The PRC Telecom The PRC Telecom Regulatory Regime: Regulatory - - PDF document

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Introduction

Since Marco Polo’s first visit in the 13th Century, China has been viewed by the Western world as a land o f b o th m y ste ry and commercial promise. Until recently there was certainly more mystery than promise in the eyes of foreign te le c o m o p e rato rs. Fo re ign investment in the industry was c o m ple te ly b lo c ke d b y no n- transparent rules and internal decrees, and until only a few years ago the telecom regulators also happened to be the key telecom

• perators. This naturally frustrated

not only foreign investors but even domestic state-owned and private sector Chinese companies from participating in this huge but largely untapped market. The past few years have seen a clear split between regulatory authority and business

• peratio ns, whic h has led to

sign ific an t in ve stm e n t an d c o m m erc ial partic ipatio n b y numerous state-owned companies and some privately-owned domestic companies. The more open and commercially c o mpetitive enviro nment has resulted in tremendous growth in virtually every sector of China’s telecommunications industry. By the e n d o f Ju ly , fo r e x am p le , China had 286.9 million telecom subscribers, 19% of which were added in the first half of 2001. The number of mobile phone users dramatic ally inc reased in the first half of 2001 to 120.6 million surpassing even the US and making China the largest mobile phone market in the world. While the number of internet users in 2001 reached only 26 million, growth in this sector is tremendous. Revenues for the telecom services sector in the first half of 2001 exceeded US$20

• billion. In preparation for the 2008

Olympic Games, Beijing city alone

The PRC Telecom Regulatory Regime: Piecing Together the Puzzle The PRC Telecom Regulatory Regime: Piecing Together the Puzzle

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Sweeping changes to the PRC telecommunications regulatory regime over the past year have laid much of the legal foundation required for China’s regulators and telecom operators to cope with the massive foreign investment expected after China’s accession to the World Trade Organization. Mitch D Dudek, David R Weaver II, Lucy Lan Xu and Richard Guoxing Qiang discuss the most significant regulatory developments and explore anticipated rules and regulations Sweeping changes to the PRC telecommunications regulatory regime over the past year have laid much of the legal foundation required for China’s regulators and telecom operators to cope with the massive foreign investment expected after China’s accession to the World Trade Organization. Mitch D Dudek, David R Weaver II, Lucy Lan Xu and Richard Guoxing Qiang discuss the most significant regulatory developments and explore anticipated rules and regulations

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is expected to invest US$3.6 billion in its info rmatio n tec hno lo gy industries in the hope of hosting the most ‘wired’ Olympics in history. Given that the current penetration rate for fixed-line telephones is only 13.2%, and a mere 9.2% for mobile phones, the market opportunities appear endless. But, with the exc eptio n o f m anufac turing c o nc erns and those companies willing to throw themselves into risky ventures with no so lid legal b asis, fo reign investors remain on the sidelines. The situation will quic kly and dramatic ally c hange as China implements its WTO commitments to gradually open up its telecom market to foreign participation. While bilateral trade agreements with the US and the EU in anticipation of WTO accession set the groundwork for opening up value-added services more quickly and more completely than basic telecom services, China did not previously have any clear regulatory regime in plac e to make suc h distinctions or to regulate what had hereto fo re been an industry dominated by a few state-owned monopolies. The c entrepiec e o f China’s telec om regulatory regime was finally put into plac e o n 25 September 2000, when the PRC State Co unc il issued the PRC Telecommunications Regulation (Telecom Regulations). The new Telecom Regulations, considered a milestone in the gradual opening of China’s telecom market, laid the foundation for standardised and transparent administration and

• peration of the telecommunications

industry in China. Significantly, it calls for the issuance of additional detailed administrative rules, catalogues and notices required to implement the general principles set forth in the regulations, some of whic h have just rec ently been issued. What is clear is that the mysteries

• f China’s telecom past are gone,

China’s telecom present is putting the regulatory pieces into place and the commercial promise of China’s telecom future is upon us.

The Telecom Past – The Mysteries

The Rules At the turn of this century China had yet to promulgate any significant comprehensive telecommunications

• legislation. The PRC telecom sector

was go ve rn e d b y pie c e m e al regulatio ns and unpub lished internal decrees consisting mainly

• f administrative notices dealing

with technical standards and service

• tariffs. On 1 September 1993,

t h e Mi n i s t r y o f Po s t a n d Telecommunications (the MPT, the telecommunications arm of which later bec ame the Ministry o f Information Industry (the MII)), issued the Tentative Telec o m Measures, which strictly prohibited foreign investment, operation and p a r t i c i p a t i o n i n t h e PR C telecommunications industry. This prohibition was memorialised in the Guidanc e Catalogue of Foreign Investment Industries (Investment Catalogue) which specifically lists the operation and management of telecommunications business as an industry category in which foreign investment is prohibited. The Market In the past China’s telecom industry was dominated by the MPT and its local branches with little room for any outside participation. Beginning in 1994 China Unic o m set up allianc es with numerous Sino- foreign joint ventures in an attempt to raise capital to compete with rival monopoly China Telecom. The joint ventures, altho ugh o stensibly prohibited from operating telecom networks, effectively borrowed the licence of China Unicom to provide telec om servic es and shared in network profits. However, after tolerating the China-China-Foreign (CCF) model for several years, in September 1998 the Chinese government c lamped down and specifically prohibited the CCF

• model. Sprint, First Pacific of Hong

Kong and France Telecom were just a few of the more than 40 international telecom companies forced to extract their investments.

