On April 10, 2024, the Ministry of Industry and Information Technology of the People's Republic of China (the "MIIT") announced the Notice on the Pilot Scheme for the Further Opening of Value-Added Telecom Services to Foreign Investment (the "Pilot Scheme"), aiming to expand opening-up in the telecom/internet sector to foreign investors. 

A.Key Contents

1. Pilot Zones for Implementation

The Pilot Scheme will initially be implemented in four designated pilot zones: (i) the Beijing Municipality Service Sector Comprehensive Demonstration Zone, (ii) the Shanghai Pilot Free Trade Zone Lin-gang Special Area and the Socialist Modernization Leading Zone (i.e., Pudong New Area), (iii) the Hainan Free Trade Port, and (iv) the Shenzhen Advance Demonstration Zone of Socialism with Chinese Characteristics (i.e., Shenzhen). Each provincial government of these pilot zones will develop a detailed pilot implementation plan for their respective pilot zone, and such pilot implementation plans will be subject to the MIIT's evaluation and approval.

2. Lifting of Foreign Ownership Restriction

In the pilot zones, restrictions on foreign equity in the following value-added telecom ("VAT") services (most of which are internet services) will be completely lifted: (i) Internet Data Centers ("IDC"), (ii) Content Distribution Networks ("CDN"), (iii) Internet Service Providers ("ISP"), (iv) online data processing and transaction processing services, (v) information publication platform and delivery services (excluding internet news, publishing, audio-video services, and internet culture operations), and (vi) information protection and processing services (collectively the "Pilot VAT Services"). Foreign investors will be allowed to wholly own companies engaging in Pilot VAT Services within the four designed pilot zones.

3. Registration and Facility Location Requirements

Foreign investors must register the operating entities and locate their service facilities within the designated pilot zones. It is not allowed to lease or purchase external CDN or similar facilities for accelerated services outside the pilot zones.

4. Service Territory

For ISP services, the service territory is restricted to the pilot zones, with services provided via equipment from basic telecom carriers as required by existing regulations. Other Pilot VAT Services, such as IDC and CDN services, can be offered nationwide, allowing foreign-invested telecom/internet companies to extend their operations and market presence across China.

5. Application and Compliance for Foreign Investors

Foreign-invested telecom/internet companies intending to offer the Pilot VAT Services in pilot zones must (i) apply for and obtain a telecom/internet business operation pilot approval from the MIIT, (ii) adhere to relevant laws, regulations, and conditions stipulated in the approval, and (iii) be subject to and cooperate with the supervision and management of telecom/internet regulatory authorities.

6. Evaluation and Expansion

The MIIT will evaluate the implementation of the Pilot Scheme, summarizing and promoting advanced experiences, models, and typical cases.  Based on the results, the scope of the pilot zones may be expanded in the future.

7. Goals and Open Services

The Pilot Scheme aims to enhance the openness of the telecom/internet sector, enrich market supply, stimulate market vitality, improve service levels, engage in international cooperation, and develop a multi-dimensional institutional and security regulatory system for high-quality development of the information and communication industry.

B. Implications

1. Attracting Foreign Investment

The Pilot Scheme is designed to attract more foreign investment into China's telecom/internet sector by offering a more open and competitive environment, potentially improving service quality and fostering innovation.

2. Regulatory Oversight

The detailed requirements for registration, service facility location, and service scope underline China's cautious approach, ensuring that the opening-up of the telecom/internet sector does not compromise regulatory compliance, security, or market order.

3. Market Dynamics

The entry of foreign players is anticipated to diversify the telecom/internet market in China, offering consumers and businesses more choices and potentially driving down prices while improving service offerings.

4. Innovation and Development

By benchmarking international standards and practices, the Pilot Scheme is expected to contribute to the high-quality development of China's telecom/internet industry, enhancing its competitiveness on a global scale.

5. Potential Expansion

Successful implementation in the pilot zones may lead to the expansion of the Pilot Scheme, gradually opening up China's telecom/internet sector to global players on a larger scale and further integrating China into the global digital economy.

To sum up, the Pilot Scheme represents a significant step in China's efforts to open up its digital and telecom/internet sectors to foreign investment within a framework of controlled pilot zones. This move signals that China's telecom/internet market is poised to become more vibrant.