29 February, 2016
On 28 December 2015, the Ministry of Industry and Information Technology ("MIIT"), China's telecoms and Internet regulator, issued the revised Classification Catalogue of Telecommunications Businesses (2015 Edition) (the "2015 Catalogue"). The long-awaited 2015 Catalogue will come into effect on 1 March 2016. A draft which included some of the main changes to the 2015 Catalogue was circulated for public comments in 2013 ("2013 Draft Catalogue"), but this is the first official 'face lift' since the 2003 version (the "2003 Catalogue"). Thirteen years is a huge gap in technology terms, and the 2003 Catalogue had become seriously out of touch with the latest technologies, leading to a disconnect between the services described in it and the market it purported to regulate.
The 2015 Catalogue retains the general classifications set forth in the People's Republic of China Telecommunications Regulations ("Telecommunications Regulations"). Regulated services requiring a telecoms business operating permit (here a "Permit", also sometimes called a "license") are divided into basic telecommunications services ("BTS") and value-added telecommunications services ("VATS"). Within these categories are sub- classifications into Type I and Type II services. The 2015 Catalogue maintains this framework, but does revise the description of certain services and moves some services from one sub-category to another. In short, there has been incremental change, rather than the radical overhaul the thirteen-year time lapse would appear to have merited.
Below we list and discuss some key revisions and new developments in the 2015 Catalogue, especially as they relate, among other things, to hot topics such as:
- cloud computing;
- e-commerce;
- content distribution networks (a point of particular relevance for offshore content providers who hire a Chinese onshore company to cache data in China for ease of delivery onshore);
- resale of cellular mobile services;
- continuing uncertainty as to when an Internet Content Provider ("ICP") Permit is necessary; and
- call centre services.
1. Cloud computing services
1.1 Concept of cloud computing services
Notwithstanding their rapid deployment in the market, currently there is no "hard law" in China which provides a clear or comprehensive definition for cloud computing services. However the State Council's Opinion on Promoting the Creativity and Development of Cloud Computing and Cultivating New Information Industry Ecology and the Guidelines on the Construction of Cloud Computing Comprehensive Standardization System (collectively, the "Guidelines") can serve as useful reference points.
Under the Guidelines, cloud computing refers to centralized management and dynamic allocation of computing, storage, software and other resources through networks, so that information technology capability can be provided on demand. From a technical perspective (and as per the Guidelines), cloud computing services can be classified into three main sub- categories of services, Infrastructure-as-a-Service ("IaaS"), Platform-as-a-Service ("PaaS") and Software-as-a-Service ("SaaS").
1.2 Cloud computing under the 2003 Catalogue
The 2003 Catalogue was particularly ill-adapted to regulating cloud computing services: this was understandable, given that cloud computing technologies were barely known and not widely deployed in 2003. However, as IaaS and PaaS were arguably already captured by the description of Internet Data Centre ("IDC") services under the 2003 Catalogue, in practice, service providers offering IaaS and PaaS needed to apply for and obtain an IDC VATS Permit. However, it was not clear under the 2003 Catalogue whether SaaS also required a VATS Permit. On the one hand, technically SaaS services are hosted by an IDC 1.3 provider, so there was an argument that a SaaS provider itself did not need to hold an IDC VATS Permit under the 2003 Catalogue. On the other hand, just to confuse matters, it appeared to us that some local MIIT branches took the position that SaaS was regulated as a type of ICP service and required an ICP VATS Permit.
Cloud computing under the 2013 Draft Catalogue
With a view to specifically capturing and regulating cloud computing services, a new category called Internet-based Resources Collaboration ("IRC") services was created and incorporated into the 2013 Draft Catalogue, which was widely interpreted as a specific category designed to capture all types of cloud computing services. However, this gave rise to a new issue, namely given that under the 2013 Draft Catalogue, part of IaaS and PaaS were still captured by the description of IDC services, any IaaS or PaaS service provider (but not an SaaS provider) would have needed to have applied for and obtained VATS Permits covering both IDC services and IRC services, which would have been an onerous burden to discharge for IaaS and PaaS providers.
