Legal News & Analysis – Asia Pacific – China – TMT

Despite China's accession to WTO in 2001, the basic telecoms business (BTB) market remains dominated by the three state-owned enterprises: China Mobile, China Unicom and China Telecom. Domestic private investors have been encouraged to participate in the value-added telecoms business (VATB) market only.

The existing restrictions on foreign investment in the PRC telecoms business are explained in a previous e-bulletin. In short, although PRC laws theoretically permit private and foreign investments in the BTB market, we are not aware of any telecoms operators in the BTB sector which have foreign investors and the number of such operators with private domestic investors is very limited.

The recent opinion issued by the Ministry of Industry and Information Technology (MIIT) is the first time that unambiguous wording is used on encouraging private investment in specific categories of telecoms business.

Key features of the opinion

The salient points of the opinion are summarised below:

1.     Difference in the "mode" of investment

• BTB: The opinion provides that private investment is encouraged to be made in BTB by way of capital participation. This may be achieved by having the telecoms operators listed on a PRC stock exchange, followed by the sale of the shares held by the state-owned enterprise in the listed company or expansion of the capital of the listed company and subscription of new shares by the private investors. In addition, the opinion also expressly states that support will be given to BTB operators that wish to introduce strategic investors.
• VATB: There is no equivalent restriction in relation to VATB and therefore a private investor can set up a 100% private enterprise to engage in any VATB.

2.     Telecoms businesses to be opened to private investment

The opinion sets out the telecoms businesses in which private investments are encouraged to be made, including:

• Re-sale of mobile communications services (on a trial basis) – the opinion does not contain any details on what this service may encompass and hence the scope of activities potentially covered could be fairly broad. For example, it may cover simple resale of mobile SIM cards but it may also extend to operation as a mobile virtual network operator (MVNO). Further clarifications will be needed.
• Network access services (on a trial basis) and customer premises network (CPN) services – as discussed in a previous bulletin, the MIIT intends to allow domestic private investors to enter into CPN services by establishing a limited liability company jointly with the three existing carriers and the commercial arm of the State Administration of Radio Film and Television. Domestic private investors could own up to 49% of the equity interest in the joint venture company. The opinion represents a further opening of the network access services and CPN services markets to private investors.
• Managed network services and construction and management of network infrastructure – telecoms operators in China are encouraged to outsource or arrange for part of their telecoms networks to be managed by managed network service providers with private investors. Similarly, BTB operators are encouraged to outsource the construction, operation and maintenance of network infrastructure such as base stations and towers to enterprises with private investors and through such arrangements to share the facilities.
• Internet data centre (IDC) and internet service provider (ISP) – although there are private investments in the IDC and ISP businesses in China, a moratorium on the issuance of further telecoms licences to operate IDC and ISP businesses has been in place since 2008. The express reference to the IDC and ISP businesses in the opinion formally signifies the end of this moratorium.

Observations

Policy-wise, the opinion no doubt represents one of the most significant steps of the PRC government to further open up the telecoms market to non-state owned enterprises, which, in the past, have largely been confined to several categories of VATB (e.g. online information services)

Notwithstanding this, the opinion does raise a number of questions and issues and it is expected that they will be clarified and answered in due course, including:

1. It is unclear at this stage whether "private investment/capital" also encompasses foreign investments. The conventional thinking appears to be that it is unlikely that such reference is intended by the PRC government to cover 'foreign' private investors. This interpretation seems consistent with that of various official documents in which the same term has been used.
2. Detailed regulations are expected to be issued by the MIIT to clarify the implementation procedures of the opinion in due course. For example, the services which "re-sale of mobile communications services" may cover and how the trial is to be implemented.