by Wang Rui and Qiu Shaolin King & Wood Mallesons’ M&A Group
Cloud computing has become quite a hot topic for discussion over the past few years. However, although recent interest in cloud computing has increased, it is not a completely new type of service. For example, when you send an email through Gmail, or store pictures on social media websites, you are using cloud computing services.
In China, cloud computing services has experienced fast and dynamic growth in recent years. The market value of China’s public cloud computing services for the year of 2012 increased by 73 per cent compared to 2011, and the estimated market value for 2013 is expected to reach RMB 6.3 billion. The growth of China’s cloud computing industry has aroused great interest among foreign service providers. In May 2013, Microsoft Corporation announced that it would add several thousand employees to its work force in China as part of a long-term investment in the cloud computing market.  However, since foreign investment in the Chinese cloud computing industry is restricted, there are concerns about the short and long term benefits of foreign investment due to the limited participation of foreign investors in the market.
This article will discuss key telecommunication regulatory issues for foreign companies that want to provide cloud computing services inChina. Section I will explain the term “cloud computing” and three different types of service models. In Section II, the article will examine the regulation of cloud computing services by foreign companies inChina. Lastly, Section III will discuss the recent “opening up” of the IDC industry in order to reflect on the current policy trends that regulate foreign related cloud computing services in China.
I. Defining “Cloud Computing”
Currently, “cloud computing” is a term without a common unequivocal scientific or technical definition. However, it is generally accepted that cloud computing exhibits five essential characteristics: (i) on-demand self-service: a consumer can unilaterally order cloud computing services at any point in time, which becomes available on demand; (ii) broad network access: computing capabilities are available through widespread network accessibility, e.g. phone, tablet, computer; (iii) resource pooling: the computing resources are pooled; (iv) rapid elasticity: computing capabilities can be provisioned and released (sometimes automatically) and are available on an “as needed” basis; (v) measured service: cloud systems control, track and optimize resource use.
These five characteristics are identified and well explained in the definition of cloud computing provided by the National Institute of Standards and Technology (“NIST”). According to the NIST’s definition, cloud computing is defined as “[a] model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g. networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or cloud provider interaction.” For example, in the case of software as a cloud computing service, customers can subscribe to the service to receive access to specific business applications from cloud providers (e.g. through an internet browser), depending on their administrative, operational and sales needs. These applications are stored in a “cloud” and operated by cloud providers. As a result, customers do not need to purchase the application software or manage the infrastructure and platform where the applications run, which simplifies maintenance and support for the customer.
Three Major Service Models
As shown in Table 1, there are three fundamental service models for cloud computing: Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS). Each service category may be implemented independently or consumed in combination with other service tiers. In the most basic cloud-service model, IaaS, users may be provided with web-based access to virtual computing resources such as processing power, storage and networks (e.g. Dropbox). The providers of PaaS deliver a computing platform that typically includes a set of development and deployment capabilities (such as an operating system, programming language execution environment, database and web server). A well known example of PaaS is the Google App Engine. Today, SaaS is the most mature area of cloud computing which provides users with complete business applications over the web (e.g. Google Docs).
II. China’s Telecommunication Regulation on Cloud Computing Services
Does a “Cloud Computing Service” License exist?
Currently, there is no specific legislation that directly addresses cloud computing services in China. However, since cloud computing services assist cloud users to store, process and transmit information through a real time network, such as the Internet, the PRC Telecommunications Regulations (《中华人民共和国电信条例》) (“Telecommunications Regulations”) and other related rules will apply to regulate the provision of cloud computing services. Furthermore, a majority of cloud computing services are likely to be categorized as value added telecommunication services (“VATS”) under the Telecommunications Regulations because such services are provided through basic public network facilities, such as the Internet.
In general, telecommunications services are divided into specific service categories, for which a specific license is required, as listed under 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》) (“2003 Classification Catalogue”) . Since cloud computing is a relatively new concept in China’s telecom sector, it was not included as a specific service category under the 2003 Classification Catalogue. However, if the features of the particular cloud computing services are caught by one or more of the existing service categories under the 2003 Classification Catalogue, the service provider will need to get the corresponding license(s) for operating such services. For example, if the cloud computing services involve the provision of IDC services, an IDC Service license will be required.
The rules are different for cloud computing services that do not fall within the service categories under the 2003 Classification Catalogue. Theoretically, the service provider will only need to file and record the case with the provincial counterparts of the MIIT before commercially operating the services.  According to our anonymous consultation with the MIIT, however, in practice, there is currently no specific procedure in place to fulfill such record-filing requirements, and only a few companies have actually completed the record-filing process with the MIIT. Neverthelss, the information about the aforesaid successful cases for record-filing is not publicly accessible.