Cloud computing under the 2015 Catalogue
It seems to us that MIIT may have attempted to solve the above new issue by simply merging IRC services as a sub-category
under IDC services in the 2015 Catalogue. Unfortunately, this had the effect of pushing another piece out of alignment in the delicately poised regulatory matrix. Whilst it has become clear under the 2015 Catalogue that IaaS and PaaS providers must henceforth apply for and obtain an IDC VATS Permit, confusion reigns over which VATS Permit SaaS providers should now apply for.
On a plain reading, the description of IRC services in the 2015 Catalogue captures all types of cloud computing services, so on the face of it, SaaS service providers would also need to apply for an IDC VATS Permit. However the question is whether this would be realistic or practical, given that most SaaS providers are software houses and do not have the necessary experience or facilities such as server warehouses available to support an application for an IDC VATS Permit. Under such circumstances, currently there is another interpretation in the market, that under the 2015 Catalogue, if the services are captured by any of the descriptors of ICP services, IRC services should be read as only encompassing IaaS and PaaS, whilst SaaS would require an ICP VATS Permit. We are of the view that the latter interpretation would make more sense both legally and practically, but it would still be advisable to check with local MIIT officials before launching any SaaS product, given the lack of clarity in the law.
1.5 Impact on foreign investment
The 2015 Catalogue does not make any substantial change in the regulatory environment for foreign investment in the area of cloud computing (or telecoms in general for that matter). China made no specific commitment to open up the IDC service market when it joined the World Trade Organization ("WTO"), and, practically speaking, it has proved very difficult (if not impossible) for foreign invested enterprises ("FIEs") to obtain an IDC VATS Permit (except for a Hong Kong/Macau invested joint venture where the foreign investor qualifies under the Closer Economic Partnership Arrangement between the Mainland and Hong Kong/Macau).
In addition, although ICP services were specifically listed in the commitments when China joined the WTO, in practice it has also proved very difficult (even with the cap on foreign investment fixed at 50%) for a foreign invested joint venture to obtain an ICP VATS Permit.
2. E-commerce
2.1 Applicable category
Perhaps the biggest disappointment in the 2015 Catalogue is the lack of progress on bringing order and rigour to the regulatory treatment of e- commerce.
The concept of what constitutes "e-commerce" has never been clarified under the law. According to the General Office of the Ministry of Commerce Circular on the Relevant Issues concerning the Examination, Approval and Administration of Foreign Investment Projects in Internet and Vending Machine Sales (the "Internet and Vending Machine Circular"), provision of a third party platform ("Third Party Platform") on which other parties can transact (e.g. an eBay or Taobao-type model which brings buyers and sellers together) requires a VATS Permit, which in practice has been interpreted as an ICP VATS Permit; whilst provision of a self-owned platform for sales of self-owned products is seen as an online extension of the bricks and mortar sales channel and only requires an ICP record filing ("ICP Filing").
However, MIIT has never officially endorsed (or refuted) the Internet and Vending Machine Circular. On top of this, according to the recently promulgated MIIT Circular on Removing the Restrictions on Foreign Equity Ratios in Online Data Processing and Transaction Processing (E- commerce) Business ("E-commerce Circular"), MIIT seems to have come to the position that operational e-commerce should be regulated under the separate VATS category of On-line Data Processing and Transaction Processing Services ("OTP"), and hence can only be engaged in subject to obtaining the corresponding VATS Permit. It is unfortunate that the E-commerce Circular fails to provide any clarification on the concept of e-commerce. After the promulgation of the E-commerce Circular, many commentators took the view that the concept of e-commerce should also refer to third party platforms, and, going forward, operators of third party platforms should apply for the OTP VATS Permit, rather than the ICP VATS Permit. Understandably this has resulted in quite a lot of confusion, with some operators having one or the other VATS Permit (often for historical reasons), and some hedging their bets with both.
(a) Traditional third party platforms
It appears that to date the only industry where the E-commerce Circular has been enforced effectively is the so called "traditional" third party platforms, where physical goods are being sold by sellers over the platform (e.g. an eBay or Taobao-type model). Most major third party platforms have obtained the OTP VATS Permit in addition to the ICP VATS Permit. However, for non-traditional third party platforms, the picture is even more confusing. We have set forth two examples below to illustrate this.
