China: Foreign equity ratios in operating e-commerce business platform during the trial period can reach 100%

Last Updated: 30 January 2015
Article by Wang Rui and Xiao Yuexin

In 2014, the Ministry of Industry and Information Technology ("MIIT") and Shanghai Municipal Government issued a series of regulations in relation to opening up value-added telecommunication services to foreign investments within the Shanghai Free Trade Zone1. According to these regulations, the restrictions on foreign investments in seven categories of value-added telecommunication services2, which were listed under the current Classification Catalogue of Telecommunication Services3 ("Classification Catalogue of Telecommunication Services (2003)"), have been relaxed to different degrees4. Among which, the percentage cap on foreign equity ownership of companies providing "Online Data Processing and Transaction Processing Services (Operating E-commerce)" has been lifted from 50% to 55%. Meanwhile, the approval and establishment process for foreign invested telecommunication enterprises have been substantially simplified in the Shanghai Free Trade Zone5, and such enterprises are permitted to provide relevant value-added telecommunication services on a nationwide basis6.

On January 13, 2015, MIIT promulgated the Circular on Removing the Restrictions on the Foreign Equity Ratios in Online Data Processing and Transaction Processing Services (Operating E-commerce) in the China (Shanghai) Pilot Free Trade Zone7 («关于在中国(上海)自由贸易试验区放开在线数据处理与交易处理业务(经营类电子商务)外资股权比例限制的通告») ("Circular") with the aim of relaxing controls on foreign investments in e-commerce business platform within the Shanghai Free Trade Zone. According to the Circular, the Shanghai Free Trade Zone will remove the restrictions on foreign equity ratios in "Online Data Processing and Transaction Processing Services (Operating E-commerce)" on a trial basis. In other words, the percentage of foreign equity ownership during the trial period can reach 100%.

In recent years, China's e-commerce sector has experienced rapid growth. According to statistics, in 2013, China surpassed the United States and became the largest e-commerce market in the world8. In the first half of 2014, the total number of China's e-commerce transaction was 30.1% higher than that recorded in the same period last year9. The local e-commerce enterprises such as Alibaba and JD continue to grow at a massive pace, and their contributions to and influence on China's economy are consistently increasing. For instance, the online sales amount on Taobao, a subsidiary of Alibaba, exceeded RMB 52 billion on November 11, 2014 ("Double Eleven" shopping carnival)10. The total transaction amount on that day alone represented about 3.2% of the United States' total online retail sales amount in 201311.

The Shanghai Free Trade Zone's full opening up of "Online Data Processing and Transaction Processing Services (Operating E-commerce)" to foreign investments is a significant measure for the Chinese government to promote the development of China's e-commerce sector12. As a result of implementing such policy, it is expected that more foreign e-commerce operation models will be introduced into China. Meanwhile, the implementation will promote further development and maturity of the upstream and downstream industry chains, as well as expanding China's consumer market.

It is worthy of notice that the definition of "Online Data Processing and Transaction Processing Service"13 in the Classification Catalogue of Telecommunication Services (2003) does not clearly reflect the concept of "Operating E-commerce" that was referenced in the Circular. This is mainly due to the fact that at the time when this Classification Catalogue was promulgated in 2003, the business model of using the Internet as the transaction platform for consumers to acquire commodities and services was not widely used in China yet. As such, the value-added telecommunication service category that is closely related to the above business model was not considered important by the regulators during the legislative process.

According to the verbal explanation given by the Shanghai Communication Administration, the definition of "Transaction Processing Service"14 in the Classification Catalogue of Telecommunication Services (2013) (Draft for Comment)15, which was promulgated by MIIT on May 23, 2013, may be used as a reference in interpreting "Operating E-commerce". According to the draft, "Transaction Processing Services" is defined as "using transaction processing platform which is connected to the communication network (including the Internet) to provide the general public with the public trading platform service, which ranges from a variety of financial and securities trading to commodities and services transactions in relation to the business such as e-commerce". In other words, a foreign entity that plans to provide third party transaction platform service (e.g. JD.com, Tmall.com, YHD.com) may establish an enterprise in the Shanghai Free Trade Zone wholly owned by such foreign entity, and file an application to obtain the value-added telecommunication services license covering "Online Data Processing and Transaction Processing Services (Operating E-commerce)."

