China’s new telecom catalogue comes into force on March 1, 2016

Summary

• Starting on 1 March 2016, the Classification Catalogue of Telecommunications Services (2015 Catalogue) will officially take effect, bringing about significant changes to the licensing regime of the Chinese telecom and Internet sectors.

• The 2015 Catalogue demonstrates the Ministry of Industry and Information Technology’s intention to strengthen the regulation of China’s telecom and Internet services, and provides a much needed update of the 2003 version. In recent years new technologies (such as cloud computing, big data and various types of information services) have emerged, and the 2015 Catalogue includes these for the first time.

• Under the 2015 Catalogue, a number of telecom services have been reclassified, and new categories of services are now considered regulated. The most notable changes are in relation to cloud computing services, most of which will now be subject to the licensing requirements. The reclassification will impact upon a number of operators/service providers, which may now be required to apply for new licences (including in relation to services they are already providing).
  
  MIIT has been steadily modernising the regulation of the telecoms and internet sectors, and has introduced a range of legislation to fully open up e-commerce and offshore call centre businesses to private and foreign investment.

• In light of the impending effective date of 1 March 2016, telecom operators and Internet services businesses should review their current business operations in order to ensure compliance with the new licensing requirements.

For foreign investors, foreign investment restrictions for basic telecom and value-added telecom services still continue to apply. However, it is anticipated that the approval process to obtain appropriate licences may be expedited for foreign investors wishing to set up subsidiaries in China to conduct business there (especially for e-commerce and offshore call centre activities, in respect of which foreign investment entry barriers have been fully removed on a national basis).

The Shanghai Free Trade Zone will continue to act as an attractive option for foreign investors to set up a presence in China in order to conduct value-added telecom and internet services. If they set up a subsidiary in the Shanghai Free Trade Zone, foreign investors can take the benefit of additional relaxation of certain market entry requirements in some sectors, such as information services (limited to Apps store), store and forward services, onshore call centres and multi-party telecom services.

Introduction

Telecommunications services in China are classified into two broad categories: basic telecommunications services (BTS) and value-added telecommunications services (VATS), each of which is further classified into various sub-categories (as set out in the Classification Catalogue of Telecommunications Services).

Under the telecommunications regulations, telecom and internet service providers are required to apply for licences for each sub-category of services they may provide. Applications are made to MIIT (or its local counterparts), which is the licence-issuing authority empowered to publish service-specific licensing regulatory rules and to amend the Catalogue as required.

On 24 December 2015, the Ministry of Industry and Information Technology’s (MIIT) issued the Classification Catalogue of Telecommunications Services (2015 Catalogue), which will officially take effect as of 1 March 2016.

The 2015 Catalogue demonstrates MIIT’s intention to strengthen the regulation of China telecom and Internet services, and provides a much needed update of the 2003 version. New technologies (such as cloud computing, big data and various types of information service) have been included in the 2015 Catalogue for the first time. The changes introduced by the 2015 Catalogue are likely to have an impact upon both domestic and foreign businesses. It will be crucial for foreign telecom and internet service providers which have entered (or which aspire to enter) the Chinese telecom and internet market to understand the changes introduced by the 2015 Catalogue, and to address their significance in practice.

Major changes signalling MIIT's intention to further regulate

• A new subcategory, “internet-based resources collaboration service”, has been introduced under the Internet Data Centre services. Internet-based resources collaboration services refer to “internet-based data storage, application development, application deployment and operation management”. This means that providers of cloud computing application services (such as infrastructure as a service (IaaS), platform as a service (PaaS), and software as a service (SaaS)) may find their services now covered by this description (requiring them to apply for a licence).

• Information service has been expanded to cover five sub-categories based on the ways information (in the form of text, picture, audio or video) is organised and delivered to end customers.
  
  The information service sector has quickly gained momentum in the past decade and extensive changes have been made by MIIT to include more sub-categories in the 2015 Catalogue (reflecting MIIT’s clear intention to expand its regulatory scope in this area).
  
  The five sub-categories of services include the following:
  • “information publishing and distribution platforms” (e.g. news websites, mobile news subscriptions, mobile newsletters and customer alerts);
  • “information searches” (e.g. search engines);
  • “information community platforms” (e.g. social network sites, Apps and chat rooms);
  • “information real-time exchanges” (e.g. instant messaging services via text or audio, video chat); and
  • “information protection and processing” (e.g. virus scanning and clearance, information security, spam intercepting and blocking).

