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New regulations in China will more tightly control the licensing procedures for telecommunications service providers. Restrictions on sub-licensing and a confirmation of liability for the acts of agents will consolidate the market position of existing operators.

Significant changes mean:

• Anyone providing services via a cooperative relationship with a Chinese licensee should review these new requirements to ensure that those cooperative agreements remain legally enforceable in China; and
• Investors in Chinese value-added service providers should closely examine the company's compliance programs, lest non-compliance lead to the loss of the service provider's license.

Telecommunications regulations in China divide service providers into two categories: basic service providers and value-added service (VAS) providers. Both types of services require licenses to be issued by the Ministry of Industry and Information Technology (MIIT) or its local counterpart at the provincial level.

In March 2009, the Ministry of Industry and Information Technology of PRC (MIIT) promulgated the Measures on the Administration of Licensing for Telecommunication Services Business (New Measures), which came into effect in April 2009, replacing earlier regulations and representing a significant change in the MIIT's licensing and monitoring procedures.

Lower Threshold for Basic Service Providers

Before the New Measures came into force, the minimum registered capital for basic telecommunications enterprises was RMB 200 million for intra-regional operators and RMB 2 billion for national or cross-regional operators. The New Measures lower the threshold of registered capital to RMB 100 million for intra-regional operators and RMB1 billion for national or cross-regional operators. It has been suggested that this will pave the way for the integration of telecommunication, cable TV and Internet service industries in the future.

Strengthened Procedures for Market Exit

Regulatory approval is required when a company wants to enter the market (and requires a telecommunications services license); approval is also required when the company wants to exit the market. Previous regulations required regulatory approval for market exit, but the New Measures provide greater detail on the administrative procedures required, including the specification of a 30-day public notification period.

Tightened Regulation of Telecommunication Business Operation

Basic and value-added licensees have always been subject to reporting and notification requirements. Annual inspections of licensees have been a long-standing feature of Chinese telecommunications regulations. The New Measures consolidate these requirements and widen MIIT’s range of supervision.

First, the New Measures create stronger obligations on licensees to monitor the services provided by third parties. For example, basic service providers who provide network access or collect fees for value-added service providers are required to monitor the contents, charges and "cooperative activities" of their respective value-added service providers.

Second, the New Measures try to level the playing field between basic service operators (that control the underlying network) and value-added service providers (providing services on the network). When revising the service terms with VAS operators, basic service providers are required to inform VAS service providers and then take their comments into account before making any adjustments. Records of the VAS operator's comments must be provided to regulatory authorities in the annual inspection.

Third, the New Measures affirm that VAS service providers that provide access to websites are prohibited from sub-licensing network access to other VAS providers.

Foreign operators are increasingly entering the Chinese market through cooperative relationships with VAS providers (such as those providing Domestic Virtual Private Networks). This prohibition will consolidate the market power of the basic operators and limit the types of cooperative relationships that VAS service providers may enter.

Certain issues surrounding the licensing system remain unresolved and, as so often in China, we can expect that they will be addressed going forward. However, by implementing a strong system of licensing telecommunications and, for the first time, providing comprehensive guidance for investors operating in China, the regulations lay the groundwork for foreign investors to enter this potentially lucrative market.