The Telecom Present – Putting the Pieces into Place

The Rules T h e T e le c o m R e gu lat i o n s , pro mulgated by the PRC State Council only last year, represent C hina’ s first c o m pre he nsive telec ommunic ations legislation and provide the basic regulatory framework required for China to

• pen its telecom sector to foreign
• investment. This key piec e o f

legislation provides for several c ritic al administrative areas. These include a licensing system whic h distinguishes b etween value-added and basic telec om

• perations; rules to govern the

in te rc o n n e c tio n o f te le c o m n e two rks; an d guid an c e o n te le c o m rate s, allo c atio n o f re so urc e s c o n struc tio n an d

• security. It is also clear from the

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c o v e r a ge o f t h e T e l e c o m Regulatio ns that China to o k i n stru c ti o n fro m th e WT O A g r e e m e n t

• n

B a s i c Telecommunications Services, of whic h China has c ommitted to become a member as part of its WTO ac c ession pac kage, in an e ffo rt to b rin g its te le c o m regulatory regime into compliance with inte rnatio nal no rm s o f t r a n s p a r e n c y a n d n o n - discriminatory practices. T h e se c o n d ke y p ie c e o f legislation was put into place in July

• f this year with the issuance of the

Notice on the Adjustment of the Telec o mmunic atio ns Business Catalogue, promulgated by the MII (Revised Catalogue). The Revised Catalogue highlights approximately 50 telecom businesses and classifies them as either basic or value-added telec o m businesses. This list

• riginally spec ified only broad

categories of telecom businesses when it was first published as an a p p e n d i x t o t h e T e l e c o m

• Regulations. The Revised Catalogue

is important to foreign investors bec ause it c learly sets out the distinctions between basic telecom services and value-added telecom services, a distinction which will de fin e th e sc o pe o f fo re ign participation in China’s telecom sector. Other pieces of legislation issued sinc e the pro mulgatio n o f the Telec o m Regulatio ns inc lude important notices or catalogues regarding telecom rates, network a c c e s s p r o c e d u r e s a n d interconnection fees. While the Telec o m Regulatio ns and the Revised Catalogue have already

• pened the door to broader domestic

participation in China’s telecom market, the prohibition on foreign participation in telecom operations as set forth in the Investment Catalogue remains, at least for now, in place. The Market Since the breakup of China Telecom

• nly two years ago, seven state-
• wned companies have emerged as

significant operators in various sectors of China’s telecom market. These include fixed line industry giant China Telecom (which had revenues in excess of US$20 billion last year), China Mobile (which, although having revenues of only US$15 billion in 2000, had profits in excess of US$2 billion) and China Unicom (which has jockeyed for position with China Telecom ever since it was established in 1994 and which saw its revenues increase by 57% in the first half of this year alone (see Table 1)). China Railcom burst

• nto the scene in March 2001 with

initial assets worth almost US$2 billion. There has been a recent trend towards formation of allianc es among domestic telecom providers in order to enable the generally sector-specific companies to bundle services and reach markets which would otherwise be unreachable. For example, in June of this year China Telecom and China Railcom signed a c o mprehensive c o -o peratio n agreement on the use of network resources and services, training and the exchange of information. China Railcom has also agreed to team up with China Netc om to provide broadband services, the first of whic h will appear in a Beijing residential area. In o rd e r to e n c o urage a more market driven competitive enviro nment, the MII is also e n c o u r a gi n g k e y i n d u s t r y participants to expand their own services into other sectors of the

• industry. Last mo nth the MII

announced that cable television

• perators should be allowed to offer

traditional fixed-line and mobile phone services, and China Telecom and China Unicom may soon start broadcasting radio and television

• programmes. It is, however, unclear

whether the State Administration of Radio, Film and Television (SARFT) will support such cross-over services as they invo lve an o verlap o f

• versight responsibilities of the two

regulatory agencies. What is clear is that Minister Wu Jichuan, head of the MII, wants the quality of servic e providers to improve and believes that this can

• nly be ac hieved thro ugh the

intro duc tio n o f c o m petitio n. Anticipating the competition China’s domestic telecoms will face from large m ultinatio nal te le c o m

• perators upon their arrival in

China, the MII is focused on blowing life into China’s domestic telecom

• perators, and fast.

The Telecom Future – Commercial Promise

The Rules The Telecom Regulations set the stage for promulgation of subsidiary regulations and implementing rules to further develop the PRC’s telecom regulatory regime, including detailed regulatio ns go verning fo reign in ve stm e n t. Pro c e d ure s fo r e n gage m e n t in th e te le c o m businesses in China will be enacted by the State Council, a draft version

• f which has been circulating since

last year. While the regulations have not yet been finalised they will

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Table 1: Key Domestic Telecom Companies

Company Date Established Owners Scope of Business Notes China Telecommunications Group Corp (China Telecom)

• Revenue of US$20.8 billion in

2000.

