China to Relax Foreign Ownership Limits in Value-Added Telecommunication Services

China has launched a pilot program to relax foreign ownership restrictions on certain value-added telecommunication services, aiming to attract foreign investment and enhance market activity.

On April 8, 2024, China’s Ministry of Industry and Information Technology (MIIT) issued a Circular on Launching the Pilot Program for Expanding the Opening-up of Value-Added Telecommunications Services (hereinafter, the “Circular”).

Before the Circular, foreign investment in value-added telecommunications services (增值电信业务, VATS) — such as electronic data interchange and networked electronic devices data processing—could not exceed a 50 percent shareholding. With the recent relaxations provided in the Circular, qualified foreign investors will be allowed to set up wholly-owned businesses in selected VATS within the pilot areas.

This Circular marks a significant departure from China’s traditional strict regulations governing foreign investment in the telecommunications sector, indicating a strategic shift towards greater openness and foreign involvement in specific sectors of the industry.

In this article, we explore key aspects of the pilot program and discuss the significance of this initiative in China’s telecommunications sector.

Background

The Circular was issued in response to the directives outlined in the report of the 20th National Congress of the Communist Party of China (CPC), which emphasized the importance of adhering to a high level of openness and constructing a new development pattern featuring dual circulation with the domestic market as the mainstay and domestic and international circulations reinforcing each other. Additionally, in September 2023, President Xi Jinping highlighted the need to expand the opening-up of sectors, such as telecommunications, tourism, law, and professional examinations.

More recent directives from the 2023 Central Economic Work Conference and the 2024 Government Work Report have further emphasized the relaxation of market access restrictions in the telecommunications sector and the need for high-level opening-up.

Key aspects of the pilot program

The pilot program introduced in the Circular outlines several crucial aspects aimed at expanding the opening-up of VATS in China.

Pilot regions

Initially, the pilot program will roll out in four strategic regions:

• Beijing’s Comprehensive Demonstration Area for Expanding Opening-up in the Services Sector
• Shanghai’s Lingang New Area of the Pilot Free Trade Zone
• Hainan Free Trade Port
• Shenzhen’s Demonstration Pilot Zone for Socialism with Chinese Characteristics

Relaxation of foreign shareholding limits

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In the designated pilot regions, restrictions on foreign shareholding will be lifted for various VATS sectors, including Internet Data Centers (IDC), Content Delivery Networks (CDN), Internet Service Providers (ISP), online data and transaction processing, and specific types of information services. Additionally, information protection and processing services will also benefit from this relaxation.

The relaxation excludes certain sectors like internet news information, online publishing, online audiovisual, and internet cultural businesses.

Implementation plan and assessment

Local governments of the pilot regions are tasked with crafting detailed implementation plans and conditions based on the pilot program’s guidelines.

Meanwhile, the MIIT will oversee the assessment and approval process of these implementation plans submitted by the pilot regions.

Once approved, the pilot regions can officially commence their pilot work.

Application to the program and requirements

The Circular is accompanied by a detailed plan for the pilot program, which specifies requirements regarding the registration location and service facility placement of business operators, as well as the scope of services provided.

Foreign-invested telecommunications enterprises are subject to the principle of “national treatment,” and their operations are regulated in accordance with relevant laws and regulations. Business operators intending to engage in VATS activities within the pilot regions must obtain a pilot program operating permit from the MIIT.

The application process and requirements will be further clarified and are likely to align with the implementation plans and conditions specified by the pilot regions. Hence, foreign investors should closely monitor updates and clarifications from the authorities.

The registration location of the pilot business operator and the location of service facilities (including leased, purchased, and other facilities) must be within the same pilot area.

CDN facilities outside the pilot area cannot be purchased or leased for accelerated services. The service scope of ISP business should be limited to the pilot area, and it must provide Internet access services to users through basic telecommunications enterprise Internet access equipment. The service scope of other business operations can cover the entire country.

Significance and outlook

The pilot program is a big step in China’s ongoing efforts to encourage foreign investment in the telecom industry. By allowing more foreign ownership in specific parts of the telecommunications sector in certain regions, China hopes to attract more foreign investors, boost market activity, improve services, and help the telecom industry grow better. If successful, this pilot could lead to even more openness in China’s telecom industry.

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It is worth noticing that, as specified in the Circular, the effective execution of the pilot program in designated areas could pave the way for extending the initiative, potentially facilitating broader participation of international entities in China’s telecommunications and internet industry. This could contribute to a deeper integration of China into the global digital economy.

As the pilot program moves forward, foreign investors should keep an eye on how plans develop in the designated regions. Once plans are set, investors can look into potential opportunities and apply for permits to enter those telecom markets in China’s pilot regions.

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