Looking Ahead: Issues in China's Telecommunications Law

The long-recognized need to finalize and issue these regulations has taken on a new sense of urgency now that China has joined the WTO. As one Hong Kong-based lawyer says: "It's rather embarrassing to be a World Trade Organization member and not even have a telecommunications act."

Revisiting the Issues

In 2000, the State Council issued the PRC Telecommunications Regulations(中华人民共和国电信条例), which were the first attempt at comprehensive telecommunications regulatory legislation in China. The regulations were seen at the time as a prelude to the Telecommunications Law, and as a preparatory statement for China to later deliver on its membership commitments to the WTO. Later, the February 2002 Foreign-invested Telecommunications Regulations and the relevant sections of the April 2002 revision to the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录)were issued to show the WTO that China was fulfilling its WTO commitments in telecommunications market access.

Most topics of importance to China telecommunications operations were covered in the September 2000 telecommunications regulations, in varying degrees of specificity. These include preliminary definitions of basic and value-added telecommunications services and the methods for obtaining permits for operating these services. An appendix to the regulations lists the services that fall under the basic and value-added categories. The regulations also mandate the interconnection of networks by telecommunications business operators, and specify that "leading" telecommunications business operators (a term to be defined by the State Council's department in charge of the information industry) cannot refuse requests for interconnection. How telecommunications charges will be assessed is also covered. Charges should be determined based on costs, according to the regulations, but also are subject to a tripartite division of cost determination as those charges regulated by the market, those guided by the government, and those that are fixed by the government, which variously apply depending on the type of service. The regulations make reference to the fact that in addition to costs, the ability of consumers to pay and the requirements of national economic and social development must be borne in mind when charges are fixed.

The regulations also give some explanation of assessments of penalties for violating government policy on telecommunications. The main categories of violations are transmission via networks of prohibited content, which includes information contrary to PRC Constitution principles, incitements to social disorder, anti-state opinions or content, and similar such information; compromising the security of a telecommunications network or stealing other party's information via a network; and illegally offering services to Hong Kong, Macao or Taiwan or illegally connecting to another party's network.

Additionally, one of the introductory articles to the 2000 regulations offers sweeping statements on the separation of government from the telecommunications operators, the breaking up of monopolies and the promotion of competition, which all are stated as foundations for service supervision and management.

In China's complex legislative hierarchy, State Council regulations do not have the legally binding effect that those issued by the National People's Congress and its local people's congresses possess. The laws issued by the legislature always take precedence over regulations and rules issued by the State Council and other administrative bodies. In practice, local administrations sometimes enact rules that exceed their authority and contravene national legislation. These rules can be revoked by a legislative body at an equivalent or higher administrative level. To some observers the 2000 regulations were an important stopgap measure for the pending release of a national telecommunications act.

Managing the Competition

The government has followed a two-pronged approach to deregulation, based on the basic services/value-added services division. In basic services, an operator builds, owns and operates the network that is used for services. In value-added services, providers use an existing basic network to provide their own services.

In basic services, the government has introduced controlled competition. Only a few sanctioned players are allowed in basic services, and all are state-owned. Among others, fixed-line and mobile services and satellite communications are considered basic services.

The definition of basic and value-added services has been reworked since the 2000 telecommunications regulations were issued and a subsequent classification was issued in June 2001. In April 2003, the Ministry of Information Industry issued a new classification scheme, which offers more detail on what is entailed both within and between basic and value-added classifications. In particular, the 2003 classification enumerated the differences between "type 1" and "type 2" value-added services. Type 1 includes online data processing and data processing, domestic multi-party communication services, internet data centre services, and domestic internet virtual private network services. Type 2 covers call centres, internet access, storage and retransmission (e-mail, voice mail, facsimile) and information services.

The government has allowed a much more competitive environment to emerge in the value-added sector. It is estimated that there are about 4,000 companies at the local level offering value-added services; these companies are particularly prevalent in the internet sector. Some are state-owned, and some privately owned and set up by only a few people. Internet usage is growing fast in China, with an estimated 53 million users at the end of 2003.

In accordance with China's commitments to the World Trade Organization, the value-added sector has opened much more quickly than basic telecoms services (within basic services, mobile services have opened to foreign investment at a quicker pace than fixed-line services). Although potentially lucrative, value-added services represent only the thin top layer of China's telecommunications services. Investment in basic telecommunications is difficult for foreign investors, who are limited to 25% ownership in fixed-line providers in three cities (Beijing, Shanghai and Guangzhou) until the end of 2004. By the end of 2007, 49% foreign ownership will be allowed in any fixed-line business anywhere in China.

At the beginning of 2002, the Ministry of Information Industry issued the Foreign-invested Telecommunications Regulations. These regulations for the first time authorized the establishment of Sino-foreign equity joint ventures in the telecommunications sector, removing the official ban on foreign investment in telecommunications services that had existed since 1993. However, despite an official endorsement of foreign investment in telecommunications, the method of determining qualified foreign investors to an equity joint venture telecommunications service provider is not clear, and the foreign-invested telecommunications regulations vest the Ministry of Information Industry with considerable discretion to grant approvals.

