Draft Telecom Regulations - Liberalizing the Market with Brakes on

BEIJING ---Long awaited draft regulations on China’s burgeoning telecommunications market have been issued and have made clear once again that China will open the information technology sector, one of its most lucrative markets, according to it's own rules.

China has pledged to liberalize its telecoms market as one of the milestones in the negotiations for China's imminent accession to the WTO. But, as was to be expected, it is one thing to liberalize the market, but quite another to let in foreign competition. The draft regulations issued by the Ministry of Information Industry (MII) have imposed tough market entry requirements on companies, which ultimately have the same effect as pre WTO market restricting mechanisms.

The new regulations will essentially divide the mainland's telecom market into network operators and service providers. Requirements governing entry into mobile and fixed line operations will be made much more difficult than investment into value added telecoms market, thus opening a line of investment into struggling internet startups, but making operations investment only possible for the top players.

China will allow 30% foreign ownership in Internet, paging and other value added services upon accession, rising to 49% after one year and 50% after two years. The draft regulations further specify that foreign partners must have annual revenues of more than US$500,000 and assets of at least US$ 1 million. Mainland partners must have one year's business experience and annual revenues of RMB 2 million.

For mobile and fixed- line ventures the requirements are much tougher. According to the regulations, foreign companies will be allowed to own 25% in mobile companies upon accession to the WTO rising to 49% if they meet the requirements. Potential foreign investors must be telecoms firms with at least two years of revenues above US$ 10 billion. Mainland partners must be licensed as state-owned companies with two years of experience in the sector and annual revenues of RMB 3 billion.

The rules thereby effectively force foreign players to partner up with telecoms giants China Telecom, China Mobile Communication and China United Telecommunications. None of these have shown interest in taking foreign partners. Even if any new licenses were issued it would take the new companies years before they met the requirements.

Dotcom enthusiasm has cooled off over the last months, with China internet portal Sohu and Netease achieving less at their mid year IPOs than aimed for, and might not strike some as the most lucrative markets in which to invest. However, legal participation in internet companies is more than has been granted to foreign participants in other sectors of the media industry. For now no one seems able to predict the outcome of the information technology revolution, but legal foreign participation in internet companies cannot be a bad thing, especially when convergence is not a matter of if, but when.