China opens the Internet to private companies

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BEIJING (Reuters) -- China's cabinet has approved landmark rules that will allow private companies to operate Internet and other value-added telecommunications services legally for the first time.

In a session on Wednesday presided over by Premier Zhu Rongji, the State Council passed the Draft Telecommunications Regulation along with a separate regulation on Internet content, the People's Daily said.

The newspaper report on Thursday gave scant details on the Internet content rules and said both regulations are still subject to revisions.

But the draft telecoms regulation marks a step towards fortifying the Internet sector and stirring up competition by allowing private domestic firms to participate, analysts said.

"Private capital has had a rocky history in China until now," said Patrick Horgan, telecoms director at APCO China, a Beijing-based consultancy. "It's definitely a signal that things are moving in the right direction."

According to the draft submitted to the State Council in June, a copy of which was seen by Reuters, fixed-line and mobile phone companies, as well as companies which operate Internet infrastructure, must remain in the hands of the state.

But a broad category of services designated as "non-proprietary networks" can be owned privately, it said.

The "non-proprietary" services include: "Information and other related services provided over the Internet and multimedia networks"; paging; value-added telecom services; and the "reselling" of traditional telecoms services.

The rules, however, are not entirely rosy for private firms.

For starters, they create an extensive licensing regime with vague requirements. Companies must provide a feasibility study to the government and "meet other requirements," the rules state.

They also put licensing authority in the hands of the Ministry of Information Industry -- a regulatory body with a history of hostility towards the Internet and competition.

The regulation also avoids answering the crucial question of how China will open the telecoms and Internet sectors to foreign investment -- something it has promised to do as a condition of its entry to the World Trade Organization.

Draft rules on global investment are in a separate and far more controversial document that apparently has not yet passed the State Council.

The draft sets towering restrictions on who can participate in mobile and fixed-line phone companies, currently off-limits to investors outside the country.

For example, Chinese partners must be licensed state-owned giants with two years experience and annual revenues of 3.0 billion yuan ($360 million).

That effectively bars other countries from doing business with anyone but three top state players -- China Telecom, China Mobile Communications Corp and China United Telecommunications Corp. -- none of which are actively courting outside investors.

Potential outside investors must be telecoms firms with at least two years of revenues above US$10 billion, which rules out a large number of potential players.

Another article in the draft that has Western executives grumbling is a requirement that "the chairman of the board of directors be appointed by the Chinese investor and the general manager be recommended by the Chinese investor."

While the document's conditions for global participation in the Internet are more lenient, they require investments to be in the form of joint ventures with a Chinese partner that has annual revenues of 2.0 million yuan ($241,600).

Almost none of China's major Web sites began as Chinese firms with pre-existing revenues and all depended mainly on other investment to survive.

As a condition of entry to the WTO, China has pledged to allow 30 percent global stakes in Internet, paging and other value-added services upon accession, rising to 49 percent after one year and 50 percent after two years.

But most Web startups in China have upwards of 90 percent outside capital. They have survived through loopholes and slack enforcement.

But the draft telecom regulation raises fears that the Ministry of Information Industry might use its licensing authority to kill firms that exceed international ownership limits.

Copyright 2000 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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