To invigorate market dynamism, propel digital economy growth, and interface with international economic and trade norms, the Ministry of Industry and Information Technology (MIIT) issued the Circular on the Pilot Scheme for the Further Opening of Value-Added Telecom Services to Foreign Investment (《关于开展增值电信业务扩大对外开放试点工作的通告》, the “MIIT Circular”) on April 10. The Circular lifts foreign shareholding limits for value-added telecommunication services like Internet Data Centers (IDC) on a trial basis in designated regions, namely the Beijing Services Sector Opening-up Demonstration Zone, Shanghai Pilot Free Trade Zone, Hainan Free Trade Port, and Shenzhen Pilot Demonstration Zone (collectively the “pilot areas”). It further contemplates expanding the application of this policy based on the progress and outcomes of these pilot programs.

In our earlier article on the transaction structure of the foreign investment in IDC (i.e.《数字地产系列（四）——外商投资互联网数据中心（IDC）项目的交易结构建议》), we outlined the transaction structures applicable prior to the issuance of the MIIT Circular. This article aims to highlight the substantial conveniences and policy advantages that the MIIT Circular has introduced for foreign investment in IDC projects.

IDC services fall under the scope of Category B11 Value-Added Telecom services under the Catalogue of Classification of Telecommunications Services (Revised in 2019) (《电信业务分类目录（2019年修订）》). To engage in IDC services, either Onshore or Offshore investors shall obtain a Value-added Telecommunications Business License (hereinafter referred to as “IDC License”, and IDC licenses applicable for foreign investors are referred to as “Foreign IDC License”) with business category B11 for Internet Data Center.

Previously, value-added telecommunications services were not fully open to foreign investors and the market access restrictions for different investors are as follows:

Consolidating the above provisions, previously, offshore investors who can satisfy any of the following conditions would be allowed to directly invest in the IDC industry:

In our earlier article (《数字地产系列（四）——外商投资互联网数据中心（IDC）项目的交易结构建议》), we extensively discussed the intricacies of foreign direct investment in IDC licensing companies and provided a comprehensive account of the procedures and requisites for applying for foreign-invested IDC licenses. Furthermore, prior to the issuance of the MIIT Circular, foreign investors cannot hold more than 50% share in IDC projects even if they have attained the license. Therefore, complex investment structures such as VIEs have been introduced in order to appropriately achieve the investment objectives.

2.1. A Breakthrough in Shareholding Restriction, but the Scheme Still Needs to be Developed

The MIIT Circular directly removes the equity ratio restriction on foreign investment in the IDC industry in the pilot areas, allowing foreign investors wishing to have control over the IDC projects to obtain a larger shareholding.

Nonetheless, the MIIT Circular leaves unspecified the exact timeframe for implementing the shareholding ratio with no restrictions. Subsequently, the pilot areas are expected to draft and submit their own tailored pilot implementation plans to the MIIT. The MIIT, in collaboration with relevant departments, will orchestrate expert evaluations, feasibility studies, and assessments of safety oversight and security systems, and only upon meeting the necessary conditions will the regions receive approval to proceed with the pilot.

The MIIT Circular requires a three-step process to materialize into concrete pilot implementation plans for the respective local governments in the four pilot areas:

Therefore, the official launch of the scheme in the four pilot areas entails a certain time frame, and in the worst case, not all of the proposed schemes will necessarily be approved. Simultaneously, the implementation of the pilot scheme demands substantial human and financial resources pursuant to the MIIT Circular. This includes allocating support to the local telecommunications authorities for enhancing staff supervision, upgrading internet information security management systems, and constructing internet regulatory information systems, etc.. Thus, the drafting and finalizing of the pilot schemed in four pilot areas should take into account not only their experiences in opening up to the outside world and their existing foundational infrastructure but also their level of economic development and their human, financial, and technical capacities to support the implementation of the pilot schemes. Thus, the exact timing and implementation requirements of the schemes remain to be seen.

2.2. Application Criteria for the Pilot Scheme

Despite the relaxation of foreign shareholding ratios, foreign-invested telecom companies intending to run IDC pilot operations in designated pilot areas must still “apply to the MIIT for approval to operate telecom pilot businesses, complying with relevant laws, regulations, and pilot approval provisions throughout their telecom operations. They must also accept and collaborate with telecom regulatory organizations and competent authorities for supervision and management.” The precise conditions for application and approval for the pilot projects will be set according to the specific implementation plans of the four pilot areas.

According to the Telecommunications Business License Approval Service Guide (Complete Version) (Edited on January 15, 2021, the “Approval Guide”), and the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2022 Revision) (Order No. 333 of the State Council, “FITE Provisions (2022)”), applications for the operation of telecom services by foreign-invested telecom enterprises shall all be accepted, examined and approved by MIIT in a uniform manner, regardless of the region where the telecom business is licensed. Specifically, applicants may apply for a Foreign IDC License in accordance with the guide for applying for telecom business licenses on the government service platform of the MIIT（https://ythzxfw.miit.gov.cn/index）.

Following the 2023 update to the Approval Guide, which removed Article 10 from the 2021 version, foreign investors are no longer mandated to possess a “good track record and operation experience in operating the value-added telecommunication business”. This change enables foreign financial investors or holding enterprises to become shareholder of an onshore IDC-licensed company directly without direct involvement in business operations. These adjustments resonate with the revised FITE Provisions in 2022, significantly simplifying the process of application for the Foreign IDC License.

However, the specific requirements imposed on pilot enterprises are yet to be observed. It is possible that a case-by-case approach may be adopted for pilot approvals, and specific obligations for the applicant companies could be imposed through the pilot approval process beyond the existing regulatory requirements for foreign investment in value-added telecommunications business licenses.

2.3. Pilot Exit Mechanism

The MIIT Circular incorporates an exit mechanism, stipulating that in cases where there are persistent legal and regulatory violations, heightened risk concentrations, or challenges in maintaining safety supervision standards within the pilot areas, the MIIT, following consultations with pertinent departments, may appropriately scale back the scope of the pilot operations according to the specific situations then. Moreover, in more severe cases, the MIIT reserves the right to terminate the pilot scheme ahead of schedule. Upon such termination, regions that have withdrawn from the pilot project shall organize relevant enterprises to safeguard the legitimate rights and interests of consumers in compliance with relevant laws and regulations, and properly handle the aftermath of the relocation and withdrawal of the remaining subscribers from the network.

In a landmark step, the MIIT Circular paves the way for opening up China’s IDC market to the outside world. Recognizing computational power - a pivotal driver of the digital economy - as a strategic resource and critical infrastructure, this initiative aims to incentivize international firms to invest in and build China’s computational infrastructure, concurrently broadening service choices for domestic enterprises.

Nonetheless, the precise conditions for implementation of pilot projects and how the landscape of the foreign-invested IDC would be re-shaped need to be further tracked and observed. Specifically, entities utilizing Variable Interest Entity (VIE) structures, for instance, might need to align their setups with future implementation plans of the pilot schemes and corresponding regulations. It’s essential for enterprises to vigilantly follow upcoming policy developments to make well-informed decisions.