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China’s Internet Services Industry: A Strategy for Legal Reform
This project was completed by Tiffany Tompkins to fulfill a requirement for a Master’s Degree in Commercial Diplomacy from the Monterey Institute of International Studies.
Table of Contents
I. Industry Development
2. Internet Access
III. Political Background
IV. Industry Laws
V. Rule of Law
I. Commercial Analysis
issue #1: How will these reforms help AmCham member
II. Policy Analysis
Policy Issue #1: How far is the Chinese government willing to open up?
Policy Issue #2: How will liberalization contribute to China’s economic growth?
Policy Issue #3: How will these reforms accommodate WTO obligations?
1. Local Governments
Box 3 Beijing Olympics 2008
Political Issue #2: Analysis of Foreign Stakeholders
VII. Comprehensive Strategy Paper
Furst, Executive Director, American Chamber of Commerce- PRC
The American Chamber of Commerce - China celebrated China’s accession to the WTO in December 2001. US businesses may, for the first time, legally invest in the highly anticipated Internet services sector. This sector has enormous market potential, including:
The conditions and schedules arduously negotiated with China’s WTO Working Group were breakthroughs in the liberalization of China’s Internet services market. China now allows up to 30 percent foreign investment in Beijing, Shanghai and Guangzhou. By December 2002, foreign investment will increase to 49 percent with an additional fourteen cities added to the geographic scope. By December 2003, foreign investment will be allowed up to 50 percent with no geographic limitations. However, while this schedule of concessions seems impressive, many barriers still need to be addressed in China’s telecommunications sector.
China’s Internet services industry is dominated by high regulatory risk, which is impeding the American investor’s willingness to invest in the industry. This high regulatory risk is a direct result of the following problems:
The Chinese government has been developing the Internet services sector and the related supply-chain industries. Both central and provincial governments believe the Internet will diversify the economy, and aid in the development of a modern telecommunications system, necessary for attracting businesses. Provincial governments, however, have received little investment in Internet services.
of China’s WTO accession package, China has promised to create a concrete,
comprehensible and more transparent telecommunications legal framework
that increases competition and improves the investment environment.
The government aims to complete these new regulations by the end of
2002. However, this timetable seems unrealistic since consensus has
been reached on none of the ten plus drafts circulating in the State
As Chief Consultant for the American Chamber of Commerce–PRC, I propose that AmCham lobby the Chinese government to accept the following recommendations:
Now is the appropriate time to forward new ideas for improving China’s Internet regulations. These proposed reforms aim at increasing American investor confidence in this potentially highly profitable sector. AmCham, a coalition of companies who have invested or anticipate investing in China’s Internet services market, wants to ensure that China’s new Internet laws create a competitive business environment.
The Chinese government lobbying campaign will concentrate on how these reforms will help China reach its economic goals, benefit the sector’s industries and the economy as a whole. The key is improving the investment environment for Internet services.
I. Industry Development
the late 1980s, the Chinese government built seamless Internet networks
to connect academic institutions. Two public data networks were developed,
connecting the capitals of 30 provinces. However it was not until 1994
this time three networks had been established with 2,200 dial-up users
and ten leased line subscribers through China Telecom, the only state-owned
telecommunications company providing Internet services. China Telecom
was a part of the Ministry of Posts and Telecommunications until China
Telecom separated from its regulator in 1998. At this time, the government
created the Ministry of Information Industry to merge the Ministry of
Post and Telecommunications and the Ministry of Electronics and Information.
The MII now oversees telecommunications, multimedia, broadcasting, satellites,
and the Internet and approves investors seeking telecom services licenses.
