Foreign Media, Chinese TV and Market Access: The New Rules from SARFT

Although the details in the Opinions were limited and although SARFT and MOFCOM officials clearly stated that no TV JVs would be approved until the actual regulations implementing the policy statement set forth in the Opinions were issued, a number of multinational media companies hurriedly negotiated the terms of TV JVs with China's large state-owned media groups and waited patiently to submit their applications for establishment of TV JVs as soon as these regulations were issued.

Thus, when the TV JV Provisions were finally issued this autumn, they were read with much interest.

Why this Sector?

The relaxations on prohibitions on foreign investment in TV JVs and in film studios are both outside the scope of the commitments that China made pursuant to its accession to the World Trade Organization. Clearly, China has not been motivated by the need to meet such commitments in opening these areas to foreign investment.

Instead, the commitment SARFT has made to the State Council to migrate 100 million urban households to digital television by 2005 and the remainder by 2015 seems to be the force behind this relaxation. In order to ensure that the digitalization rollout is successful and profitable, China needs good Chinese-language content.

It seems that the government has determined that foreign expertise is required for development of the television programme production industry in China and that Chinese-foreign content on China-related topics produced in the carefully controlled atmosphere of a TV JV will not be dangerous. In addition, it is hoped that the experience provided by foreign investors in TV JVs will enable China to escalate the development of its media industry to the point that Chinese programmes will soon be able to compete on the global stage with programmes produced by multinational media conglomerates.

Differences between the Opinions and the TV JV Provisions

Foreign Investor Qualifications

While the qualifications required of the foreign investor in a TV JV as set forth in the TV JV Provisions are not as stringent as those set forth in the Opinions, they are still very limiting. The Opinions required that the foreign investor be a "powerful and influential" film and/or television programme production company, but the TV JV Provisions merely require that the foreign investor must specialize in radio and television business.

Thus, under the TV JV Provisions all foreign companies that operate radio and television businesses would meet the qualifications for investment in a TV JV but foreign private equity funds, which had harboured hopes that financial investors would be permitted to take a minority stake in TV JVs alongside foreign media company investors, have been completely shut out from investments by the TV JV Provisions.

Although this restriction was not unexpected, it is still disappointing. In imposing this requirement, SARFT has narrowly focused on upgrading the quality of content produced by Chinese media companies. However, the management and financing expertise of financial investors should also be tapped in order to help these Chinese media companies to develop healthier and better management in corporate and financing matters.

Chinese Investor Qualifications

Although the Opinions stated that the Chinese investors in TV JVs would be required to be state-owned enterprises, fortunately the TV JV Provisions do not include this restriction. The only requirement is that the principal Chinese investor must either have a radio and television programme production and operation permit or a television drama production permit (Class A). This considerably broadens the field of potential partners for foreign companies considering investments in TV JVs and opens up opportunities for China's fast-developing private media companies. Many private companies now have radio and television programme production and operation permits due to the gradual opening of the media industry to domestic private investment that has occurred over the last few years. Thus, many private Chinese companies would qualify to be the principal investor in a TV JV. It remains to be seen how many such TV JVs in which the Chinese investor is a private company will be approved in practice by SARFT.

In addition, the TV JV Provisions leave open the possibility of a domestic company that does not qualify for a programme production permit or have any media experience, such as a domestic financial investor, taking a minority interest alongside a Chinese media company in a TV JV.

Types of Joint Ventures

Unlike the Opinions, which indicated that TV JVs must be established as equity joint ventures, the TV JV Provisions permit the establishment of TV JVs as equity or cooperative joint ventures. Although this might seem to be a more flexible approach, allowing more than one form of joint venture, we believe the actual practical effort is minimal.

In fact, the TV JV Provisions specifically state that the Chinese investor may contribute in cash or in kind to the registered capital of the TV JV. But they only list the following as types of permitted in-kind contributions: buildings, factories, machinery and equipment or other materials, industrial property rights, proprietary technology and land use rights. Thus, even for the Chinese investor, the TV JV Provisions seem to eliminate the possibility of the Chinese investor contributing non-appraisable intangibles referred to as "conditions of cooperation", as is normally permitted for contributions to cooperative joint ventures.

The foreign investor is even more limited in the form of its contribution. The TV JV Provisions state that the foreign investor must contribute in cash in the form of foreign exchange. Thus, the foreign investor is not even permitted to contribute equipment and other assets that would normally be acceptable as contributions to an equity joint venture.