(b) Online travel agents
Online travel agency services can also be seen as the provision of a third party platform for travel services. However, based on our research, most providers of online travel agency services in China have only obtained an ICP VATS Permit, and have not obtained the OTP VATS Permit.
(c) Online finance business
According to the Promoting the Healthy Development of Online Finance Guidance Opinions jointly issued by MIIT and other nine departments of the State Council, third party online finance platforms must have either obtained a VATS Permit or conducted an ICP Filing. This raises the issue of whether this provides the basis for an argument that in the specific area of online finance business, an ICP Filing may be enough to satisfy the regulatory requirement from the telecommunications perspective, or whether the wording used is shorthand (omitting the words "whichever type of consent may be required by law"). Based on our research, quite a number of providers of third party platforms for online finance services have only conducted an ICP Filing. Does this mean MIIT has tacitly given ground (or been told to do so) in the financial services area in the same way as MOFCOM does not approve the establishment of certain financial sector FIEs? The position in this very promising sector is far from clear or satisfactory.
2.2 2015 Catalogue
Under the 2015 Catalogue, there are two major changes to OTP services:
(a) OTP services have been re-classified from Type I VATS to Type II VATS. Typically Type I VATS include services based on facilities and resources, while Type II VATS include services based on public application platforms. Generally speaking, it should be easier to obtain a Type II VATS Permit compared to a Type I VATS Permit.
(b) In addition to telecommunications networks, the 2015 Catalogue also adds the Internet as another medium for providing the platform for OTP services.
Notwithstanding the above changes, nothing in the wording of the 2015 Catalogue bears any relation to, or casts any light on, the E-commerce Circular, and therefore the concept of e-commerce remains unclear under the 2015 Catalogue.
3. Content distribution network ("CDN") services
3.1 Background
CDN service is another example reflecting the lack of clarity and rigour in the area of telecommunications in China. From a legal perspective, the business scope covered by a VATS Permit should be expressly listed in the Telecommunications Catalogue. Nevertheless, MIIT once issued a CDN VATS Permit to a Chinese company around 2000, when CDN was not even listed as a category in the Telecommunications Catalogue. After issuing that CDN VATS Permit, however, MIIT then refused to issue any more CDN VATS Permits. Because of this, for quite a long time, it was unclear whether CDN services were subject to a "special" VATS Permit supplemental to the realm of the Telecommunications Catalogue, or whether the CDN VATS Permit did not actually exist as a live category and the first one issued, although not retracted, had merely been a mistake. The 2015 Catalogue appears to finally put this question to bed with the creation of a new Type I VATS service for CDN services.
3.2 Impact on offshore structures
Given the strict controls over foreign investment in the area of telecommunications, a number of international telecommunications service providers have been providing their services to Chinese clients under an offshore structure, whereby the services are hosted outside of China and are delicately modeled to reduce or remove any nexus with China. Arguably, such services are not subject to Chinese law and therefore the service providers do not need to apply for a BTS/VATS Permit.
However, one of the important technical issues is that in part due to the 'Great Fire Wall of China', latency and slow response times for cross-border Internet services may, in some cases, significantly diminish the user experience. To overcome this issue, most offshore telecommunications service providers are now caching the relevant data in China by using CDN services. After the promulgation of the 2015 Catalogue, to avoid the risk of business interruption, services providers should reconfirm with their Chinese CDN service providers and ask such providers to provide their CDN VATS Permit to ensure that such provider actually has the right to provide CDN services under Chinese law.
4. Virtual network operators ("VNOs")
4.1 Background
With the slow-down in the pace at which the Chinese economy is developing, the Chinese government is trying to kick-start the economy by encouraging privately owned companies (as opposed to state-owned companies, for these
purposes) to invest in areas which originally were only open to state-owned businesses. Telecoms in China, particularly BTS has historically been and remains to this day dominated by the "Big Three", all of which are majority State-owned. Under such circumstances, one important development in the BTS area is that under the 2015 Catalogue, subject to approval by MIIT, privately owned companies are now allowed to act as resellers (traditionally referred to as VNOs) of cellular mobile telecommunications services.
