China's State Council recently enacted the Telecommunications Regulations of the People's Republic of China (the "Telecom Regulations"), which for the first time implement a comprehensive telecommunications licensing system and provides comprehensive guidance for investments and operations in China's telecommunications industry. The Telecom Regulations also pave the way for foreign companies to invest in China's lucrative telecommunications businesses. As is common for any newly enacted regulations in China, the Telecom Regulations leave a certain number of issues unresolved, and these issues may continue to be road blocks for telecommunications investors in their investments in China.

Classification of Telecom Businesses.

The Telecom Regulations require that all telecommunications operators must obtain an industry-specific license to carry on their business. The Telecom Regulations defines the term "telecommunications" as any activity utilizing wired or wireless electro-magnetic or opto-electronic systems to transmit, broadcast or receive any telephonic, text, data, graphic or other form of information. The Telecom Regulations further classify the telecommunications business into two parts: infrastructure telecommunications businesses and value-added telecommunications businesses. Each classification is broken down into a number of sub-categories, which are set forth in an appendix to the Telecom Regulations.

The Telecom Regulations define infrastructure telecommunications business as those business operations relating to public network infrastructure facilities, public data transmission and basic telephonic communication services. Interestingly, paging service operations and the resale of infrastructure telecommunications are classified as infrastructure telecommunications businesses, but the administration of these two kinds of activities is governed by the provisions applicable to value-added telecommunications businesses under the Telecom Regulations.

The Telecom Regulations define value-added telecommunications businesses as those businesses that utilize public network infrastructure facilities to provide telecommunications and information services. According to the appendix attached to the Telecom Regulations, Internet information services (commonly known as Internet Content Provider, or ICP, services) are classified under this category. Simultaneously with the enactment of the Telecom Regulations, the State Council also enacted the Administrative Measures for Internet Information Services (the "ICP Measures"), which set forth the requirements specific to investments and operations in any ICP business.

In addition, the Telecom Regulations require any telecommunications businesses utilizing new telecommunications technology, but not covered by the Telecom Regulations' classified categories, to make a filing with relevant government authorities.

Licensing Procedures.

Licenses can be obtained at the local, provincial or central level depending on the classification of the operations and the territorial coverage of the contemplated operations. The operation of any infrastructure business and the cross-jurisdiction inter-provincial operation of value-added telecommunications business require a license issued by the Ministry of Information Industry ("MII"). The operation of any value-added telecommunications business within one province-level jurisdiction requires a license issued by the local telecommunications authority (the "Local Authority"). Notably, the Telecom Regulations require that issuance of a license for any telecommunications infrastructure business be subject to a bidding process held in accordance with applicable state regulations. The rationale and procedure for such requirement are unclear and an investor may as a practical matter need to seek specific clarification from MII in order to comply with the requirement. Under the Telecom Regulations, MII or any Local Authority is required to make a decision as to whether to grant a license within 180 days after receipt of the application in the case of an application in respect of any infrastructure telecommunications business, or within 60 days in the case of an application in respect of any value-added telecommunications business.

Other Provisions.

The Telecom Regulations also provide comprehensive guidance for matters such as inter-connection among telecommunications networks, pricing of telecommunication services, certain standards and requirements in connection with the provision of telecommunication services, market competition, allocation of telecommunications resources and penalties for violations of the Telecom Regulations. All these matters are important and each warrants a separate discussion which is beyond the scope of this memorandum. For example, with respect to allocation of telecommunications resources (defined as the limited resources that support telecommunications functions such as wireless electronic frequency, location of satellite orbits and so forth), the State adopts a pay-for-use system and may allocate the resources through a designated process or through a bidding process.

Indications for Foreign Investment. Contrary to reports in the press, nothing contained in the Telecom Regulations constitutes any specific guidance for foreign investment in China's telecommunications businesses. The Telecom Regulations only provide that the investments and operations of foreign entities or individuals in telecommunications businesses within China are subject to a separate procedure to be formulated by the State Council. The ICP Measures clearly contemplate that foreign investment will be allowed in ICP businesses, subject to proper approvals from the relevant government authorities, but do not provide explicit approval procedures for such investment. Nevertheless, compared to the previous rigid policy of MII, these provisions for the first time unambiguously indicate that the Chinese government is ready to open China's telecommunications industry to foreign investors, and they represent the first step on the part of the Chinese government to honor its commitment made in the WTO negotiations regarding the opening of China's telecommunications market. That being said, for the time being, neither MII nor any Local Authority will be in the position to start processing any application for foreign investment in the telecommunication business before the contemplated implementing regulations for foreign investments in this field are put in place.

Outstanding Issues. Many outstanding issues remain unresolved under the newly enacted Telecom Regulations. First, given the broadness of the definition of the telecommunications business under the new Telecom Regulations, some Internet-related technologies, such as Internet-related application solution services or management solution services, may fall within the scope of the regulations. The Telecom Regulations also fail to provide guidance in connection with online business activities and online advertising activities, including whether these activities will fall within the definition of value-added telecommunications business as ICP services. In addition, some telecommunications business classifications under the Telecom Regulations are ambiguous. For example, a broad interpretation of the category of electronic data exchange would subject daily e-mail exchanges to the licensing requirements under the Telecom Regulations. Furthermore, the broad requirement that any new telecommunications businesses utilizing new technologies be subject to a filing process could be problematic as well. This language could allow the relevant government authorities to extend the application of the Telecom Regulations to telecommunications-related technical services not covered or contemplated by the regulations. There are also a number of issues relating to the licensing process (such as the bidding process involved in issuing a license for any infrastructure telecommunications business) and other matters covered by the Telecom Regulations which need further clarification.

Conclusions.

Despite the obvious limitations, the enactment of the Telecom Regulations is certainly a positive sign indicating a change in the policy of the Chinese government with respect to the telecommunications industry in light of China's entry into the WTO. The actual implementation and application of the new Telecom Regulations will be tested in the next few months. We will continue to monitor and keep you updated on the newest developments in this regard.

Because of the generality of this newsletter, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.