In addition, although it is not explicitly mentioned in the TV JV Provisions, based on our experience in other industries we believe SARFT will likely not approve TV JVs established as cooperative joint ventures in which the profits of the TV JVs are intended to be split such that the foreign investor would receive more than 49% of the profits. Such a provision would normally be permitted in cooperative joint ventures engaging in non-restricted industries.

Thus, permitting cooperative joint venture TV JVs will probably not permit any additional flexibility in practice.

Limits on Foreign Investment

Although the provision specifying the limit on foreign ownership in a TV JV set forth in the TV JV Provisions does not contradict the Opinions, which provided that the Chinese investor must be the controlling shareholder in a TV JV, the provision in the TV JV Provisions does clarify the specific percentage interest that a foreign investor will be permitted to hold in a TV JV. There was speculation in the period between the issuance of the Opinions and the issuance of the TV JV Provisions that SARFT was considering limiting foreign investment to about 30%. Thus, the clarification that foreign investors would be permitted to take a 49% ownership stake was greeted with relief.

Chinese Investor Control over a TV JV

The TV JV Provisions include several provisions designed to make clear that the Chinese investor in a TV JV will be held responsible for compliance with restrictions on prohibited content.

Thus, although the TV JV Provisions do not explicitly state that the Chinese investor must appoint its personnel to fill any specific management positions of the TV JV, it does state that the Chinese investor must appoint the legal representative of the TV JV. This position, which also entails acting as the chairman of the board of directors of the TV JV, is largely ceremonial from the point of view of the day-to-day operations of the TV JV. But to the government, requiring the Chinese party to appoint the legal representative of the TV JV makes clear that the Chinese investor will be held liable for the violations of the TV JV. The legal representative of a joint venture can be held personally liable (and even criminally liable) for the actions of the TV JV.

The TV JV Provisions also explicitly state that the contract for the establishment of a TV JV must provide that the selection of the programming topics and the contents of programmes shall require the explicit consent of the Chinese investor in the TV JV. This ensures that the Chinese investor is in charge of compliance and cannot deny that it had the right to reject any non-compliant programming.

It is noteworthy that the TV JV Provisions do not include a requirement that the Chinese investor appoint any management personnel of the TV JV. Despite the lack of a specific provision to this effect, we believe, based on our experience, that it is likely that SARFT would not approve a TV JV in which the Chinese investor had no right to appoint a high-level manager such as a deputy general manager. In fact, it is likely that such deputy general manager may, in practice, be required to have a content compliance brief.

Branding: The Crown Jewel

Many multinational media companies seem to view investments in TV JVs primarily as a means of brand building in China. They expect to use their TV JVs as a means of gaining recognition for their brands in the enormous Chinese market.

Thus, the provision requiring a TV JV to have an independent logo in the TV JV Provisions has caused some concern among foreign investors. The TV JV Provisions provide that a TV JV must have an "independent" enterprise logo that must be submitted to SARFT as part of the approval process.

The exact intent of this provision is unclear. If the logo is required to be completely distinct from the logo of the foreign shareholder of the TV JV, this requirement will have an impact on foreign media companies considering investments in TV JVs and may discourage a significant number of them from making such investments.

It should be noted that the Administration of Radio and Television Cable Digital Pay Channel Business Tentative Procedures (Trial Implementation), issued by SARFT on November 14 2003 and effective on December 1 2003, contain a related restriction that requires that digital pay television channels own their brands and other intangible assets. In both cases, the intent seems to be to ensure that Chinese media companies build their own brands rather than merely utilizing existing foreign brands. Thus, this requirement is part of the general strategy of developing globally competitive Chinese media companies. Foreign investors must consider whether and how their own brand building strategies can be synthesized with this overall Chinese media strategy.

Limits on Programme Types

TV JVs are permitted to produce a wide variety of programmes, including feature programmes, topical programmes, variety shows and animated programmes. They cannot, however, produce news shows. Also, at least two-thirds of the content produced by a TV JV must be on Chinese topics. As usual, definitions are lacking and it is not immediately clear how the terms "news" and "Chinese topics" will be defined in certain ambiguous cases.

The TV JV Provisions also specifically set forth the established list of prohibited types of content that appears in many other pieces of legislation. TV JVs are prohibited from producing programmes that contain any banned content.

Conclusion

China is continuing efforts to develop its media industry through the opening up of various sectors to private domestic investment and, in some cases, foreign investment. This policy promises to result in a burgeoning of talent and programming in this content-starved market and to offer increasing opportunities for foreign media companies striving to break into the coveted China market.