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    China Business
     Jan 29, '14


SPEAKING FREELY
China keeps its telecoms sector close
By Romi Jain

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

In December 2013, 11 of China's mobile virtual network operators received licenses from the Ministry of Industry and Information Technology (MIIT) to offer repackaged mobile services. Apparently an outgoing year gift, as part of a pilot program, the move is expected to "inject vitality" into the telecom sector through private capital while offering consumers a wide choice.

Although the measure does not entitle the private operators to own the telecom infrastructure, it is significant since the country's basic telecom services have largely been in the firm claws of three



state-owned eagles - China Mobile, China Unicom, and China Telecom. Nevertheless, the December news was not delightful to foreign companies that were excluded from the pie.

China's commitment to open up its telecom services market to foreign investors is rooted in the Services Schedule that accompanied its Protocol of Accession to the World Trade Organization (WTO) in 2001. Accordingly, foreign suppliers can provide telecom services through joint ventures (JVs) with Chinese companies. The foreign equity stake is 49% for basic telecom services (BTS), and 50% for value-added services (VAS).

While the provision of BTS pertains to public network infrastructure, public data transmissions and basic voice communication, VAS includes telecom and information services such as e-mail and voicemail that are provided using public network infrastructure. It may be added that in early 2012, China had 284.3 million fixed-line subscribers and 1.01 billion mobile customers.

Contrary to the WTO commitment, however, the reality is mostly unfavorable to foreigners. For instance, the euphoric White House had issued a press release in March 2000, terming the US-China WTO Accession Deal a "Clear Win for US High Technology, Greater Openness and US Interests," only to see its hopes belied later.

It had noted that access to China's growing telecom market was vital to maintaining the US global leadership in information technology. But the United States Trade Representative (USTR) now complains of the barriers in obtaining a basic service license from China, such as a high capital requirement (1 billion yuan [US$165 million] for nationwide coverage) and the "informal ban on the entry" requiring that JVs must be majority government-owned, as a result of which foreign suppliers cannot partner with "attractive" private Chinese enterprises (Report to the Congress on China's Compliance with the WTO, 2012, 2013).

This apart, the US Chamber of Commerce in its 2012 report gave a detailed account of the stringency and uncertainty surrounding China's approval process for inbound FDI in telecom and financial services sectors.

It must be conceded, however, that the US "enjoys a substantial surplus in trade in services with China, as [its] cross-border supply of private commercial services into China totalled $30 billion in 2012" (USTR, 2013). But investment in telecom services continues to be challenging. As a matter of fact, China has largely and deftly protected this sector, especially basic services, in the post-WTO scenario.

While state organizations such as the MIIT, the National Development and Reform Commission (NDRC), and the State Development and Reform Commission (SDRC) are influential players in regulating its telecom industry, a multitude of regulations governing foreign investment have surfaced from time to time. They include: Administrative Regulations on Foreign-invested Telecom Enterprises (2001); China Compulsory Certification (2003); Circular on Strengthening the Administration of the Provision of VAS Involving Foreign Investment (2006); Rules on the Administration of Foreign Invested Telecom Enterprises (2008); and Administrative Measures for Telecommunications Operations Licensing (2009).

Moreover, the 2012 Trade Policy Review, released by the WTO, spelt out the following key facts highlighting the "extremely marginal foreign presence" in the Chinese telecom sector:

i. No application for license for basic telecom services was received from foreign operators [apparently because of the discouraging investment environment] II. Up to April 2011, 25 licenses (out of 60 applications) for VAS had been granted to foreigners, compared with 23,259 licenses delivered to Chinese citizens/companies (90% of them privately owned) III. 23 out of 25 foreign-funded enterprises are concentrated in the sub-market of cross-regional VAS, representing 1.1% of the total of the 2,087 companies licensed, compared with 106 state-owned enterprises and 1,958 private Chinese-owned companies.

Thus, while on paper foreign companies are not barred from entering the telecom services market, in practice they find barriers, especially in the BTS segment, which are difficult to challenge for one reason or another. For example, China would justify the regulations on the ground of their being "essentially technical", being reflective of a streamlining effort, and being essential for ensuring the security of telecom network. It might also argue that it actually lowered the minimum registered capital from 2 billion yuan to 1 billion yuan via administrative measures (2009), improving market access for foreigners. In contrast, foreign companies find it a non-substantive reduction, while the fundamental regulatory framework remains unaltered.

Furthermore, China is seeking to crackdown on variable interest entities (VIEs)- an entry mode used by foreign investors to circumvent draconian legal restrictions. For instance, the VAS- related circular (2006) aimed at stifling the formation of VIEs. In fact, penetration into the VAS domain also encounters a complex approval process, with the first stage being the "Validation Opinions on Foreign Investment in Telecommunications Business." But it is less stringent than BTS, and has presence of foreign operators such as AT &T, SK Telecom, and RIM.

So what explains China's approach to the WTO? We find a simultaneous operation of the dyad strands of neoliberalism and realism, as the country attempts to keep its national interest, as perceived and articulated by the communist regime, intact, while pursuing free market policies. Roselyn Hsueh (2011) couches this contradiction in China's pursuance of a "bifurcated strategy of macro-level liberalization and micro-level reregulation".

Thus, irrespective of China's membership to the WTO, a neoliberal institution, its firm control over the telecom sector is propped on national security considerations, including political stability. The regime apparently fears cyber spying or a domestic or foreign element sneaking into the telecom infrastructure to chip away at its reign. Also, China's national champion strategy in respect of strategic sectors fuels its aversion to foreign presence.

No doubt, the central leadership is proud to see China Telecom emerge as the world's largest wireline telecommunications, CDMA mobile network and broadband Internet services provider, and China Mobile as the world's largest mobile operator; and now the "go global" strategy aspires for these giants' substantive foreign presence. As such, the telecom sector falls in the "restricted" category of China's Catalogue for the Guidance of Industries for Foreign Investment (2011). In contrast, foreign investment is "encouraged" in the new strategic industries such as energy-saving and environmental protection which China needs to develop.

Given the strategic politico-economic interests, the Chinese government is unlikely to relax its grip over basic telecom services substantively, at least until it is able to continue with the regulations. Where private involvement becomes essential, for example, for capital or sector upgradation, the government will welcome it, but without losing its own grip.

The VAS segment holds out hope for foreign operators, as the government is seeking "innovation and reform". In January 2014, for instance, it announced permitting full foreign ownership in five value-added services in the Shanghai Free Trade Zone: app stores, store and forward, domestic multi-party communication, call centers, and home Internet access.

Ultimately, from the perspective of foreign investment, China's telecom services sector will reflect interplay (at times mutually conflicting) of China's WTO commitment, its drive for technological innovation, its ambition to nurture and protect national champions, and its desperation for the regime's survival by shielding the sector from any hostile domestic or foreign force.

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing. Articles submitted for this section allow our readers to express their opinions and do not necessarily meet the same editorial standards of Asia Times Online's regular contributors.

Romi Jain is vice president of the Indian Journal of Asian Affairs, a bi-annual, refereed journal. She is an MBA from San Francisco State University and also holds MA and BA Honors degrees in Political Science. She has extensively contributed articles on China to refereed, international journals, apart from publishing numerous creative works.

(Copyright 2014 Romi Jain)






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