Recent relaxation of foreign investment restrictions in the telecom sector

Introduction

On 23 November, the State Council issued its approval of the “Supporting Beijing in Deepening the Comprehensive Demonstration Zone for Expanding the Opening-up of the National Service Industry Construction Work Plan” (Expanding BJ Opening-up Work Plan).¹ This signifies a significant step toward further opening up Beijing to foreign investment across various service sectors.

The Expanding BJ Opening-up Work Plan is comprehensive in scope, addressing topics such as the expansion of opening policies, exploration of regulations for innovative business models, refinement of trade and investment arrangements, and enhancement of risk prevention and control systems. It is expected that supporting measures will be implemented across various service sectors, including telecom, health and medical, financial, cultural and educational, and professional consulting. In this brief, we will focus on the preferential policy in the telecom sector.

Key highlights

• Foreign Equity Ratio Relaxation: The Expanding BJ Opening-Up Plan stipulates that restrictions on foreign equity ratios will be lifted within Beijing for information services (limited to application store) and internet access services (limited to providing internet access service to users). Furthermore, policies for further opening up value-added telecom services are under consideration. These relaxations signify continued progress in Beijing's opening-up policy since 2019².
• Removal of geographic restrictions: In 2021, the State Council issued a notice³ concerning opening-up that covered the same categories of telecom services as outlined in the Expanding BJ Opening-Up Work Plan. However, their application was limited to smaller geographic areas. Notably, foreign equity ratio could be up to 100% for information services operators (only limited to application store)incorporated in Haidian Park of Zhongguancun National Independent Innovation Demonstration Zone (in Chinese: 中关村国家自主创新示范区海淀园)and for internet access services providers (only limited to providing internet access services for users) incorporated in Beijing Integrated Demonstration Zone and Demonstration Park for Increased Opening in the Service Sector (in Chinese: 北京市服务业扩大开放综合试点示范区和示范园区)。
• Joint venture for IP-VPN services: In 2021, foreign telecom operators were also permitted to establish joint ventures in Beijing, with foreign equity ratio capped at 50%, to provide IP-VPN services to foreign-invested enterprises in Beijing. However, the Expanding BJ Opening-Up Work Plan does not address this specific point. 

A Glimpse of Regulatory Framework

The telecom services in China are divided into value-added telecom services (VATS) and basic telecom services (BTS) from a regulatory perspective. Operating telecom services in China is subject to the licensing regime as administered by the Ministry of Industry and Information Technology (MIIT) and its local counterparts. As per the regulations outlined in the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (Provisions on FITE)⁴, foreign investment in VATS enterprises is limited to a maximum of 50%, while investment in BTS enterprises is restricted to a maximum of 49%, unless the State stipulates otherwise.

Application store, as mentioned above, falls within “information publishing platform and delivery services”, a subcategory of information services business (B25) which is a type of VATS business covered by the so-called “ICP” license. Providing internet access service to users is a subcategory of Internet access services business (B14) which is another type of VATS business covered by the so-called “ISP” license.

Status Quo of Opening Up Position for Foreign Investors

Historically, the telecom services businesses open to foreign investment were limited to those expressly mentioned in China’s WTO commitments⁵. Over time there has been progressive development in further opening up to foreign investment and streamlining the administration approaches under different regimes, including Free Trade Pilot Zone and CEPA. The current opening-up policies following China’s accession to WTO are summarized as follows:

It is important to note that relaxation policies in respect of foreign investment restrictions in the telecom service sector may vary depending on the specific locality⁹.  Therefore, foreign investors are advised to carefully review local policies and practices.

Notably, the incumbent Provisions on FITE have undergone another significant revision by eliminating the prior requirement for primary foreign investors¹⁰ in VATS enterprises and BTS enterprises to demonstrate a track record of operations in the telecom sector. In the past, financial investors lacking a telecom operation track record encountered obstacles when seeking significant direct investment in license-holding entities, which may affect the feasibility for the latter to acquire and maintain the necessary licenses. This often compelled them to resort to the Variable Interest Entity (VIE) structure, which has been perceived as a compromised approach for foreign investment in restricted sectors. Under the current regulatory framework, financial investors are presented with a broader array of options, even in the absence of prior experience within the telecom sector.

Implications for foreign investors

The preferential policies introduced in Beijing's telecom sector as well as other recent legislative amendments have significant implications for foreign investors:

• More autonomy: Foreign telecom service providers can now venture into the niche market by establishing wholly owned enterprises in any district of Beijing. Established entities in the market might contemplate divesting from joint ventures to achieve full operational autonomy and capitalize on the economic benefits it entails.
• Diversified investors: Financial investors now have the green light to engage in significant direct investments in license-holding entities and take up the mantle as primary foreign investors, even if they lack a track record of operations in the telecom sector. This newfound flexibility extends to their ability to adjust shareholding proportions as needed.
• Opting out of VIE structure: With the possibility of making direct investments into license-holding entities now on the table, some may find it worthwhile to consider abandoning the VIE structure, especially if they have concerns about the inherent risks it carries. This decision may align with their aspirations to adhere to the "Narrowly Tailored" principle¹¹, which is a key consideration when contemplating a listing in Hong Kong.

Conclusion

Recent preferential policy initiatives in Beijing, combined with other forward-looking developments in the telecom sector, underscore China's unwavering dedication to welcoming foreign investment. This commitment offers foreign investors increased autonomy and a broader spectrum of investment opportunities. Nevertheless, it remains crucial to remain attentive to regional policy nuances and to stay abreast of evolving regulations in order to adeptly navigate the dynamic terrain of the Chinese telecom industry.