How to break through the bottleneck of opening up my country's telecommunications sector?

Author: Cao Lei, Information and Communication Business Acceptance Center, China Academy of Information and Communications Technology

Since my country joined the World Trade Organization in 2001, the country's telecommunications sector has been gradually opened to foreign investment in a timely and orderly manner in accordance with its "WTO accession commitments". In particular, in recent years, my country has accelerated its opening-up pace and continued to promote the opening-up of the service industry. The telecommunications sector has also accelerated its opening-up process, attracting more foreign-funded enterprises to enter my country's telecommunications sector and making the market more prosperous.

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At the same time, foreign-funded enterprises are increasingly calling for further opening up of my country's telecommunications market. In recent years, the Party Central Committee has repeatedly stated that China's door to opening up will only get bigger and bigger, and that it is necessary to continue to promote higher-level opening-up measures. As an important area in the service industry, the telecommunications sector will also gradually relax restrictions on foreign investment in the future, promote reform and development through opening up, optimize the foreign investment business environment, and attract more foreign-funded enterprises to enter. This article analyzes the opening-up process of my country's telecommunications sector, the current market development situation, and the bottlenecks encountered in the further opening up of value-added telecommunications services, and puts forward subsequent opinions and suggestions on the opening up of telecommunications services.

The opening-up process of my country's telecommunications sector

Joining the World Trade Organization and opening the door to the outside world

On September 25, 2000, the State Council promulgated the "Telecommunications Business Regulations of the People's Republic of China", which clarified that the state would implement a licensing system for telecommunications business operations according to the classification of telecommunications business. In December 2001, my country officially joined the World Trade Organization (WTO), promising to open up relevant value-added telecommunications business areas, allowing foreign service providers to establish joint ventures with foreign investment not exceeding 50%; promising to allow foreign service providers to establish joint ventures in relevant basic telecommunications businesses with foreign investment not exceeding 49%.

On December 11, 2001, the State Council promulgated the "Regulations on the Administration of Foreign-Invested Telecommunications Enterprises", which laid a legal foundation for the opening up of telecommunications services to the outside world. At the same time, it clarified that companies and enterprises in the Hong Kong Special Administrative Region, the Macao Special Administrative Region and Taiwan should apply the same regulations when investing and operating telecommunications services on the mainland.

Expanding the opening of value-added telecommunications services to Hong Kong and Macao capital

In 2003, based on the CEPA policy and on the basis of WTO commitments, a higher level of telecommunications business opening policy was introduced to Hong Kong and Macao capital, allowing Hong Kong and Macao service providers to operate Internet data centers, call centers, Internet access services and other businesses in the Mainland, with the equity ratio not exceeding 50%.

In 2015, based on the previous opening-up policies, Guangdong Province further relaxed the equity ratio restrictions on some businesses of service providers from Hong Kong and Macao, including domestic multi-party communication services, Internet access services (service scope is limited to Guangdong Province), information service business (application store), etc., and there is no restriction on foreign equity ratio.

In 2016, my country further expanded the opening of its previous pilot policies across the country, clarifying that service providers from Hong Kong and Macao can set up companies in the country to carry out online data processing and transaction processing (limited to business-type e-commerce), information service business (limited to application stores), etc., and are allowed to operate solely as a wholly-owned enterprise; for other value-added telecommunications businesses, Hong Kong and Macao equity shall not exceed 50%.

Innovate regional pilot projects and gradually replicate and promote them

In 2014, the Ministry of Industry and Information Technology, together with the Shanghai Municipal People's Government, launched a pilot program to expand the opening of value-added telecommunications services in the Shanghai Pilot Free Trade Zone, further opening up related value-added telecommunications services on the basis of WTO commitments. Five of these businesses are allowed to be wholly foreign-owned, including information services (app stores only), store-and-forward services, call centers, domestic multi-party communications, and Internet access services (providing Internet access services to Internet users); the foreign shareholding ratio of domestic Internet virtual private network services shall not exceed 50%, and the foreign shareholding ratio of online data processing and transaction services (operational e-commerce) shall not exceed 55%.

In January 2015, the Shanghai Free Trade Zone took the lead in fully liberalizing online data processing and transaction processing businesses (business e-commerce), allowing wholly foreign-owned enterprises to set up business e-commerce companies.

Foreign-invested telecommunications enterprises flourish

As of the end of June 2020, there were 266 foreign-invested telecommunications companies approved by my country, of which 182 were licensed by the Ministry of Industry and Information Technology and 50 were approved by the Shanghai Communications Administration for pilot projects (enterprises in the Shanghai Free Trade Zone). An analysis of the current license holders shows that they have several major characteristics.