4.2 Approval and record filing procedure under the Pilot VNO Circular
According to the MIIT Circular regarding the Launch of Pilot Re-sale of Mobile Telecommunications ("Pilot VNO Circular") issued on 17 May 2013, resellers must first obtain approval from the central MIIT, and then file such approval together with the resale agreement with the local branch of MIIT where such resale business is to be conducted. Interestingly, the Pilot VNO Circular even required that every BTS must work with more than two resellers to engage in the resale of its mobile telecommunications services, presumably to prevent them from putting roadblocks in the way of VNOs by only accepting one or doing a 'sweetheart' deal with one connected to it. It is also worth noting that the Pilot VNO Circular expired on 31 December 2015. We expect a new rule to be put in place very soon which reportedly will further liberalize the resale market for privately-owned companies.
4.3 Resale of mobile telecommunication services under the Catalogue
Those with long memories will remember that "resale of mobile telecommunication services" briefly appeared in a pre-2003 Catalogue draft as a BTS administered 'by reference to VATS' before disappearing completely in the final 2003 Catalogue, as it was deemed too sensitive to include in the 2003 Catalogue due to the impact on the businesses of the State-owned incumbents.
However, with the breakthrough of the Pilot VNO Circular, it resurfaced again in the 2013 Draft Catalogue, also categorized under BTS but regulated as a VATS.
With the 2015 Catalogue, resale of mobile telecommunication services is now officially recognized, although unlike the 2013 Draft Catalogue it is not an independent category, but rather reflected in a provision that states that resale of cellular mobile telecommunications services should be regulated in the same way as VATS, which gives rise to two issues around such resale business:
(a) Given that resale of cellular mobile telecommunications services is not an independent BTS or VATS category under the 2015 Catalogue, it is unclear whether the service provider should be issued a BTS Permit or VATS Permit for such services, given that a Permit should supposedly only be issued to cover a category expressly listed on the 2015 Catalogue, or whether, as under the Pilot VNO Circular, resellers will continue be issued an MIIT "approval". BTS providers are required by law to be at least 51% State- owned. This suggests that a VATS Permit will be issued. We expect that this issue will be clarified by the new VNO rules to be issued by MIIT following the expiry of the Pilot VNO Circular.
(b) The Pilot VNO Circular expressly excluded FIEs from the scope of the privately-owned companies which could apply for MIIT approval to resell mobile telecommunication services. It is unclear whether the new VNO rule will permit such approval to be granted to FIEs, but given the consistent historical view of MIIT that China is not under any obligation to liberalise any telecommunications services not specifically listed on China's WTO commitments on foreign investment, we are not optimistic.
5. ICP services
5.1 Conflict with the ICP Measures
ICP services are one further example of the complexity of the regulatory environment for China telecommunications. The key issue is that the relationship between the Telecommunications Catalogue and the Internet Information Services Administrative Measures ("ICP Measures") has never been made clear, not to mention the issues around how to apply them both at the same time in real life cases.
Under the ICP Measures, whether an ICP VATS Permit is required should be determined by one simple and straightforward criterion: whether the online information is provided to users for consideration or free of charge. If it is provided for consideration, then the provider would need to apply for and obtain an ICP VATS Permit; if not, then only an ICP Filing is required.
Unfortunately, such criterion has never been cited in the various iterations of the Telecommunications Catalogue, which has given rise to much confusion. The 2015 iteration is not particularly helpful in resolving this issue either. By way of example, under the 2015 Catalogue, there are certain new sub-categories included under ICP services such as search engine services (online database search and retrieval, in WTO-speak), information community platform services, and information real-time exchange services.
However, currently most such services in China are provided free of charge to users (e.g. WeChat, Weibo). If we apply the principle provided under the ICP Measures, such services should not require an ICP VATS Permit, but clearly this is not the case under the 2015 Catalogue. Under the current regulatory environment, the ICP Measures appear to be outdated to the point where they seem to be stuck in an Internet dot-com boom time warp while the technology has moved ahead at light speed, and should, in our view, be amended by the State Council.
