China to Remove Foreign Restrictions on IDC Investment

Tag:corporate-mergers-and-acquisitions-foreign-direct-investment-fdi,digital-economy,projects-energy-and-infrastructure-infrastructure-and-new-infrastructure

On 10 April 2024, the Ministry of Industry and Information Technology (“MIIT”) of China released the Circular on the Pilot Scheme for the Further Opening of Value-Added Telecom Services to Foreign Investment/工业和信息化部关于开展增值电信业务扩大对外开放试点工作的通告 (“MIIT Circular”)[1], announcing that China will remove foreign ownership restrictions on certain value-added telecom services provided within domestic pilot areas (“Pilot Areas”). For the first time, the internet data center and its sub-item internet resource collaboration business are open to foreign capital other than those from Hong Kong SAR and Macao SAR.[2]

I. What is Value Added Telecommunication Regulation?

China adopts a rather stringent management upon foreign investments towards telecommunication services. Telecommunications business is divided into two categories: basic telecommunications services and value-added telecommunications services (“Value Added Telecommunications”), the former of which is highly restricted from foreign direct investment, while the latter of which is partly opened up for foreign investors.

In its latest effort to strengthen its openness, MIIT Circular aims to spearhead pilot initiatives in Pilot Areas with the following Value Added Telecommunications services (“Newly Opened-Up VAT”). MIIT will coordinate the development of pilot implementation plans and establish the necessary implementation conditions, including assessment and evaluation processes, for which it will grant approval.

1. Internet Data Centers (互联网数据中心, “IDC”);

2. Content Delivery Networks (内容分发网络, “CDN”);

3. Internet Service Providers (互联网接入服务, “ISP”);

4. Online data processing and transaction processing (在线数据处理与交易处理);

5. Information publishing platforms and information delivery services (信息发布平台和递送服务, excluding services related to internet news information, online publishing, internet radio and television, and internet culture management);and

6. Information protection and processing services (信息保护和处理服务).

The Pilot Areas shall include the following:

1. Beijing’s national comprehensive demonstration zone for expanding opening-up in the service sector (北京市服务业扩大开放综合示范区);

2. Lingang new area of the China (Shanghai) Pilot Free Trade Zone and the pioneer area for socialist modernization in Shanghai (上海自由贸易试验区临港新片区及社会主义现代化建设引领区);

3. Hainan Free Trade Port (海南自由贸易港); and

4. Shenzhen pilot demonstration area of socialism with Chinese characteristics (深圳中国特色社会主义先行示范区).

II. Material Considerations of MIIT Circular

Following the issuance of MIIT Circular, on 10 April 2024, the Central Government of China also published MIIT Circular in response to journalists' questions[3]. MIIT Circular exemplifies China's drive to enhance market access and foster entrepreneurial development. However, before embarking on any business endeavor, the following factors should be carefully considered:

1. Room for Detailed Implementation Rules

MIIT Circular has not yet specified the detailed implementation rules. Instead, the provincial government of the Pilot Areas proposed for implementation shall submit a pilot implementation plan to MIIT in accordance with their own circumstances. MIIT will, in turn, organize relevant departments to conduct expert evaluation and verification, research and inspection of the safety supervision and security assurance system, among others. Upon meeting the necessary requirements, MIIT will issue an approval to the eligible areas to proceed.

2. Material Requirements towards Operating Entities:

MIIT Circular, in principle, sets up the plan to lift foreign ownership limit in Newly Opened-Up VAT in Pilot Areas but still there are requirements to the operating entities, with the material requirements as listed below:

（1）Operating entities which intend to provide the services under the Newly Opened-Up VAT shall be incorporated in and servicing facilities (服务设施, 含租用、购买等设施 (including leasing, purchasing, and other facilities)) must be placed in the same Pilot Areas.

（2）Operating entities shall not purchase or rent facilities such as CDNs outside the Pilot Areas to carry out acceleration services.

（3）Scope of Value Added Telecommunications can be provided nationwide except whereby the service scope of ISP is limited to the Pilot Areas only, and ISP operators shall provide users with internet access services through the internet access equipment of basic telecommunications enterprises.

3. Introduction of Exit Mechanism

MIIT may, depending on the circumstances, reduce the scope of pilot business operations and prematurely terminate the pilot program in cases of severe misconduct, if Pilot Areas encounter frequent instances of corporate misconduct, concentrated risks, or difficulties in ensuring safety supervision.

MIIT Circular also provides that the exiting Pilot Areas should organize relevant enterprises to comply with applicable laws and regulations in safeguarding the legitimate rights and interests of consumers, and appropriately handle post-termination matters such as transferring existing users and withdrawing from the network.

4. Support from All Levels of Government Authorities

MIIT: MIIT Circular requires that MIIT, as the regulatory authority for Value Added Telecommunications services, will, in collaboration with relevant departments, carry out an evaluation to expand the pilot program for the opening up. Each relevant department shall fulfill its responsibilities and divide the work to effectively implement supporting measures for the opening up, strengthen information exchange, sharing, and cross-departmental coordination, and prevent and resolve security risks.

Local telecommunications administration (各地通管局), as the regional telecommunications regulatory body, in conjunction with relevant departments, will supervise and urge the pilot enterprises to operate in compliance with the expanded opening up of Value Added Telecommunications services. They will oversee and manage service quality, establish mechanisms for enterprise information reporting and regular inspections, enhance network and data security supervision capabilities, and ensure that enterprises effectively fulfill their responsibilities as security subjects.

Local government in the Pilot Areas will ensure efficient management and service provision by establishing a robust mechanism for information sharing and coordination, constructing a two-way notification and data comparison mechanism, and effectively integrating mechanisms such as licensing connection, regulatory synergy, and law enforcement cooperation, thereby creating a stable, fair, transparent, and predictable development environment. The local government in the pilot areas will provide support in terms of personnel, funding, and other resources, and will support the local telecommunications administration in strengthening the construction of regulatory talent teams, upgrading and renovating the internet information security management system, and establishing an internet governance information system to provide regulatory support for the pilot program's opening up.

5. Potential Expansion

According to MIIT Circular, based on the implementation of the pilot program, the scope of the Pilot Areas will be expanded in a timely manner, and any relevant matters will be notified separately.

As China continues to ease market access restrictions, we will diligently oversee market practices and remain vigilant of regulatory agency attitudes.

Thanks to Lin Deng for her contributions to this article.

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