China’s Telecom Evolution: New Opportunities for Foreign Investors

The Chinese government has implemented a new pilot scheme since late 2024, which aims to ease restrictions on foreign investment in key value-added telecom services. Until 28 February 2025, 13 foreign invested companies have been granted approval to participate in the pilot scheme. This initiative marks a continous effort in China's opening up of its telecom sector, in response to business demand and technological advancement. We will share in this article, the potential drivers and the practical implications of the pilot scheme to foreign investors.

China's gradual opening up of value-added telecom services sector

Telecom services are heavily regulated in China ¹. Operators would need to apply for various licenses to provide basic and/or value-added telecom services (VATS). Along with China's accession to the World Trade Organisation in 2001, it has committed to gradually open up the sector to foreign investors.

With respect to VATS specifically, prior to 2014, such "open-up" was limited to a few types of services such as intenet information services, storage and forwarding services, and online data processing and transaction processing services (in line with China's WTO commitment), and there was a 50% cap of foreign investment to the aforesaid areas.

Since 2014 and starting from the Shanghai Free Trade Zone (FTZ) then expanded to more areas, China has allowed foreign investors to enter into certain service sectors beyond its WTO commitment (such as call centre services and domestic VPN services). Foreign capital limits have also been removed for limited service types. A typical example was the nationwide lift of foreign investment restrictions on e-commerce services, which aligned with China's policy then to boost domestic consumption.

By the end of 2024, in total 2,343 foreign invested companies are permitted to operate telecom businesses within China, according to the Ministry of Industry and Information Technology (MIIT).

However, a few doors had remained shut for foreign investors. For example, besides domestic investors, only those from Hong Kong and Macau were allowed to invest in internet data centre services and subject to a 50% shareholding cap, through the Closer Economic Partnership Arrangement (CEPA).

On 10 April 2024, Chinese government released a directive and associated work plan to lift foreign shareholding restrictions in six types of VATS within designated pilot areas in Beijing, Shanghai, Hainan, and Shenzhen (Pilot Scheme, please see our previous briefing here). The Pilot Scheme was officially enacted on October 23, 2024.

This means foreign players are now allowed to operate the below VATS on their own in the said places:

• Internet Data Center (IDC)

• Content Distribution Network (CDN)

• Internet Service Provider (ISP)

• Online data processing and transaction processing

• Information service including information publishing and delivery services (excluding internet news, online publishing, online audio-visual and internet cultural operations)

• Information protection and processing services

Why these types of services?

The Pilot Scheme not only marks China's commitment to continuous opening-up, but also reflects its strategic response to the evolving landscape of digital technologies and market demands. The types of services covered by the Pilot Scheme appear to be carefully selected, and will provide important infrastructures and supports to the emerging digital businesses, such as cloud computing, data center facilities and content delivery network service. Specific examples include:

• cloud service providers (e.g. IaaS and PaaS providers which require the IDC license), especially those that are currently operating through local partners (such as Amazon Web Services) will be able to operate independently in the pilot zones without the need for local partnerships;

• CDN providers offering webpage, download, streaming media and video acceleration. More investment in this area will assist the businesses of streaming, gaming, cross-border e-commerce and even autonomous driving companies that require low-latency content delivery;

• ISP providers offering access to the public internet, website access services for business clients as well as internet access services for general users. Foreign investors will be able to benefit from the Pilot Scheme and provide ISP services in the pilot zones independently;

• online data processing and transaction processing services including e-commerce platforms, lnternet of things services and big data processing companies which provide services in relation to smart homes, industrial internet, telemedicine and connected vehicles, etc; and

• businesses offering information protection services, including UGC/PGC content publishing platforms and cyber services services will be able to benefit from the Pilot Scheme.

Over the past two decades, China's data center industry has undergone a significant transformation, progressing from basic IDC to sophisticated computing power centres. The chosen sectors align closely with China's current surge in demand for cloud computing, big data analytics, AI, and edge computing capabilities. By opening these specific sectors to foreign investment, China aims to leverage global expertise and capital to accelerate the development of its digital infrastructures.

