International investors looking to take advantage of China’s vast telecoms market are faced with a multitude of regulatory restrictions. Although China initially opened up its telecoms market to international investors under its World Trade Organisation (WTO) accession commitments, international companies are only allowed to conduct telecom services in a limited range of sectors and are subject to strict ownership restrictions.

In the Year of the Horse these restrictions are gradually lifting within the China (Shanghai) Pilot Free Trade Zone (CSPFTZ), and Barbara Li from Norton Rose Fulbright says that this may spur foreign telecoms players to get in the zone.

In the past ten years, China’s telecoms industry has witnessed explosive expansion. The data from the Ministry of Industry and Information Technology (MIIT) shows that by the end of December 2013, China recorded over 1.2 billion mobile subscribers with mobile phone penetration rate increasing 6.7 per cent on a year-on-year basis. Internet access has seen similar growth; China now boasts 600 million internet users with 50 per cent growth projected in the next three years, and Chinese e-commerce companies often outperform their US competitors.

On 6^th January, 2014, the State Council issued the Guidelines on Interim Adjustment of the Administrative Approval in China (Shanghai) Free Trade Zone (Guidelines). On the same day, the MIIT and the Shanghai Municipal Government jointly issued the Opinions on Further Opening Value-added Telecommunications Services to Foreign Investors in China (Shanghai) Free Trade Zone (Opinions). The Guidelines and Opinions are part of the rules issued by various regulators following the promulgation of the Overall Programme for the China (Shanghai) Free Trade Zone by the State Council on 27^th September, 2013. These developments are an important step towards the liberalisation of China’s telecom industry.

State Council Guidelines

The Guidelines affect eight different sectors, with those relating to the telecom and technology sectors being especially noteworthy. They state the broad intention to allow international companies to run designated value-added telecommunications services in the CSPFTZ; the ban on production and sales of gaming consoles in China that was imposed fourteen years ago has also been conditionally lifted.

MIIT Opinions

The Opinions set out objectives for promoting the liberalisation of value-added telecoms services in the CSPFTZ, further opening up the telecoms industry to foreign capital and maintaining a competitive telecoms market.

Compared to the current system, several breakthroughs emerged from the Opinions. The first notable breakthrough is that international companies will be able to invest in a broader range of sectors and the following fields are now open to foreign companies:

• call centre services
• internet access services
• multi-party voice and video communication services
• domestic Internet virtual private network (VPN) businesses.

In the past, the MIIT has taken a relatively conservative approach in interpreting the scope of value-added telecoms services and the above fields have generally been closed to foreign capital[1].

Another major breakthrough is that for the first time international companies are permitted to set up wholly foreign-owned enterprises (WFOEs) to conduct certain value-added telecoms services. This demonstrates a significant regulatory movement to open up the telecoms market to international companies. According to China’s WTO commitments, international companies must set up a sino-foreign joint venture to engage in value-added telecoms services and the maximum equity interest an international company can hold is 50 per cent. Now, under the Opinions, there is no foreign ownership restriction and international companies can set up 100 per cent subsidiaries in the following sectors to run:

• online  application stores
• storage and forward businesses
• call centre services
• internet access services
• multi-party voice and video communication services

The 50 per cent foreign equity restriction is now removed for online data exchange and transaction processing (i.e. operational e-commerce), although the foreign investor is still subject to a maximum of 55 per cent foreign ownership. However, this relaxation means that international investors can hold a majority equity interest in the local company and will be able to exercise better control over the business operations of its local subsidiary.

Crucially, all telecom business enterprises that register and base their service facilities in the CSPFTZ will be allowed to offer their services (excluding internet access services) nationwide.

Streamlining the approval process

A new simplified registration and processing system for company incorporation has been adopted in the CSPFTZ and this will apply to foreign-invested telecoms companies established there. Foreign investors used to be required to go through a time-consuming review process, which involved obtaining approvals and permits from several different governmental agencies. The Opinions provide that new implementing rules will be issued with a view to simplifying the approval process. From our consultation with the MIIT, it appears that the final draft of the new implementing rules will be issued soon. After the new implementing rules are adopted, the timeline required for incorporation of foreign-invested telecoms enterprises in the CSPFTZ will be greatly shortened.

Practical implications

With opening up of new telecoms sectors to international investors and the relaxation of foreign capital requirements under the Opinions, international companies are expected to take proper actions to strategise and structure their business operations in China. The breadth of access given to companies registered in the CSPFTZ to sell to the greater China market will be a considerable pull factor for many international companies which previously held back from participating in the pilot scheme.

Although the Opinions are silent on some hot telecoms topics, such as cloud computing, internet data centre and virtual mobile network operator services, there is no doubt that they have sent out a plausible message that China’s telecoms industry will be further opened up to international investment. More significantly, the CSPFTZ acts as an experimental field to develop and test drive the pilot scheme. The regulatory relaxations adopted in the CSPFTZ will be duplicated and implemented in other free trade zones to be established throughout the country; this should eventually lead to China’s market reform and drive China’s integration into deeper globalisation.

This year is the Year of the Horse – a Chinese symbol of progress and vitality. International companies that are quick and decisive in responding to the new regulatory movements in China will no doubt be able to lead the race to capture the greatest market share in their respective industries. There are, therefore, ample reasons for international companies to seize the reins of opportunity and ride the speeding horse of China’s economy.

For more information please contact the author, Barbara Li, a partner of the Beijing office of Norton Rose Fulbright LLP, on +86 (10) 6535 3130 or email Barbara.li@nortonrosefulbright.com.

Norton Rose Fulbright is a global legal practice, providing the world’s largest corporations and financial institutions with a full business law service. Norton Rose Fulbright has more than 3,800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.