China's WTO Commitments Undermined by Telecoms Legislation

Strategic Insights -

China's State Council has adopted a package of measures that will allow foreign telecoms operators to enter the Chinese market for the first time. However, a closer look at the new laws reveals that China may be reneging on key commitments made to the US and EU during its accession to the WTO. The new laws limit foreign investment and control, restricting foreign operators to joint ventures with Chinese companies, who retain control.

Foreigners may acquire a stake of up to 25% in joint ventures in major cities, increasing to 35% in 2005 and 49% in 2006. However, conditions for value-added services are more restrictive, with a foreign party requiring a representative office in China for at least three years to participate in a joint venture. Operating licenses will be granted only to companies with a "record of sound performance and experience in the industry," giving Chinese authorities considerable discretion.

Key Takeaways:

  • China's new telecoms laws limit foreign investment and control, contradicting its WTO commitments.
  • Foreigners will be restricted to joint ventures with Chinese companies, who retain control.
  • The permissible stake for foreigners in joint ventures will be phased in over three years, starting from 25% up to 49%.
  • Value-added services will have more restrictive conditions, requiring a foreign party to maintain a representative office in China for at least three years.
  • Operating licenses will be granted based on a company's "record of sound performance and experience in the industry," giving Chinese authorities significant discretion.
  • Chinese partners in joint ventures must be State-owned or majority-controlled enterprises with annual revenues of at least $350 million.
  • The requirement for a foreign investor's Chinese partner to meet specific revenue criteria may deter many potential foreign investors.

Statistics:

  • 25% maximum stake for foreigners in joint ventures in major cities as of 2003.
  • 36% maximum stake for foreigners in joint ventures in fourteen additional cities as of 2005.
  • 49% maximum stake for foreigners in joint ventures in all cities as of 2006.
  • 30% maximum stake for foreigners in value-added services as of the day China enters the WTO.
  • 49% maximum stake for foreigners in value-added services one year after China's WTO entry.
  • 50% maximum stake for foreigners in value-added services two years after China's WTO entry.
  • Three years: required time for a foreign party to maintain a representative office in China before participating in a joint venture.
  • $350 million: minimum annual revenue required for a Chinese partner in a joint venture.
  • $10 billion: minimum annual revenue required for a foreign investor's Chinese partner before a limitation on foreign entry was dropped.

Sources:

  • "China's WTO Commitments Undermined by Telecoms Legislation" (exact wording and source not specified)
  • [No additional sources mentioned in the text]