China Further Eases Telecoms Market Entry for Foreign-Invested Enterprises

On 15 October 2020, the Ministry of Industry and Information Technology (“MIIT”) of China released the Notice on Strengthening Interim and Ex-Post Supervision of Foreign-Invested Telecommunications Enterprises[1] (“Notice”). The Notice confirms that a separate process for MIIT approval (“MIIT FITE Approval”) is no longer required for the establishment of foreign-invested telecommunication enterprises (“FITEs”),[2] and all the procedures and documents required under the former MIIT FITE Approval application will be integrated into the existing application process for licenses of telecoms services. This is yet another easing of foreign-invested enterprises’ entry into China’s telecoms market that has been opening up more and more since the country joined the World Trade Organization (“WTO”). 

When China joined the WTO in 2001, it committed to opening up a limited number of specified telecoms services to foreign investment (with a cap of 50%), including storage and forwarding services, online data processing and transaction processing services, information services, and code and protocol translation.[3] Not only has China passed laws, regulations, etc. eliminating or reducing foreign shareholding limitations in the sectors it committed to opening up and more – both many value-added telecoms services (“VATS”) and some basic telecoms services – but it has also continuously been unifying and streamlining the application procedures for FITEs and domestic companies to obtain telecoms licenses.

In the last half decade, China has stepped up the easing of FITEs’ entry into its telecoms market in several respects. Most notably:

• In 2014, the Shanghai Free Trade Zone (“FTZ”) began implementing preferential VATS policies on a pilot basis, which foreign businesses were able to take advantage of by setting up subsidiaries in the FTZ or transacting business through the FTZ. For example, for a certain period of time, it was only in the FTZ that there were no foreign shareholding restrictions on the following VATS subcategories: app stores of information services, call center services, domestic multiparty telecommunications services, Internet access services; also, foreign investors could hold up to 50% equity in companies engaging in domestic internet protocol virtual private network services while foreign investors in other areas in China were prohibited from holding any stake.[4]
• Beginning from 2015, China has been expanding the number of FTZ areas. As of September 2020, there are 21 FTZs in total, which share the same preferential policies regarding foreign investment in telecoms sectors. [5] The FTZs have generally also offered much more streamlined procedures for setting up FITEs and carrying out VATS license applications, which significantly reduces the time required to set up shop.
• Also since 2015, Mainland China has had Closer Economic Partnership Arrangements with each of Hong Kong and Macau on Trade in Services (collectively, “CEPA”), whereby certain parties incorporated in Hong Kong and Macau and qualified as “Service Providers” are allowed to invest in Mainland China’s VATS to a greater extent. For example, foreign investors qualified as Hong Kong or Macau “Service Providers” may hold up to 50% equity in Internet data center services and CDN services while other foreign investors are prohibited from holding any stake. In two thirds of the 266 FITEs in China as of mid-2020, according to a report of the China Academy of Information and Communications Technology (“CAICT Report”),[6] the foreign parties are connected with Hong Kong.
• In 2018, the PRC began implementing the Special Administrative Measures for Access of Foreign Investment (Negative List) both nationwide and in FTZs (“Negative Lists”),[7] which specify the maximum foreign shareholding limits applicable to restricted industry sectors. The WTO commitments and the Negative Lists taken together entail the following for the offering of VATS anywhere in China (though not factoring in preferential policies applicable in FTZs or under CEPA): (i) foreign investment in Internet data center services (B11), CDN services (B12), domestic internet protocol virtual private network services (B13), and Internet access services (B14) are all prohibited; (ii) foreign investment in online data processing and transaction processing services (B21),[8] information services (B25),[9] and code and protocol translation services (B26) is restricted by a cap of 50% on foreign shareholding; and (iii) foreign investment in other VATS sectors has no restrictions, which means foreign investors can hold up to 100% of telecoms companies engaging in such VATS.[10]
• Since 1 December 2019, China has implemented a further simplified “notification-commitment” license application procedure. This procedure can be used by both foreign-invested and domestic enterprises that are established in FTZs and apply for Category II VATS licenses. Under the “notification-commitment” procedure, an applicant submits a largely declaratory application, the MIIT branch in the relevant FTZ issues a letter notifying the applicant of the further materials to be submitted and requesting a signed commitment from the applicant; then, if the applicant makes the commitment, the relevant MIIT branch will, assuming no irregularities, grant the relevant VATS license immediately. The time for issuance of the VATS license under this procedure will be significantly reduced (e.g., to two to three weeks). However, the substantial review conducted under the standard procedure is still required to be done thereafter: within three months after the VATS license is issued, the MIIT will examine whether the application materials (e.g., documents proving that the FITE has the infrastructure and ability to engage in the specific services, such as servers, qualified employees, and management rules and systems) are submitted and satisfy the requirements. If a FITE is found in violation of the commitment made to MIIT, the relevant FTZ’s MIIT will request rectification with a certain period of time, failing which, the issued VATS license will be revoked.