Similarly on the basis of the ICP Measures, a paid- for newspaper subscription website requires an ICP Permit, but in practice MIIT only now requires an ICP Filing if the newspaper is only selling its own product.
Catch-all category
Another confusing issue is that traditionally, when it is not clear which category of the Telecommunications Catalogue should be applicable to a specific real-world telecommunication service, MIIT tends to classify such telecommunication service under ICP Services. By way of example, technically speaking, the provision of a third party platform (as mentioned above) has nothing to do with content provision services. However, before the promulgation of the E-commerce Circular, it was generally thought that such services were subject to an ICP VATS Permit. The new sub-categories that have been incorporated into the 2015 Catalogue reflect a trend that MIIT is trying to make the description of ICP VATS more specific. But with the rapid development of technologies, MIIT may still end up having to use ICP VATS Permit as a 'sweep up' or 'catch-all' category to capture certain new forms of telecommunication services, primarily as a device to bring them within its regulatory ambit.
Consistent with this theme of using ICP as a sweep-up category, ICP is the category which has undergone the most substantial expansion of any BTS or VATS category, from the original 2003 Catalogue focus on content provision, online gaming, commercial information, and positioning services to now include:
- information distribution platforms and delivery services (e.g. SnapChat or video-on-demand services like Tudou);
- search and retrieval services (such as Baidu or Google);
- information community platform services such as Facebook (banned in China) or WeChat;
- instant messaging services and interactive voice response services (WeChat);
- information protection services; and
- public service subscriber platform virus query
- and removal or spam blocking services.
This is quite a wide scope indeed, especially as providers of spam protection and network security services would not traditionally see themselves as part of the same industry sector as content providers.
Call centre services
Call centre services, a category of Type II VATS, have been split into domestic call centres, which primarily cater to domestic customers, and offshore call centre services, which cater to overseas subscribers, reflecting changes in law and practice in recent years whereby foreign investors have been allowed to establish offshore (i.e., overseas-customer facing) call centres in pilot cities in China without restrictions on the percentage of foreign equity ownership.
Changes to other service categories
7.1 Contraction of the scope of OTP services
One noticeable feature of the 2015 Catalogue is the contraction of the scope of OTP to remove securities transaction processing, banking services, ticketing sales services, online auctions and payment services. This still leaves everyone in the dark as to the line in the sand (if there is one, we see it as shifting with the policy tides, and the position is not helped by a lack of coordination
in this area between MIIT and PBOC to clarify this) between Payment Services Organisation ("PSO") licenses issued by the People's Bank of China for third party payment processors like AliPay or TenPay on the one hand, and OTP services requiring an OTP Permit from MIIT, on the other.
7.2 Capturing new mobile cellular technologies
Finally, there have been various minor technical adjustments made in the 2015 Catalogue to the wording of certain BTS to capture new mobile cellular technologies, hence BTS Type I (cellular mobile communications services) is now broken down into 2nd/3rd/4th/LTE generation services, and satellite communications BTS Type I have been similarly broken down more logically into mobile fixed and leased circuit services. This is more in the way of 'housekeeping', rather than substantive changes.
8. Conclusion
The key question on everyone's lips in relation to the 2015 Catalogue is why did it take so long to get to this point, given the relatively minor changes to the overall scheme and contents of the 2003 Catalogue? The 2015 Catalogue fails to grasp the thornier problems of interpretation (notably cloud computing and e-commerce) and leaves industry participants in certain sectors in the dark about where certain key services sit in the regulatory scheme (PSO license v OTP VATS Permit or ICP VATS v OTP VATS). It may bring some cheer to domestic players with an eye on the resale market, but there is nothing in the 2015 Catalogue that suggests any breakthrough for foreign investment in the sector, and indeed there is nothing in it to rival the changes brought about by the liberalization in the China (Shanghai) Free Trade Zone. So, in short, there have been some minor improvements and updates and moving around of pieces, but nothing remotely meeting the weight of expectation in the market after such a long gestation period.
