telecom services to strictly monitor the development of these services.

In contrast, Class II basic telecom services are regarded as having less impact on the state’s economy and security. Accordingly, the government’s control over this type of telecom services is more relaxed, and it is easier for operators to clear regulatory barriers to become a market player in Class II areas.  

Similarly, the Telecom Catalogue divides value-added telecom services into two categories according to their degree of importance and influence. The second type of value-added telecom services is more accessible for operators, particularly small and medium-sized enterprises.  

  1. Highlights of the New Measures
  1. Lowering the market access threshold may facilitate telecom convergence

One of the highlights of the New Measures is that they halve the initial capital requirements for basic telecom operators. Specifically, the New Measures stipulate that a basic telecom operator that provides services nationwide or across provincial borders must have a minimum registered capital of RMB 1 billion, compared with the previous requirement of RMB 2 billion. In addition, the New Measures reduce the minimum registered capital for a basic telecom operator that runs its business within a province, autonomous region, or municipality from RMB 200 million to RMB 100 million.  

Industry insiders expect that this change will facilitate the convergence of the different communications media (including telecom, broadcasting/cable and the Internet) by allowing more competitors to enter the basic telecom market. Currently, telecom, broadcasting/cable and the Internet are separate business operations providing distinct services. For example, telephone, broadcasting and Internet services are operated on different platforms and subject to different regulations.  

Operators in the three areas – telecom, broadcast/cable and the Internet – have been calling for their convergence. And according to this year’s government work report, the State Council also intends to promote the convergence of the three areas. At this stage, convergence of the three areas means the convergence of their business applications, and the use of uniform IP protocols across the different platforms. Consequently, each provider may offer multi-media services outside of their traditional business realm. However, the sectors are regulated by different government departments, with the MIIT regulating the telecommunications and Internet area, and the State Administration of Radio, Film and Television (SARFT) overseeing the television and broadcasting sector. Therefore, the proposed convergence may encounter formidable obstacles, and it is difficult to predict how it will turn out.  

Despite the likely obstacles, the New Measures’ relaxation of registered capital requirements for basic telecom should allow more companies, especially those formerly focusing on broadcasting/cable or the Internet, to provide telecom services, which will propel the convergence forward.  

  1. Operators must fulfill specific duties in their operations

Compared with the Old Measures, the New Measure add an entire chapter on the regulation of telecom operations. Over the past few years, MIIT has launched several campaigns to combat illegal activities, such as spam and fraud, in the telecom market. With the aim to further regulate the telecom market, the new chapter specifies and formalizes certain requirements for basic telecom operators, value-added telecom service providers, as well as telecom authorities.  

  1. Basic telecom operators

The New Measures prohibit basic telecom operators from providing telecom resources, Internet connections, or any other connections to the telecom network to any person that does not have the required telecom licenses, or has failed to file with the appropriate government authorities. Telecom authorities will maintain and publish records of operators’ violations, and basic telecom operators must take into account value-added operators’ record of violations as published by the telecom authorities. Furthermore, any basic telecom operator that provides support services to valueadded telecom operators has the obligation to monitor the latter’s compliance with applicable laws and regulations. The New Measures also require that when basic telecom operators provide services to value-added telecom service providers, they must regulate the content, pricing, and cooperative activities of the value-added services, and establish a mechanism to deal with any violation of the rules.  

  1. Value-added telecom operators

Under the New Measures, value-added telecom operators may rent basic telecom resources (such as Internet connections) only from properly licensed basic telecom operators, and may not sublease such basic telecom resources to any other valueadded telecom operators. They may not provide access services to websites that do not have appropriate telecom licenses or have failed to file with government authorities. Additionally, value-added telecom operators are required to establish an internal control system to monitor their users and prevent the flow of any illegal information.  

  1. Telecom authorities

According to the New Measures, the telecom authorities must strengthen their regulation of illegal telecom activities, and publish a blacklist of telecom operators that violate the telecom rules and regulations. In addition, the telecom authorities must establish a supervision mechanism to monitor the entire telecom market and ensure that operators submit all relevant information.  

  1. Exit requirements are enacted to protect consumers  

For telecom operators exiting the market, the New Measures provide detailed procedural rules. A telecom operator must meet the following requirements if it intends to terminate its operations before the expiration of its business license: (1) its proposed exit fits with the telecom authorities’ overall plan for the industry; and (2) it has a feasible plan to address customer-related issues that arise after the termination of its operations, and has already taken steps to handle such issues. In addition, the New Measures enumerate the materials that operators must submit to the telecom authorities in order to terminate their operations. These materials include, among other things, a specific application letter, certain corporate resolutions, and a specific plan for settling post-termination costumer-related issues.  

Upon receiving an operator’s application to terminate its operations, the responsible telecom authority will publicize the application for 30 days. The authority will finish its review of the application and render a decision within 60 days after the expiration of the 30-day waiting period. According to the New Measures, if the authority believes that the application fails to satisfy the exit requirements, it will send the operator a rejection notice that contains an explanation for the rejection.  

One important rationale behind this exit scrutiny is to protect consumers’ rights. Basic telecom operations usually serve a wide range of consumers, who tend to rely on the services provided by a single telecom operator. Thus, when an operator terminates its services, it creates problems for a large number of people. Regulators therefore believe that operators have the obligation to continue providing their services unless they have made proper arrangements to safeguard the interests of their customers after the termination of their services.  

  1. Observations

In sum, after the promulgation of the New Measures, the fundamental regulatory framework for the telecom business remains substantially unchanged. However, by lowering the market access threshold, enacting specific operational requirements and incorporating new rules for exit from the market, the New Measures reflect the telecom authorities’ intention to keep pace with this developing sector. Prospective investors may find it easier to access the basic telecom market, while existing operators have to assume greater operational burdens in order to exit.