First, the types of business applications are relatively comprehensive. Foreign-invested enterprises hold corresponding licenses for 8 of the 10 value-added telecommunications services, while no foreign-invested enterprises have applied for storage and forwarding services and Internet domain name resolution services due to small business volumes. Most of the businesses for which foreign-invested enterprises hold corresponding licenses are mainly concentrated in information services, online data processing and transaction processing services. The main reason is that the above two businesses are both second-class value-added telecommunications services, which are platform-based businesses with low business costs and strong openness, and can better attract foreign investment.

Second, the sources of foreign investment are diverse. From the perspective of capital sources, there are developed countries such as the United States, Germany, France, South Korea, and Japan, as well as Hong Kong and Taiwan. As much as 2/3 of the foreign investment in enterprises comes from Hong Kong, mainly because China's current opening-up policy has the strongest impact on Hong Kong investment under the CEPA framework, and many European and American companies invest in the mainland through their Hong Kong companies.

Third, foreign investment covers a wide range of industries. From the perspective of foreign investment, there are traditional telecommunications companies, including British Telecom, Hong Kong Telecom, NTT, etc., which are optimistic about the huge potential market in the mainland and use their own technological advantages to develop corresponding telecommunications business; there are also traditional offline fields moving to the Internet, such as Volkswagen and General Motors in the automotive field, Carrefour and Heiwatang in the supermarket field; including Amazon, Microsoft and other well-known overseas Internet high-tech companies, using their influence in the Internet field to enter the Chinese market. There are also many foreign investors who are optimistic about the development of enterprises and make pure financial investments.

Fourth, foreign investment takes different forms. For businesses with foreign equity restrictions, foreign investors will apply for licenses by establishing a joint venture with domestic enterprises; for businesses without foreign equity restrictions, foreign investors will apply for licenses by establishing a wholly-owned enterprise in China; and foreign investors may enter China's telecommunications market by purchasing shares of licensed domestic enterprises. Regardless of the form of investment, it must comply with China's opening-up policies and relevant laws and regulations.

Bottleneck has appeared

In recent years, my country has continued to promote high-level opening up and has gradually reduced the negative list for foreign investment access, demonstrating my country's determination to expand opening up. Under the influence of the country's overall macroeconomic policies, the telecommunications sector has been opening up very strongly in recent years. At the same time, the further development of opening up is also facing some problems. For example, there is no adjustment in the telecommunications sector in the 2020 negative list for foreign investment access, which also shows that my country's telecommunications business opening has encountered a bottleneck.

Network information security issues

The telecommunications industry involves network security, information security, etc., especially basic telecommunications services that carry the lifeline of the national economy. From the previous opening situation, the first and fully liberalized businesses are basically the second-category value-added telecommunications services of the platform type, which have relatively small security risks. The first-category value-added telecommunications services involving infrastructure are less open, including Internet data centers, intranet distribution network services, etc., which carry a large amount of information resources. For security reasons, only 50% is currently open to Hong Kong and Macao capital. The Party Central Committee and the State Council attach great importance to security issues. In 2014, they put forward the overall national security concept. The national security system covers 11 types of security, including information security. In 2016, my country promulgated the "Cybersecurity Law of the People's Republic of China" to provide legal protection for the existing network security management system, which further reflects the country's emphasis on network security. In the process of promoting opening up in the future, how to properly handle the issue of opening up and security is a key core issue that requires in-depth research and national coordination.

Impact on domestic industrial development

Although domestic high-tech enterprises have also ushered in vigorous development in recent years and are in a world-leading position in certain key technologies and fields, it has to be admitted that there is a certain gap between my country's overall level of scientific and technological development and that of European and American countries. Taking the cloud computing market as an example, Alibaba Cloud and Tencent Cloud in China occupy most of the domestic cloud computing market, but whether in terms of technical level or the overall market share in the world, there is still a large gap with the cloud computing of Microsoft and Amazon in the United States. In recent years, my country's cloud computing market has ushered in vigorous development, and all walks of life have vigorously advocated that enterprises go to the cloud. Especially under the influence of the new crown pneumonia epidemic, the importance of cloud office has become more and more prominent. In the future, domestic cloud computing will be a market of more than 100 billion yuan. Once related businesses are opened to foreign capital and foreign capital is allowed to enter, it will inevitably bring certain impacts to domestic industrial development. It is still unknown whether well-known domestic cloud computing manufacturers can stand firm and achieve better development in the face of fierce competition.

