Telecoms requlation: china's other great wall?: Sometimes liberalization means restriction in the short term - PERSPECTIVE

CommunicationsWeek International, Nov 12, 2001 by Mitch Dudek

Terrorism may have been on the minds of the 23 world leaders gathered at the Asia Pacific Economic Cooperation (APEC) summit in Shanghai in October. but the accession of China to the World Trade Organization (WTO) was not a complete afterthought. Despite the anxiety some countries feel about China's economic ascension, foreign companies stand to gain major return on investments in the country. This is no better demonstrated than in the telecoms sector, which has leapfrogged past other industries in preparing for the open market.

But while headway has been made in developing a framework for how companies can enter into joint ventures for services, companies now need to figure out where to draw the line between what these services are about. For an example of this, one need look no further than the first approved joint venture established between a Chinese and foreign operator, a recent deal between AT&T and Shanghai Telecom, which entails a $25-million investment from AT&T. Remarking on the agreement, AT&T China President Arthur Kobler said, "Now we are quite clear about how much we can hold in a joint venture. But we are still a bit confused about what services we can offer."

It may be some time before AT&T gets direct answers to questions like these. But as a first step, the Chinese Ministry of Information Industry (MII) has at least started to untangle the regulatory web--a much-needed measure in an industry heretofore governed by a combination of loose decrees and administrative measures.

The Telecommunications Regulations, published in 2000, represent China's efforts to create a comprehensive telecoms law. Updated last June, they lay the foundation for realizing China's WTO promises by tacitly permitting foreign participation in the telecom industry for the first time. To distinguish between companies and operations, the regulations split service into value-added and basic services.

But some might argue that these measures aimed at liberalization are in reality more restrictive. To offer basic telecoms service, for instance, the regulations say the the State must hold at least 51% of the shares and investing companies must have "a reputation or capability to provide long-term service to clients," Investors familiar with doing business in China will appreciate the political burden that pairing with the State will necessitate. More importantly, they will also recognize the second approval requirement as perhaps the leading example of China's use of non-tariff barriers to restrict foreign investment.

These regulations provide for the creation of other specific measures governing foreign investment: the Administrative Regulations on Foreign Invested Telecommunications Enterprises. Released in draft form last June, the promulgation of these measures is expected to coincide with China's entry into the WTO.

These administration regulations also include stricter requirements for basic service operators than for value-added service providers. In basic telecoms, the foreign investor must have had revenues in excess of $10 billion over the preceding two years--effectively eliminating all but the world's largest operators from investing in basic telecoms--and must have maintained a representative office in China for at least 3 years. To offer value-added services, the investor's revenue requirement is only $500,000 in the preceding year, with no representative office requirement.

And there may yet be more hurdles in store for foreign companies: among the terms and conditions for telecoms joint ventures, the regulations require that the Chinese party in the JV has the final say in appointing both the JV's chairman of the board and the general manager.

Operators have waited a long time for China's open door policy to reach the telecoms industry. Severe restrictions on investments in basic telecom services will likely remain in place for many more years, yet foreign investment in value-added services is set to explode, most likely beginning in the second half of 2002. Even if the limitations and investment restrictions are clearly evident, the payoff for foreign companies still willing to play is also clear.

Mitch Dudek is the partner-in-charge at the Shanghai offices of law firm Jones Day Reavis&Pogue