China Classifies Telecom Services

Open to Foreign Investment

While domestic network operators dominate BTS, foreign investment is currently permitted in the area of VATS. To some extent, the Classification provides guidance to foreign investors on the types of VATS that they can provide pursuant to China's WTO commitments to foreign investment (see the chart: WTO Schedule versus Classification 2003).

However, foreign investors will need to refer to both the Classification and the Foreign Investment Industrial Guidance Catalogue (Foreign Investment Catalogue, effective April 2002) in order to reconcile China's official definition of services with the timeframe for phasing-in China's WTO commitments to foreign investment in BTS and VATS. In accordance with the Foreign Investment Catalogue, foreign investors in VATS and paging services are currently permitted to take up to 49% equity in such ventures; by December 11 2003 they will have the option to increase the shareholding to a maximum of 50%.

No Access to Basic Services

In contrast, foreign investment in BTS will be liberalized gradually, and will always be subject to foreign ownership restrictions. For domestic and international fixed-line services, foreign investors may hold up to 25% equity by December 11 2004, rising to a maximum 49% by December 2007. Foreign investment in mobile and fixed-line services is also subject to higher minimum capital requirements; for example, an operator who intends to provide coverage in one province requires a minimum registered capital of Rmb200 million. At present, the provision of BTS and VATS is also subject to certain geographic limitations.

All Value-added

Of particular interest to foreign investors, the revised VATS Classification differs significantly from the June 2001 version. According to the latest Classification, there are two types of VATS. These can be broadly described as:

1) data and transaction processing, tele-, video- and net-conferencing, virtual private networks, and data hosting; and

2) communications storage and re-transmission, call centres, Internet access, and general information services.

Each category is generally defined according to the type of service provided, the technology involved, access, distribution of service, and level of inter-activity available to end users.

On-line Data and Transaction Processing

These services cover online banking, stock-broking, securities trading, on-line auctions and payment processing. Under the Classification, banks, securities firms and other financial institutions would need to apply for a VATS licence pursuant to the PRC Administration of Foreign-funded Telecommunications Enterprises. A nationwide VATS licence requires a minimum registered capital of Rmb10 million, making the rollout of such services a substantial investment.

Similarly, many back-office functions may also fall within the purview of the VATS licensing system. The Classification includes service providers that operate data and transaction processing facilities connected to telecom networks, and accessed by subscribers or their customers.

Domestic Internet Virtual Private Network Services

Domestic Internet virtual private network (IP-VPN) services enable businesses to operate or lease a private, dedicated Internet-based network (using TCP/IP protocols) within China. The advantage of these private networks is that they offer a higher level of security and privacy than public access Internet services, through the use of data encryption.

However, in recognizing the potential of IP-VPNs to circumvent the restrictions on VATS and encroach on the territory of basic telecom operators, the Classification states that such networks cannot be used to directly access the public Internet or conduct business transactions, thereby by-passing official control of the Internet and telecom services.

Internet Data Centre Services

Internet data centre (IDC) services cover a wide range of technology, maintenance and communications functions relating to Internet access, systems management and data hosting facilities. As well as building, installing, maintaining, operating and leasing Internet access systems and networks, IDCs can also operate as application service providers (ASPs) (i.e., hosting software for access by subscribers and their clients) and offer bandwidth capacity solutions to their customers.

IDC providers must ensure that they take appropriate security measures to protect mainframe equipment rooms, network switching gear and related ancillary facilities.

Storage and Retransmission Services

These Type 2 services cover three sub-categories: voice mail, e-mail and faxes. Essentially, this category is concerned with delayed or non-real time delivery and management of information (as opposed to data), and is mainly related to services that enable remote access by end users.

For example, voice mail services would include messaging services to individual subscribers via a networked facility, who could send, receive, forward, store or delete messages delivered to and from a central service, but from remote access points such as fixed line or mobile phone connections.

E-mail services mean those that are ITU X.400 compliant (i.e., using packet transmission protocols). They enable users to transact a wide range of information exchange services from various access points, over public telecom and Internet services.

Call Centre Services

Under this heading, companies may establish or lease call centre facilities, to handle customer enquiries and related information-based services (such as data-retrieval), via telephone or other communications networks. Call centres can deliver these information services via voice, fax on-demand, e-mail or SMS systems.

Internet Access Services

These service providers (or Internet Service Providers, ISPs) allow their subscribers to use basic public telecom facilities to connect to the Internet via service nodes linked to the network by way of dedicated servers and software.

ISPs operate two main types of service: to enable businesses and specialist Internet Content Providers (ICPs) to offer information, data and transaction-based services to their customers and subscribers; and to enable end users to access the Internet for the purpose of research, information retrieval, business transactions and other on-line applications.

Information Services

Finally, this catch all category covers general services providing a broad range of information services accessed by or distributed to end users via voice, on-line or data retrieval platforms, connected to public communications networks. The latter encompasses fixed line, mobile, Internet or other network systems.

The types of information provided by these services might include published content, games, business information and directories.

Open House?

While the service descriptions contained in the revised Classification appear to bring the technology up-to-date and are helpful in defining the MII's official understanding of the service parameters, some issues remain unclear. For example, MII officials still seem to hold different views on exactly which VATS services are open to foreign investment.

Some MII officials in Beijing believe that only those services in the VATS Classification that correspond with the services set out in China's WTO Schedules are open to foreign investment. Meanwhile provincial officials take a more liberal view suggesting that the entire range of VATS is open to foreign investors.

Interestingly, a senior MII official has also announced that based on market demand, certain Type 2 BTS such as "fixed network domestic data transmission services", "wireless data transmission services", "customer premises network services" and "network hosting services" will now also be treated as VATS. Such announcements have quickly added to the confusion so soon after the release of the revised Classification.

Central and provincial regulators have scheduled meetings in the coming weeks to mull over the official interpretation of the revised Classification. It is definitely a case of wait and see.

Conclusion

Undoubtedly, the revised Classification provides more guidance to foreign investors who have been particularly eager to lease bandwidth from the BTS operators to market their own high-end VATS services. The revised Classification appears to allow BTS operators to sell or lease capacity for networks that they have built and control.

However, it is important to note, that in devising the 2003 Classification, the MII was not solely concerned with the fortunes of foreign investors. Clearly, from the service definitions for BTS and VATS, the MII is primarily interested in providing greater clarity and a more stable market for domestic service providers. It is still early days to judge whether, as a by-product, foreign investors will also benefit.