Chinese Telecom Joint Ventures: No Entry Without Permission

The Notice acknowledges that some subsidiaries of PRC telecom operators have been using the operating permits of their parent companies in order to provide a variety of telecom services. The announcement presumably covers services ranging from fixed-line business to value-added services such as internet access and data communications. The Notice elaborates that domestic joint ventures established by entities with operating permits are independent legal persons, and are therefore required to apply for operating permits in their own name.

A Question of Percentage

The Notice imposes different disclosure and filing requirements on the licensed telecom operators based on the percentage of interest held in such domestic joint ventures.

If a licensed operator has a direct shareholding of 51% or more, the details of the joint venture should be filed with the MII or the local telecommunications authority. The licensed operator is also required to obtain a separate operating permit for the joint venture, and the business scope and geographic coverage of the joint venture must be in line with the original permit holder. This requirement appears to be a straightforward filing procedure rather than an onerous licensing system requiring both approval and recordal with the MII or its local counterpart. However, the submission of a new application for an operating permit appears to be necessary for joint ventures where the licensed operator has less than 51% shareholding or where the licensed operator has an indirect interest.

Indirect Investments

The Notice provides that if a licensed operator directly holds less than 51% in a domestic joint venture, the joint venture must apply for an operating permit. In order to qualify for an operating permit, the joint venture must meet various requirements, including those set out in Chapter 2 of the Telecom Regulations. The same applies to indirect investments by the licensed operator. In this case, the licensed operator will indirectly establish a new domestic joint venture through one of its existing ventures. The Notice stipulates, however, that this newly formed entity must apply for its own operating permit. Finally, the Notice also prohibits a licensed operator from setting up more than one joint venture in the same locality.

Why the Clampdown?

The Notice is clearly a rectification announcement aimed at existing joint ventures, as well as a statement by the MII of its intention to oversee the establishment of new domestic joint ventures. Reports in the Chinese media suggest that, among other things, the Notice is intended to target the activities of China Netcom, and particularly its flirtation with enterprises linked to the State Administration of Radio, Film and Television (SARFT). In order to strengthen its market share and also to consolidate its geographic reach, China Netcom has reportedly established joint ventures in several cities with local broadcasting and TV companies.

Same Bed, Different Dreams

Industry observers suggest, however, that the MII is targeting these joint ventures because it perceives that the SARFT is wandering into its territory. Interestingly, the MII has in recent months made overtures to the SARFT in an attempt to explore the possibility of communications and broadcasting convergence in the PRC. So far it appears to have received a lukewarm response from the SARFT, possibly because the SARFT may have its own plans for achieving convergence without the participation of the MII.

The rivalry between the two government departments has been apparent for some time. As part of the Chinese government restructuring in March 1998, some of the functions of the former Ministry of Radio, Film and Television (MRFT) were taken over by the MII, although the assets of the MRFT were placed under the control of the SARFT. Since then, seemingly overlapping responsibilities have added to the rivalry between the MII and the SARFT, especially their competition for jurisdiction over the management of China's cable network.

Tug of War

Cable stations in the PRC are owned mainly by municipal governments and are regulated by the SARFT or its local counterpart. The MII maintains however that it has overall jurisdiction over the development of regulatory and strategic policies concerning China's television and broadcasting networks. Against the backdrop of this tug of war, many cable stations are planning to provide internet and other telecom services via their cable facilities. Industry commentators concede that this route may be the best way to connect Chinese consumers to the internet, since ownership of personal computers in China is insignificant when compared to the millions of television sets already linked to the cable network.

Domestic Strife

As long as the telecom sector remains closed to foreign investors, the main rivals to the MII's licensed operators will come from domestic enterprises. If strictly enforced the Notice will also limit the number of new entrants into the market. Consolidation of the market will result in better profits for existing licensed operators and will enable the MII to keep track of the key players. Clearly, the MII is attempting to bring order to its own house before foreign visitors come knocking at the door.

By Nancy Leigh,
Baker & McKenzie,
Hong Kong