Easier market entry for international companies to digital China?

What do the revised Administrative Provisions on Foreign-Invested Telecoms Enterprises say and how important are they?

China revised its 21-year-old Administrative Provisions on Foreign-Invested Telecom Enterprises with effect from 1 May. The changes brought the provisions up-to-date with other laws, regulations and operational practices. More significantly, the reforms may make room for further deregulation in the telecoms and internet industry, and are worth a closer look by international companies interested in entering the vast Chinese market.

The original administrative provisions were first issued in December 2001, right after China’s accession to the WTO with the aim to open up and develop the telecoms industry in China. The first two rounds of changes in 2008 and 2016 proved insubstantial. The key changes in this round and their impacts are discussed as below:

No track record requirement for foreign investors – the revised provisions take out the requirement of “good track record and operating experience” on foreign investors of a foreign-invested telecoms enterprise (or FITE). This is clearly good news, as more international companies will be eligible to establish subsidiaries in China.

• Valued-added telecom services (VATS) – The track record requirement has been a major obstacle for international companies which want to provide VATS in China. In the first decade of 21st century, Chinese government only accepted high-profile strategic investors into China, with examples like Microsoft, Google, and General Motors which established 50/50 joint ventures in China holding VATS licenses. In the past 5-10 years, the Chinese telecoms regular has become more flexible to accept smaller companies and even financial (rather than strategic) investors. Removing the track record requirement entirely is even more welcome.
  
  
• Basic telecom services (BTS) - For an international company that plans to apply for a basic telecoms service license in China, it still needs to hold a business permit in its home country to be eligible to establish a presence in China. While the home country license requirement was generally straightforward to satisfy for those playing in this segment of the market, the revisions to the rules make it plausible to avoid the subjective “good record” appraisal by the Chinese telecoms regulator – further removing any concerns that some in the market may have held regarding the potential for regulator discretion to be a factor in the approval process.

More categories / higher investment ratio? - Under the revised provisions, foreign investment can exceed the equity ratio caps that have traditionally been an important structuring topic for prospective market entrants, if “otherwise provided by the state”. The current cap is 49% for basic telecoms services and 50% for value-added telecom services. Adding the new qualification does not directly open up any telecoms business lines, however, leaves the door ajar enough that industry should expectantly monitor future developments.

• Over the past decade, China has opened 4 VATS (third-party e-commerce, multi-party communication, storage and forwarding, and call centers) on a nationwide basis by increasing potential foreign investment to 100%. There are more preferential polices in China’s 20 free trade zones and Hainan Free Trade Port, as well as special policies for Hong Kong and Macau investors based on the Closer Economic Partnership Arrangement. International treaties, such as the pending EU-China Comprehensive Agreement on Investment, can also provide further market entry opportunities.
  
  
• On the contrary, China has not opened up BTS in practice to foreign investors as it committed under WTO concessions. Even with the revised rules, it remains to be seen when this will happen. It is worth noting that China agreed in the EU-China agreement to open more categories of BTS (such as international communication facilities services and satellite communication services) to EU investors than it agreed under its WTO concessions. Hopefully, bilateral relations will set the platform for the EU to approve the agreement in the near future.

Simplified procedures and shorter timeline – Under the old administrative provisions, it was a four-step process for a foreign-invested company to obtain a telecoms license: pre-approval from the telecoms regulator, approval from the foreign investment regulator, approval from the company registry, and (finally) issuance of the relevant operational license by the telecoms regulator. This procedure has been simplified to a two-step process over the past 5 years, along with deregulation in the related areas. The revised provisions reflect those changes – a foreign-invested company can directly apply for a telecoms license after receiving its business license, i.e., after its incorporation. In terms of timeline, it requires 60 days to hear a “yes” or “no” from the telecoms regulator for a VATS application, and 180 days for a BTS application.

Reconsider your China structure – Every few years, the market tends to revisit the legality of VIE (Variable Interest Entity) structures in China. The VIE structure allows foreign investors to enter fields that are not open to foreign investment. Foreign investors have always been worried that they may lose control of the VIE company and its assets. A foreign-invested telecom enterprise, either formed as a whole foreign owned subsidiary or a joint venture with a Chinese party, is an alternative for international companies to operate in China. The revised provisions reduce barriers to the FITE approach. International businesses should consider the viability of FITEs based on the categorization of their China business.

It is plausible to see pro-opening up polices positively as cutting red tape, especially during economy downturns. The revised provisions provide a good reminder for international businesses to reconsider their China strategies and structures – is it possible to provide full or part of your services in China with your fully-owned or part-owned company? What would be the ideal locations to incubate your entities? Can you gradually reduce your reliance on your local partners which hold the operating licenses in China? Does any existing or potential deregulation provide opportunities for your businesses?