The 2022 Decision does not change the Administrative Provisions 2016’s basic restrictions concerning the foreign capital contribution ratio in the telecommunications sector.  Article 6 of the Administrative Provisions 2016 (hereinafter referred to as “Article 6") sets out the cap of the ultimate foreign capital contribution ratio in a foreign-invested enterprise providing basic telecommunications services (hereinafter referred to as “BTS") (excluding wireless paging services) at 49% while that in a foreign-invested enterprise operating value-added telecommunications services (hereinafter referred to as “VATS") (including the wireless paging services as a part of BTS) at 50%.  The 2022 Decision further adds an exception to Article 6, i.e., “unless otherwise provided by the State".[1]

In fact, prior to this revision, some departmental rules and regulatory documents had already gradually relaxed the restriction on the capital contribution ratio of foreign investors in VATS (see Table 1 for details).  The 2022 Decision responds to the trend of expanding opening-up in the telecommunications sector.  On one hand, the newly revised Administrative Provisions 2022 formally confirms the aforesaid phased relaxation in the past few years at the statutory level; on the other hand, the 2022 Decision expresses the exception to Article 6 as “unless otherwise provided by the State" instead of “unless otherwise prescribed by any law or regulation".  The choice of word here implies a legislative intention, that is, the restrictive measures on the foreign capital contribution ratio in the telecoms sector can further be adjusted by means of departmental rules and regulatory documents.  Compared to laws or regulations under the Chinese legislation framework, these two legislative tools, despite their lower effectiveness level, can be applied in a more flexible manner.

Given that certain types of VATS (e.g., for-profit e-commerce) were already opened up to wholly foreign-owned enterprises (hereinafter referred to as “WOFE") before the 2022 Decision and the Administrative Provisions 2022 further removes the restrictions that the foreign-invested telecoms enterprises should be established “in the form of a Sino-foreign equity joint venture", the “foreign-invested telecoms enterprise" is therefore redefined as “enterprises lawfully established by foreign investors within the territory of the PRC to operate telecommunications businesses".  This change implies that foreign investment in telecommunications businesses does not necessarily entail the establishment of joint ventures.  In respect of specific types of telecommunications services, the WOFE is also legally permitted.

The following table illustrates how these requirements on the maximum foreign shareholding cap in telecommunications businesses have gradually been relaxed.

Table 1: The Course of Expanding Opening Up in the Telecommunications Market[2]

The Administrative Provisions 2022 significantly simplifies the procedures for establishing foreign-invested telecoms enterprises.  According to the original Administrative Provisions 2016, before this revision, the complicated pre-approval procedure is a must-have.  In particular, the principal Chinese investors of the foreign-invested telecoms enterprises (hereinafter referred to as “principal Chinese investors") should complete the following approval procedure in turn:

(i) First, apply for Approval Opinion on Foreign Investment in Telecommunications Services (hereinafter referred to as “Approval Opinion") to the Ministry of Industry and Information Technology (hereinafter referred to as the “MIIT");

(ii) Second, present such Approval Opinion to apply for Approval Certificate for the Establishment of a Foreign-invested Enterprise (hereinafter referred to as “Approval Certificate") to the Ministry of Commerce;

(iii) Third, present the Approval Certificate to complete company registration with market supervisory authorities;

(iv) Finally, submit the Approval Certificate and the business license granted by market supervisory authorities to obtain MIIT’s approval of the telecoms license. 

To sum up, the whole procedure above includes four stages of approval and may take months or even up to a year to complete.  This will increase the difficulty in establishing foreign-invested telecoms enterprises.  What’s more, once any equity changes to the enterprise occur, such enterprise will be subject to the aforesaid examination and approval afresh, which may greatly hamper its normal operation.

Along with the abolition of the examination and approval for establishing foreign-invested enterprises and the reform of “Separation of Business Licenses and Operation Permits", prior to the current revision, the procedure for setting up a foreign-invested telecoms enterprise in the PRC had already been gradually simplified.  Since the Foreign Investment Law of the PRC, which took effect on 1 January 2020, canceled the examination and approval for the establishment of foreign-invested enterprises, the Ministry of Commerce accordingly no longer issued the Approval Certificate.  The MIIT has also ceased to grant the Approval Opinion upon the abolition of the examination and the approval as prescribed by the Circular of the MIIT on Deepening the Reform of “Separation of Business Licenses and Operation Permits, which became effective on 1 July 2021.  Instead, the corresponding foreign investment review will be incorporated into the MIIT’s approval process for the telecoms license.  That is to say, the preliminary examination and approval were already removed from the application procedure of the aforesaid operation permit.