• Ranking in Fortune Global 500:

#228.

• China’s dominant fixed-line

phone service provider.

• Profits of US$911 million in

2000.

• In 1999, China Telecom was

split into fo ur c o mpanies according to business areas: – Fixed-line services (China Telecom) – Mo bile servic es ( China Mobile) – Paging Servic es (went to China Unicom) – Satellite servic es (China Satellite)

• Rumored that China Telecom

may be further split into several i n d e p e n d e n t r e g i o n a l companies, or into two separate companies running fixed long distance and local telephony services.

• Planned to list its stock in New

York and Hong Kong in July 2001, but delayed until late September 2001.

• Licensed to provide:

– Domestic and international f i x e d

• l

i n e t e l e c o m m u n i c a t i o n s n e tw o r k s ( i n c lu d i n g wireless local loops) – V o i c e , d at a, i m age , m u l t i m e d i a a n d information services based

• n the above networks

– Relevant system integration a n d t e c h n o l o g y development Directly under the State Council. A p r i l 2 0 0 0 ( e s t a b l i s h e d following spin-offs)

China Mobile Telecommunications Group Corp (China Mobile)

April 2000 ( sp un - o ff fro m China Telecom) Directly under the State Council.

• Licensed to provide:

– Mobile telephony services – Internet Pro to c o l ( IP) telephony services – Data and m ultim e dia services – Internatio nal internet in te rc o n n e c tio n un it services – F a c s i m i l e , d a t a , information-on-demand, handset banking, Global Access WAP and a host of

• ther value-added services
• Ranking in Fortune Global 500:

#336.

• Revenue of US$15 billion in

2000.

• Biggest operator of GSM mobile

services in the world.

• Profits of US$2.1 billion in

2000.

• Shares traded in Hong Kong and

New York.

China Satellite Communications Group Corp (China Sat)

• Total Revenue in 2000 was

RMB290 million, a decline of RMB50 millio n fro m 1999 (when it was still a division of China Telecom). June 2000 ( sp un - o ff fro m China Telecom) Fo u n d e d b y f i v e companies including:

• C h i n a Sat e lli t e

Communications & B r o a d c a s t i n g Company

• China East Satellite

Communications Co Ltd

• Licensed to provide satellite-

related: – T e l e c o m m u n i c a t i o n s services – Broadcasting services – Da t a t r a n s p o r t a t i o n services – Video services – IP telephony services – Audio signal services – Channel renting services – Satellite-related export and import services

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China United Telecommunications Co Ltd (China Unicom)

July 1994 Direc tly under the State Council. Founded by:

• M i n i s t r y
• f

Electronic Industry

• Ministry of Electric

Power

• Ministry of Railway

14 investors, including:

• China International

Trust & Investment Corp

• China Reso urc es

Group Co Ltd

• China Merc hants

Holding Co Ltd

• Licensed to provide:

– D o m e s t i c a n d International fixed-line long distance telephony services – Local telephony services in areas where there is no public telephone network access or where there is a network shortage – Mo b i l e t e l e p h o n y services and other radio te le c o m m u n i c ati o n s services – Paging services – V a l u e a d d e d te le c o m m u n i c ati o n s services – Engine e ring se rvic e s f o r a l l k i n d s

• f

te le c o m m u n i c ati o n s systems

• For the first half of 2001, China

Unicom’s revenue increased by 57% to RMB15.96 billion.

• China Unic o m’s June 2000

public listings in Hong Kong and United States raised nearly US$5 billion.

• China’s dominant paging service

provider.

• It is the only mobile service

license holder other than China Mobile.

• It is the only operator allowed to

provide both fixed and mobile phone services.

• Rumoured that the State Council

has approved a merger with China Railcom by 2004.

• Annual revenue growth rate for

1998 and 1999 was 168.88% and 295.33%, respectively.

• Total Revenue for year 1999 was

US$ 23 million.

• In July 2000, it controlled about

12% of China’s voice-over IP telephony service market.

• By April 2000, it had almost

RMB1 billion in assets.

• Planning to build three Internet

data centres in Beijing, Shanghai and Guangzhou.

Jitong Communications Co Ltd (Jitong)

January 1994 Fo u n d e d b y t h e Ministry of Electronics Industry. Over 30 shareholders under MEI, including:

• Rai n b o w G ro u p

Corp

• China Elec tro nic

I n f o r m a t i o n Industry Group Corp

• Guotou Electronics

Co

• Licensed to provide:

– C o m m e r c i a l d a t a communication services – IP telephony services – Br o ad b an d In te r n e t infrastructure – Network direct-line access – Dial access – Satellite communication services – E-commerce services – Virtual private network (VPN) services – Frame relay services

• Revenue expec ted to reac h

US$65 million in 2002.

• Main focus is on multinationals

an d le ad i n g go ve rn m e n t enterprises.

• On 12 February 2001, China

Netcom announced the official closing of an US$325 million series A private placement.

