Out-Law News 2 min. read

Rules relaxed on foreign companies entering Chinese telecoms market

Foreign businesses are now able to set up their own telecoms businesses in China or buy a majority stake in existing domestic operators after the Chinese government relaxed rules on foreign ownership.

The Xinhua news agency reported that foreign businesses can now own up to 100% of some telecom value-added services (VATS), including app stores, call centres and home internet access providers. Foreign companies can own up to 55% of online data and dealing analysis service providers, it said.

To take advantage of the relaxation of the rules, foreign companies must set up business within an 11 square mile 'free trade zone' in the Pudong district of Shanghai. Once set up in the area, foreign companies will be able to provide the VATS across China, except in the case of home internet access services which will be confined to within the FTZ, according to the Xinhua report.

The Shanghai FTZ was established as a pilot initiative in September last year. Within the zone foreign businesses operating in a range of sectors, including financial services and technology, media and telecoms, face fewer regulatory restrictions than currently apply elsewhere in the country. Certain activities within the zone remain blacklisted, including investment in stem cell technology development and application or in news agencies, books or newspapers.

However, Hong Kong-based technology law specialist Peter Bullock of Pinsent Masons, the law firm behind Out-Law.com, said that the cost of setting up business within the FTZ had rocketed since the pilot scheme was established.

"In a classic case of supply and demand, real estate prices have risen significantly in the Zone since its establishment was announced in late September 2013," Bullock said. "Companies with perhaps moribund businesses, but with premises in the Zone, are actively trying to reinvent themselves to take advantage of the new rules."

Bullock said that China's Ministry of Industry and Information Technology (MIIT) and the People’s Government of Shanghai Municipality had jointly released the ‘Opinions on Further Establishing Telecom Value-added Services (VATS) in China (Shanghai) Pilot Free Trade Zone’ to outline the latest proposals for the FTZ. He said the "umbrella regulation" would "loosen the tight control" that is currently placed over the provision of VATS in the country. The effect of the new rules would not be felt immediately, however, he added.

"The Chinese government is in the process of drafting administrative measures and simplifying the examination and approval process, so there will not be an immediate opening of the floodgates for foreign investment in VATS in the zone," Bullock said. "However, it will be encouraging news to many foreign IS vendors that they can invest greater than 50% in companies providing call centre, domestic multi-party communication services, internet access services and online data-processing and transaction-processing services, so long as they base their operations in the Free Trade Zone."

"China’s domestic market for many of these services is already highly competitive, with well established brands, and it may be that the advantage to foreign companies is to allow them to incorporate elements of these VATS regulated telecoms activities in their wider service offerings," he said.

Bullock said that it was an "important development" that the rules would allow foreign companies based within the Shanghai FTZ to offer most of the services accounted for under the new rules across China, except in the case of home internet access services. This had not been guaranteed, he said.

"Given the small size of the FTZ it would obviously be unattractive if all foreign provided telecoms services originating in the zone could only be provided to users within the zone," Bullock said. "However, it was not a foregone conclusion that these services could be ‘exported’."

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