New Telecom Enterprise Regulations: The Door is Opened, but MII Still Keeping the Gate

By Robert Lewis, Lovells

In the past three months, the entire face of the China telecom market and regulation regime has been changed. First, in October of last year, a massive overhaul of China Telecom and several other domestic basic telecom operators was announced, purportedly to improve their competitiveness in anticipation of foreign competition following China's World Trade Organization (WTO) entry. Then with the publication in November of the WTO Working Party report on China's accession to the WTO at the Doha ministerial conference, China officially committed for the first time to open up its telecom operation sector gradually to foreign participants.  This had long been reported but never officially confirmed by China.  Following the WTO Working Party report, the Ministry of Information Industry (MII) formally rescinded the prior notices banning foreign investment in the PRC telecom sector. Most recently, on December 11 2001, the State Council approved the new Administration of Foreign-funded Telecommunications Enterprises Provisions (New Telecom FIE Regulations), which took effect on January 1 2002.

With entry into the WTO, China has committed to open its telecommunications market to foreign investment and participation on a gradual basis.  With the adoption of the New Telecom FIE Regulations, China has demonstrated that the emphasis should be on "gradual" rather than "open", as these new regulations vest the MII with substantial discretion to extend its "managed competition" model to foreign-invested telecom operations in China.

NEWLY PERMITTED FOREIGN INVESTMENT LEVELS UNDER CHINA'S WTO COMMITMENTS

On the face of China's WTO commitments, almost all the news for foreign telecom operators is good.  Up to 25% foreign investment in mobile telecommunications operations in Beijing, Shanghai and Guangzhou was permitted immediately upon China's formal accession to the WTO in December 2001.  This will expand to 35% foreign investment in 14 additional major Chinese cities within one year.  Within three years post-WTO, foreign investors will be able to own up to 49% of a mobile telecom company operating in the same 17 cities, and within five years, there will be no geographical restrictions.

The news is even better for value-added telecom investments (see Chart 1 on the following page).1 Under relevant PRC regulations, value-added telecom services operation includes, among others, operation of internet service providers (ISPs), internet content providers (ICPs), internet data centres (IDCs) and applications service providers (ASPs). Basic telecom services operation includes operation of mobile or fixed line voice and data networks and satellite operation.  Customer premises networks (CPNs) and resale of basic telecom services are classified as basic telecom services under PRC regulations but under some MII notices (but not under the New Telecom FIE Regulations) are to be managed as value-added services for administrative purposes.

The outlook is not as favourable for foreign investors in fixed-line telecom operations (see Chart 1).  No foreign investment is permitted for the first three years after China joins the WTO.  Unfortunately, China has not made a distinction between the more sensitive residential and commercial "retail" fixed line telephone and data services and the "wholesale" activities of backbone operators like Qwest, Global Crossing, Level 3 and others who supply network capacity to other basic and value-added telecom service operators and major public and private institutional users.  Although backbone network construction and operation would seem to be ripe for foreign investment in China, it will be subject to the same three-year ban.  Unless foreign investors in this sector can find stable alternative investment structures, they risk losing this market to the domestic players.