China Eases Restrictions for Foreign-Invested Telecom Enterprises

Telecom services have long time been one of the most sensitive and restrictive areas in China for foreign investment. Except for a complex licensing regime towards both Foreign-Invested Telecom Enterprises (“FITEs”) and domestic enterprises, industry access and business operation of FITEs is also subject to the negative list management system, and FITEs are imposed by additional restrictions compared with domestic funded enterprises. Meanwhile, telecom services falling within the scope of such regulatory regime is particularly broad, including traditional telecommunications service offerings, and extending to many other types of technology and services provided via the Internet.

Against such background, on March 29, 2022, PRC State Council made important amendments (“Amendments”) to the Regulations on the Administration of Foreign-Invested Telecom Enterprises (“Telecom Regulations”), which are the basic rules for the telecoms industry in China. The Amendments effective as of 1 May 2022 reveal a positive and affirmative attitude of China towards foreign investments in the telecom field.

Encouraging More Foreign Investment in Telecom Businesses
Before the Amendments, Article 2 of Telecom Regulations restricted that FITEs can only be operated "in the form of Sino-foreign joint ventures". Now, by defining the "FITE" as "an enterprise established by foreign investors in China in accordance with the law to operate Telecom business", the Amendments indicate that in some Telecom businesses FITEs may also operate as wholly foreign-owned enterprises.

Meanwhile, although the Amendments do not further lift the restrictions on the proportion of foreign investment in specific Telecom sectors, the Amendments do add a general exception to the basic principle that "the cap on foreign ownership in basic Telecom business shall be 49%, and in value-added Telecom business shall be 50%."  i.e. "except where otherwise provided by the State".

In fact, prior to the Amendments, some regulatory documents have gradually broken through the restriction on the ratio of foreign investment in value-added telecom businesses, such as e-commerce, domestic conferencing, storage and forwarding, and call centers. The Amendments are in the written form of a regulation clarifying that the foreign investment ratio restrictions in some telecom businesses have been lifted, and can reach up to 100%. In practice, some wholly foreign-owned enterprises have been granted telecom business licenses.

Moreover, this exception leaves room for subsequent relaxation in the foreign investment ratio restriction in other telecom sectors.

Giving foreign investors more flexibility in structuring their investments
The Amendments remove the requirement in the 2016 version of Telecom Regulations that the main foreign investor of a FITE in value-added Telecom business shall have a "good track record and operational experience in Telecom business". Such elimination is a breakthrough and highlight of this amendment.

The above changes have undoubtedly lowered the threshold for foreign investment in the value-added telecom business. In practice, the requirement of a "good track record and operational experience in Telecom business" was a major obstacle for many financial investors with strong financial strength to invest in the value-added Telecom business. These investors, even though they have strong advantages in terms of capital and management, are still unable to enter the Chinese Telecom market due to their lack of track record and operational experience.

In addition, although some foreign investors are not primarily engaged in value-added telecom businesses, as traditional industries continue to undergo digital transformation, there is also a strong demand for foreign-invested enterprises (“FIEs”) established by these investors to carry out business activities that overlap with value-added telecom services. These businesses may include adding forums and instant messaging functions to websites and APPs, or building e-commerce web pages or any form of cloud services.

The previous business performance requirements towards the main investor made it difficult for many FIEs to fully satisfy this requirement and thus perceived a barrier to applying for a license. Some FIEs could only outsource their Telecom business to other companies holding value-added Telecom licenses. This arrangement adds to the operational and communication costs and may not be helpful in improving the service quality and user experience.

With the implementation of the Amendments, FIEs whose investor has limited experience in telecom operations are more likely to meet the application requirements, which will encourage FIEs to apply for licenses, thus further helping to expand online and digital businesses within a compliance framework.

Simplifying the application process for Telecom business license
According to the 2016 version of Telecom Regulations, establishing a FITE requires case-by-case approval from the Ministry of Industry and Information Technology (“MIIT”) and Ministry of Commerce (“MOFCOM”) before applying for the business license and the telecom license. Under the Amendments, such a pre-requisite procedure has been removed.

The current procedures for establishing FITE are basically the same as those for domestic telecom enterprises, which are first set up to obtain a business license, and then apply to the MIIT for a telecom license.

Meanwhile, the approval period for applying for value-added Telecom business applications is reduced from 90 days to 60 days. Substantially shortening the statutory review period for Telecom business applications establishes a more efficient application process for foreign-invested telecom business licenses and reduces the uncertainty of the long review period on business operations.

Conclusion
The Amendments provide notable relaxations of foreign investment limits in FITEs and harmonise the rules and present foreign investment regulatory practice addressing FITE. The removal of track record requirements for main foreign investors and simplified procedures provide greater flexibility for foreign investors, making it less time-consuming and costly for foreign investors to apply for licenses for Telecom services.

Although the Telecom Regulations are subject to more adjustments to further open up the telecom sector, the Amendments have given foreign investors more room to operate telecom business in China and foreign investors now have more reason to be positive about the investment in Chinese Telecom services. We will also continue to monitor the latest developments in this area.