As required by law, licenses are issued on the basis of the company’s
investment strength, their ability to provide long-term services, their
management expertise, and their technical strength. The Ministry functions
as a policy and standards coordinator for the entire industry. Since
1998, the MII has overseen all basic and value-added telecom development,
in addition to
1. State-owned Telecom Enterprises
China Telecom (CT) is a de facto monopoly. Until the recent announcement of China Telecom’s north-south break-up, the company controlled the country’s largest fixed line infrastructure with a 120,000-kilometer network of trunk and branch lines. As the country’s dominant fixed-line operator, with over ninety-nine percent of the local service market and almost all international direct dial and domestic direct dial long-distance calls (144 million subscribers out of 144.4 million total subscribers), China Telecom has retained an unassailable lead over its smaller and younger competitors and respectively stands as one of the worlds largest telecom companies. Revenue for the first seven months of 2001 equaled $10.5 billion (87.3 billion Yuan).[i]
is the largest network operator in
In 1994, the government created China Unicom (CU) to initiate competition for China Telecom. China Unicom was the first company established to absorb the paging business but has since moved to become a prominent mobile service provider. China Unicom is the only state operator that offers a full range of services and has therefore benefited from annual revenue of nearly $3 billion.[iii] CU does provide some local and domestic long distance services but the service is considered inferior to China Telecom’s telephone service. Its telephone services are limited to a few large cities and total subscribers are .32 million.[iv]
In the Internet industry, most of Unicom’s services revolve around wireless Internet services and VoIP technologies. In August, China Unicom completed the second of three phases in its network build out, giving it the world’s largest VoIP network.[v] The company’s existing leased-line Internet service consists of a 55Mbps international Internet connectivity and has completed 20,000 km of a nationwide fiber optic backbone, providing cable Internet access for 25 cities. CU is the second largest ISP in number of cities covered, but its market share is low and operations are lacking in its Internet access and Internet data center services. Content delivery is also poor in the sense that Websites are unattractive in both content and presentati on.
government has continued to restructure telecom services by creating
four additional state-owned enterprises to introduce competition to
the industry. Each of these companies, Jitong Network Communications
(est.1994), China Mobile (est.2000), China Netcom (est.1999), and China
Railway Telecom (est.2001) specializes in a variety of telecom services.
1c. Jitong Communications
Communications provides data and voice communications services with
its broadband Internet protocol-based network, serving approximately
700 customers, including government agencies, Chinese and foreign corporations,
small and medium-sized businesses, and other Internet access providers.
The company operates the national public Golden Bridge Network backbone
infrastructure for Internet access and data communications and is the
second company controlling the international gateways. Since 1997, Jitong has established branches in the following
ten cities: Beijing, Shanghai, Guangzhou, Shenzhen, Wuhan, Dalian, Qingdao, Shenyang, Chongqing and Changchun.
latest telecom company, China Railway Telecom, was established in March
2001 to diversify services and create additional competition for the
entire industry. The state-owned company provides basic long-distance,
local services, data transportation and Internet-related business but
does not have the ability to provide mobile or international long distance
services. Most of the Railway Telecom’s network is outdated. The company
is in dire need of technology, specialists and capital.
2. Internet Access
As more state-owned telecommunication companies developed and the Internet grew, the government initiated several laws to regulate the industry.
In 1996, the Ministry of Public Security issued the Circular Concerning the Recordal of Computer Information Systems Linked to Foreign Networks. The Cirular[vii] states that all Internet users are required to register with a local public security bureau within 30 days of establishing a link. It empowers public security authorities to warn and/or shut down computer networks that jeopardize the safety of computer information networks. Public registration forms are now included in applications for Internet service subscriptions.
addition, two laws were initiated to regulate the actual Internet access
process. These laws legally set forth the Internet services system by
regulating international gateways and creating a four-tier system for
domestic networks’ international access.[viii]
1. The Provisional Regulations of the People’s Republic of China Concerning
of International Connections of Computer Information Networks (Provisional
Networks) — developed by State Council 1996, revised in 1997. “This
regulation lays out the basic organizational and administrative structure
The Implementation Measures — issued in 1998, states that “all connections
to overseas computer networks must go through the international gateways
operated by the Ministry of Information Industries that can be connected
to China’s domestic network for the purposes of commercial services.
In this regard, no one can set up or use other channels for international
access. Only interconnected networks or computer information networks
that directly carry out international connections, and are actually
The four-tier level consists of 1) Internet subscribers, 2) local/private ISPs, 3) national state-owned ISPs and 4) the international gateways[xi].
1) The first level consists of the Internet subscribers.
The second level consists of local/private ISPs, often referred to
as Internet access networks. These service providers are not directly
The Implementation Measures identifies six network organizations
operating international network facilities that connect to the gateways.
These are divided into educational and commercial ISPs.