Notwithstanding the loosening of restrictions and preferential procedures summarized above, until roughly a year ago, before the Foreign Investment Law came into effect,[11] the general procedures for FITEs to obtain VATS licenses were rather complicated and time consuming, including: (1) MIIT FITE Approval, which required MIIT’s review of substantial application documents for setting up a FITE and generally took three to six months to complete; (2) approval from the Ministry of Commerce also for the establishment of the FITE (“MOFCOM Approval”), which generally took one to three months; (3) approval from local State Administration for Market Regulation for the issuance of a business license to the FITE (“SAMR Approval”), which took one to one and half months; and (4) approval from MIIT for the issuance of a VATS license, which generally took two to three months. Under this previous application procedure, it was not uncommon for a FITE to need six to twelve months to obtain a VATS license.

Starting from 1 January 2020 (when the Foreign Investment Law came into effect), the MOFCOM Approval was abolished. As for the MIIT FITE Approval, it has actually not been required since 13 September 2020, but the Notice has now confirmed this as a clear point of law. As such, the entire standard procedure for FITEs to obtain VATS licenses has been reduced from four steps, as outlined above, to two steps, i.e., (1) setting up a foreign invested company, and (2) then applying with MIIT for a VATS license by submitting requisite documents.

The easing of restrictions and procedures for foreign parties to invest in and operate telecoms businesses in China is reflected in data showing activity in the market, particularly since the last half decade’s many major opening-up measures. According to the CAICT Report: until 2014, there were no more than 35 FITEs; in the milestone year 2015, another 12 FITEs began operating; the numbers surged since then, with 20 FITEs added in 2016, another 20 FITEs in 2017, 34 in 2018, and 70 in 2019; and in just the first half of 2020, which may be viewed as another milestone year, 75 FITEs were established. More and more foreign parties are taking advantage of the opened-up opportunities in China’s telecoms market.

[1] The Chinese title of this Notice is 《工业和信息化部关于加强外商投资电信企业事中事后监管的通知》.

[2] The MIIT FITE Approval was officially abolished by the Decision of the State Council on Cancelling and Decentralizing a Number of Administrative Licensing Items (《国务院关于取消和下放一批行政许可事项的决定》), issued by the State Council on 13 September 2020.

[3] This classification was listed in the Catalog of Telecommunications Businesses 2003 issued by MIIT and was largely revised in 2015.

[4] The Opinions on Further Opening Up Value Added Telecommunication Services to Foreign Investors in China (Shanghai) Pilot Free Trade Zone (《关于中国（上海）自由贸易试验区进一步对外开放增值电信业务的意见》), jointly issued by MIIT and the Shanghai Municipal People’s Government on 6 January 2014.

[5] There were 21 FTZs by the end of September 2020, including FTZs in Shanghai Municipality, Guangdong Province, Tianjin Municipality, Fujian Province, Liaoning Province, Zhejiang Province, Henan Province, Hubei Province, Chongqing Municipality, Sichuan Province, Shaanxi Province, Hainan Province, Shandong Province, Jiangsu Province, Guangxi Zhuang Autonomous Region, Hebei Province, Heilongjiang Province, Beijing Municipality, Hunan Province, and Anhui Province.

[6] Development Status and Trend of Foreign-invested Telecom Enterprises (June 2020) (《外商投资电信企业发展态势（2020年6月）》), released in July 2020.

[7] The latest and effective version are the Special Administrative Measures for Access of Foreign Investment (Negative List) (2020 Edition) and Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (Negative List) (2020 Edition), which were both issued on 23 June 2020.

[8] No equity restrictions for operating for-profit e-commerce platforms.

[9] No equity restrictions for operating app stores.

[10] Such sub-sectors include domestic multi-party communications services (B22), storage and forwarding services (B23), and call center services (B24).

[11] The Foreign Investment Law of the People's Republic of China (《中华人民共和国外商投资法》), issued by the National People’s Congress on 15 March 2019 and effective as of 1 January 2020.