C h i n a N e t w o r k Communications Co Ltd (China Netcom)

August 1999 Four owners with equal shares:

• Chinese Academy of

Sciences

• Ministry of Railway
• SARFT
• Shanghai Municipal

Government

• Licensed to provide:

– D o m e s t i c a n d international broadband access – High-speed Internet access – High-speed network data center and services – VPN services – ISP services – IP telephony services

• Assets worth RMB13.6 billion at

start up.

• Widely regarded as the only

player with the resources and capabilities to compete in the fixed-line telecom monopoly c urrently enjoyed by China Telecom.

• Rumoured that the State Council

appro ved China Railc o m’s merger with China Unicom by 2004.

China Railway Communication Co Ltd (China Railcom)

March 2001 Fo u n d e d b y t h e Ministry of Railway and its 14 railway branch bureaux.

• Licensed to provide:

– Fix e d-line te le pho ny services – Internet services – Data c o m m un ic atio n services – IP telephony services

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almost certainly mirror China’s market access commitments made in its Protocol of Accession to the WTO and are expec ted to be promulgated soon after China’s WTO

• accession. It can be anticipated that,

concurrently with or soon after the promulgation of regulations permitting fo reign investment i n C h i n a ’ s d o m e s t i c telecommunications industry, the existing Investment Catalo gue foreign investment prohibitions will be lifted and replaced with restrictions which are in line with China’s WTO commitments. It is expected that a continuing stream

• f detailed administrative rules,

catalogues, and notices will be issued to complete the regulatory puzzle

• ver the next 12 to 24 months.

The Market The Pro to c o l o f Ac c essio n fo r China’s entry into the WTO obliges China to gradually open its telecom

• markets. Specifically, in the value-

added and paging services sector, foreign investment of up to 30% will be allowed upon accession, 49% within one year and up to 50% within two years. In the mobile services sector, foreign investment of up to 25% will be allowed upon accession, 35% within one year and 49% within three years. With respec t to domestic fixed line services, foreign investment of up to 25% will be allo wed within three years o f accession, 35% within five years and 49% within six years. Naturally, China’s accession to the WTO does not preclude the possibility that China could open its telecom markets wider or quicker than expected in certain sectors. While the ability to engage in wholly foreign owned telecom operations would appear to be a distant dream in most sectors, Sino-foreign joint venture operations are expected to flourish in the not too distant future.

China’s Telecom Regulatory Regime – An Overview of the Regulatory Puzzle

The telecommunications industry in the PRC is mainly regulated by the MII centrally and regionally by the MII’s local bureaux. In addition to the MII, other key PRC telecom regulators inc lude the National People’s Congress (NPC) (to adopt natio nal-level laws) , the State Council (to promulgate detailed administrative regulations and

• versee the MII) and a handful of
• ther ministry level and lo c al

regulators which add multiple layers

• f complexity to the regulatory

environment. There are eight administrative areas outlined in the Telec om Regulations, the aim of which is to h e lp stan d ard ise an d m ake transparent rules and procedures of an industry that until recently had been opaque and obscure. The first administrative area (and probably the most significant to foreign investors) is the lic ensing system, whic h classifies all telecom businesses in the PRC as either a basic telecom business

• r a value-added telecom business. It

provides the required qualifications for operators to be licensed to engage in such businesses. The remaining administrative areas, discussed in greater detail below, provide a framework for the remaining pieces

• f the telecom regulatory puzzle (see

Table 2).

The Regulators

There are a number of governmental bo dies in the PRC that have varying degrees of legislative or administrative control over the telecom industry in China. The highest legislative body of the PRC government is the NPC whose adopted laws are generally followed by implementing regulations issued by the State Council, the highest administrative government body. In the case of the Telecom Regulations, due to the time-consuming legislative process and the speed at which China’s telecom industry is changing th e State C o un c il was th e promulgating body. In the near future the NPC is expected to adopt the Telec om Law, whic h will help to c larify areas that are no t fully explored in the Telec om Regulations, including consumer protection and telecom industry supervision. The State Council is expected to so o n issue the FIE Telec o m Regulations, a significant piece of legislation with respect to foreign investment in the telecom industry. However, it is the MII that is the major player in both the legislation and enforcement of China’s telecom laws and regulations. Before 1999 MII not only governed the telecom industry but also managed the commercial operations of China Telec om, whic h until rec ently enjoyed monopoly status in virtually every telecom sector. It is the MII that drafted the Telecom Regulations and the FIE Telecom Regulations for approval by the State Council. The MII (in particular); the NPC, the State Co unc il; the State De ve lo p m e n t an d Plan n in g Commission (SDPC); the State Administration of Radio, Film & Televisio n ( SARFT) and o ther government agencies (see Table 3) influence the telecom industry in

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Table 2: The PRC Telecom Regulatory Regime

Regulation Regulator Promulgation Date Scope Investment Catalogue of Foreign Investment Industries (Investment Catalogue)

• Establishes the basic framewo rk and

restrictions / prohibitions for approval of all foreign investments in China

• Currently prohibits all foreign investments

in PRC telecom operations

• Expected to be amended soon after China’s

accession to WTO.

