China Regulates The Global Gateway

Article 6 of the Gateway Procedures sets the scene by reiterating the existing policy that all international telecommunications services must be provided through a gateway authorized by the MII. Moreover, communication facilities linking the mainland to Hong Kong, Macao and Taiwan are treated as international communication facilities. The policy is consistent with China's WTO telecom commitments which states that all international services are required to go through gateways established with the approval of China's telecom authorities.

Who Can Establish and Operate a Gateway?

Article 2 of the Communications Facilities Provisions provides that any activities relating to the construction of international communications facilities must comply with the regulations, including the construction, alteration, expansion or change of title of such facilities. In particular, Article 5 of the Gateway Procedures states that only wholly state-owned telecommunications service providers can apply to set up, operate and maintain international communications gateways.

Definitions

The Communications Facilities Provisions provide an umbrella definition of "international communications facilities" (ICFs) to include "international communications gateways" (ICGs), and "international transmission networks" (ITNs).

ICGs for these purposes are defined as international communications channel gateways, international communications service gateways and border area international communications gateways. For the purposes of the new regulations, ITNs cover all forms of communications infrastructure, including fixed line, radio and satellite channels linking international communications channel gateways in China to countries and regions outside China.

The Gateway Procedures define "channel gateways" to mean the transfer point between domestic and international telecom transmission channels; and define "service gateways" to mean the service transfer point between domestic and international telecom service networks. Channel gateways include the landing or entry stations in China of international optical or electrical cables, microwaves and satellite communications systems. Service gateways extend to switching routers and transmission services provided via frame relay, DDN and ATM networks. The distinction between infrastructure providers and service providers is further refined by the definition of "border area international communications gateways" to include international direct circuits connected to the communications networks of adjacent foreign regions via domestic switchboards.

Planning, Administration and Supervision

The MII has overall responsibility for the supervision, administration and construction of ICFs, with local supervision being delegated to the relevant communications administrations of the provinces, autonomous regions and municipalities. The Department of Comprehensive Planning within the MII is responsible for drafting and implementing specific plans for developing and administering ICFs.

In addition to safeguarding state control over communications, the Communications Facilities Provisions shall be applied in such a way so as to ensure the security of communications networks and information, to encourage competition and discourage monopolies, as well as to promote efficient use of resources, along with market transparency, fairness and impartiality. Notwithstanding these commendable aims, the monopoly over the approval process and the restrictions imposed on foreign participation would suggest that the Communications Facilities Provisions are designed to control rather than encourage competition.

Ownership of Operating Rights

Article 25 of the Gateway Procedures provides that telecom service providers that have the right to operate international telecom infrastructure may not directly lease foreign international communications transmission channels, nor may they purchase, construct themselves or participate in the construction of international telecom channels. In addition, telecom service providers that do not have the right to provide international communications services may not lease international communications channels to provide international services nor may they purchase or participate in the construction of international communications transmission channels. As such, Article 25 appears to exclude the participation of many value-added telecom services providers in favour of providers licensed to provide basic telecom services.

Approval Process

The construction, operation and maintenance of ITNs and channel gateways within China are dependent on having the right to operate international communications infrastructure. Likewise, the development and management of PRC-based service gateways and border area gateways is limited to entities that have the right to provide international communications services. This echoes the above-mentioned definitions that distinguish between "infrastructure" and "services" (see Figure 1 for the relationship between definitions and "right to operate" requirements).

Investment Limits

The MII is to conduct preliminary review and approval of applications to construct ICFs. In addition, the approval process is subject to the following procedures where the investment limit exceeds the amount specified by the state for such projects:

• capital construction projects that are above the specified state investment level are also subject to the approval of the State Development Planning Commission (the SDPC); and
• a technical transformation project requiring more investment than is specified under state limits shall also be approved by the State Economic and Trade Commission (the SETC).

The Communications Facilities Provisions further state that no other department is to have authority for approving ICF projects. Although the Provisions are silent on the specified state investment limits, industry observers suggest the amount may be Rmb 50 million (about US$6 million).

The approval process is also determined by whether or not the project involves either a foreign party, or any non-mainland entity, in which case any memorandum of understanding must be submitted for approval by the MII before being executed (see Figure 1 for the approval process decision flow chart).

As part of the review and approval process, the MII may consult with industry experts to evaluate the project, or to undertake appraisal and feasibility studies. The MII shall issue its opinion after the preliminary review or expert evaluation.

Article 9 of the Gateway Procedures notes that channel gateways should be established at locations where fibre optic submarine cables or satellite transmissions can be easily connected. In addition, factors such as network security and reliability will also be considered. Specifically, service gateways should be established in core cities where an international communications business is concentrated and presumably the Gateway Procedures are referring to the main hubs in Beijing, Shanghai and Guangzhou.

Earlier Approvals may be Revoked

The Communications Facilities Provisions set out severe penalties for non-compliance with the new approval process. If any agreement for an ICF project involving a foreign or non-mainland party is executed prior to the preliminary approval process, or if any relevant issues are not disclosed at the time of initial application, the MII may refuse to review or approve such projects.

If such a project has already completed preliminary review, or been approved by the MII, the latter may revoke its earlier decision. In such cases, if consent has already been obtained from either the SDPC or the SETC, the MII will notify the relevant authorities to revoke the approval, and if the project has already been constructed, it cannot be operated. Finally, any ICFs built and operated without MII approval will be subject to prosecution under the relevant provisions of the Telecom Regulations.

No Data Privacy

The Gateway Procedures impose an obligation on ICGs to establish sound security management systems, and more importantly, to provide the MII and its local counterpart with bi-annual reports on the location, technical configuration, types of services and communications capacities of the ICGs. Channel gateway operators are required to provide the names of subscribers leasing private international communications transmission lines, the scope of services, and the names of enterprises at each end of the communications channel. Internet gateway providers must also provide IP ranges, including the IP address and details of the backbone internet provider.

The information disclosure set out in the Addendum to the Gateway Procedures could prove onerous and highly intrusive depending on the level of detail required by the MII and its local counterparts.

Calling the Shots

The timing of the new regulations is important. Telecom construction around the world may be in the doldrums, but China is one market that can still absorb new projects. The MII, and its central planning partners the SDPC and SETC, have been given the mandate to ensure that China's network and operators do not go the way of their global counterparts. Recent events have shown that the telecom industry in the developed markets is beset by overcapacity and debt. In China, the central government wants to know, and to approve what gets built and who can build and operate the network services. Although national security reasons may be the driving force behind the new legislation, they also empower the government to scrutinize business alliances and to have the final say regarding the future of the infrastructure system, and who can or cannot enter the market.