China's first steps towards a comprehensive legal framework governing the Internet

Two pieces of legislation were announced by the PRC State Council on 1st October 2000: Telecommunication Act and Administrative Measures on Internet Information Service ("Measures"), which no doubt has been by far the most important legislative move made by the Chinese government in the telecom area. It can also be seen as China's first step toward fulfilling its WTO entry commitments made to the EU and the US. China has committed to allow foreign investors to take 49 percent stakes in PRC telecommunication businesses upon accession to the WTO, and this figure will increase to 50 percent two years after its entry.

It was made clear in the Telecommunication Act that telecom businesses are divided into two categories: basic telecom businesses and value-added businesses. ICP, together with e-mail, voice mail, online information storage and search, electronic data exchange, online handling of data and transaction, added-value fax service, IAP, and viewable conference call service, fall within the second category.

With respect to foreign investment, the Telecommunication Act provides that it is to be subject to special legislation formulated by the State Council. The significance of this provision is that it is the first statutory recognition of allowing foreign investment in the telecom area. Before this, foreign ownership in telecommunication was forbidden, although it had not been clear whether Internet was considered part of telecommunication until September 1999, when the Ministry of Information Industry (MII) provided clarification. This was adopted in the Telecommunication Act. This time gap explains to some extent why huge sums of foreign investments found their way into China's Internet sector.

The Measures deal, in particular, with ICPs. For regulation purposes, profit-making and non-profit-making content services are distinguished. With respect to profitable content services, a licensing system will be implemented, which is in line with the general administration framework set up by the Telecommunication Act. Non-profit-making content services are subject to the far less burdensome filing requirements.

Again, the use of foreign fund was expressly addressed. It is provided that the overseas listing or setting up of an equity joint venture or cooperative joint venture with foreign investors of such providers shall be required to obtain the MII's prior approval, and the stake ratio allowed by foreign investors in such joint ventures shall be in compliance with the provisions of relevant laws or administrative regulations (Emphasis is ours).

Currently, there aren't any such relevant laws or administrative regulations. According to government and industry reports, a draft of 'Regulations on the Administration of Foreign Invested Telecommunications Enterprises' has also been submitted to State Council for review and approval. This will address issues left open in the recently issued laws and regulations, for instance, stakes allowed by foreign investors, procedures and qualification requirements for foreign investments. The approval and release of such regulations will just be a matter of time.

We see these new, or soon to be approved, laws and regulations as good news for investors, foreign and domestic alike. They hold our promise to build a clear and transparent legal environment for investment. Interested investors could learn beforehand in which form and to what extent they would be allowed to invest and operate in China's telecommunication sector. This will enable investors to undertake a more realistic risk analysis before they invest.

For those foreign investors already holding stakes in China's Internet businesses, ICPs for instance, some provisions of the Measures may create cause for concern. This is especially so for those holding stakes above the percentage China promised to allow at its WTO accession. Article 26 requires those ICPs who commenced business before the inception of this Measures (ie. 1st October 2000) to go through the licensing or filing procedures, as the case may require, within 60 days of this date. The concern is that they will have to reduce their shareholding in order to obtain the required operating license from MII.

We cannot say that such concern is uncalled-for as, at one time, the Minister of MII did vow to clear up those "irregularities".

But we think it would be unwise for Chinese Government to do so. It is widely reported in the industry that 80 to 90 percent of China's dot coms are to close down by the end of the year either due to lack of funds or solutions, or both. To further reduce foreign involvement in existing dot coms at such a time would create further uncertainties and threaten the survival and development of companies in China and more importantly, threaten their ability to compete internationally after China's WTO accession.

On the other hand, it is not evident that to apply the restrictions only to foreign investments made after the inception of the relevant laws and regulations, it will effect China's use of the telecoms market as a lever to gain greater access to foreign markets, or the healthy development of China's telecom industry - supposedly the two most important reasons for China's taking extra cautions with its telecoms market.

This would be a policy decision for the Chinese Government to make, which should not be far off now, since without such relevant laws and regulations, it would be impossible for the 60 days deadline set in the Measures to be implemented.

This atmosphere of anticipation reminds us of another scenario which took place late last year. China issued regulations requiring that the use, manufacture and importation of encryption technology be subject to the watchful eye of the State, at which time caused wide anxiety among foreign investors. But before long, the Chinese Government narrowed down the regulations as being applicable only to specialized hardware and software that uses encryption as a "core function". This clarification, in effect, exempted most of the products of concern to foreign investors, such as wireless phones, windows software and browser software. This result was said to be mainly due to the lobbying of the industry and the Government's concern over the discouraging effects such regulations would have on the development of the industry.

It would be the wish of the existing foreign shareholders in China's telecom businesses that history repeat itself.