This move is particularly timely given the exponential growth of China's data center market, which exceeded RMB 220 billion in 2022, and the emergence of new technologies like generative AI that require advanced computing power. The Pilot Scheme thus represents China's strategic effort to meet the increasing and evolving demands of the digital era, fostering innovation in areas crucial for the next generation of digital services and maintaining its competitive edge in the global tech landscape.

Implication on investment strategies

The new policy allows foreign investors to establish wholly-owned enterprises within the pilot zones and apply for the relevant licenses, potentially shifting strategies away from Variable Interest Entity (VIE) structures or joint ventures to having direct ownership over the VATS.

This change offers several advantages, including greater control of operations, reduced legal risks associated with VIE structures, elimination of potential deadlocks in decision-making that can occur in 50:50 joint ventures and retention of revenue and profit within the foreign-owned company. It also allows for greater reinvestment in research and development and business expansion.

Diving deeper into the policy - choice of pilot zones

Note that businesses falling within the aforementioned scopes will have to have their registered locations and service facilities within the same pilot zone, but they may provide services to customers across China - except for ISP services, which are limited to serving clients within the same pilot zone and must provide internet access through basic telecom carriers' equipment.

The selection of Beijing, Shanghai, Shenzhen, and Hainan as pilot zones is rooted in both historical precedent and current market dynamics. These regions have been at the forefront of China's gradual opening to foreign investment in the telecom sector since 2002, accumulating valuable experience in piloting and implementing such initiatives. Each of these areas has a track record of experimenting with increased foreign participation in VATS, adapting national standards to local conditions. This long-term experience provides a solid foundation for the new, more expansive Pilot Scheme.

Moreover, the choice of these zones aligns closely with the market demand. Areas around Beijing, Shanghai and Shenzhen have the most important clusters of financial and technology companies in China. Such high real-time businesses also generate high demand for digital infrastructure such as computing power. These areas also host many of China's existing data centre facilities. The established technological ecosystems and robust infrastructure will help maximise the potential impact of foreign investment and expertise. The inclusion of Hainan, while not a major data center hub, likely reflects its status as a free trade port and focus on tourism and modern services such as cross-border financial and medical services, where there is surging demand for CDN, ISP and online data processing services.

Foreign investors are advised to carefully compare these pilot zones during the decision making process, taking into account their target clients, infrastructure resources (again, note that the place of incorporation and service facilities must be in the same pilot zone), talent pool, as well as incentives provided by the local governments.

Future outlook

Following the implementation of the Pilot Scheme, dozens of global players have expressed their interests and/or applied for participation. According to official annoucement by the MIIT on 28 February 2025, a first batch of 13 companies have been approved to participate in the Pilot Scheme, including the China subsidiaries of T-Systems, HSBC Fintech, Airbus, Siemens Healthcare, etc. Four of these companies are located in Beijing, four in Shanghai, three in Shenzhen and two in Hainan.

It took the Chinese authorities about four months to handle and approve this first batch of applications, but the process is likely to accelate - on 19 February 2025, China's Ministry of Commerce and National Development and Reform Commission jointly published the 2025 Action Plan to Stablise Foreign Investment, in which the authorities pledge to support the pilot zones to ensure effective implementation and expand the Pilot Scheme in due course.

The pace and extent of future liberalization will, however, likely be carefully managed to balance the benefits of foreign expertise and capital with considerations of national security and domestic industry development. Foreign players shall also note other legal and commercial challenges to operate VATS within China, including cybersecurity, privacy protection especially cross-border data transfer (please see our feature page to learn more about China data protection laws), as well as fierce competition with local giants such as Huawei, AliCloud and Tencent.

¹ For the purpose of this article only, “China” refers to the mainland of the People’s Republic of China, excluding Hong Kong and Macau Special Administrative Regions and Taiwan region.