New Rules Expected on Foreign Investment in Mainland Internet Companies
China's policy moves in the Internet industry have been closely watched by foreign investors in that sector. On March 31 this year, Wu Jichuan, Minister of Information Industry, the Ministry in charge of China's Internet industry, stated that mainland Internet companies seeking overseas listing must exclude their content services and assets from the listing vehicle until China's accession to the WTO. This has come as an additional clarification to his earlier remarks in the same month that Internet companies are allowed to list abroad but prior approvals by the relevant authority in charge of the particular industry and by the Ministry of Information Industry (MII) must first be obtained.
This also comes at a time when popular Internet portals, such as Sina.com, have filed applications with the US Securities and Exchange Commission (SEC) for a listing on Nasdaq.
While mainland companies have been racing to go abroad seeking much needed funds, foreign investors and entrepreneurs have also been endeavoring to seek ways to get into the China Internet industry.
Attractive Market
Statistics and estimates published on China's Internet development strengthen the beliefs of many foreign investors and entrepreneurs that China's Internet sector is now at a stage that cannot be missed.
According to China Internet Network Information Center (CNNIC), the leading authority on China's Internet statistics, by the end of 1999:
- 3.5 million computers in China had an Internet connection
- Total bandwidth of international connection amounted to 351m
- Countries directly interconnected to China's Internet included the United States, Canada, Australia, Britain, Germany, France, Japan and South Korea
- Internet users in China approached 8.9 million
- The Government approved 520 Internet Service Providers (ISPs)
- E-commerce related websites in China exceeded 600
It is expected that China's e-commerce will enter a rapid expansion period from 2002, when its transaction volume will reach 10 million yuan (USD 1.2 billion). This year alone, the country's e-commerce turn-over is expected to be 800 million yuan (USD 96.4 million), the source was quoted as saying.
What is more encouraging to foreign investors and entrepreneurs is that the Chinese Government, recognizes the Internet, e-commerce in particular, as a measure of improving efficiencies and sharpening competitive edges of enterprises, state owned enterprises especially, and now has a firm and committed policy to promote the development of the Internet industry. MII plans to expand the bandwidth of the international connection of China's Internet to over 1000 m, nearly triple the current figure of 351 m. The first-phase construction of the China Financial Certification Authority Centre is close to completion. Regulations and rules required for the healthy development of the Internet industry have been in the process of preparation.
However, the major challenge China faces now is the lack of capital injection and the lack of advanced technology in developing China's Internet industry, which is not least due to the uncertainty of China's policies on foreign investment in this sector. For instance, most Chinese network companies have difficulties operating due to lack of funds, and seeking venture capital or listing overseas has become the only way for them to survive and to develop. For those few without capital concerns, many have technical difficulties in coming to grips with providing value-added services on the Internet.
It seems that these should have paved the way for the inflow of foreign investment into China's Internet. However, this has not been the case so far.
PRC Policy Towards Foreign Investment in China's Internet
Strictly speaking, foreign investment in telecommunications (including the Internet according to some insiders' interpretation), is not allowed under current PRC law. However, the Chinese Government had not said anything specific about foreign investment in China's Internet sector (which explains why many foreign investors currently hold stakes directly or indirectly in PRC network companies) until MII Minister Wu Jichuan vowed to clear up those "irregularities" last September.
Opening up of the Internet sector was promised by the Chinese Government as part of China's bid to join the WTO. According to the Sino-US WTO Accord concluded last November, foreign companies are expected to be allowed to hold a 49% stake in telecommunications companies from the beginning of China's WTO accession. This figure is expected to increase to 50% after two years.
Many analysts have predicted that China is likely to wrap up all negotiations involving its WTO accession in May this year. Insiders claim that, with such a pressing time limit, related policy adjustments concerning the expected opening-up of the telecom and Internet service sectors are expected to be made by MII soon.
In early this March, MII Minister Wu Jichuan confirmed the Government's commitment to the promotion of the development of the Internet industry. He stated that, on top of the basic telecommunication services, there exists a layer of value added telecommunication services which include Internet businesses. Internet business can be further divided into two categories: ISP (Internet Service Provider) and ICP (Internet Content Provider). The undertakings of ISP businesses need to be examined, approved and licensed by MII. Foreign investors would be allowed to hold not more than 50% stake in ISP companies. Other conditions might be imposed on foreign investments. Regulations on ISPs are expected to come out before the end of April. The undertakings of ICP businesses will need additional prior examination and approval by the authority in charge of the particular industry before the MII examination.
As mentioned above, China's Internet industry provides tremendous potential for foreign investors and foreign entrepreneurs, foreign e-solutions providers in particular. However, the promulgation of specific regulations and rules has been delayed time and again, which probably has something to do with the progress of China's ongoing WTO negotiations. For instance, it is not clear how key terms like ISP and ICP are to be further defined. Currently the definitions are very vague. As mentioned above, the term ISP refers to Internet service provider and the term ICP refers to Internet content provider. It is not clear whether IAPs (Internet Access Providers), ASPs (Application Service Providers), E-solution Providers, etc. are to be defined and distinguished for the purpose of regulating foreign investment.
From what we can gather now, the activities an e-solution provider may undertake, such as to set up an e-commerce platform for businesses to subscribe to, will be regulated as ISPs. However, this needs to be confirmed by the long expected PRC regulations on ISPs. If this is confirmed, foreign e-solution providers would be subject to the restriction on foreign investors having no more than a 50% stake on internet ventures set up in the PRC. The setting up of the venture would be subject to MII examination and approval and a license will need to be obtained from the MII.
Conclusion
A picture can be painted about the Chinese Government, China's Internet and foreign investors and entrepreneurs. In this picture, Chinese Government is like a hostess who has announced her plan to hold a grand game, foreign investors and foreign entrepreneurs are like the intended participants who are eager to play the game. The only problem is that the hostess has yet to complete formulating the rules of the game. However, intended participants need to be alert now, since, according to the hostess, it has reached the stage that rules may be out soon and the game may begin at any moment!
For further information on this issue, please contact
Yongfu Li (yfl@cms-cmck.com) or Aili Zhao (aiz@cms-cmck.com) on +86 10 6590 0389 in Beijing.
