Further Opening Up of Value-added Telecom Services in China (Shanghai) Pilot Free Trade Zone

As an overarching framework for the “special” policies within the China (Shanghai) Pilot Free Trade Zone (“FTZ”), the Blueprint issued by the State Council on September 27, 2013 has indicated that the FTZ would relax certain regulatory restrictions imposed on the foreign investment in the value-added telecommunications services (“VATS”) market.

On January 6, 2014, the Ministry of Industry and Information Technology and the Municipal Government of Shanghai jointly released the Opinion on Further Opening-up of Value-added Telecommunications Services for Foreign Investment in the FTZ (“Opinion”), which allows foreign ownership to exceed 50 percent of certain VATS businesses in the FTZ. The Opinion suspends the application in the FTZ of the nationwide regulation in this regard, namely, the Regulations on Administration of Foreign Investment in Telecommunication Enterprises (amended in 2008).

Highlights

Through the Opinion, the FTZ will open up seven types of VATS to foreign investors, with five of them released for full foreign ownership. Below is the breakdown.

1. Full foreign ownership allowed on five types of VATS

The current legal regime governing foreign invested VATS businesses restricts the foreign stake at the maximum of 50%, while the Opinion removed such restriction on the following five VATS businesses:

(i) online application store;

(ii) online storage-and-forward services;

(iii) call center services;

(iv) internet access services; and

(v) multi-party communication services.

2. Further opening-up on two types of VATS with foreign ownership restrictions

The following two types of VATS businesses have been further opened up, but still subject to restriction on foreign ownership:

(i) domestic internet virtual private network (VPN) services (subject to 50% foreign ownership restriction); and

(ii) on-line data processing and transaction processing services (i.e. e-commerce business, subject to 55% foreign ownership restriction).

3. New VATS opened up to foreign Investors

Of all the opening-up of the VATS in the FTZ, the following four types of VATS are new businesses to foreign investors, going beyond China’s WTO commitment.

(i) call center services;

(ii) internet access services

(iii) multi-party communication services; and

(iv) domestic internet VPN services.

Note that the last one of the above, domestic internet VPN services, is still subject to 50% foreign ownership restriction.

4. Others

The Opinion provides that, all telecom business operators that register and base their service facilities in the FTZ will be allowed to offer theirservices nationwide, saving for the internet access services.

Comments

After a long period of closure in the Chinese VATS market, the Opinion shows a significant signal to foreign investors on the further opening-up of this highly regulated market in China if the pilot in the FTZ turns out to be successful.

Previously, with the 50% foreign ownership restriction and other practical hurdles to obtain the requisite VATS license, some foreign capitals have been prevented from the investment opportunities. Although others may have sought alternative structures (e.g. VIE) to circumvent the regulatory restrictions, the legality of the alternative structures is always an issue.

Due to the fact that the actual move of foreign investors to incorporate an entity in the FTZ will be subject to the implementation rules of the Opinion setting out the qualifying criteria for foreign investors, the implications of the Opinion remain to be seen.