• State Development

a n d P l a n n i n g Commission (SDPC)

• Ministry of Foreign

Trade and Economic C o - o p e r a t i o n (MOFTEC)

• State Economy and

Trade Commission (SETC) 2 0 J u n e 1 9 9 5 , a s a m e n d e d

• n

31 December 1997

• Expected to set out basic principles with

respect to governing the telecom industry.

Telecommunications Law (Telecom Law)

• Natio nal Peo ple’s

Congress Not yet promulgated

Telecommunications Regulations (Telecom Regulations)

• Ba s i c r e gu l a t i o n go v e r n i n g t h e

telecommunications industry in China

• Provides for 8 administrative areas to manage

the telecom industry, including – A licensing system – Interconnection of telecom networks – Telecom rates – Telecom resources – Telecom services – Telecom construction – Network access – Telecom security

• State Council

25 September 2000

• Categorises telecom businesses into basic

telecom business or value added telecom business

• The Telecom Business Catalogue was first

issued as attac hment to the Telec om Regulations.

Notice on the Adjustment of the Telecommunications Business Catalogue (Revised Catalogue)

• M i n i s t r y
• f

Information Industry (MII) 11 June 2001

• Sets new telecom rates as being either

government-fixed, government-guided or market-oriented prices.

The Notice Concerning Structural Adjustment of Telecommunications Rates (Telecom Rates Adjustment Notice)

• SDPC
• MII
• Ministry of Finance

(MOF) 22 December 2000

Catalogue of Telecommunications Equipment (1st group) Required to Have a Network Access License (Network Access License Equipment Catalogue)

• MII
• S t at e T e c h n i c al

Supervision Bureau (STSB) 9 January 2001

• Lists telecom equipment required to have a

network access license.

Administration Measures of Telecom Equipment Network Access (Network Access Measures)

• MII

10 May 2001

• Provides procedures to supervise network

access and administration of network access licenses.

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the PRC and all play a critical role in putting the piec es o f this regulatory puzzle together.

The Licensing System – Basic and Value Added Telecom Services

Overview The Telecom Regulations classify telecom businesses into two types, basic and value-added. Prospective telecom operators are required to

• btain a licence to engage in either
• type. Generally, basic refers to the

p ro visio n o f in frastru c tu re facilities and basic voice and data transmissions, both domestically and internationally, while value- added refers to the provision of specialised services via the basic infrastruc ture fac ilities. The Telecom Regulations were clarified with the issuance of the Revised Catalogue by the MII in June of th i s y e ar, wh i c h c lassi fi e s approximately 50 types of telecom businesses as basic or value-added

Public Interconnection Administrative Provisions (Interconnection Provisions)

• To be drafted and approved by the State

Council

• Article 44 of the Telecom Regulations

provides that fee standards for the provision

• f general telecom services will be drafted.
• MII

10 May 2001

• Establishes technical standards for telecom

network interconnection and fee structure.

Foreign Investment Enterprise Telecom Regulations (FIE Telecom Regulations)

• State Council

Not yet promulgated

• Were drafted and submitted by the MII to

the State Council in 2000, however, the State Council did not approve them at that time

• Article 80 of the Telecom Regulations

pro vides that spec ial m etho ds fo r engagement by foreign organisations and individuals will be determined.

• To be drafted and approved by the State

Council

• Article 28 of the Telecom Regulations

provides that detailed fee standards for telecom operators use of telecom resources will be drafted.

Telecommunications Resources Fee Standards

• MII
• SDPC
• MOF

Not yet promulgated

Telecom General Service Cost Compensation Administrative Measures

• MII
• SDPC
• MOF

Not yet promulgated

(see Table 4 for details). Ba s i c T e l e c o m Li c e n s i n g Requirements In order to qualify for a ‘Basic T e le c o m Busin e ss Lic e n c e ’ , the Telecom Regulations require that the pro spec tive telec o m

• pe rato r m e e t the fo llo wing

conditions:

• Be an e nte rprise le gally

established for the purpose of spec ialising in the basic t e l e c o m m u n i c a t i o n s business;

• Be at least 51% state owned;
• Submit a feasibility study and

technical proposal for network formation;

• Have adequate c apital and

professional staff to operate its services;

• Have business premises and

related resources essential for

• perations;
• Have the creditworthiness and

capacity to provide long-term services; and

• Meet the other requirements

as stipulated by the state. In addition, the MII or its local c o u n te rp art will tak e in to c o nsideratio n fac to rs suc h as national security, telecom network security, environmental protection and market c ompetition in the approval proc ess. The Telec om Regulations also state that licensing for Basic Telecom Businesses must apply to the MII through a bidding process, although industry specific bidding regulations have yet to be issued. Although foreign parties are not spec ific ally mentio ned in the licensing provisions of the Telecom Regulations, the draft Administrative Regulations on Foreign Invested Telecommunications Enterprises (Draft FIE Telecom Regulations) – which have yet to be approved by the State C o unc il – im po se additional conditions on foreign parties that desire to engage in a

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Table 3: Key Telecom Regulators

Regulator Scope of Authority Notes National People’s Congress (NPC)

• State’s highest and o nly autho rity

responsible for: – promulgating laws

• Expected to adopt the Telecom Law
• Promulgated the Telecom Regulations.
• Expected to promulgate the FIE Telecom

Regulations.

