Communicating changes

The Measures became effective on April 10 2009.

The new Measures
The PRC Telecommunications Regulations (中华人民共和国电信条例)introduced in 2000 provide for two categories of telecoms services: Basic Telecommunications Services and Value-added Telecommunications Services. The Measures regulate both types of services.

Broadly, Basic Telecommunications Services refer to services provided by operators which own telecommunications network infrastructure. Value-added Telecommunications Services are services provided by operators using the network infrastructure of the Basic Telecommunications Services operators.

The new Measures govern the application procedures for operating licences including conditions of applying for such licences, approval procedures, scope of use of operation licences, amendment and de-registration of licences, supervision and inspection of telecom operators' activities, and penalties for non-compliance. The Measures also introduce new provisions relating to the regulation of the conduct of telecom operators.

The following important changes have been introduced by the Measures:

1. Lower entry requirements in respect of Basic Telecommunications businesses

The Measures introduce lower capital requirements for investors who intend to engage in Basic Telecommunications businesses.

The minimum investment requirement for operating telecoms infrastructure in provincial, municipal and autonomous regions has been reduced from Rmb200 million to Rmb100 million. Capital requirements for national or cross-regional operations have been reduced from Rmb2 billion to Rmb1 billion.

2. Anti-competitive behaviour and illegal internet activities

The Measures introduce a new chapter five on the regulation of operation activities, which mainly requires telecom operators to provide services under the principles of openness and equity and not to engage in unfair competitive practices. The anti-competitive provisions in the Measures complement the Anti-monopoly Law (中华人民共和国反垄断法) which took effect on August 1 2008.

The Measures also impose an obligation on Value-added telecom service providers who provide internet access services to monitor, record and report any illegal transmission of information through the relevant network and/or suspend the service of network access to offending users. This requirement is in line with recent efforts by the Chinese government to promote a healthy online culture including limiting access to any online content which may have the effect of undermining government control or social stability.

3. Stricter exit requirements

Under the previous regulations, a telecom operator could cease operations before the expiry of its licence and make an application for de-registration of the licence. De-registration was permitted on the basis that the operator met with certain conditions such as submission of supporting documentation and ensuring minimal disruption to end users.

Chapter six of the Measures stipulates that if a telecom operator is required to terminate its licence before its expiry, it must submit the following:

(a) a written application providing details of the licence which must be signed by an authorised representative of the relevant licensee;

(b) a resolution of the shareholders' of the licensee authorising the termination of the relevant licence;

(c) a statement of commitment in relation to handling termination issues and ensuring minimal disruption to end users as a consequence of the termination;

(d) a detailed plan setting out end user issues which may arise as a result of the termination of the licence, proposed internal and external announcements and representations to be made to users, end-user opinions and an implementation plan in relation to the termination; and

(e) the original business permit and a copy of the enterprise licence.

If an operator intends to terminate its licence before it has expired, the operator will be required to make a public announcement of the termination.

The Measures also provide for sanctions for non-compliance with the provisions of the Measures including financial penalties, suspension and revocation of licences.

Practical implications
The implementation of China's commitments to market access, competition and foreign investment in the telecommunications sector has been lagging for several years. The country has made a notable transformation to its telecommunications regulatory framework, however. The new Measures are expected to play a transitional role as part of broader reforms before a complete reformation of the 2000 Telecommunications Regulations comes into effect, reportedly in 2010.

The Measures will have different implications at different stages of the development of the telecoms sector. The short- to medium-term impact following the issue of the Measures is likely to include the following:

1. Integration of telecommunications, cable TV and internet

While the capital requirements for basic telecommunications businesses have been reduced by 50%, the capital requirements for Value-added Telecommunications businesses remain unchanged. Lowering entry requirements will encourage domestic enterprises to participate in the Basic Telecommunications services sector creating an environment conducive to convergence of telecommunications, cable TV and internet networks.

Entry barriers for foreign investors continue to remain more stringent in the telecommunications sector than in the cable television and internet sectors. Some analysts predict that the latter sectors are likely to see a higher foreign investment as a result: foreign operators are reluctant to invest vast sums in companies over which they do not have majority control. Despite this, there have been operators who have taken minority stakes and will continue to do so, to ensure they gain a foothold in the world's largest market. It is unlikely that the Measures will have any impact on the decision of a foreign operator in whether or not to invest in the PRC.

One of the main benefits of the provision of so-called converged services is that the integration of the three platforms will promote efficient use of existing spectrum and bandwidth as well as technology innovation. This is particularly true given the substantial growth in network scale and capacity in the telecommunications sector since 2002, the recent granting of the 3G licences and the manner in which the operators have indicated they will use those new licences. The relaxation of capital investment requirements in the basic telecommunications services sector coupled with readily available resources means that the provision of converged services will be on the horizon sooner rather than later.

