China Revamps Regime on Foreign Investment in Telecom Services

On 7 April 2022, the State Council published the Decision on Amending and Abolishing Certain Administrative Regulations, which makes notable amendments to the Provisions on Administration of Foreign-Invested Telecom Enterprises (“FITE Provisions”). The amendments started to take effect on 1 May 2022.

I. BACKGROUND

China officially acceded to the World Trade Organisation on 11 December 2001. On the same day, the Chinese government released FITE Provisions to meet its commitments in the telecommunications sector under the accession documents.

Under the then effective FITE Provisions, foreign investors must obtain an approval before they can invest in an enterprise to operate telecom services in China, also known as a foreign-invested telecom enterprise (“FITE”). Foreign ownership in basic telecom services (“BTS”) and value-added telecom services (“VATS”) are capped at 49% and 50% respectively. In China, telecom services are divided into BTS and VATS, which were first introduced by the Telecommunication Rules in 2000, and each type entails a number of categories of telecom services.

Operation of BTS and VATS requires a telecom license to be awarded by the Ministry of Industry and Information Technology (“MIIT”). However, for a long period after the first FITE Provisions came into force, the MIIT has only approved a handful of FITEs. For BATS and many categories of VATS, there has been no successful case where foreign investors are approved to establish an FITE.

Since 2014, the government has eased up the restrictions over foreign ownership of FITEs in certain categories of VATS. Such policies were first introduced in the free trade zones and for qualified service providers in Hong Kong and Macau under the Closer Economic Partnership Arrangement. Recently, similar relaxations were later rolled out nationwide. Notably, under these recent policies foreign investors are permitted to exceed the 50% cap on their shareholding in an FITE. In certain cases, even 100% foreign ownership is permitted. We set out in below table the restrictions on foreign ownership of an FITE in VATS under different policies.

These recent policies have caused inconsistency between regulatory practice and the previous version of the FITE Provisions and confusions for foreign investors. The new FITE Provisions are the government’s response to address the issue. 

II. KEY CHANGES

Relaxed foreign ownership 

In the previous version of the FITE Provisions, an FITE refers to an enterprise operating telecom services that is jointly invested and established in China by both foreign and Chinese investors in the form of a Sino-foreign equity joint venture (“EJV”) in accordance with law.

The new FITE Provisions define an FITE as an enterprise operating telecom services that is established in China by foreign investors in accordance with law. This new definition is consistent with the current foreign investment policies, which allow certain types of FITEs to be wholly foreign-owned.

The cap on foreign ownership in an FITE operating BTS remains at 49%, but the new FITE Provisions allow the cap to be adjusted by other laws and regulations. This is the first time that we have seen an indication in a central government regulation that the cap on foreign ownership in the BTS could be relaxed.

To further lift up the cap on foreign ownership in the BTS, more regulations will need to be amended. For instance, under the Administrative Measures for Telecom Service Licensing, the state ownership in a company operating the BTS must not be lower than 51%.

Track record requirements removed for foreign investors 

The new FITE Provisions remove the requirements in the previous version that the main foreign investor of an FITE should have good credentials and operational experiences in operating relevant telecom services. Given the lack of explanation on how the foreign investors can demonstrate their credentials and experiences, the removal of this requirement will no doubt reduce the uncertainty in the license application process and bring down hurdles for financial investors and smaller companies to invest in FITEs.

Simplified application procedures 

The new FITE Provisions streamline the process for applying for a license of telecom services by an FITE. Notably, it removes from the process the applications for an opinion from the MIIT and an approval certificate from the Ministry of Commerce before the FITE can be established. As a result, the proposed FITE can now apply directly to the MIIT for a telecom service license after having been established. Moreover, the new FITE Provisions reduce the statutory period from 90 days to 60 days for reviewing and approving an application for the license for the VATS by an FITE.

This amendment reflects the reform of the foreign investment approval regime in recent years. The new FITE Provisions will greatly cut down the time required to obtain the telecom service licenses and therefore save the resources and cost incurred on the process. 

III. CONCLUSION

The new FITE Provisions herald possible further relaxations of the restrictions on foreign ownership in FITEs, especially in BTS, and brings consistency between the regulation and the current foreign investment regulatory practice regarding FITE.

The removal of track record requirement for main foreign investors and the streamlined process provides the foreign investors with more flexibility in structuring their investment and render the application for a telecom service license less time-consuming and less costly for the foreign investors.

Although further amendment and changes to the regime are necessary to further open up the market, foreign investors now have reasons to be more optimistic about the prospect of investing in the telecom services in China. 

https://www.lexology.com/library/detail.aspx?g=2aa3d68b-dc1d-453d-9c98-c10afd9a48e4

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