China removes foreign ownership restrictions on more value-added telecom services

On April 10, 2024, the Ministry of Industry and Information Technology issued the "Notice on Conducting Pilot Work for Further Opening Up the Value-Added Telecommunications Services" (referred to as Document No. 107). According to Document No. 107, restrictions on foreign ownership in value-added telecommunications services such as cloud services, internet access, data processing, and app stores will be lifted in pilot areas of Beijing, Shanghai, Hainan, and Shenzhen. As long as the registration location (not necessarily office locations) and service facilities (typically referring to data centres or servers) of foreign businesses are within the pilot areas, they will henceforth be able to offer IDC, IRCS, CDN, EDI, ICP services throughout China.

I. What does "lifting the foreign shareholding restrictions" (取消外资股比限制）mean?

According to Chinese law, foreign investment in value-added telecommunications services(增值电信业务) cannot exceed a 50% shareholding. With the lifting of the foreign shareholding restrictions in the pilot areas, foreign investment in the pilot open categories of value-added telecommunications services can exceed the 50% limit up to 100%, meaning foreign investors can wholly own these services.

II. Which pilot areas enjoy the new policy?

The pilot areas enjoying the new policy are Beijing's national comprehensive demonstration zone for expanding opening-up in the service sector, Lingang new area of the China (Shanghai) Pilot Free Trade Zone and the pioneer area for socialist modernization in Shanghai, Hainan Free Trade Port, and Shenzhen pilot demonstration area of socialism with Chinese characteristics

Which value-added telecommunications service categories have been opened?

1. Data Centers: IDC and IRCS, such as AWS, Azure, GCP, etc.,

2. Content Distribution Network (CDN) Network acceleration services, such as Akamai Technologies, Cloudflare, Microsoft Azure CDN, etc.,

Previously, MIIT had on multiple occasions expressed intentions to lift foreign investment restrictions in IDC and CDN business, but implementation had not materialized. Before this, foreign investment in IDC and CDN business was subject to a 50% foreign shareholding restriction. The examples under the restriction include SAP's joint venture Inspur Cloud and IBM's joint venture Hisense Network Technology. Others, such as AWS, Azure, and iCloud, could only operate in China through partnerships with Chinese companies that hold IDC licenses. For instance, Azure's partnership with 21Vianet, AWS's with Sinnet, and iCloud's with Guizhou-Cloud Big Data, all follow this model, generally with the American companies providing technical support and expertise while the Chinese companies handle operations.

The "Special Management Measures (Negative List) for Foreign Investment Access in Hainan Free Trade Port (2020 Edition)" previously released had, in fact, lifted the restrictions on foreign capital to conduct IDC and CDN businesses within the zone, although, at that time, the service scope was limited only to users within the Free Trade Port and international users.

Document No. 107 will reinvigorate the enthusiasm of foreign capital to apply for licenses directly. Before this, some foreign cloud service providers had already carried out frequent adjustments in equity and business cooperation modes in preparation for the upcoming policy opening to foreign investment. However, for foreign cloud service providers to fully launch operational activities in China through the channel provided by Document No. 107, they still need to undertake some necessary compliance actions, such as building an ICP/IP address/domain name information filing system and passing evaluations by relevant Chinese departments.

The removal of restrictions on foreign investment in Data Centers and its sub-item "Internet Resource Collaboration Service" marks the first time China has fully opened up to foreign capital in these fields. This may reflect China's strategic consideration to introduce foreign companies to participate in China's computing power supply more vigorously in the face of computing power shortages caused by US semiconductor export controls. As Wang Zhiqin, Vice President of the China Academy of Information and Communications Technology (CAICT), said, "With the vigorous development of the digital economy and AI, computing power has become a globally scarce strategic resource and an important infrastructure supporting the development of the digital economy... This policy welcomes foreign companies to participate in the investment and construction of China's computing power infrastructure and also provides more cloud computing service options for domestic companies."

3. Internet Access Services: ISP services (such as Comcast Corporation, AT&T Inc., Verizon Communications, etc., )

MIIT has already lifted the foreign shareholding restrictions for Hong Kong and Macau capital in ISP business. Later, the State Council of China applied same policy within specific areas in Beijing. A joint venture of British Telecom, BT Communications Information Consulting (Shanghai) Co., Ltd, had obtained an ISP business license as early as 2018.

Document No. 107 further relaxes the foreign shareholding restrictions in ISP services on a larger scale. However, according to Document No. 107, foreign companies conducting ISP business can only utilize services of the three major internet operators (China Mobile, Unicom, Telecom) to provide Internet access services to customers within the pilot areas, and are not permitted to offer access services such as Virtual Private Networks (VPNs) without authorization.

4. Online Data Processing and Transaction Processing Services, namely EDI services, include 1) Transaction processing services, such as operational e-commerce platform services; 2) Data exchange services, such as internet clearing and settlement services; 3) Network/electronic equipment data processing services, such as Internet of Things (IoT) platform services.

China has removed foreign investment restrictions in e-commerce (a category of EDI) since 2016. Many wholly foreign-owned e-commerce, automotive, and retail companies have obtained the licenses required to conduct EDI business throughout China.

Document No. 107 further expands the openness of EDI services and, for the first time, completely lifts restrictions on foreign investment in electronic data interchange services and network/electronic equipment data processing services. This means qualified foreign companies can now wholly own and provide IoT platform services, presenting greater development opportunities for foreign IoT and big data processing companies in China.

5. Information Services Business: ICP services, including 1) Information publishing platforms and delivery services, such as UGC/PGC content publishing; 2) Information protection and processing services, such as virus inquiries, security filtering, etc.

In some regions, such as Beijing, Shanghai, and Hainan, foreign companies are already allowed to enter the App Store business( a category of ICP services) without any restrictions. In 2023, Siemens Digital Technologies (Shenzhen) Co., Ltd., registered in Shenzhen Qianhai, obtained a 100% foreign-owned ICP license (App Store).

Document No. 107 further lifts foreign investment restrictions in other catalogues of ICP services, like the sub-category of information protection and processing services, and partially opens up information publishing platforms and delivery services (mainly App Stores).

However, Document No. 107 has not lifted restrictions on foreign investment in services related to information content security, such as public communities, instant messaging, search engines, news publishing, live streaming, short videos, and online games. Generative AI services, which also fall under ICP services, show no sign of opening up to foreign businesses. This reflects the Chinese government's cautious stance on opening internet information service businesses to foreign capital, given these services' relevance to China's ideological security and social stability.

In general, Document No. 107 marks a significant policy shift in China's traditionally cautious approach towards foreign investment in the value-added telecommunications service sector. It represents a measure to further open up in response to the new situation of a domestic economic slowdown and worsening international environment. In fact, China’s Vice Commerce Minister Guo Tingting hinted at the new policy shift at the China Development Forum 2024 last month by saying that China will promote the opening up of sectors such as telecommunications and medical care to create more trade and investment opportunities for foreign investors.

It is also an additional initiative following more pro-foreign business policies around the 2024 China Development Forum, such as new rules for cross-border data flow and service trade. As stated by China’s Xinhua News Agency, “The move is China's latest effort to expand opening-up, align itself with high-standard international economic and trade rules, stimulate market competition and vitality of business entities, serve the building of a new development pattern, and share the development dividends of China's digital economy with the world.”

Below is my translation of the MIIT’s Document No. 107. You can also find the Chinese version of Document No. 107 here.