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Threats to U.S. Networks/Section 3B

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Section III, A
Threats to U.S. Networks: Oversight of Chinese Government-Owned Carriers
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Section III, C
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​B. China Heavily Regulates its Telecommunications Industry and Carriers

To reach its goal to be a leader in the telecommunications industry, the Chinese government exerts control over foreign investment and domestic carriers. Further, it has incentivized state-owned carriers to expand operations internationally. This section analyzes each topic in turn.

1. China Heavily Restricts Foreign Telecommunications Investments

China maintains one of the most restrictive foreign investment regimes in the world.[1] The Chinese government first allowed foreign businesses in China during the 1970s.[2] Foreign investment accelerated in 2001, when as a condition to join the World Trade Organization-China committed to allowing foreign carriers to form joint ventures with domestic carriers.[3] Despite the appearance of opening up, however, China has continued to restrict access to the telecommunications ​sector.[4] Many telecommunications services remain "off-limits to foreign operators."[5] Instead, with limited exceptions, [6] foreign telecommunications companies must enter into joint ventures that are at least 50 percent owned by a Chinese party.[7]

The joint venture agreements often require U.S. companies to turn over their technology, proprietary know-how, and intellectual property to their Chinese partners, an exchange referred to as "forced technology transfer."[8] Former U.S. Treasury Secretary Timothy Geithner described the practice:

We're seeing China continue to be very, very aggressive in a strategy they started several decades ago, which goes like this . . . you want to sell to our country, we want you to come produce here. If you want to come produce here, you need to transfer your technology to us.[9]

The European Union Chamber of Commerce in China reported in May 2019 that "results from its annual survey showed 20% of members reported being compelled to transfer technology for market access, up from 10% two years ago."[10] In addition, "nearly a quarter of those who reported such transfers said the practice was currently ongoing, while another 39% said the transfers had occurred less than ​two years ago."[11] Some researchers, however, suggest these percentages are under-inclusive given that Chinese officials often exert pressure to transfer technology orally to avoid creating a written record, and many companies avoid raising the issue to evade negative publicity or retaliation from the Chinese government.[12]

China's foreign investment approval process is also complex and variable. China imposes strict administrative licensing requirements for telecommunications carriers—they must secure approval from up to six government agencies before operating in the country.[13] This can include an anti-monopoly and national security review by the Ministry of Commerce; a review of the company's name by the State Administration of Industry and Commerce; and approval from the Ministry of Information Industry and Technology, China's telecommunications regulator.[14] Although the telecoms licensing approval timelines are officially either 60 or 180 days, depending on the type of license sought,[15] the overall approval process can last more than a year.[16] Complicating the bureaucratic licensing process is the discretion held by local officials, who may add unofficial requirements[17] and "impose deal-specific conditions in exchange for the licenses."[18]

These restrictions have blocked foreign carriers from accessing China's BTS market.[19] Since China's accession to the World Trade Organization almost two decades ago, "not a single foreign firm has succeeded in establishing a new joint venture to enter this sector."[20] China's VATS regulations have also "created serious barriers to market entry for foreign [carriers] seeking to enter this sector."[21] As a result, "only a few dozen foreign-invested [carriers] have secured licenses to value-added telecommunications services, while there are thousands of licensed domestic suppliers."[22] Although China has publicly agreed to lessen barriers for foreign ​investment in China,[23] numerous challenges remain.[24] China continues to "use discriminatory regulatory processes, informal bans on entry and expansion, case-by-case approvals, overly burdensome licensing and operating requirements, and other means to frustrate the efforts of U.S. suppliers of services to achieve their full market potential in China."[25]

2. China Exerts Control over Domestic Carriers

Not only does China limit foreign investment in the telecommunications industry, but it also controls its state-owned carriers. Prior to 1999, the Chinese government relied on a single carrier, which effectively had a monopoly on all telecom services in China.[26] However, the government chose to break up that monopoly and create a number of smaller, state-owned carriers to spur competition.[27] In 2008, the Chinese government reversed course and launched a series of reforms, which resulted in consolidating the number of carriers in China.[28]

Today, the Chinese telecommunications market is dominated by the "Big Three" carriers: China Mobile, China Telecom, and China Unicom.[29] The Chinese government controls the companies' management and operations.[30] "[M]ost senior executives of the Chinese telecom companies have links to the [Ministry of Information Industry and Technology], the Government, or the [Communist] Party."[31] The Chinese government handpicks the companies' leaders, frequently shuffling senior leadership between the companies, and implements policies discouraging intense competition between the Big Three.[32] In fact, in 2017, the ​government stated that it intended to factor in "social obligations" when selecting senior management for the Big Three carriers.[33]

