In March 1998, the 9th National People's Congress of the People's Republic of China announced an institutional reorganization of the various ministries, reducing the total number from 40 to 29. The NPC retained 27 of the original ministries and added two new ministries. The purpose of the reforms is to improve efficiency, streamline the massive government bureaucracy, separate the government from economic enterprise administration, reduce the scope of corruption, and reduce the civil service. (1) Those ministries most affected are those focused on industry-specific areas such as coal, internal trade, and chemicals. The reform plan also calls for privatization of certain ministry-owned enterprises. The State Council is responsible for carrying out the reorganization plan.
New "Super" Ministry: MII
One of the more significant changes concerns the creation of the Ministry of Information Industry (MII), a new "super" ministry. The MII will replace and assume the functions of the Ministry of Posts and Telecommunications (MPT), the Ministry of Electronics Industry (MEI), and the Ministry of Radio, Film, and Television, the China Aerospace Industry Corporation, and the China Aviation Industry Corporation.
The leadership of the MII includes Wu Jichuan, minister of MII (and former minister of the MPT), and five vice ministers two of which are former MPT vice ministers and three former MEI vice ministers. The new vice ministers include:
Liu Jianfeng, Executive Vice Minister (MEI)Lu XinKui, Vice Minister (MEI)
Qu Weizhi, Vice Minister (MEI)
Yang Xianzu, Vice Minister (MPT)
Zhou Deqiang, Vice Minister (MPT)
The choice of leadership from both the MPT and MEI is intended to balance the interests of these two competing former ministries. The State Council's objective is to halt the competitive bickering of the MPT-controled China Telcom and the MEI-invested and foreign-invested China Unicom, two different domestic telecommunications service providers. From a technological perspective, the formation of the MII brings together rival ministries that compete in the areas of data communications, broadcast networks, and proprietary telecommunications.
The MII leadership is in the process of developing the organizational structure for the new ministry including the number of departments and staffing needs. The process is expected to take most of the summer of 1998 to complete. The State Council has emphasized that the reorganization of the MII is a showcase for overall system-wide reform.
The NPC announcement also provides that the MII is required to work closely with the State Economic and Trade Commission in setting standards and policies for China's information technology industry, which includes the development of polices concerning foreign investment, technology transfer, and strategy development plans. (2)
Foreign Investment Opportunities in China's Telecom Market
Foreign telecom equipment suppliers and the construction of networks are open to joint ventures. Chinese laws, however, prohibit telecom service providers from direct equity ownership of telecom networks or operations. Since 1994, foreign service providers have constructed mobile or fixed-line networks in cooperation with China Unicom, in exchange for a percentage of revenue. By the end of March 1998, China Unicom had signed 23 joint venture contracts with equipment suppliers and operators for mobile networks for a total investment of US $1.5 billion. Although Chinese law prohibits Unicom's partners from securing an equity position in the projects, foreign parties are allowed to first form joint ventures with local partners that, in turn, fund the Unicom projects for a set rate of return. For example, Sprint and Sumitomo are partners in a joint venture with a local company known as Tianjin Global Communications. Tianjin Global is China Unicom's partner in a fixed-line business in the City of Tianjin, which began operations in July of 1998.
Although China Unicom has been open to involvement by foreign parties, China Telecom, at the direction of the MPT, has not. In addition, any advancements by China Unicom have been met with resistance by China Telecom, which has purposefully restricted interconnection with the national trunk network and, where access is granted, on terms that favored China Telecom at the expense of China Unicom and its foreign investors. By controlling the public network, the MPT stifled the development of China Unicom which, in turn, restricted foreign investors from making any real inroads in China's telecom sector.
The creation of the MII gives little encouragement for foreign investors. On April 3, 1998, Minister Wu was quoted as saying that the reorganization would not lead to additional foreign investment opportunities for foreign companies. He has made it clear that the MII will centralize control over all aspects of China's telecom sector. In June of 1998, the MII announced the creation of a new subsidiary under the control of China Telecom, entitled China Telecom Paging to regulate all paging services nationwide. These events are indicative that the xenophobic approach of the MPT is likely to prevail through the reorganization process. In the short-term, the legal and regulatory framework will not favor foreign parties. Whether Wu and his cohorts in the new MII are able to continue to bar foreign investors will depend upon a number of external factors including:
- International pressure to open China's market as a condition of WTO membership.
- Internal pressure to meet the objectives of the Ninth Five-Year Plan to upgrade China's technology, digitalization of the country's public and private networks using fiber optic cable and satellite systems, and the expansion of the mobile communications networks. At some point, the MII will concede that it needs to provide concessions to investors with access to the desired technology.
- Internal financial pressure to secure foreign investment to tap into capital to modernize its telecommunications sector in much the same way as it is modifying its rules for foreign investment in its airport sector. As the Asian-Pacific region continues to reel from the ongoing financial crisis, China will continue to look to outside sources for infrastructure development funds, which, at some point, may only be available for greater access.
- Internal political pressure to deregulate the telecommunications industry and to reduce state involvement in economic enterprises. Although the MII may, at first, toe the MPT line, it will eventually be forced to follow Prime Minister Zhu Rongji's goals to reduce the bureaucracy, over-regulation, and monopolistic ties between the industry and the industry regulator.
Many foreign firms have unsuccessfully tried to work around China's ban on direct investment, and most have turned their backs on the China market until restrictions are eased. Understandably, the inclination of foreign parties is to invest elsewhere. But China is rapidly changing and timing may be critical to securing opportunities. Rather than abandoning the market, foreign telecom firms should
- seek out creative investment opportunities utilizing investment vehicles that make economic sense even though direct ownership is disallowed;
- maintain a presence with the players to preserve access for potential opportunities that may arise;
- work with U.S. government trade negotiators to encourage China to lift its restrictions; and
- patiently ride the waves of internal institutional reform.
1. Since 1979, the number of civil servants in China had grown by 82.3 percent, while the size of the population only increased by 27.1 percent. The reform calls for eliminating approximately 4 million government jobs. See Domestic News Economic Plans, China Economic Rev. (April 23, 1998).
2. The institutional reform plan calls for the broadening of power of the State Economic and Trade Commission (SETC) which will be responsible for developing and implementing national economic policy. The SETC will assume regulatory control over five different ministries including the Ministry of Coal Industry, Ministry of Machine Building Industry, Ministry of Metallurgical Industry, Ministry of Internal Trade, and the Ministry of Chemical Industry. These industry-specific ministries will become bureaus under the auspices of the SETC. The Ministry of Chemical Industry will be replaced by the SETC-controlled Petrochemical Industry Bureau and will assume regulatory functions over the China Petroleum and Natural Gas Corporation and the China Petroleum and Chemical Industry Corporation.
This memorandum is intended to be general information for the clientele and colleagues of Morrison & Foerster LLP. Readers are advised that the information in this memorandum may apply differently in any given situation. Readers are further advised to seek the advice of counsel with respect to their China-related transactions.