ISPs for Educational Purposes:
Education Network (CERNET) — a private network only used for academic
and educational institutions in
Science and Technology Network (CSTNET) — the primary network for research
institutions and scientists
ISPs for Commercial Services:
State-owned Commercial ISPs
the largest commercial ISP in
2a-2. China Golden Bridge Network
GBNet was launched in 1996. Jitong Communications is the main ISP behind
it. The GB project was developed in March 1993 to establish a computer
information service system for government agencies and enterprises.
The project connects 24 provinces and cities in central and eastern
Unicom’s Internet services operate through Uninet. Its primary network
is located in southern
China Netcom is the parent company of CNCNET, which had existing connections to broadcasting and railway networks before becoming a China Netcom company in 2000. CNCNET reduced its networking capacity when Railcom was developed in 2001. Many original CNCNET railway networks controlled by Netcom were given over to China Railcom.
four Internet backbones were interconnected on a broadband basis in
April 2000 and have a significant advantage in providing users with
services. As of July 2001,
At the apex of the system are the international gateways controlled by China Telecom and Jitong Communications. All networking traffic is funneled through the international gateways. This funneling system has caused congestion problems since there are few international gateways relative to the total number of Internet users.
The limited number of local/private ISPs results from state control of the international gateways and national backbones, and a general lack of investment. Higher rates have resulted from the lack of competition between the four national carriers and two gatekeepers. The Chinese government finds it very important to control the international gateways to censor Websites containing “objectionable material”. The government can block certain general sites, like foreign news organizations, that might contain unwanted information. CNN and BBC are just a few of the Web sites that have been blocked from entering the country. This censorship has become known as the “Great Firewall”.
These regulations were some of the earliest government controls over Internet services. In September 1998, a Notice outlined detailed qualifications and procedural requirements for the establishment and operation of ISPs. The Notice on Relevant Issues Concerning Implementation of a Business Permit System for Operating International Connections of Computer Information Networks[xiii] requires that special business permits be applied under the auspice of MII. Applications can be filed at local MII branches for companies planning to engage in the ISP business. These local branches are authorized to approve and issue permits, and file and record the permits with the MII. Multi-province ISPs must apply directly to the MII for permits. This system established control over second and third level ISPs in the industry.
these four laws help demonstrate how Internet access works in
To give an example, a local ISP in Beijing that possesses local area networks (LANs) must lease lines from China Telecom’s Chinanet’s networking backbone to gain access to and from international gateways. China Telecom then makes money from Chinanet’s network because they own the lines and the data centers that make up the backbone.
Over the years these networks’ bandwidth has increased with the increasing volume of processed information. The following is a chart of these increases.[xiv]
 These are 2000 figures; as of July 2001 the total number of fixed-line subscribers was 166.8 million. The 2000 numbers are given to show the extent to which CT monopolizes the industry.
 Ranked by consolidated financial statements. “International Telecom Statistics,” Siemens, December 31, 2000 , p. 8.
 As of June 2001, there was another company, China Great Wall Internet Network (CGWNET) that was granted approval for backbone networking but it is still under construction.
[i] “China Telecom,” Chinanex, http://www.chinanex.com/company/operator/cntelecom.htm ( March 2, 2001 ).
[iii] Alison Overholt, “China Unicom's Long-Distance Leap,” Fast Company.com, October 2001, http://www.fastcompany.com/online/51/unicom.html ( December 7, 2001 ).
[vi] “Press Releases: China Mobile Communications Corp., China’s Largest Cellular Provider, Selects Openwave and Siemens to Enable Wireless Internet Services in China,” Openwave, 22 January 2001, http://www.openwave.com/news/Archive2001/01222001_cmcc_siemens.html (May 4, 2001).
Jiang-yu Wang, “The Internet and E-commerce in
[x] Ibid, p.6.
Original explanation of four-tier system was used from Wang, “Internet
and E-commerce in
[xii] Definitions provided by: FOLDOC-Online Computing Dictionary,
( November 10, 2002 ).
Wang, “Internet and E-commerce in
[xiv] “CNNIC Semiannual Survey Report on the Development of China’s Internet,” China Internet Network Information Center, July 2001, http://www.cnnic.net.cn/develst/rep200107-e.shtml ( April 22, 2001 ).