Key Points

  • The Opinions propose to further open seven value-added telecom business fields on pilot basis in PFTZ.
  • Except internet access service business, the other types of business can be provided to users over the country.

Background

Under PRC law, telecom services are categorized as a restricted industry for foreign investment. Telecom services are classified into basic telecom services and value-added telecom services, each of which are subject to further classification as shown in Table A, based on the Telecom Services Classification Catalogue 2003 (the “Catalogue 2003”).

According to the WTO schedule committed to by China and the Closer Economic Partnership Arrangement (“CEPA”) between mainland  China and Hong Kong and the CEPA between mainland China and Macau, the list in Table B and value-added Telecom services that are open to foreign investors and investors from Hong Kong and Macau respectively. Except for the services specified above, foreign investors, including investors from Hong Kong and Macau (collectively as the “Foreign Investors”), are not permitted to engage in any other telecom services in China.

Further, with regard to the services that are open for foreign investment, the foreign investors must engage in such services in the form of a joint venture (“JV”) with Chinese partners. For basic telecom services, foreign investors may not hold more than 49% ownership in the JV, and the Chinese partner must be a state owned enterprise with not less than 51% ownership in the JV. For value-added telecom services, foreign investors may not hold more than 50% shareholding in the JV.

The formation of such JV must be pre-approved by the MIIT and approved by the Ministry of Commerce (“MOFCOM”). Once a JV has obtained the approval certificate issued by MOFCOM it must apply to the MIIT for a basic telecom services license (“Basic License”) and/or a value-added telecom services license (“VAT License”)1 for the services it intends to engage in respectively.

In practice, it can be very difficult and time consuming for a JV to apply for and successfully obtain the licenses for the above services in China, particularly the licenses for basic telecom services – although in theory they are permitted to make such applications. According to a list of JVs licensed to engage in telecom services in China, available on the official website of the MIIT2  (which may not be entirely up-to-date or complete), no JVs have been licensed to provide basic telecom services and there are only a few JVs that are owned by Hong Kong investors licensed to engage in Domestic Internet Protocol Virtual Private Network Services, Internet Access Services and/or Internet Data Center Services.

There has been an informal moratorium against issuing telecom operators licenses to foreign-owned companies in China, but it appears that in recent months the government is again willing to consider and process license applications – although as of the date of this article we are only aware of the government having announced that some recent applications have fulfilled the license criteria.

The New Regulations in PFTZ on Further Opening Value-added Telecom Business

The MIIT and the Shanghai Municipal People’s Government jointly issued the Opinions on Further Opening Value-added Telecom Business in the China (Shanghai) Pilot Free Trade Zone (the “Opinions”) on January 6, 2014, deciding to further open value-added telecom business on a pilot basis in the China (Shanghai) Pilot Free Trade Zone (“PFTZ”).

The Opinions propose to further allow seven value-added telecom business fields on a pilot basis in PFTZ, as well as:

  1. further open foreign investors’ shareholding ratio for (a) information service business, (b) store and forward business, (c) online data processing and transaction processing business based on foreign investors’ shareholding ratio of the said three businesses not exceeding 50% as committed to the WTO, of which there is no restriction on foreign investors’ shareholding ratio of application store business of information service business, as well as store  and forward business; foreign investors’ shareholding ratio of e-commerce business of online data processing and transaction processing business is relaxed to 55%;
  2. open (a) call center business, (b) domestic multiparty communications service business, (c) internet access service business provided to internet users, (d) domestic Internet virtual private network business, of which there is no restriction on foreign investors’ shareholding ratio of the first three businesses; foreign investors’ shareholding ratio of domestic Internet virtual private network business is not permitted to exceed 50%.

Among the above seven types of business, Internet access service business provided to Internet users is restricted to be provided only in the PFTZ, whereas the other types of business can be provided to users throughout the country – though business operators must register in the PFTZ and have their facilities located there.

Conclusion

Although the percentages of ownership by foreign investors on the seven value-added telecom business fields are increased, the investment in these fields is still restricted in the form of JV. Therefore, it is still the key issue that the foreign investors must have a suitable local partner to develop the telecom business in China. Further, the detailed rules and procedures on the formation of the JV to engage in such telecom business have not been released.

Click here to view table A.

Click here to view table B.

Click here to view table C.