China Significantly Revises its Regulation on Foreign Investment in the Telecom Sector

Introduction

On April 7, 2022, the State Council issued the Decision on Amending and Repealing Certain Administrative Regulations (the “Decision”), which revises fourteen administrative regulations and repeals six administrative regulations.  Among them, the Administrative Provisions of Foreign-Invested Telecommunications Enterprises (the “Administrative Provisions”) is substantially revised, with the number of articles reduced from 23 to 17.  The changes not only reflect the reform measures concerning telecommunications regulation and foreign investment since the last revision of the Administrative Provisions, but also the lift of relevant requirements imposed on foreign investors.  The new Administrative Provisions will come into force on May 1, 2022.  In this article, we will analyze the key contents of the current revision against the background of reform and opening up in the fields of telecommunications and foreign investment.

1. Redefine “foreign-invested telecommunications enterprises”

Before the revision, the concept“foreign-invested telecommunications enterprises”(“FITEs”) is defined in Article 2 as “enterprises incorporated by foreign investors and Chinese investors within the territory of the People’s Republic of China in the form of sino-foreign equity joint venture which operate telecommunications businesses.”  This definition is revised as “enterprises incorporated by foreign investors within the territory of the People's Republic of China which operate telecommunications businesses”, deleting “and Chinese investors” and “in the form of sino-foreign equity joint venture”.

The redefinition of FITEs not only achieves consistency with the relevant concept under the Foreign Investment Law, but also reflects the ongoing development of the regulatory policies and practices concerning FITEs.   On one hand, the Foreign Investment Law, which came into effect on January 1, 2020 and abolished the Sino-foreign Equity Joint Ventures Law, the Sino-foreign Cooperative Joint Ventures Law and Wholly Foreign-Owned Enterprises Law, defines foreign-invested enterprises (“FIEs”) as “enterprises incorporated in China per PRC laws wholly or partially invested by foreign investors”[1]  The revision of  Article 2 of the Administrative Regulations makes the definition of “FITEs” consistent with the concept of FIEs under the Foreign Investment Law.  On the other hand, as illustrated below, the share ratio restriction of foreign investment has already been lifted to up to 100% for certain types of telecom services in Free Trade Zones (“FTZs”) and even on a nationwide-level.  In practice, some wholly foreign-owned enterprises have already obtained the licenses for telecommunications business.

2. Delete requirements on major foreign investors concerning the good performance and operation experiences in conducting telecommunications businesses

Among the revisions, the new Administrative Provisions deleted the previous Article 9.1.4 and Article 10, which required major foreign investors of FITEs that engage in basic and value-added telecommunications (“VAT”) services to have good performance and operational experience in managing telecom businesses.  The deletion of these requirements is one of the breakthroughs and highlights of the revision this time.

According to the FAQ instructions issued by the Ministry of Industry and Information Technology (“MIIT”, the regulator for telecom business) in the context of the old version of the Administrative Provisions, a foreign-invested enterprise is not eligible to apply for the license if the foreign investor only contributes capital but does not have the experience in operating telecom business[2].  In addition, according to MIIT’s “Guidelines for the Application of Telecom Business License”, the applicant should provide a detailed description of the previous experience of the major foreign investor (or its first-tier parent or subsidiary company) in providing VAT services, and provide relevant supporting documents.[3]  In practice, the relevant supporting documents vary from case to case, and there is uncertainty as to whether the major foreign investors can fulfill the experience requirement.  As some major foreign investors are investment vehicles or holding companies that do not participate in the actual operation of the enterprise, and there are differences in the telecom regulatory systems of foreign countries (regions), this requirement has caused certain obstacles for foreign investors to engage in telecommunications business in China.  The deletion of the requirement can help reduce the burden of foreign investors in the applications, stabilize market expectations, and further expand the opening up of China’s telecommunications business sector.

The deletion of the requirement on major foreign investors’ telecom operation performance and experience also reflects the new development in China’s reform of foreign investment regulatory system.  The Foreign Investment Law, taking effect on January 1, 2020, and its implementing regulations established a regulatory system of “pre-establishment national treatment plus negative list”. The “pre-establishment national treatment” means granting to foreign investors and their investments, in the stage of investment access, the treatment no less favorable than that granted to domestic investors and their investments.  The “negative list” system means that China implements special administrative measures on foreign investments of business sectors specified in the list and grants national treatment to foreign investments in business sectors not specified in the list[4].  Pursuant to Negative List of Foreign Investment (2021), the special administrative measures for telecom companies are “limited to the opening of telecommunications services in the commitments made by China upon WTO accession.  The foreign shareholding in a VAT service shall not exceed 50% (except e-commerce, domestic conferencing, store-and-forward, and call center services), and the Chinese party shall have a controlling stake in basic telecommunications.”  There is no requirement on the performance and experience of foreign investors concerning telecom business operation on the negative list.  Therefore, the deletion of the provisions concerning telecommunications operation performance and experience also reflects the requirement of “pre-establishment national treatment and negative list” under the new foreign investment regulatory system of China.

3. Provide a legal basis for further relaxing and lifting the restrictions on the ratio of foreign shareholding

Prior to the current revision, Article 6 of the Administrative Provisions stipulates that: “The ultimate proportion of contribution of the foreign investors of a foreign-invested telecom enterprise that is engaged in the basic telecom services (except the radio paging services) shall not be more than 49%.  The ultimate proportion of contribution of the foreign investors of a foreign-invested telecom enterprise that is engaged in the value-added services (including the radio paging business in the basic telecom services) shall not be more than 50%.  The different proportions of contribution of the Chinese and foreign investors in a foreign-invested telecom enterprise at different stages shall be determined by the administrative department of industry and information technology under the State Council according to relevant provisions.”  The Decision adds a “carve-out” exception to both Paragraph 1 and 2 of Article 6, i.e. “except as otherwise provided for by the State", and deletes Paragraph 3 thereof.  The newly added exception provides a legal basis for China to further relax and lift the restrictive measures on the ratio of foreign shareholding in telecommunications business.  As a matter of fact, China has gradually relaxed and lifted some restrictive measures on the ratio of foreign shareholding in recent years by means of pilot programs and the combination of overall and local efforts.

