China’s Elimination of Foreign-Investment Restrictions in Telecoms Services under Pilot Policy Comes to Fruition

by Richard Ma, Joanna Jiang, and Dimitri Phillips

On 28 February 2025, the Ministry of Industry and Information Technology (“MIIT”) announced that 13 foreign-invested businesses in pilot areas of Beijing, Shanghai, Shenzhen, and Hainan (“Pilot Areas”) have been granted approvals/licenses to engage in certain value-added telecom services (“VATS”) that were previously subject to foreign-investment restrictions. From publicly available information, the VATS operating licenses granted to these companies include those for internet service providers (B14, known as an ISP license), online data processing and transaction processing (B21 license), information services (B25, known as an ICP license), and domestic multi-party communication services (B22 license). This marks the first fruition of a 8 April 2024 pilot policy for eliminating foreign-investment restrictions (“Pilot Policy”),[1] represents a milestone for foreign investment in VATS, and reflects the PRC government’s determination and initiative to attract more foreign funds and ease market access for foreign investment.[2]

Categories of VATS Freed from Foreign Shareholding Restrictions

Under the Pilot Policy, as now reflected in practice, foreign-invested entities (including wholly foreign-owned entities (“WFOEs”) and joint ventures with more than 50% foreign shareholding) registered in Pilot Areas are now eligible to apply for and obtain the operating licenses for the following VATS:

• B11: internet data centers (IDC) and internet resource collaborative (IRC) services;
• B12: content delivery network (CDN);
• B14: internet service providers (ISP);
• B21: online data processing and transaction processing;
• B22: domestic multi-party communication services;
• B23: store-and-forward-type services;
• B24: call center services;[3] and
• B25: the following subcategories of information services: app stores, information release platforms and delivery services (excluding internet news information, online publishing, internet audio and video, and internet cultural operations), and information projection and process services.

Now, among all the VATS defined under the Catalog of Telecommunications Business, only the following categories remain subject to foreign-investment restrictions in Pilot Areas:

• B13: domestic internet virtual private network services (IP-VPN), in which foreign investment is still prohibited, except for up to 50% in such businesses in free trade zones (FTZs) or under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA).
• B26: encoding and protocol conversion services, which are still subject to a 50% cap on foreign ownership.
• The following subcategories of B25 (information services): information search services, information community platform services, and information instant interaction services, which are all still subject to a 50% cap on foreign ownership.

Pilot Areas

For now, the Pilot Policy is implemented in the following four areas:

• Beijing Service Industry Expansion and Opening-Up Comprehensive Demonstration Zone, which covers the whole of the Beijing (provincial-level) municipality.
• Shanghai Free Trade Zone Lingang New Area and Socialist Modernization Leading Area, which together cover all of the Pudong district.
• Hainan Free Trade Port
• Shenzhen Socialist Pioneer Special Cooperative Zone, which covers the whole of the Shenzhen municipality.

Requirements for Operating Free from the Restrictions

For a business to be free of the foreign investment restrictions as summarized above, it must satisfy the following requirements: (a) the business must apply to the central MIIT for approval (via the local branch of MIIT, which forwards the application to the central MIIT); and (b) the business’s registered address must be physically located within a Pilot Area. It is uncertain whether the service facilities must be located within a Pilot Area. Also, although the Pilot Policy appeared to stipulate that the clientele of ISP services provided by a foreign-invested company utilizing the Pilot Policy would be limited to denizens of the Pilot Area in which the company was registered, the ISP licenses announced on 28 February 2025 appear to allow for provision of services to clientele nationwide.

Takeaways

The announcement of the realized implementation of the Pilot Policy has been enthusiastically welcomed by the market. Not only is market access generally eased, but it is expected to have major knock-on effects in numerous respects. For example, many companies using red-chip structures (e.g., variable-interest entity (VIE) structures) both to engage in previously restricted VATS business and to IPO in foreign markets are obtaining new licenses in the name of their WFOEs under the Pilot Policy and are likely to restructure operations in China to adjust their previous structures for efficiency and greater legal certainty.

Given the PRC government’s renewed initiative to develop the entire nation’s economy, including by attracting and stabilizing foreign investment, we expect the Pilot Policy will be expanded to more areas and possibly more categories of VATS in the foreseeable future.

[1] Notice on Carrying Out the Pilot Work of Expanding Opening-Up to Foreign Investment in Value-Added Telecom Services; for more details, see our previous newsletter, China to Eliminate Foreign Investment Restrictions in Cloud and Other Telecom Services | DaHui Lawyers.

[2] On 19 February 2025, the General Office of the State Council made public the Action Plan for Stabilizing Foreign Investment in 2025 issued by the Ministry of Commerce and the National Development and Reform Commission, which outlines key measures to attract and retain foreign investment by expanding market access, easing financial restrictions, and fostering a fair business environment. With a focus on sectors such as telecommunications, education, and healthcare, the initiative seeks to enhance foreign participation in China’s industrial and service sectors.

[3] In practice, the MIIT seems still relatively reluctant to grant licenses for call center services, and only a few foreign-invested telecoms enterprises have obtained such licenses during the past years, notwithstanding the principle that foreign investors are allowed 100% ownership in call center services businesses.