• Will submit the draft Telecom Law to the

NPC.

State Council

• Central administrative authority responsible

for: – promulgating regulations – issuing administrative orders – appro ving c ertain administrative measures, and – drafting certain laws for the NPC

• G o ve rnm e nt b o dy re spo nsib le fo r
• verseeing:

– telecommunications, including: – multimedia – broadcasting – satellite – the Internet

• Also responsible for promulgating:

– administrative measures – notices – circulars, and – industry standards

Ministry of Information Industry (MII)

• Pro m ulgate d th e No tic e o n th e

Adjustment of the Telecom Business Catalogue and other telecom related administrative measures (see Table 2).

• Formed by a merger of the Ministry of

Post & Telecommunications (MPT) and the Ministry of Electronics Industry (MOEI).

• Rumoured merger with the SARFT by

2003.

• Rumoured merger with the MII by 2003.
• Previously known as the Ministry of

Broadcasting & Television (MOBT).

State Administration of Radio, Film & Television (SARFT)

• G o ve rnm e nt b o dy re spo nsib le fo r
• verseeing:

– Cable channels – Satellite – Broadcasting – Film, and – TV

• G o ve rnm e nt b o dy re spo nsib le fo r

formulating policies applicable to: – foreign investors – large scale projects – pricing – finance – taxation, and – other long-term and macro-economic plans

State Development and Planning Commission (SDPC)

• Pro m ulgate d an d am e n d e d th e

Investment Catalo gue o f Fo reign Investment Industries.

• Promulgated relevant telecom pricing

policies.

• Formulated the Investment Catalogue of

Foreign Investment Industries

• Expected to be one of the examination

autho rities in respec t o f fo reign investment in telecom industry.

Ministry of Foreign Trade and Economic Co-operation (MOFTEC)

• Government body responsible for:

– formulating and carrying out detailed polic es applic able to foreign trade, ec onomic c o-operation and foreign investment – guiding national foreign investment administration, and – governing establishment and operation foreign-invested enterprises

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• G o ve rnm e nt b o dy re spo nsib le fo r

adm inistratio n o f and fo rm ulating administrative measures regarding: – standards – computation, and – quality

• G o ve rnm e nt b o dy re spo nsib le fo r

formulating: – finance policies – taxation policies, and – certain macro-economic policies

Ministry of Finance (MOF)

• Promulgated relevant telecom pricing

policies.

• Government body responsible for:

– formulating industrial policies – drafting comprehensive economic laws, regulatio ns and po lic ies go verning industries, commerce and trade, and – formulating other short-term economic policies

State Economy and Trade Commission (SETC)

• Formulated the Investment Catalogue of

Foreign Investment Industries.

State Technical Supervision Bureau (STSB)

• Formulated the Catalogue of Telecom

Equipment Required to Have a Network Access License.

basic telecom business in the PRC. Pursuant to the Draft FIE Telecom Regulations, a foreign party must enter into a Sino-foreign equity joint venture with a qualified Chinese enterprise and meet the following conditions:

• Have obtained an operating

permit for telecom operations in the c ountry where it is legally established;

• Have an ave rage annual

telecom business revenue of at least US$10 billion for the two years before applic ation is made;

• H a v e

e s t a b l i s h e d a representative office in the PRC for at least three years; and

• Have sound performance and

experienc e in the telec om industry. Pursuant to the Draft FIE T e l e c o m R e gu l a t i o n s , t h e qualifications of the Chinese party to a basic telecom Sino-foreign equity joint venture include:

• Be a state-o wned o r state

majority-controlled enterprise;

• Have an ave rage annual

telecom business revenue of at least RMB 3 billion for the two years before applic ation is made; and

• Have more than five branches
• r subsidiaries in the PRC

which have been engaged in telecom operations for at least two years each. While the Draft FIE Telecom Regulatio ns do no t state any limitations on the amount of equity the foreign party can hold in a basic telecom equity joint venture, the requirement under the Telecom Regulations that at least 51% of the equity be o wned by the state effectively limits the foreign party to no more than 49%. Even 49% may not be possible unless the Chinese co-venturer is wholly state owned. It remains to be seen whether the FIE Telecom Regulations as actually promulgated will immediately allow 49% foreign ownership of basic telecom equity joint ventures given China’s accession commitments, which, with respect to fixed-line services, only require that foreign investors be allowed to hold up to 25% within three years of accession, 35% within five years and 49% within six years. Value-Added Telecom Licensing Requirements In order to qualify for a ‘Value-Added Telec om Business Lic enc e’ the Telecom Regulations require that the prospective telecom operator meet the following conditions:

• Be a le gally e stab lishe d

enterprise;

• Have adequate c apital and

professional staff to operate its services;