In fact, ever since the implementation of relevant supporting policies by the Chinese government to promote and attract foreign investments in the Shanghai Free Trade Zone in 2013, foreign investors have been actively taking measures to run e-commerce business in the Shanghai Free Trade Zone. In November 2013, Newheight E-Commerce (Shanghai) Company Ltd., a company aimed at providing technical support for the operation of"YHD"(一号店) online transaction platform (http://www.yhd.com/) (whose operation is controlled by Wal-Mart), was established in the Shanghai Free Trade Zone and have obtained the value-added telecommunication service license covering "Online Data Processing and Transaction Processing Services".

In December 2013, Chinese government launched "KJT.com" e-commerce platform, a cross border trade e-commerce service pilot project in the Shanghai Free Trade Zone16. As of August 201417, there were 32 enterprises started business on the "KJT.com" e-commerce platform, all of which are based in countries and regions such as Japan, South Korea, Australia, the United States and Europe18, and nearly ten thousand products were available online. On August 20, 2014, Amazon (China) Investment Co., Ltd. announced its cooperation with other two entities (including the Shanghai Free Trade Zone and Shanghai Information Investment Inc.) to carry out cross-border e-commerce business in the Shanghai Free Trade Zone, and such cooperation consists of jointly setting up a cross border e-commerce platform and a warehousing and logistics platform, as well as carrying out services such as cross border e-payment19.

After the removal by the Circular of the percentage cap on foreign equity ownership of companies providing "Online Data Processing and Transaction Processing Services (Operating E-commerce)" , it is predicable that more foreign e-commerce enterprises will attempt to gain a foothold in the Shanghai Free Trade Zone. Meanwhile, the achievement gained and the experience accumulated in the Shanghai Free Trade Zone, together with the "Negative List" administration approach for foreign investment, are expected to be replicated, promoted and even be further developed in the three free trade zones to be established in Guangdong, Tianjin and Fujian, respectively, from March 201520.

In addition, the Catalogue of Industries for Guiding Foreign Investment (Draft for Comment)21, which was published by the National Development and Reform Commission on November 4, 2014, provided that "foreign equity ratios in value-added telecommunication services cannot exceed 50%, except for e-commerce business." This draft Catalogue reveals the intention of the Chinese government to allow foreign equity ratios to exceed 50% in the field of e-commerce related value-added telecommunication services, and it is hence reasonable to anticipate that Chinese government may remove the cap on foreign equity ratios in operating e-commerce business. Meanwhile, taking into consideration of the provisions in the Circular prescribing that foreign equity ratios can reach 100% in "Online Data Processing and Transaction Processing Services (Operating E-commerce)", the draft Catalogue can be understood as a signal of Chinese government to further lifting restrictions on foreign investments in e-commerce sector across the country.

Footnotes

1The related documents include the Opinions on Further Opening up Value-added Telecommunication Services to Foreign Investments in the Shanghai Free Trade Zone («关于上海自贸区进一步对外开放增值电信业务的意见»), jointly promulgated by MIIT and Shanghai Municipal Government on January 6, 2014 and effective as of the date of promulgation, and the Administrative Measures for the Pilot Operation of Value-added Telecommunications Services by Foreign Investors in the Shanghai Free Trade Zone («上海自贸区外商投资经营增值电信业务试点管理办法»), promulgated by MIIT on April 15, 2014 and effective as of the date of promulgation.

2. These seven categories of services include: (i) Information Services (application store services), (ii) Store-and-forward Business Services, (iii) Call Center Services, (iv) Internet Access Services (provision of internet access services to network users), (v) Domestic Multi-party Communication Services, (vi) Online Data and Trade Processing Services (Operating E-commerce), and (vii) Domestic Internet Virtual Private Network (VPN) Services.

3 See the Circular of the Ministry of Information Industry on the Readjustment of the Classification Catalogue of Telecommunication Services («信息产业部关于重新调整<电信业务分类目录>的通告»), promulgated by the Ministry of Information Industry on February 21, 2003 and effective as of April 1, 2003.

4 See relevant discussion in China's (Shanghai) Free Trade Zone Paves Way for Foreign Investment in China's Value-added Telecommunication Service Market, by Wang Rui and Ge Yibo, published in China Law Insight on May 9, 2014 (http://www.chinalawinsight.com/2014/05/articles/ma/chinas-shanghai-free-trade-zone-paves-way-for-foreign-investment-in-chinas-value-added-telecommunication-service-market/).