On one hand, MIIT has lifted the restrictions on the ratio of foreign shareholding regarding certain businesses in the Shanghai Pilot FTZ on a pilot basis[5], and subsequently extended the experience to nationwide/ all pilot FTZs approved by the State Council.[6]  On the other hand, in order to implement the new measures for liberalizing the telecommunications sector under the Agreement on Trade in Services to the Mainland and Hong Kong Closer Economic Partnership Arrangement and the Agreement on Trade in Services to the Mainland and Macao Closer Economic Partnership Arrangement, MIIT has made special arrangements for service providers from Hong Kong and Macao (hereinafter as “CEPA Investors”).[7]  The current restrictions on the ratio of foreign shareholdingequity applicable to VAT services are summarized as follows:

In addition to the abovementioned relaxation of restrictions on the ratio of foreign shareholding, the addition of an exception to Article 6 of the Administrative Provisions by the Decision not only confirms the previous policy measures at the legislative level, but also provides room for the Chinese government to further deepen the reform and opening up in the telecommunications sector with regard to foreign investment in the future.

4. Accelerate the licensing process and implement the “separation of business licenses and permits” principle

Prior to the revision, Paragraph 2 of Article 11 of the original Administrative Provisions provides that MIIT shall examine the relevant documents as of the day when the application is received.  If the application is for engaging in the basic telecom businesses, the examination shall be completed within 180 days and a decision shall be made concerning whether to approve or disapprove the application; if the application is for engaging the value-added telecom businesses, the examination shall be completed within 90 days and a decision shall be made whether to approve or disapprove the application.  The Decision has made adjustments to the above provision regarding the examination and approval of VAT businesses.  After the revision, the time limit for the examination and approval of an application for VAT businesses is shortened from 90 days to 60 days, which reflects the reform principle of “streamlining administration, delegating powers, and improving regulation and services” and is conducive to energizing market entities. 

In addition, the original Articles 12, 14, 15 and 16 of the Administrative Provisions which set out the approval procedures regarding the original “Examination Decision of Foreign Investment in the Telecommunications” (“Examination Decision”) and “the Approval Certificate of Establishing A Foreign-invested Enterprise” (“Approval Certificate”) are all deleted in the new version.  The licensing procedures for foreign-invested telecommunications enterprises before the revision are shown as below:

Before this revision, MIIT has, in accordance with the State Council's reform principle of “separating permits from business license”, lifted the requirement of Examination Decision.  “Separating permits from business license” refers to the separation of the examination and approval of business licenses and that of permits issued by the relevant authorities in the respective sector, so as to reduce administrative procedures and to energize enterprises and the market.  In September and October 2020, the Decision of the State Council to Cancel or Delegate to Lower-level Authorities a Group of Administrative Licensing Items (Guo Fa [2020] No. 13)[9] and the Notice by the Ministry of Industry and Information Technology of Strengthening Interim and Ex Post Supervision of Foreign-funded Telecommunication Enterprises (MIIT Letter [2020] No.248)[10] cancelled the issuance of Examination Decision.  On June 29, 2021, MIIT issued the Announcement from the Ministry of Industry and Information Technology regarding Deepening the Reform of “Separating Permits from Business Licenses” (MIIT Letter [2021] No.159)[11], which adopted measures concerning foreign investment in the telecommunications sector including “canceling the examination and approval for foreign investment in telecommunications sector”, optimizing the examination and approval procedures, as well as implementing the notification and commitment method when applying for Class II VAT businesses in pilot FTZs.  With respect to the reform of regulatory system for foreign investment, since the implementation of the Foreign Investment Law on January 1, 2020, the Ministry of Commerce no longer issues Approval Certificates, and has instead established a foreign investment information reporting system.  According to the Order of the Ministry of Commerce of the People's Republic of China and the State Administration for Market Regulation, foreign investors or foreign-invested enterprises shall report investment information to commerce departments through the enterprise registration system and the National Enterprise Credit Information Publicity System.  The examination and approval procedure for FITEs after the “separation of permits from business licenses” is shown as below:

To sum up, the Decision removes many provisions on the licensing requirements for FITEs, confirms and implements the reform principle of “separating permits from business licenses” from the legislative level, and shortens the time for the examination and approval for VAT businesses, which is conducive to further optimizing the application process for foreign-invested telecommunications business and improving the efficiency of examination and approval.

5. Summary and outlook

With the introduction of measures deepening reform and further opening up of the telecom business sector in China in recent years, the number of FITEs has increased substantially.  As can be seen from the following chart, the number of foreign-invested enterprises that have obtained VAT licenses issued by MIIT has increased by more than 13 times since 2017.[12]

Based on the analysis above, we believe that the revisions made by the Decision regarding the “Administrative Provisions” are comprehensive and significant. The revisions not only reflect China’s recent reform measures in administrative licensing and foreign investment, but also simplify specific conditions and procedures for foreign investment in telecom business sector.  After the new version of Administrative Provisions comes into force, we believe that it will bring more room for foreign investors to invest in telecom businesses in China.  As the implementation of the Decision is still some time away, the specific impacts on the telecom license application and approval brought by the revision are to be seen in practice.  We suggest relevant enterprises to pay close attention to the implementation of the new Administrative Provisions which may bring new opportunities in the sector.

Thanks to Cai Lingke and Qiao Qiya for their contributions to this article.