The Chinese government also retains ultimate control over the carriers by setting target returns and growth rates.[34] State-owned carriers are subject to "national service," which compels them to put the government's development goals ahead of the companies' own market interests.[35] In 2017, for example, Li Keqiang, Premier of the Chinese Government, "directed China Mobile, China Unicom and China Telecom to remove all domestic long-distance and mobile roaming fees by the end of [the] year, significantly cut internet connection and leased line charges for small and medium-sized enterprises . . . and reduce international long-distance tariffs."[36] All three companies pledged to do so within 24 hours of the Premier's directive, despite noting that doing so would negatively impact their financial performance.[37]

3. China Encourages State-Owned Telecommunications Carriers to Expand Internationally

Although strictly regulating the domestic telecommunications industry, the Chinese government has also sought to take advantage of more open international markets. China formally announced a "Go Out" policy or "Going Global" strategy in 1999 to encourage state-owned enterprises to invest and expand overseas.[38] The Chinese government pledged financial support to companies in strategic industries to encourage expansion into global markets.[39] "The essence of the 'going global' strategy [was] to promote 'the international operations of capable Chinese firms with a view to improving resource allocation and enhancing their international competitiveness.'"[40] Other commentators noted that the underlying motive of the policy was to bolster "[Communist] Party claims to legitimacy by becoming an effective global actor."[41] Chinese telecom companies have benefited from this policy, ​establishing operations abroad in an effort to acquire technology and new markets.[42]

