The telecoms industry in mainland China has been growing rapidly as the vast consumer market continues to use wireless technologies at an unprecedented rate. According to government figures, around 60 million new mobile phone users have subscribed each year since 2000. However, entry into this market is challenging for foreign investors due to heavy regulation and policy restrictions on foreign investment.
China’s telecoms regulatory regime divides the service market into two sectors: basic telecoms services and value-added telecoms services, or VATS. The basic telecoms sector (primarily consisting of telephony, data and satellite services) is now dominated by three state-owned enterprises: China Mobile, China Unicom and China Telecom, each of which cannibalised portions of other state-owned rivals during a government ordered industry restructuring in 2008. The VATS sector is broadly defined to include virtually any company charging customers for services using telecoms networks or equipment, including internet service providers, on-line data processing and transaction processing services, teleconferencing and videoconferencing services, video-on-demand, IP-VPN services, internet data centre services, systems integration, and providing online content on a fee-paying basis. In contrast with the basic telecoms sector, the VATS sector is highly fragmented. Companies operating in both the basic telecoms and VATS sectors must receive licences from the industry regulator, the Ministry of Industry and Information Technology (MIIT).
This article introduces the applicable regulations for foreign investors along with market practices, followed by highlighting some uniquely Chinese characteristics of telecoms regulations with a focus on recent regulatory developments.
RULES ON FOREIGN INVESTMENT
A number of restrictions on foreign investment in the telecoms sector have effectively hindered competition in the industry. Under China’s Telecommunications Regulations (effective 1 October 2000), foreign investment in the telecoms sector is only permitted through a joint venture with a Chinese party, commonly referred to as a foreign invested telecoms enterprise, or FITE. Subject to the Telecommunications Regulations and China’s WTO obligations, a FITE in the basic telecoms sector must be at least 51 per cent state-owned; a foreign investor may hold up to 50 per cent of the equity in a VATS sector FITE with any qualified Chinese party as its partner.
In practice, the MIIT rarely grants licences for FITEs – this perhaps reflects the historical origins of China’s telecoms industry as primarily a vehicle for government and military use prior to the nation’s reform and opening. As a result, much of the foreign investment in the telecoms industry is achieved indirectly through some variation of what is commonly known as a CCF structure. A typical CCF structure involves three parties: (1) a wholly domestic-owned Chinese party with the necessary licences and approvals; (2) a foreign-owned Chinese entity effectively controlling the first enterprise through a series of contracts; and (3) the foreign investor which owns and controls the second enterprise. Because the purpose of using a CCF structure is mostly to avoid limits on foreign investment and the MIIT approval process, its compliance with Chinese law is questionable.
The CCF structure has long been used in China as a means of investing in the telecoms market, most notably in the early 1990s when foreign investors used this model to invest in the basic telecoms sector in cooperation with China Unicom. At the time, prior to China’s WTO entry, foreign investment in the telecoms industry was prohibited and eventually these foreign investments were targeted by a government rectification campaign. Subsequently, CCF investments in the basic telecoms sector were unwound pursuant to government orders.
Nevertheless, the continued use of the CCF structure for indirect foreign investment in the VATS sector is an open secret which has been disclosed in the prospectuses of companies listed in Hong Kong and New York, and its existence is undoubtedly known to Chinese regulatory authorities. A circular issued by China’s telecoms regulatory authorities in the summer of 2006, reiterating restrictions on foreign investment prohibiting the effective transfer of VATS licences “by any means”, renewed concerns of a new enforcement campaign against foreign investors. Later revisions to the Telecoms Licensing Management Measures (effective 10 April 2009) also included a provision requiring basic telecoms operating companies to consult a MIIT “blacklist” of VATS companies violating telecoms regulations before contracting. However, no widespread enforcement measures have yet been taken against the growing number of CCF investments in the VATS sector.
Internet activities are also regulated heavily as telecoms services by the MIIT and other agencies. The MIIT divides internet activities into two categories under the Internet Information Services Management Measures (Internet Measures, effective 25 September 2000): fee-based internet activities are labelled Operating Internet Information Services, and require a VATS licence; free internet services are labelled Non-operating Internet Information Services, and require registration through pro forma record-filing with the MIIT. Under this system, companies providing internet content in China must receive an internet content provider (ICP) licence or registration number, depending on the nature of their website. Chinese websites are required to post their ICP registration or licence number on their main page.