The 2002 foreign-invested telecommunications regulations envisioned the set up of new joint ventures. To date, this has not materialized, with the exception of a sports internet portal set up by ESPN/Star Sports with a Chinese internet company and the February 2004 conclusion of an agreement between China Netcom and International Data Group for operation of a broadband network. Big foreign telecommunications players with connections have taken a stake in some of the large Chinese telecommunications service companies, but these have been exceptional cases with central government approval. Foreign investment in telecommunications services remains a strategic, foothold-in-China type of engagement.

Reworking the Telecommunications Monopoly

In the past couple of years, the entire telecommunications landscape in China has been transformed.

The break up of China Telecommunications Corporation in May 2002 was a landmark development in preparation for creation of a more competitive telecommunications services market in China. Largely in response to the market access schedules that China agreed to as part of its WTO membership, the break up of China Telecom and the creation of a duopoly was seen as the first step to creation of a competitive market. Under the State Council plan, two competing companies, China Telecom and China Netcom, were created. Between them they dominate the fixed-line services market. China Telecom was assigned control of operations in 21 mainly southern provinces and municipalities, while China Netcom assumed control of 10 mainly northern cities and provinces. In addition to these two, there are four companies capable of providing basic services: China Mobile; China Unicom; China Railcom; and China Satellite. China Mobile and China Unicom are the leading mobile phone service operators, with China Mobile holding about four-fifths of the mobile phone services market.

Problems with Interconnectivity and Convergence

Competition among and between local operators has been intense. In this climate, a lack of interconnectivity has led to frayed tempers and conflict, including rival operators destroying each other's equipment and assaulting workers from rival companies. Although this might sound overly dramatic, the chaotic quasi-competitive telecoms market is in dire need of strong regulation and implementation of clear interconnection policies to bring order to the market and service to customers.

The government is facing the difficult task of effectively unifying regulation of the main telecommunications businesses and enforcing an interconnection system between networks and operators - issues that it is trying to address in the draft of the new law. Another critical issue is that of enabling convergence of the three main telecommunications networks: telephony; broadcasting; and the internet.

As in other countries, in China the blurred lines between traditional telephone, media broadcasting and use of the internet brought on by rapid developments in technology has led to a patchwork of regulations and approaches to regulating convergence technology. Currently there are two main regulatory authorities charged with regulating the areas that must be covered by new convergence legislation: the Ministry of Information Industry and the State Administration of Radio, Film and Television (SARFT).

For years the Ministry of Information Industry has overseen the telecommunications and internet spheres, while the State Administration for Radio, Film and Television has focused on regulating broadcasting and related media.

To date, the authorities have not been able to include broadcasting in an overarching regulatory framework because of sensitivity over broadcasting's traditional role as the mechanism for dissemination of propaganda, official ideology and a perceived need to shelter Chinese citizens from negative outside influences. As such, internet broadcasting and other fast growth areas have constituted a grey area with respect to how they can be combined under the authority of a single regulator. Chiefly because of its potential to carry unwanted content, broadcasting in China has remained an area that receives particular scrutiny.

Nonetheless, the interconnection issue is high on the agenda for a new telecommunications law. Most industry observers and practitioners stress the fact that the regulatory authorities in China are engineers, and as such are focused on creating a grand interconnection policy that, while not necessarily serving as a panacea for all the ills of China's telecommunications infrastructure, would create some kind of cost-based interconnection regime that serves China's concern for the maintenance of social stability, especially in light of the violent confrontations between different operators in recent years.

Another main reason for the impetus to introduce the law now is the growing movement for creation of a unified regulatory authority for all telecommunications-related industries and technologies.

Although the re-organization of the regulatory authorities is often discussed, it is doubtful that the telecommunications law will make any mention of who is in charge of what. A draft version of the law makes reference to a state telecommunications supervisory and administrative authority as the overarching regulator for the industry, but exactly who this refers to is not clear. Is it a new body created by the government? Or the Ministry of Information Industry renamed? For now, such questions remain unanswered.

The draft refers in suitably vague language to the fact that the law governs all telecommunications and related activities, and that "telecommunications" refers to cable and wireless systems, as well as other optical systems. The language is vague for the latter to conceivably cover cable television, one of SARFT's main responsibilities, but this isn't made clear.

In a development that indicates a more concerted effort to organize government structure in a way that would lead to convergence of the industry, Wang Xu Dong, the Minister of the Ministry Information Industry, was appointed in the spring of 2003 as the head official in charge of the State Council Informatization Office. The latter office, which reports to the State Council, is responsible for determining a comprehensive plan for integration of new technology into overall plans for China's economic development. To date, there have not been any concrete details of the empowerment of this office and it is currently far from clear how it would be able to force the regulatory consolidation of telecommunications and related media.

Interconnection of the networks is an area of crucial importance for the growth of the telecommunications industry. As with the 2000 telecommunications regulations, the draft law mandates interconnectivity among different service providers. Additionally, the draft calls for set up of an administrative tribunal to decide on cases of non-compliance with the interconnectivity mandate within 45 days. Unfortunately, the draft does not contain any provisions for what penalties for non-compliance would entail.

Interconnection charges are also addressed in the law, an area that has been impossible to regulate thus far. Each mobile and fixed-line operator has been extremely wary of cooperating with the competition, in an effort to protect its markets.