In view of the changes above, the procedure for establishing foreign-invested telecoms enterprises is basically the same as that for domestic ones, both of which require the investors to complete company registration first and then apply to the MIIT for the telecoms license (hereinafter referred to as “Business License before Operation Permits").  The current revision to the Administrative Provisions 2016 further confirms the establishment procedure aforesaid in the form of legislation, which reflects the principle of national treatment for foreign investment.

However, another problem may arise.  Foreign investment in the telecommunications sector could suffer uncertainty owing to the approval result of the telecoms license that cannot be completely foreseen.  According to the original examination and approval procedure under the Administrative Provisions 2016, prior to the company registration, the proposed foreign-invested telecoms enterprise would first go through a substantive review at the stage of application for the Approval Opinion.  In general, if this Approval Opinion is successfully obtained, then it is highly possible for such enterprise to obtain the telecoms license after its formal establishment.  However, things could be different when the requirement of Approval Opinion is removed.  Under the current procedure, relevant investors should establish the enterprise first and then apply for the telecoms license.  Without the preliminary review of the MIIT, the investors cannot exclude the possibility of being rejected when applying for this operation permit.  Given that certain funds, premises, personnel and equipment may have been invested upon the establishment of the foreign-invested telecoms enterprise, great losses may accordingly occur if the enterprise cannot legally provide telecommunications services as planned.  The concern above is reasonable solely from the procedural level.  However, in the context of the change to the application criteria (see below), we do not see a significant increase of uncertainty to obtain the telecoms license.

The Administrative Provisions 2022 abolishes the requirement on principal foreign investors that engage in BTS and VATS for “good business results and operation experience in managing telecommunications services".  For principal foreign investors in the VATS sector, this means they will be given the same treatment as that granted to domestic investors when applying for telecoms licenses.  However, as to the BTS sector, compared with domestic counterparts, relevant principal foreign investors are still subject to an additional condition, which requires these principal foreign investors to obtain a permit for operating BTS in the country or region where they are registered.[3]

The changes above have undoubtedly lowered the threshold of entry for foreign investment in VATS.  Prior to the current revision, the requirement concerning “good business results and operational experience in telecommunications services" has practically prevented many financial investors with abundant resources from investing in VATS.  These investors, despite their strong advantages in funds and management, usually lack established performance and operation experience in telecommunications services and thus are still unable to enter China's telecommunications market.  At this point, the removal of such requirement will help reduce access barriers for financing activities in the telecoms business, particularly those in the VATS sector.  In addition, the original Administrative Provisions 2016 does not clearly specify how to define “good business results and operational experience in managing telecommunications businesses".  Although the MIIT’s Guidelines for the Approval of Telecoms License expressly interprets this requirement as “obtaining preliminary permission, filing or operating well-known websites and Apps", the MIIT still enjoys broad discretion in determining whether the foreign investors fulfill the performance and experience requirement.  Considering that such requirement now is completely removed, the application criteria for the telecoms license may become more definite.  Hence, increasing opportunities in China’s telecommunications market will then be available to foreign investors and a boost in the market confidence is expected to be seen.

The Administrative Provisions 2022 also emphasizes that foreign-invested telecoms enterprises should comply with the Telecommunications Regulations of the PRC, especially with those provisions regarding the classification of telecommunications businesses therein.  The corresponding supporting legislations include the Classified Catalogue of Telecommunications Services (hereinafter referred to as “The Catalogue"), which details the categories of BTS and VATS.  The Catalogue was last updated in 2015.  Although the Catalogue was further revised to add 5G businesses in 2019, the rest thereof remain unchanged since its release.  In the context of the broad definition provided by the Catalogue and the emerging new technologies and business models in practice, it is increasingly difficult to determine whether a certain service qualifies as a telecommunications service and what specific subsector it should be classified as.  Given that foreign-invested telecoms enterprises are also subject to the telecoms license according to the Catalogue, the vague classification may accordingly cause difficulties and uncertainties to the foreign investment access in this regard.  Accompanying with the expansion of opening up and the lower barriers to entry, China’s telecoms market anticipates a more practical and definite service classification, which will be conducive to the further improvement of the market access regime in this regard.