• Have the creditworthiness and

capacity to provide long-term services; and

• Meet the other requirements

as stipulated by the state. Applic ations for lic enc es for value-added telecom businesses that will operate across more than one province, autonomous region or municipality must apply for a ‘Value- Added Telecom Business Across Regions Licence’ from the national MII, while strictly local businesses may apply to the MII’s regional counterparts. No state ownership of a value-

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Reselling of basic telecom

Table 4: Telecom Operations Classifications

Business Basic Telecom Value-added Telecom Fixed Network / Fixed Line

• Fixed-netwo rk do mestic lo ng distanc e

telephony

• Fixed-line local telephony
• Telephone information services
• Paging centre services
• Voice-mail
• Video teleconferencing services
• Analog mobile telecom

– Analog cellular mobile telecom

• Digital data telecom
• Second-generation (2-G) digital cellular mobile

telecom – TDMA (GSM) digital cellular mobile telecom – CDMA digital cellular mobile telecom

• Third-generation (3-G) digital cellular wireless

mobile telecom

Mobile / Wireless

• Analog mobile telecom

– Wide-area wireless mobile telecom – Analog data telecom

• Wireless paging

– One-way wireless paging – Two-way wireless paging

• Satellite mobile telecom
• Satellite retransmission products leasing and

sale

• Satellite fixed telecom

Satellite

• Very Small Aperture Terminal (VSAT) telecom
• Internet access services
• Internet data centre
• Internet information services
• Internet virtual specialised networks
• Internet conferring video and imaging services
• Internet paging centres
• Other internet value-added telecom
• Computer information services
• Electronic data interchange
• Voicemail
• E-mail
• Facsimile storage and retransmission
• Virtual specialised networks

Internet and Other Data Transmission

• Internet backbone network data transmission
• Other data network transmission

– X.25 data transmission – DDN data transmission – ATM data transmission – Frame relay data transmission

• Public telegram and client telegram
• Wireless data transmission

Leasing and Sale of Network Elements

• Leasing and sale of wavelength for broadband
• r optic communications
• Leasing and sale of electric cable, optical cable,

and optical fiber

• Leasing and sale of telecom network channels

N/A

Network Access and Subcontracting

• Network access

– Wired access – Wireless access

• Network subcontracting

N/A

International Communications Infrastructure and International Telecom Services

• International communications infrastructure

– Leasing and sale of wavelength, electric cable, optic cable, optic fibre and other netwo rk elements fo r gro und based international telecom network broadband and optic communications – Specialised international satellite

• International telecom

– International long-distance telephony – International data telecom – International imaging telecom N/A Reselling of basic telecom

Reselling

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added telecom business is required by the Telecom Regulations and foreign ownership is not mentioned. However, the Draft FIE Telecom Regulations provide additional conditions that a foreign party must meet to engage in a value-added telecom business. As with the basic telecom businesses, the foreign party must enter into a Sino-foreign joint venture with a qualified Chinese enterprise and also must meet certain conditions, including:

• Be a le gally e stab lishe d

enterprise;

• Have an annual business

revenue of at least US$500,000

• r total assets worth US$1

million during the immediately p r e c e d i n g y e ar b e f o r e application is made; and

• Have sound performance and

experienc e in the telec om industry. Pursuant to the Draft FIE T e l e c o m R e gu l a t i o n s , t h e qualifications of the Chinese party to a value-added telec om Sino- foreign equity joint venture include:

• Be a le gally e stab lishe d

enterprise;

• Have annual business revenue
• f at least RMB 2 million or

to tal assets wo rth RMB 3 million during the immediately p r e c e d i n g y e ar b e f o r e application is made;

• Have been engaged in the

telecom industry for at least

• ne year; and
• Have sound performance and

experienc e in the telec om industry. Without the requirement of state

• wnership it would appear possible

for the foreign party in a value-added telecom equity joint venture to hold mo re than 50% o f the equity. However, it remains to be seen w h e t h e r t h e FIE T e le c o m Regulations as actually promulgated will allow a foreign party to be the majority equity holder given China’s WTO ac c essio n c o mmitments which, with respect to value-added telecom and paging services sectors,

• nly require that foreign investors

be allowed to hold up to 49% within

• ne year after accession and up to

50% within two years.

The Other Pieces of the Puzzle – Implementing Rules and Regulations

In addition to the licensing system, the Telecom Regulations introduced seven other administrative areas that elucidate the MII’s vision for the ad m in istrative m an age m e n t structure of the telecom market. In te rc o n n e c tio n o f Te le c o m Networks T he Pub lic Inte rc o nne c tio n A d m i n i s t r a t i v e Pr o v i s i o n s ( Interc o nnec tio n Pro visio ns) , promulgated by the MII on 10 May 2001, set forth technical standards for the interconnection of telecom networks as well as the fee structure to go v e rn i n te rc o n n e c ti o n arrangements between telec om

• perators. The Interconnection

Provisions distinguish between ‘do minant telec o m o perato rs’, which control the basic telecom infrastructure, and all other telecom

