Further Opening up of Value-added Telecom Service Sector in China

Based on the Notice of the State Council on Issuing the Framework Plan for China (Shanghai) Pilot Free Trade Zone, on 6 January 2014 the Ministry of Industry and Information Technology of the PRC (“MIIT”) and the People’s Government of Shanghai jointly released the Opinions regarding Further Opening up Value-added Telecom Service Sector towards Foreign Investments in China (Shanghai) Pilot Free Trade Zone (“Opinions”).

According to the Classification Catalogue of Telecom Business (“Category”) released by MIIT on 21 February 2003, value-added telecom services are classified into eight categories. They are information service business, store-and-forward type of business, online data processing and transaction processing business, call center business, domestic multi-party communication service business, internet access services business, domestic internet virtual private networks business and internet data center business. According to the Opinions, except for internet data center business, all the other seven categories are opened up for foreign investment in the FTZ. Among the seven categories allowed in the FTZ, three categories had already been opened up for foreign investment outside of FTZ as part of the WTO commitments earlier and four categories are now to be newly opened up in the FTZ. Also, the shareholding ratios for foreign investors in certain categories are eliminated or raised in the FTZ.

The opening up of information service business, store-and-forward type of business and online data processing and transaction processing business to foreign investment were already part of China’s WTO commitments. According to the Opinions, now there will no longer be limitations on foreign shareholding ratios in the application store business of information service business and store-and-forward type of business. The foreign shareholding ratio restriction in E-commerce business of online data processing and transaction processing business is raised from no more than 50% to 55%.

In addition, call center business, domestic multi-party communication service business, internet access services business for internet users and domestic internet virtual private networks business are newly allowed for foreign investment in the FTZ. Other than domestic internet virtual private networks business which requires foreign participation to be no more than 50%, in the other three categories the relevant limitations on foreign shareholding ratios are cancelled completely.

In other words, it is now allowed to establish wholly foreign-owned enterprises in the FTZ to engage in application store business of information service business, store-and-forward type of business, call center business, domestic multi-party communication service business and internet access services business for internet users.

The Opinions further require that in order to enjoy the incentives of the Opinions, the foreign invested enterprises must be legally established in the FTZ and their service facilities must also be located in the FTZ. Except for the internet access service business for internet users, the service scope of all the other six allowed categories can be nationwide. The service scope of internet access service business for internet users is limited to be within the FTZ only.

In general, the above is a big step forward for foreign investment in the telecom sector. With registration and service facilities located in the FTZ, most of the above-mentioned value-added telecom services can also be offered outside of the FTZ, i.e. for the first time foreign invested telecom services providers will be able to offer these services via wholly foreign-owned enterprises all over China. Of course, as always, it still remains to be seen how the new opening up will be implemented by the authorities in practice.

The Opinions might also be a good sign for other industry sectors. So far, one of the major shortcomings of the new FTZ was that it remained unclear whether the liberalization of services in various sectors only applied for services provided to contract partners within the FTZ or also to those located in other regions of China. The Opinions now clearly state that the telecom services mentioned above can be provided nationwide. This offers hope that comparable implementing regulations will also be released for other sectors.