China Removes Another Major Hurdle for Foreign-Invested Telecoms Enterprises

On 7 April 2022, the State Council (the highest PRC government organ) issued a decision to radically ease the market entry requirements applicable to foreign-invested enterprises seeking to obtain PRC telecoms operating licenses – a historically burdensome prerequisite for conducting various online and communications-driven activities in China.

Specifically, the Decision on the Amendment and Repeal of Some Administration Regulations changes existing rules that govern the establishment and operation of foreign-invested telecoms enterprises (“FITEs”), i.e., the Administrative Provisions on Foreign-Invested Telecommunications Enterprises (“FITE Provisions”), in a manner that will be welcome news to foreign investors hoping to introduce or expand online business activities in the China market. The key change of the amended FITE Provisions involves the removal of the previous requirement placed on foreign-invested companies seeking to obtain telecoms operating licenses (and thus become FITEs) to demonstrate that their principal shareholders/parent companies have a “good track record in the telecoms business”.

Historically, back when China joined the World Trade Organization in 2001, it made commitments to open up certain telecoms services to foreign investment. Nevertheless, for various reasons, it could still in practice remain relatively difficult and time-consuming for foreign investors to obtain many of the telecoms operating licenses needed to perform various online activities. In particular, the unique and complicated procedure for obtaining FITE approval,[1] including the “good track record” requirement for telecoms licenses (and other impediments), often convinced foreign investors that they were better off to adopt alternative means of participating in China’s telecoms space, including the use of variable-interest entity (“VIE”) structures and other solutions.

Over time, China gradually liberalized these requirements and made parallel efforts to speed up the ability for foreign-invested applicants to obtain telecoms operating licenses. This brought about the first major breakthrough in 2014, when China’s Free Trade Zone (“FTZ”) in Shanghai began implementing preferential “value added telecoms service” (“VATS”) policies on a pilot basis. For the first time ever, these Shanghai FTZ policies allowed foreign businesses to establish subsidiaries in the Shanghai FTZ capable of providing limited VATS activities that had long been beyond the reach of foreign investors (e.g., app stores of information services, domestic multi-party communication services, Internet access services). Beginning in 2015, China further expanded the number of FTZs providing preferential VATS policies.[2] Especially, since 1 December 2019, China has implemented a further simplified “notification-commitment” license application procedure in all FTZs, under which the time for issuance of VATS licenses has been significantly reduced.[3]

As the number of FITEs has proliferated in China, the restrictions imposed on telecoms operating license applicants have gradually but consistently been eased. This is especially true in the case of foreign shareholding caps, which restrict the maximum foreign-shareholding levels that an applicant may exhibit when seeking to obtain required operating licenses in the PRC telecoms space. In certain types of telecoms services (e.g., e-commerce platform services), these restrictions were eventually removed entirely, although in some other types, foreign-shareholding caps remain and thus necessitate foreign businesses and investors relying on joint ventures or VIE structures for such types of telecoms activities in China, regardless of other restrictions on FITEs.

Despite this general trend of liberalization, prior to the amended FITE Provisions, the requirement for foreign-invested parties to obtain such operating licenses was still often fraught with practical difficulties. Chief among these has been the need to sufficiently demonstrate to the MIIT that the applicant’s principal foreign shareholder has a good track record in telecom services, i.e., that it has positive track records providing telecoms services in the market. In reality, it could be difficult for foreign investors to demonstrate that they have a “good track record in telecoms business”, not only because requirements for what constitutes a “good track record” from the MIIT are not crystal clear (and even sometimes subject to the MIIT’s discretionary review), but also because some foreign investors (especially those taking offline businesses online) will not have engaged in telecoms business within and outside China prior to applying to set up FITEs. Furthermore, the telecoms track record requirement also often precluded foreign financial investors (e.g., USD-denominated funds) from taking significant stakes in PRC companies performing Internet/telecoms activities, given that such investors lacked established experience in providing telecoms services. Even some strategic investors in this industry have had to adopt alternative structures to bypass the good track record requirement.

However, now, the amended FITE Provisions entirely remove the longstanding “good track record” requirement. Foreign investors seeking to obtain telecoms operating licenses in China and to become FITEs are now expected to have a much easier and more straightforward experience. As some subsectors of telecoms services in China are still subject to a few other restrictions or requirements, most notably foreign-shareholding caps, some foreign parties may for now continue to adopt alternative structures, but in many subsectors, foreign parties may more easily obtain approval to operate or invest in the telecoms market via straightforward Sino-foreign joint ventures or even wholly foreign-owned entities. Taken as a whole, the amended FITE Provisions stand to serve as a major development in China’s Internet and telecoms regulatory framework, which is likely to have a positive, far-reaching impact on foreign participants seeking to perform various Internet/telecoms activities across different sectors of China’s economy.

1. The complicated procedure included approval from the Ministry of Industry and Information Technology (“MIIT”) for setting up a FITE, approval from the Ministry of Commerce for setting up a FITE, company registration with the State Administration for Market Regulations, and then the MIIT’s approval of the issuance of the relevant telecoms license. This complicated procedure has been abolished since October 2020 through the Notice on Strengthening Interim and Ex-Post Supervision of Foreign-Invested Telecommunications Enterprises, issued by the MIIT, and the amended FITE Provisions also conform and reflect such abolition.
2. There are now 21 FTZs in total in China.
3. According to a report released by the China Academy for Information and Communications Technology (CAICT) in June 2020, prior to 2015, less than 35 FITEs existed in China. In the milestone year of 2015, this number grew by another 12 FITEs, followed by a surge of another 144 FITEs between 2016 and 2019. In 2020 (another milestone year for the PRC telecoms sector), the total number of FITEs operating in China was brought up to 266 in total.