Introduction
China’s annual Central Economic Work Conference in December 2023 and the Report on the Work of the Government in March 2024 proposed to expand market access for telecom services and other service industries. New requirements are introduced for the telecom industry to implement a higher level of openness for foreign investors.
On April 10, 2024, the Ministry of Industry and Information Technology (“MIIT”) issued the Circular on Pilot Programs for Expanding the Opening-up of Value-added Telecom Business to Foreign Investment (Chinese: 工业和信息化部关于开展增值电信业务扩大对外开放试点工作的通告) (the “Circular”). The Circular launches pilot programs in four key regions, Beijing, Shanghai Lin-gang Special Area and Pudong New Area, Hainan Province and Shenzhen, to remove foreign investment shareholding restrictions in various value-added telecom sectors, including internet data centers (IDC), content delivery networks (CDN), internet service providers (ISP), online data processing and transaction processing, and parts of information services. These information services include information publishing platforms and delivery services (excluding internet news information, online publishing, online audiovisual, and internet cultural operations) and information protection and processing services.
This article contains analysis and commentary on the key contents of the Circular.
1. Pilot Regions
The pilot regions include:
(i)Beijing’s comprehensive demonstration zone for expanding the opening-up of the services industry, which covers the entire city of Beijing;
(ii)China (Shanghai) Pilot Free Trade Zone Lin-gang Special Area and the Pioneer Area for Socialist Modernization, which cover Shanghai Lin-gang Special Area and Pudong New Area;
(iii)Hainan Free Trade Port, which covers all of Hainan Province; and
(iv)Shenzhen Pilot Demonstration Area of Socialism with Chinese Characteristic, which covers the entire city of Shenzhen.
These four regions are all pioneers in opening up to foreign investment. The work programs or planning of these regions have either signaled an intention to expand market access to foreign investment in telecom business or have already begun opening some value-added telecom services to foreign investors under certain conditions.
The pilot regions have established local regulatory systems that welcome openness to foreign investment and innovation. These regions boast well-developed information and communication industries, leading supporting facilities and regulatory capabilities in China. All these factors are conducive to attracting foreign investment and providing excellent services and supervision for the opening of value-added telecom businesses.
The Circular also proposes to expand the scope of the pilot regions gradually as the pilot programs are implemented.
2. Pilot Value-added Telecom Services
According to the Circular, foreign investment shareholding restrictions on the following value-added telecom services are lifted in the pilot regions:
(i)internet data centers (IDC);
(ii)content delivery networks (CDN);
(iii)internet service providers (ISP);
(iv)online data processing and transaction processing;
(v)some information services, including information publishing platforms and delivery services (excluding internet news information, online publishing, online audiovisual, and internet cultural operations) and information protection and processing services.
Currently, value-added telecom businesses open to foreign investment are limited to information services, store-and-forward business, online data processing and transaction processing. Additionally, the foreign investment shareholding ratio must not exceed 50%, except for e-commerce, domestic multi-party communication, store-and-forward and call center businesses. Free trade zones have further removed foreign investment restrictions on certain value-added telecom businesses. For example, in information services businesses, the foreign shareholding ratio in application store businesses can reach 100%; and in internet access services (providing internet access services for internet users only), the foreign shareholding ratio can exceed 50% but must be within the service scope of the free trade zones.
Under the Closer Economic Partnership Arrangement between Chinese mainland and Hong Kong and Macau (“CEPA”), Chinese mainland has adopted a more open stance towards investments from Hong Kong and Macau. For example, qualified service providers from Hong Kong and Macau can establish joint ventures in Chinese mainland to provide IDC and CDN services, with the shareholding ratio of Hong Kong and Macau investment not exceeding 50%.
The foreign investment access policies regarding the pilot value-added telecom services are summarized in the below table.
The pilot opening of IDC and CDN under the Circular marks the first time that China has opened these sectors to foreign investments beyond Hong Kong and Macau. Notably, there are no restrictions on foreign shareholding ratios. While the Hainan Free Trade Port has opened these businesses, the scope is confined to operations within port and international transactions. In contrast, the pilot programs encompass IDC and CDN nationwide, representing a significant breakthrough. Historically, foreign investment restrictions in the IDC sector have compelled investors in data center and cloud computing industries to devise specialized transaction structures to ensure the IDC license holder remain a wholly domestic entity. With the introduction of these pilot programs, foreign investors can now engage in relevant business more conveniently and enjoy greater flexibility in transaction structuring.
Regarding ISP services, only the subcategory of ISP services, i.e. providing internet access services for internet users, has been opened to foreign investment in free trade zones and under CEPA. Other ISP services are opened to investment from Hong Kong and Macau, with the foreign shareholding ratio of no more than 50%. The pilot programs extend the scope to cover all ISP services.
Foreign investment restrictions on e-commerce within online data processing and transaction processing business have been lifted at the national level. The pilot programs further expand to encompass all online data processing and transaction processing business.
Information services include: (i) information publishing platforms and delivery services, (ii) information search and query services, (iii) information community platform services, (iv) information instant interaction services, and (v) information protection and processing services. Among these, application store services (a sub-service of information publishing platforms and delivery services) are open to foreign investment in free trade zones and under CEPA. The pilot programs further open information publishing platforms and delivery services (excluding internet news information, online publishing, online audiovisual, and internet cultural operations) and information protection and processing services, but information search and query services, information community platform services and information instant interaction services are not included in the scope of the pilot.
3. Operational Requirements
The Pilot Plan for Expanding the Opening-up of Value-added Telecom Business to Foreign Investment attached to the Circular specifies operational requirements for pilot businesses: operators must have their registered address and facilities (either owned or leased) within a pilot region. They are prohibited from procuring or leasing CDN and other facilities outside the pilot region for acceleration services. The ISP service must operate within a pilot region and provide internet access services to users through basic telecom operator’s internet access equipment. The scope of other services can be nationwide.
4. Applications to Join the Pilot
The Circular stipulates that foreign-invested telecom operators seeking to carry out pilot value-added telecom services in pilot regions shall apply to the MIIT for approval of pilot telecom business operations in accordance with the relevant provisions. They must comply with the applicable laws, regulations and the pilot approval, and accept and cooperate with the supervision and management of the regulatory authorities.
While applications for value-added telecom licenses are typically managed by local authorities, foreign-invested telecom operators must obtain approval from MIIT to participate in the pilot programs under the Circular.
5. Pilot to start upon MIIT’s approval of the Implementation Plan in Pilot Regions
According to the Circular’s requirements, the provincial governments of the four pilot regions are tasked with formulating implementation pilot plans and submitting them to MIIT for approval. MIIT, together with the other relevant authorities, will then organize assessments, demonstrations, and research to verify safety supervision and security systems before granting approval. Once approved, the relevant region can formally commence the pilot program.
Summary
The issuance of the Circular represents another significant stride in China’s opening-up to foreign investment in the value-added telecom industry. Particularly noteworthy is the breakthrough opening of IDC and CDN services, aligning with China’s policy to attract foreign investment in the computing industry. Implementation of the pilot programs is pending MIIT’s approval of the detailed pilot plans for each pilot region which will provide further clarification. Foreign operators interested in participating in the pilot programs are encouraged to closely monitor developments. We will also actively follow up and share additional insights in due course.
For further information, please contact:
CHEN, Wei, Partner, JunHe
chenwei@junhe.com