Additional MIIT regulations on internet activities extend to content restrictions, advertising, and bulletin board services. The Internet Measures prohibit publication or distribution of information harming national security, causing loss to the nation’s reputation or interests, promoting ethnic discrimination or hatred, or including pornographic content. Sending unsolicited email advertisements is illegal under the Email Services Management Measures (effective 30 March 2006) and subject to fines of up to RMB 30,000. Online advertising is also subject to regulation by the State Administration of Industry and Commerce and other applicable industry regulators regulating traditional advertisements. Companies operating websites with bulletin board services are required to apply for permission under the Internet Bulletin Board Service Measures (effective 8 October 2000).
As broadband internet services have spread, so has regulation of online media content. The State Administration of Radio, Film and Television (SARFT), claims jurisdiction over the content of video and audio broadcast over the internet and the coaxial cable infrastructure. Providers of online audio or video media are required to apply for a licence from SARFT and applicants must be at majority state-owned entities, subject to the Rules on Online Media Programming Services (effective 31 January 2008). Online media programming has grown increasingly popular in recent years through applications such as PPLive, which streams hundreds of media channels, from live Chinese TV programming to reruns of Western movies and classic NBA games.
Recent regulations have sought to limit the “import” of media through the internet as well as media piracy online. The Ministry of Culture’s recent Circular on Strengthening and Improving Review of Online Music Content (issued 18 August 2009) requires entities importing music online to submit a copy of a contract establishing the importing party’s licensing rights as well as a copy of the lyrics and their Chinese translation. It is not clear how these rules will be enforced in practice, given the ease of accessing media content online.
Online gaming has also emerged as a regulatory concern, as the Ministry of Culture and the Ministry of Commerce issued a circular in June 2009 addressing the use of virtual currency in online games. These rules may have been issued partly in response to businesses which employ people to play online games, and then sell their virtual items online to other internet users for real currency. As the estimated real-currency value of the virtual economies of popular online multiplayer games has grown to equal that of smaller developing countries, policymakers may have been concerned about human capital being increasingly diverted to the “unproductive” pursuit of gaming. (Though, technically, under Marxist theory, the value of a commodity is determined by the quantity of labour expended in producing it.)
ENFORCING INTERNET REGULATIONS
The difficulty of enforcing internet regulations has led the MIIT to impose some responsibilities for policing compliance on VATS operating companies. The 2009 revisions to the Telecommunications Licensing Management Measures introduced more detailed obligations for internet access providers, requiring them to monitor content, and provide copies of clearly illegal content to the appropriate authorities. In addition, VATS providers should not host websites which have not received an ICP licence or registration number.
Earlier this year, the MIIT proposed further improving enforcement of existing content restrictions through software installed on individual personal computers. However, the circular which would have mandated all new personal computers sold in China to include pre-installed “Green Dam” content-filtering software was rescinded following strong public opposition to the measure. In addition to the privacy concerns expressed by the public, reportedly, the software included easily exploited security vulnerabilities which would have exposed computers to remote attacks.
After withdrawing the Green Dam proposal, MIIT issued draft Measures on Internet Safety and Supervision for comment in August 2009. The draft measures would only apply to certain VATS operating companies providing internet services, which are dependent on the MIIT for their operating licences. These draft measures could achieve some of the same MIIT goals on increasing central control and the effectiveness of content supervision by proposing that internet service providers must implement “supervision systems” connecting to the MIIT. Since the draft measures do not visibly affect personal computers or the internet experience of individual users, the proposal has not received similar media attention.
In 2009, China’s telecoms regulatory authorities have also focused on increasing reporting obligations following telecommunications network security breaches. The Implementing Measures on Internet Safety Reporting and the Mechanisms for Identifying and Resolving Trojan Horse and Botnet Activities (both effective 1 June 2009) implement a colour-coded reporting program requiring certain VATS operating companies to notify the National Computer Network Emergency Response Technical Team Coordination Center of security breaches. The most serious (red) alerts must be reported within two hours. Similarly, the Telecommunications Network Operational Supervision Management Measures (effective 1 May 2009) update previous rules requiring basic telecoms operating companies to report problems with telephone communications networks.
As China’s telecoms market continues to develop, the country’s regulatory agencies will need to move fast to keep pace with society. At the same time, the regulatory regime should try to avoid overburdening businesses or hampering the introduction of new telecoms technologies with the potential to increase productivity and economic growth. Having worked on China-related telecoms legal issues for over 15 years and observed rapid development in this area, it is safe to say that the regulatory challenges will only be matched by the compliance challenges for companies trying to keep up.
The authors wish to thank Gaston Fernandez for his assistance in conducting research for this article