5 Ibid.

6 However, Internet Access Services are only allowed to be provided to customers based in the Shanghai Free Trade Zone.

7 The Circular came into effect on January 13, 2015.

8See China's E-commerce Market Data Monitoring Report for 2013 (http://www.100ec.cn/zt/2013ndbg/), China's E-commerce Transaction Amount in 2013 Surpassed 10 Trillion (http://www.mofcom.gov.cn/article/difang/yunnan/201403/20140300512563.shtml) and China Has Become the Largest E-commerce Market in the World ( http://www.360doc.com/content/14/0819/00/2101570_402956129.shtml). In 2013, China's online retail market sales amount was RMB 1.8851 trillion (equivalent to around US$303.2 billion) whereas the U.S. online retail market sales amount was US$262 billion in the same year.

9See E-commerce Transaction Amount was 30.1% Up Over the Same Period Last Year in the First Half of 2014 (http://news.xinhuanet.com/newmedia/2014-07/30/c_126813351.htm).

10 See Taobao's Sales Amount Exceeded 52 Billion Yuan for Double Eleven Shopping Carnival on November 11, 2014 (http://www.chnews.net/jryw/20141110/80863.html).

11 See supra note 8 for the U.S. online retail market sales amount in 2013.

12 In November 2013, the Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening Reforms (promulgated by the Third Plenary Session of the 18th Communist Party of China Central Committee on November 12, 2013) proposed the "establishment of a new system of open economy", "relax control on foreign investments in the service industry such as nursery, caring for the aged, architecture design, accounting and auditing, trade and logistics, and e-commerce". (emphasis added in italics)

13 According to the Classification Catalogue of Telecommunication Services (2003), "Online Data Processing and Transaction Processing Services" refers to "the online data processing and transaction/affair processing services provided for users through communication networks, using various kinds of data and affair/transaction processing application platforms connected with various kinds of communication networks. Online data and transaction processing services include transaction processing services, electronic data interchange services and network/electronic equipment data processing services." Among which, "transaction processing services include conducting a variety of banking services, stock trading, ticket transaction, sale of auction goods, payment of costs and the alike".

14 According to publicly available information, Shanghai Communication Administration's explanation is consistent with MIIT's actual execution of the policies. For instance, Newheight E-Commerce (Shanghai) Company Ltd., a joint venture established in the Shanghai Free Trade Zone, obtained the value-added telecommunication services license covering Online Data Processing and Transaction Processing Services from MIIT in 2013 (the number of the license is Hezi B1.B2-20130004) for providing third-party transaction platform service through "YHD" (http://www.yhd.com/).

15 The deadline for soliciting public opinions was June 24, 2013. Currently, the Draft for Comment has entered into the final review stage by the State Council.

16 See Shanghai Free Trade Zone "KJT.com" E-commerce Platform will be Launched (http://finance.ifeng.com/a/20131004/10796190_0.shtml).

17 See Amazon Settled Down in Free Trade Zone and Users of "KJT.com" Can Log into Amazon's Headquarter to Purchase Goods Directly (http://www.china-shftz.gov.cn/NewsDetail.aspx?NID=050c19fe-0a4c-4c7f-be7f-08815925947f&CID=f672f518-99a3-4789-8964-1335104906b4&MenuType=1).

18 The companies start business on the platform includes dchnu.com, rbyair.com, bhkjt.com, hmall.kuajingtong.com, payment.careline.com.au, etc. See related information on the webpage of "KJT.com" (http://www.kuajingtong.com/BusinessCards.php).

19 See Amazon Joined Shanghai Free Trade Zone E-Commerce Platform and the Businesses on the Platform Has Reached 32 (http://js.winshang.com/news-278070.html).

20 MIIT clearly noted in the Circular that "Support Shanghai Free Trade Zone to promote development, reform and innovation through opening up, and obtain the experience which can be replicated and promoted". Also See Guangzhou, Fujian and Tianjin Free Trade Zones Will Make Breakthrough Compared with Shanghai (http://www.gov.cn/xinwen/2014-12/17/content_2792780.htm) and The Policies for Three Free Trade Zones of Guangzhou,Tianjin and Fujian Will be Carried out Since March 1, 2015 ( http://www.dnkb.com.cn/archive/info/20141229/072434147618168_1.shtml).

21 The deadline for soliciting public opinions was December 3, 2014.

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