New rules provide a framework for Shanghai free-trade zone to open the doors on VATS: a cause for optimism?

Since the establishment of the Shanghai free-trade zone (FTZ), investors have been closely monitoring the liberalisation policies in the telecommunications sector. Historically, given the highly sensitive nature of the telecommunications sector, foreign participation has been very limited in this highly regulated industry. In the People’s Republic of China, telecommunication services are divided for regulatory purposes into basic telecommunication services (BTS) and value-added telecommunication services (VATS). The provision of either BTS or VATS in China requires the service provider to obtain a BTS operating permit or a VATS operating permit respectively, each of which is issued by the Ministry of Industry and Information Technology (MIIT) at the central level or by its local branches. MIIT is the main regulator of the telecommunications and internet industries in China. The types of telecommunication services falling under BTS and VATS are listed in the Circular of the Ministry of Information Industry on the Readjustment of the Classification Catalogue of Telecommunication Services (‘Telecoms Catalogue’) issued by the predecessor of the MIIT, the Ministry of Information Industry (MII). The most recent version of the Telecoms Catalogue was issued on 1 April 2003 (‘2003 Telecoms Catalogue’). MIIT has issued a draft version of the 2013 Telecoms Catalogue, but the final version has not been issued as of the date of this note.

Under existing telecommunications laws and regulations, in order to apply for a VATS permit, a foreign investor must establish a foreign invested telecoms enterprise (FITE) in the form of a Sinoforeign equity joint venture (EJV) with a Chinese partner in which the foreign shareholding is capped at 50 per cent (the foreign shareholder is capped at 49 per cent in applications for a FITE holding a BTS permit). Notwithstanding the letter of the law, MIIT and MII have historically taken a very protectionist stance in opening up the telecommunications industry to foreign investment. Since China became a member of the World Trade Organisation (WTO), it appears that only 201 or so FITEs have been formed, all in the VATS area. The reluctance of MIIT to open up the telecommunications sector to foreign investors accounts at least in part for the large number of variable interest entity structures that have been adopted in this area…

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