Increasing regulatory pressure

In recent years, the State Council has deepened the reform of streamlining administration, delegating power, combining regulation and service optimization, and shifted more administrative resources from prior approval to strengthening supervision during and after the event. The Ministry of Industry and Information Technology strictly implemented the overall deployment of the State Council's "separation of licenses and certificates" reform, and piloted the "notification and commitment" pilot for the second category of value-added telecommunications services in 18 free trade pilot zones across the country. For enterprises that promise to meet relevant conditions, approval decisions will be made on the spot, including foreign-funded enterprises. Among them, there may be foreign-funded enterprises that do not meet the conditions but obtain licenses through the commitment system and conduct telecommunications business in violation of regulations. In this situation, it is even more necessary to strengthen ex-post supervision to prevent risks. However, for a long time, the competent departments of my country's telecommunications industry have been understaffed. There have always been only two-level regulatory departments, namely the Ministry of Industry and Information Technology and the Communications Administration Bureaus of provinces, autonomous regions, and municipalities directly under the central government, which has brought new challenges to ex-post supervision.

As my country continues to grow and develop, its international status gradually improves, and it has more say in the world, the United States has begun to use various means to suppress my country, including launching a trade war or sanctioning my country's high-tech companies, encouraging American companies to withdraw their capital from my country, in an attempt to prevent my country's technological development and try to make my country surrender. At the same time, companies in the European Union and the United States have certain demands for the opening of my country's telecommunications services. Under the current situation, the opening of telecommunications services is an important bargaining chip for my country to strengthen international exchanges and cooperation. How to make good use of this card requires overall consideration and follow the trend.

Improve our own strength and enhance international competitiveness

Looking at the history of opening up my country's telecommunications business and combining it with the current international and domestic situation, the author puts forward the following considerations and suggestions on opening up my country's telecommunications sector to foreign investment.

First, give full play to the role of the pilot reform and opening-up of the free trade zone and the pilot port. From the perspective of China's early opening-up process, the pilot of the Shanghai Free Trade Zone has played a vital role. During the pilot period, it has undergone stress testing and accumulated certain in-process and post-process supervision experience, enabling more opening-up measures to be further replicated and promoted, including e-commerce, call centers, and storage and forwarding domestic multi-party communication service businesses, which are promoted nationwide on the basis of the previous pilot. In order to further accumulate pilot experience and expand the pilot geographical scope, the pilot opening-up policy of the Shanghai Free Trade Zone has been replicated and promoted in other free trade pilot zones across the country. On June 1, 2020, the CPC Central Committee and the State Council announced the Overall Plan for the Hainan Free Trade Port, which aims to accelerate the construction of a high-level free trade port with Chinese characteristics. Hainan has unique geographical advantages and can fully carry out the pilot under the premise of safety and control. In the future, it is necessary to make full use of the Hainan Free Trade Port, a pilot field of reform and opening-up, to promote the pilot work of telecommunications business opening-up in a safe and orderly manner, improve the network information security management mode, and build an efficient and powerful security guarantee system.

Second, improve their own strength and enhance international competitiveness. In order to avoid the impact of the opening of telecommunications services on domestic industries, the most important thing is to improve the strength of domestic enterprises, strengthen independent research and development while learning advanced foreign technologies, and master key core technologies. The government should also increase support, formulate policies that are conducive to industrial development, increase financial support, and create a business environment that is conducive to industrial development.

Third, innovate supervision methods and strengthen supervision during and after the event. In the face of insufficient supervision manpower, the regulatory authorities need to give full play to technical means and rely on new technologies such as the Internet and big data to innovate supervision models and improve supervision efficiency. By building a monitoring system to obtain information on various business supervision points, and through data comparison and analysis, real-time monitoring of the business development and safety and compliance of licensed enterprises; make full use of the credit management system, classify and supervise enterprises according to their credit status, increase inspections on dishonest enterprises, deter enterprises, and enhance their awareness of legal and compliant operations.

Fourth, speed up the improvement and perfection of relevant laws and regulations. At present, there is a lack of superior laws in the telecommunications field. In recent years, the Ministry of Industry and Information Technology has been working hard to promote the introduction of the "Telecommunications Law". However, due to various reasons, there are only two State Council regulations, the "Telecommunications Regulations of the People's Republic of China" and the "Regulations on the Administration of Foreign-Invested Telecommunications Enterprises". Both were formulated nearly 20 years ago, and some of their contents are no longer suitable for the current situation. China should promote the introduction of the "Telecommunications Law" as soon as possible, improve relevant regulations, provide legal guarantees for the open development and supervision of the telecommunications industry, better promote the development of the industry, and safeguard the interests of enterprises and users.