China Controls Bandwidth: The Fibre-optic Rectification Circular

The Circular has been issued in accordance with the PRC Telecommunications Regulations (中华人民共和国电信条例) (Telecom Regulations), which entered into effect on September 25 2000. Article 45 of the Telecom Regulations provides that the construction of public and dedicated telecommunications networks, and radio and television transmission networks, is subject to overall planning and administration by the MII. The involvement of the SDPC in the issuance of the Circular is consistent with the SDPC's role as China's central planner.

Construction ban

The Circular begins by stating that in recent years some enterprises have constructed long distance fibre-optic cables without State approval thus compromising the security of the national communications system and resulting in a significant duplication of network resources. Under the Circular, the construction of unapproved fibre-optic cable projects is to be immediately halted and illegal projects are to be screened in an attempt to impose market order.

The Circular requires all enterprises that have not obtained proper approval to disclose information concerning the nature of their projects. Details such as the type of investment, level of funding, technical data and the status of the network construction must be submitted to the MII and the SDPC. The deadline for disclosure was the end of April 2001.

Basic telecommunications services

The Circular applies to all departments, provinces and autonomous regions under central and municipal governments and to enterprises that own long distance fibre-optic cable network elements but have not been licensed to operate basic telecommunications business. The Telecom Regulations define "basic telecommunications services" as the provision of public network infrastructure, public data transmission or basic voice communications services. Notably, the appendix to the Telecom Regulations categorizes the lease and sale of broadband, wavelengths, optical fibres, optical cables, cable ducts and other network elements as basic telecommunications services.

Foreigners keep out

Furthermore, under the Telecom Regulations, a basic telecommunications services operator must fulfil certain conditions, the first of which is that it must be a legally established company in which the State's equity or shareholding is not less than 51%. This requirement would seem to limit ¨C at least for the time being ¨C the equity participation of foreign investors in fibre-optic cable construction projects. The Circular also reiterates the policy contained in several recently issued telecommunications regulations; namely that prior to China's accession to the World Trade Organization, no foreign entity or individual may directly invest in the construction, operation or management of telecommunications networks in the PRC. In this context, enterprises established in Hong Kong, Macao and Taiwan are also prohibited from engaging in such business activities.

Permit system

The Circular clarifies certain provisions in the Telecom Regulations that empower the MII to introduce a permit system for the operation of telecommunications business in the PRC. Enterprises that have been issued with a permit may engage in the lease or sale of network elements such as broadband, wavelength and optical fibre cable. Enterprises that do not possess such a permit but have been granted a permit to engage in other basic telecommunication business may purchase or lease network resources to meet their own transmission needs. Presumably, this would enable China's fixed and mobile network carriers, internet and other public data transmission service providers to purchase or lease available bandwidth from the owners of fibre-optic networks.

Right to intervene

In addition, the Circular permits enterprises that are authorized to engage in basic telecommunications business to construct their own fibre-optic cable networks by themselves or in conjunction with other entities provided that approval has been obtained before the commencement of the project. For construction projects that have not been duly approved, the Circular suggests that the MII and the SDPC will intervene either by purchasing or taking equity in the projects.

Confiscation of assets

The MII and the SDPC may also participate in the reorganization of network assets and have the authority to dispose of such assets to any telecommunications enterprise which has obtained a permit to lease or sell network resources. Notably, the Circular provides for the expropriation of illegal assets in cases where an enterprise engaged in unauthorized construction has failed to report its activities to the authorities or has refused to take part in the reorganization of its network assets.

Clearly, the Circular reinforces and clarifies the regulatory system outlined in the Telecom Regulations. It also demonstrates the willingness of both the MII and the SDPC to assert control over the development and utilization of the country's fibre-optic network.

By Nancy Leigh,
Baker & McKenzie,
Hong Kong