• perators. After being classified as

such by the MII, a dominant telecom

• perator may not refuse to allow

interconnections to its network and must, on the princ iples of transparency and non-discrimination, negotiate and enter into agreements with other telecom operators on the terms of interconnection. Telecommunications Rates The Notice Concerning Structural Adjustment of Telecommunication Rates (Telecom Rates Adjustment Notice), promulgated by the SDPC and the MOF on 22 December 2000, details the specific rates or ranges applicable to telecom businesses subject to government-set prices, government-guided pric es, and m arke t- re gulate d p ric e s in accordance with such classifications as set fo rth in the Telec o m Regulatio ns. Pursuant to the Telecom Regulations, rates for basic telec om servic es c an either be market-regulated, government- guided or government-fixed and value-added telecom services can be either market-regulated o r government-guided. G o v e r n m e n t - gu i d e d a n d government-fixed rates are to be set after the MII or its regional c o unte rparts have c o m pile d accurate and complete cost data required to be submitted by telecom

• perators and subjecting proposed

rates to public hearings. Telecommunications Resources Although detailed procedures have yet to be promulgated, the Telecom Regulations provide that limited te le c o m re so urc e s ( ie radio frequencies, satellite orbit locations, telecom network codes and the like) will continue to be state controlled and will be allocated for a fee on the basis of a telecom resources plan, the operators’ use of such resources and the anticipated service capacity

• f the operators. A telecom operator

that is allocated telecom resources must begin use of such resources within a stipulated time period, must meet a minimum scale of use within a specified period and cannot assign,

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rent or change the purpose of the alloc ated resourc e without the permission of the MII. Telecommunications Service The Telecom Regulations provide the basic principles of service a telecom operator must follow in its provision of services to end users. The basic principles of telecom service include the requirement that telecom operators publicise the scope of their businesses, their rates, th e i r i n stallati o n c h arge s, disclose their protocols for service i n te r r u p ti o n s an d p r o v i d e notification of extraordinary service c harges. Fee standards will be subject to forthcoming procedures. Telecom Construction Procedures to be promulgated will detail requirements in the Telecom Re gulatio n s re late d to th e c o n s t r u c t i o n

• f

t e l e c o m infrastructure facilities. They will include the MII approval procedures for basic telec om c onstruc tion p ro j e c ts, d e si gn d o c u m e n t re q uire m e n ts an d ap p ro val p r o c e d u r e s , m a r k i n gs f o r underground components, prior notice to operators before engaging in activities that may endanger telec o m fac ilities, equipment rem o val req uirem ents, prio r notice to property owners of the c onstruc tion or installation of equipment such as antennas and base stations and environmental protection and safety requirements. Ne tw o rk Ac c e s s o f Te le c o m Equipment T h e C a t a l o g u e

• f

Telecommunications Equipment ( 1st gro up) Required to Have a Ne two rk Ac c e ss Lic e n c e (Network Access Licence Equipment Catalogue), promulgated by the MII and the STSB on 9 January 2001, lists the telecom equipment which is required to have a network access

• licence. The Administrative Measures
• f Telecom Equipment Network

Access (Network Access Measures), promulgated by the MII on 10 May 2001, pro vide the pro c edures necessary to supervise and license telecom terminal equipment, wireless communication equipment and any

• ther equipment or devices related

to telecom network access. Before putting devices or equipment into service, operators must submit a pro duc t quality c ertific ate o r examination report issued by an

• rganisation approved by the relevant

department charged with quality supervision under the State Council to the MII with an application for licensing. Telecommunications Security The telecom security procedures are primarily requirements which will seek to prevent information from being pro duc ed, repro duc ed, released or transmitted on the internet and all forbidden actions that may endanger network and information security. Fo r t e l e c o m o p e r a t o r s , compliance with the procedures for administration of telecom security includes: (i) forming an internal security protection system and a security responsibility system; and (ii) keeping records of forbidden a c t s , s t o p p i n g f o r b i d d e n transmissions and reporting such acts to the responsible institution. En gagi n g i n i n t e r n at i o n al communications services within the PRC requires application to the International Telecommunications Import/Export Bureau as authorised by the MII. With th e State C o un c il’ s approval, the MII is permitted to requisition all telecom facilities in the event of a major natural disaster. However, as no detailed procedures have been drafted, it is unclear what will constitute a ‘major natural disaster’. The scope of the MII’s requisition power and whether any compensation is payable as a result

• f such requisition also remains

unclear. The Telecom Regulations protect the freedom and privacy of telecom service subscribers by prohibiting telecom operators and their staff fro m transmitting subsc ribers’ content and communications to

• thers without authorisation.

The telecom security area seems to be quite ambitious. However, as no detailed procedures have been promulgated, the implementation strategy of the area is as yet unknown.

The Promise

With a c o m ple te re gulato ry framework unfolding in what must be record-breaking time commercial promise is quickly overtaking mystery in the eyes of foreign telec om

• perators viewing China’s telecom
• market. While some pieces of the

puzzle are still missing, it is already possible to anticipate how most of these pieces will fit into place. The puzzle is indeed being piec ed together. Mitch D Dudek David R Weaver II Lucy Lan Xu Richard Guoxing Qiang Jones, Day, Reavis & Pogue – Shanghai e-mail: mdudek@jonesday.com