The provision of telecoms services is one of the fastest growing sectors of the Chinese economy. In the mobile phone market alone, China has exceeded the US in terms of the number of subscribers. The legal prohibition of foreign investment in the operation of telecoms services has remained firmly in place although the sector is working its way towards a phased-in liberalisation for accession to the World Trade Organisation
Recently, however, China has allowed several foreign investors entry into this coveted market despite the lack of an enabling legal regime. The early entry of such foreign investors does not indicate a departure from the level of market access concessions that China has already offered as part of its negotiations on WTO accession. Rather, the entry may be heralded as the beginning of an era in which China ceases to hold back on opening up one of its hitherto most tightly controlled sectors.
The China Unicom example
Foreign investment in the telecoms sector has endured a checkered past. Perhaps the most publicised of earlier attempts to bypass prohibitions against foreign investment was the Chinese-Chinese-Foreign (CCF) structure instituted by China Unicorn. After its establishment in 1994, China Unicorn allowed foreign investors, through the establishment of cooperative joint ventures, to fund the construction and acquisition costs of regional mobile networks in return for a percentage of revenue generated by the operation of the networks.
The revenue-sharing nature of such investment arrangements met with the disapproval of the Ministry of Information Industry, culminating in a declaration that the structure was illegal. China Unicorn bought such investments back from the foreign investors in preparation for its initial public offerings.
More recent attempts at foreign investment have fared rather better, with some reportedly receiving the support of relevant government ministries. A prime example i the joint venture formed by AT&T's acquisition of a 25 percent shareholding it Shanghai Symphony Telecommunications, which intends to operate as a local internet service provider and implement high-reliability fibre-optic rings with high-speed routers and switches, along with providing broadband internet access to users it the Pudong area of Shanghai.
In addition, Rupert Murdoch's News Corporation and the investment bank Goldman Sachs in co-operation with two Chinese banks have concluded a deal tc acquire a 12.5 percent share of China Net.com, a broadband telecoms network company, for US$325m. The deal will allow News Corporation to sell content directly to domestic internet users.
Moving ahead of WTO accession
With China's coming entry into the WTO, these recent investments, unlike the earlier CCF structure, serve as important bench-marks by which to judge the trend of China's gradual liberalisation. Importantly, China has permitted foreign investments in the telecoms service sector ahead of its accession to WTO. It should be noted, however, that the two examples listed above do not exceed the market access commitments contained in China's WTO accession agreements and are not emblematic of any further concessions.
Both examples are limited regionally and operationally and pose no real competitive threat to the main domestic carrier China Telecom. The AT&T joint venture will be limited to the Pudong area of Shanghai, while China Netcom is still dependent upon China Telecom, in many cases, for `last mile' access.
In addition, in contrast to the CCF structure, the recent investments are relatively limited in scope and do not appear to allow foreign investors to make any significant inroads into infrastructure development within China. The AT&T joint venture, for example, will be prohibited from operating its own backbone infrastructure. Instead, it will have to utilise the network owned by its Chinese partner.
Furthermore, the foreign equity in both examples is relatively small and within the limits guaranteed by China's WTO agreements. The Ministry of Information Indus-try and officials from other departments had voiced concerns over foreign influence over telecoms networks financed through the CCF structure, wherein foreign investors controlled the board of directors of the joint ventures holding the networks and, together with their respective Chinese partners, are entitled to upwards of 70 percent of the revenue arising from the net-works. The CCF structure ran the risk of excessive foreign control.
The AT&T share of Shanghai Symphony is only 25 percent, a far cry from the majority percentage stake (or profit-share entitlement) owned by foreign investors in the CCF structure. Foreign parties involved in the China Netcom deal will share an even smaller 12.5 percent with two domes-tic banks.
This smaller percentage of foreign ownership is in line with China's WTO commitments. The AT&T share of its Shanghai joint venture is consistent with the 25 percent allowed upon WTO accession by the related bilateral access agreements already entered into by China.
Both the AT&T joint venture and the China Netcom deal serve as telling examples of the trend towards liberalisation in China's telecoms sector. The scale of the relaxation is measured, but the deals stand as indicators that China is one step closer to realising its WTO market reforms.
However, they are also emblematic of the continued gap between legislation and practice; both deals cited above were made in the absence of a supporting regulatory frame-work. But they were made with the, at least implicit, approval of the relevant authorities. It is this game of catch-up between policy and practice that China's accession to the WTO will hopefully end.
This article was written by Colin Law, senior associate Freshfields Bruckhaus Deringer. For further information on this topic, please contact Colin Law by email (colin. law @ freshfields. corn), telephone (+852 2846 3421) or fax (+852 2810 6192).