  1. ↑ See id. at 26 (citing OECD FDI Regulatory Index, http://www.oecd.org/investment/fdiindex.htm).
  2. ↑ Laney Zhang, China: Foreign Investment Law Passed, Library of Congress: Global Legal Monitor (May 30, 2019), https://www.loc.gov/law/foreign-news/article/china-foreign-investment-law-passed/.
  3. ↑ Wayne M. Morrison, Cong. Research Serv., RL33536, China-U.S. Trade Issues 49–50 (2018).
  4. ↑ Office of the U.S. Trade Representative, Exec. Office of the President, Findings of the Investigation Into China's Acts, Policies, and Practices Related to Tech. Transfer, Intellectual Prop., & Innovation under Section 301 of the Trade Act of 1974 26, 28 (Mar. 22, 2018) [hereinafter 2018 U.S. Trade Representative Report].
  5. ↑ Yang Zhou, Regulation of Telecommunications Sector in China: Overview, Zhong Lun (Aug. 16, 2017), http://www.zhonglun.com/Content/2017/08-16/1841302098.html#co_anchor_a836533_1.
  6. ↑ In 2019, the Chinese government removed restrictions on three categories of value-added telecommunications services: multi-party communication, store-and-forward, and call center businesses. Foreign ownership of businesses providing these services is now permitted. See Zoey Ye Zhang, China's 2019 Negative Lists and Encouraged Catalogue for Foreign Investment, China Briefing (July 10, 2019), https://www.china-briefing.com/news/chinas-2019-negative-lists-encouraged-catalogue-foreign-investment/.
  7. ↑ See Regulations on the Administration of Foreign-Invested Telecommunications Enterprises, Art. 6 (promulgated Feb. 6, 2016), https://china.lexiscn.com/law/law-english-1-3161594-T.html?crid=1ffa565c-d660-b54d-6325-79b30208a4f5&prid= ("The proportion of capital contributed by the foreign investor(s) in foreign-funded telecommunications enterprise that is engaged in basic telecommunications services (other than radio paging services) shall not ultimately exceed 49%. The proportion of capital contributed by the foreign investor(s) in a foreign-invested telecommunications enterprise that is engaged in value-added telecommunications services (including radio paging business as part of its basic telecommunications services) shall not ultimately exceed 50%.").
  8. ↑ See, e.g., Karen Sutter, Cong. Research Serv., IN11208, U.S. Signs Phase One Trade Deal with China 1 (2020); U.S. Trade Representative Report, supra note 15, at 19.
  9. ↑ Wayne M. Morrison, Cong. Research Serv., RL33536, China-U.S. Trade Issues 44 (2018). China publicly committed to rectifying this problem in 2016, but evidence indicates that the problem still exists. Id.
  10. ↑ Michael Martina, China's Tech Transfer Problem is Growing, EU Business Group Says, Reuters (May 20, 2019).
  11. ↑ Id.
  12. ↑ Wayne M. Morrison, Cong. Research Serv., RL33536, China-U.S. Trade Issues 44 (2018).
  13. ↑ See U.S. Chamber of Commerce, China's Approval Process for Inbound Foreign Direct Inv. 10, chart 1 (2012).
  14. ↑ Specifics for the telecommunications industry are laid out in the Regulations on the Administration of Foreign-invested Telecommunications Enterprises (revised in 2016). See also U.S. Chamber of Commerce, China's Approval Process for Inbound Foreign Direct Inv. 8-20 (2012) (listing other requirements).
  15. ↑ U.S. Chamber of Commerce, China's Approval Process for Inbound Foreign Direct Inv. 8-20 (2012).
  16. ↑ 2018 U.S. Trade Representative Report, supra note 15, at 37.
  17. ↑ See id. at 20 (quoting an investigation submission that states, "Chinese officials are careful not to put such requirements in writing, often resorting to oral communications and informal 'administrative guidance' to pressure foreign firms to transfer technology").
  18. ↑ Id. at 39.
  19. ↑ Office of the U.S. Trade Representative, Exec. Office of the President, Nat'l Trade Estimate Rep. on Foreign Trade Barriers 119 (2020).
  20. ↑ Id.
  21. ↑ Id. (citing restrictions, including "opaque and arbitrary licensing procedures, foreign equity caps, and periodic, unjustified moratoria on the issuance of new licenses").
  22. ↑ Id.
  23. ↑ See Karen Sutter, Cong. Research Serv., IN11208, U.S. Signs Phase One Trade Deal with China (2020).
  24. ↑ Office of the U.S. Trade Representative, Exec. Office of the President, Nat'l Trade Estimate Rep. on Foreign Trade Barriers 116 (2020).
  25. ↑ Id.
  26. ↑ James Huddleston, The Battle between China's 3 Telecom Companies and Its Impact on Profits, Seeking Alpha (July 23, 2013), https://seekingalpha.com/article/1565812-the-battle-between-chinas-3-telecom-companies-and-its-impact-on-profits.
  27. ↑ Id.
  28. ↑ Yukyung Yeo, Between Owner and Regulator: Governing the Business of China's Telecommunications Service Industry, 200 China Quarterly 1013, 1023–24 (2009), https://www.jstor.org/stable/pdf/27756541.pdf.
  29. ↑ See Alan Weissberger, China's Big 3 Mobile Operators Have 9 Million 5G Subscribers in Advance of the Service; IEEE Comm. Soc. Tech. Blog (Oct. 7, 2019), https://techblog.comsoc.org/2019/10/07/chinas-big-3-mobile-operators-have-9-million-5g-subscribers-in-advance-of-the-service-barrons-china-to-lead-in-5g-deployments/.
  30. ↑ See, e.g., Bien Perez, Bosses of China Mobile, Unicom and Telecom Reshuffled as Beijing Revamps State-Owned Telecommunications Firms, South China Morning Post (Aug. 24, 2015).
  31. ↑ China: Telecom Industry Business Opportunities Handbook 1, 61 (2014).
  32. ↑ China Telecom Chairman Moves to China Mobile, The Economist Intelligence Unit (Mar. 6, 2019), http://www.eiu.com/industry/article/147729798/china-telecom-chairman-moves-to-china-mobile/2019-03-06; Huddleston, supra note 37.
  33. ↑ Bien Perez, Why Government Policy has a Bigger Impact on China's Telecoms Industry than Market Competition, South China Morning Post (Mar. 11, 2017).
  34. ↑ Id.
  35. ↑ Id.
  36. ↑ Id.
  37. ↑ Id.
  38. ↑ See generally Nargiza Salidjanova, U.S.-China Econ. & Sec. Review Comm'n, Going Out: An Overview of China's Outward Foreign Direct Inv. (Mar. 30, 2011).
  39. ↑ See Hongying Wang, A Deeper Look at China's "Going Out" Policy, Centre for Int'l Governance Innovation (Mar. 8, 2016); Nargiza Salidjanova, U.S.-China Econ. & Sec. Review Comm'n, Going Out: An Overview of China's Outward Foreign Direct Inv. 5 (Mar. 30, 2011) (citing United Nations Conference on Trade & Dev., World Inv. Report (2006)).
  40. ↑ Nargiza Salidjanova, U.S.-China Econ. & Sec. Review Comm'n, Going Out: An Overview of China's Outward Foreign Direct Inv. 5 (Mar. 30, 2011) (citing United Nations Conference on Trade & Dev., World Inv. Report (2006)).
  41. ↑ China Policy, China Going Global: Between Ambition and Capacity 3 (Apr. 2017), https://policycn.com/wp-content/uploads/2017/05/2017-Chinas-going-global-strategy.pdf.
  42. ↑ Cf. Dr. Daouda Cissé, "Going Global" in Growth Markets—Chinese Investments in Telecommunications in Africa, Stellenbosch Univ. Centre for Chinese Studies (2012).
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