The reduction in registered capital requirements is expected to boost investments in the provision of basic telecommunications services, facilitate the convergence of telecoms, cable and Internet platforms and improve competition.

However, given that foreign participation in the Basic Telecommunications businesses remains restricted – foreign investors may hold a maximum stake of up to 49% in respect of Basic Telecommunications businesses – it is likely that this reduction in the minimum investment requirement will be of more interest to domestic investors rather than foreign investors.

2. Increased regulation on operator conduct and curbing illegal internet activities

The Measures aim to strengthen the regulation of the activities of telecom operators as well as establish a fair and competitive telecoms market. They specifically provide for both Basic telecom operators and Valued-added telecom operators to work in co-ordination with each other with respect to provision of content and charging fees, as well as establishing corresponding systems and measures. This emanates from the government's policy of mutually beneficial co-operation, effectiveness, achievement sharing and promotion of growth in the telecoms sector.

To an extent, the Measures appear to harmonise the provision of Basic and Valued-added services. Whether they will prove to be effective, however, remains to be seen, particularly given the inherent tension between the owners of the network infrastructure and those operators who wish to sell services using that infrastructure. The experiences of other countries suggests that the incumbent operators resist all attempts to open up their networks to easy access by new operators; new operators are constantly in battle with the incumbents to get the access they believe they need in order to be able to provide their services economically.

The MIIT will also establish an inspection system specifically catering to the Chinese telecommunications market. Under this system, telecom operators will be subject to further reporting obligations as and when required by telecom authorities in accordance with the Measures. This will impose additional costs on those operators as they will be required to set up systems to be able to meet those reporting requirements.

It is worth noting that the Measures include specific provisions to regulate the dissemination of illegal online content. Value-added telecom operators have a positive obligation to supervise activities of users transmitting any “illegal” content over accessed networks. They are also required to suspend or terminate access to networks as required by the telecom authority.

China's efforts in controlling the transmission and dissemination of online content have been the subject of widespread criticism as well as international news headlines. This has not deterred the government from deploying far-reaching measures to regulate content which may potentially cause damage to, or disruption of, national unity, territorial integrity, social order and stability. The MIIT has introduced various regulations and measures over recent years in an attempt to combat the proliferation of offensive or potentially damaging content on the internet. The Measures add another layer to the existing regulatory framework and represent the latest front in the battle between those trying to avoid the controls and the government, which is seeking to retain control over online debates and content.

3. More emphasis on consumer welfare and transparency

As the telecom industry develops, so will consumer expectations. It has become a lot harder for a telecom operator to cease operations before the term of their licence. The Measures provide for submission of detailed information by telecom operators wishing to terminate their licences, including shareholders' resolutions authorising the termination, statements of commitment and detailed plans on continuation or termination of services to end users. This is designed to protect consumers from being stranded without a service which they have paid for, as well as to require enterprises to commit to satisfactory levels of customer services. It will also ensure that any new investor will have to be very certain of their business plans before applying for and receiving a licence.

The Measures also aim to introduce transparency in relation to licensing and reporting procedures. Administrative departments are required to maintain records and publish the identity of telecom operators whose conduct is in violation of the Measures. These provisions are intended to encourage compliance with the Measures, and more importantly, to encourage telecom operators to operate in a fair and reliable manner.

The importance of convergence
While China paves the way for reform in the domestic market, foreign ownership and participation in China's telecommunications industry remains restricted. The State will continue to hold controlling stakes in all telecom operators. Therefore the impact of these Measures will be more relevant for the domestic investors rather than for foreign investors.

It is, however, clear that the Chinese government considers competition, foreign investment and convergence integral to the progression and development of its telecommunications industry. The emergence of converging platforms, such as fixed-mobile convergence, has meant that change is imminent. This change will ensure that China's telecommunications industry is effectively regulated and a level playing field applies to all investors.

The Measures, to a large extent, achieve some of China's wider objectives in spite of laws which are sometimes regarded as protectionist. The relationship between China's international trade commitments and its domestic reforms to create an institutional framework is reflective of continued growth of the domestic telecommunications sector. Following an announcement in March 2009 by the Telecommunication Policy Research Institute, it was reported that the National People's Congress will be finalising in 2009 the long awaited new telecommunications legislation. The legislation is expected to give MIIT and other supervisory bodies more power than the 2000 Telecommunications Regulations, including governing access to the basic and value added service markets. The Measures can be seen as part of the iterative process of change which will result in new telecommunications legislation coming into effect in 2010.