• Call centre services have been divided into “domestic call centre services” and “offshore call centre services”.
  
  With the expansion of digital data across a number of industries, there have been correspondingly rapid increases in cross-border transfers of data and in the setting up of offshore call centres.
  Back in 2010, MIIT issued a pilot scheme removing the shareholding restrictions on foreign investors whose businesses provide call centre services to offshore clients and customers. The further division of domestic and offshore call centre services under the 2015 Catalogue reflects MIIT’s ongoing commitment to open up offshore call centre services to foreign investment.
• Re-categorisation of VATS: Type I or Type II
  
  For the first time, MIIT has issued an explanatory note accompanying the 2015 Catalogue to explain the differences between the two broad sub-categories of VATS: Type I VATS and Type II VATS.
  Type I VATS are based on “infrastructure and resources”, which are mostly provided to enterprise users and are more likely to raise concerns in relation to issues such as national information security and social order. Type I VATS include, among others, the following services:
  • internet data centre service;
  • content dispatch network; and
  • internet access services.

Type II VATS are based on the “public application platforms”, which are mostly provided to public end customers and are more closely concerned with personal data protection issues. Type II VATS include, among others, the following services:

• online data processing and transaction processing service (for example e-commerce);
• information services;
• call centre services; and
• domestic multi-party real-time communication services.

Under the 2015 Catalogue, online data processing and transaction processing services and domestic multi-party real-time communication services (which used to be Type I VATS) are now re-categorised as Type II VATS. On the other hand, internet access services (which used to be Type II VATS) are now re-categorised as Type I VATS.

Different treatment of Type I and Type II VATS

MIIT adopts a diverging approach when granting licences for Type I and some Type II VATS. Therefore it is important for businesses to examine closely MIIT’s practical treatment of the Type I and Type II VATS when applying for a VATS licence under the 2015 Catalogue.

For Type I VATS, MIIT is likely to apply more stringent criteria when granting licences (given that the services have implications for national information security and social order). MIIT will typically take into account concerns reflected in the Anti-Terrorism Law and the Cyber Security Law (which is currently still in the draft form, but will be finalised soon) when reviewing applications for Type I VATS licences.

For Type II VATS, however, the situation appears to be different. Advances in technology and innovation within the internet sector have typically been equated with Type II VATS. MIIT has introduced service-specific regulations and has fully opened up some of the Type II VATS (that is, online data processing and transaction processing services for e-commerce operations and offshore call centre services) to foreign investors. In effect this reduces market entry requirements for those services which fall under Type II VATS.

Impact on international businesses in China

The 2015 Catalogue does not directly impact upon the scope of telecommunications and internet services a foreign investor may provide in China. This is because the existing restrictions imposed on international businesses by the China Telecommunications Regulations and the Regulations on Administration of Foreign-invested Telecommunications Enterprises continue to apply, restricting the percentage of shares or equity held by a foreign investor to no more than 49% for BTS and no more than 50% for VATS.

The Shanghai Free Trade Zone has promoted a pilot scheme since January 2014. Under it, foreign investors can benefit from additional relaxations of foreign ownership restrictions for selected VATS services (such as information services (limited to Apps store), e-commerce, store and forward services, call centres and multi-party communications services).

The ongoing move towards liberalisation of China’s telecom and internet market is particularly apparent in the full opening up of two areas of activity to foreign investment on a national basis: online data processing and transaction processing (for e-commerce operations) and offshore call centre services. In these areas foreign investors are permitted to hold up to 100% of shares or equity. This change was introduced by service-specific legislations published by MIIT before the 2015 Catalogue was issued.

What next?

The 2015 Catalogue provides more regulatory clarity to the range of services that has emerged in recent years as well as laying a foundation for MIIT to issue more service-specific regulations to address more opportunities for foreign investment. Such liberalisation will be of particular interest to foreign investors, who should take into account new service-specific policies introduced by MIIT before exploring new investment opportunities in China’s telecommunications sector.

In the meantime, businesses which currently operate in China should be mindful of the changes introduced by the 2015 Catalogue. From 1 March 2016 onwards, the MIIT will grant licences for telecommunications services in accordance with the 2015 Catalogue. Licences granted to existing licence holders prior to that date will continue to be valid within the stipulated scope and for the full term of the relevant licence. However, existing licence holders must nevertheless review their current business practices and apply for a new licence if any of their existing services become subject to the licensing requirements under the 2015 Catalogue.