Restrictions on Foreign Investment in the Provision of Cloud Computing Services
In 2001, when entering the WTO, China made commitments related to telecommunication services in Annex 9 (Schedule of Specific Commitments on Services-List of Article II MFN Exemptions) of the Protocol of Accession of the PRC (“Annex 9”). In this regard, foreign service providers are only permitted to provide the telecommunication services listed in Annex 9 to Chinese customers, unless the Chinese government decides to expand foreign entrance to other service categories. Furthermore, in order for a foreign service provider to provide any of the services listed in Annex 9 to its Chinese customers, it must first establish a commercial presence inChina. Foreign service providers may not provide cross-border telecommunication services to China, regardless of whether the particular service category is open to foreign party.
As such, if a foreign company wants to provide cloud computing services in China, it must establish a foreign invested telecommunication enterprise (“FITE”) in China, in accordance with the relevant requirements set forth in the Catalogue of Industries for Guiding Foreign Investment (《外商投资产业指导目录》) (“Foreign Investment Catalogue”), the Telecommunication Regulations, the Provisions on Administration of Foreign-Invested Telecommunications Enterprises (《外商投资电信企业管理规定》) (“FITE Provisions”) and other related rules. Presently, the proportion of foreign capital investment in FITEs providing BTS should not exceed 49% and for VATS-type FITEs should not exceed 50% in total.
The substantial requirements for establishing a FITE that wants to operate VATS include: (i) the corporate structure of the firm shall be a Sino-foreign equity joint venture; (ii) the proportion of capital invested by the foreign company shall not exceed a total of 50%; (iii) the registered capital shall be or more than RMB 10 million (if it wants to provide services nation-wide); and (iv) the foreign investor shall have a record of good performance and operating experience in managing value-added telecommunications business.
In the application process, there are a few procedural requirements to be followed. First, the principal Chinese party (“Principal Chinese Investor”) should obtain the Examination Opinion on Foreign Investment Engaging in Telecommunication Business from the MIIT or its provincial counterparts, which is equivalent to the consent of the Chinese government from the industry regulatory perspective. Second, the Principal Chinese Investor should obtain the Foreign Investment Enterprise Approval Certificate from the Ministry of Commerce or its provincial counterparts. The third step is for the Principal Chinese Investor to apply for the relevant telecommunication service license from the MIIT. Lastly, the proposed FITE should register with the State Administration for Industry and Commerce or its local counterparts to obtain a Business License. Once the Business License is obtained, the FITE is considered to be duly incorporated under Chinese law, and it must provide telecommunication services in accordance with its operational scope as approved.
In practice, however, the establishment of FITEs in Chinais relatively restricted. For instance, since the promulgation of the 2003 Classification Catalogue, only around 28 FITEs have managed to obtain the telecommunication license in China so far.  Also, the Chinese government is making it increasingly difficult for FITEs to obtain ICP licenses because of the tightening policies on internet censorship.
III. New Trend in the Regulation of Cloud Computing Services in China
Proposed Amendment to the 2003 Classification Catalogue
In line with the rapid progression of the cloud computing industry, and its significance to the global comptetition of the countries in the era of information, Chinahas made tremendous efforts to promote the development of this industry. In 2012, the Chinese government formed a specific five year plan for developing cloud computing technology. Furthermore, cloud computing services and the relevant equipment are also considered as two key categories under the Guiding Catalogue on Key Products and Services in Strategic Emerging Industries (《战略性新兴产业重点产品和服务指导目录》).
Moreover, the MIIT has strengthened its efforts to regulate the cloud computing industry. To this end, among other things, MIIT circulated an updated version of the 2003 Classification Catalogue on May 25, 2013 (“2013 Draft Classification Catalogue”), to solicit public comments. Compared with the 2003 Classification Catalogue, the 2013 Draft Classification Catalogue has added several service categories for both BTS and VATS services.
Although the 2013 Draft Classification Catalogue did not add a “cloud computing service” category, it introduced a new service category named “Internet Resources Collaboration Services” in the VATS Section. According to the 2013 Draft Classification Catalogue, “Internet Resources Collaboration Services” refers to “the use of equipment and resources constructed on data centers, and through the internet or other networks, to provide customers with services, including, data storage, development environment for internet applications, deployment of internet applications and operation management to users by way of easily accessible, use on-demand, easily expanded and/or collaborative sharing.” The additition of this service category, and other new relevant categories such as the “Content Distribution Network Services”, to the Classification Catalogue is probably intended to capture or facilitate the development of cloud computing.
Will the Urge of Promoting Industry Outweigh Restrictions to Foreign Investment?
If the 2013 Draft Classification Catalogue is approved, and if the two above-mentioned service categories related to cloud computing services are still included therein, then the new catalogue is likely to expand the service scope of foreign service providers in the Chinese market. In practice, however, it remains uncertain whether the Chinese government will loosen the tight restrictions imposed on foreign service providers in the telecommunication industry, and more specifically in the cloud computing industry.
For example, IDC is largely used as the fundamental IT infrastructure in the provision of cloud computing services. The IDC Service itself is an exisiting service category listed in the 2003 Classification Catalogue, and it remains a separate service category in the 2013 Draft Classification Catalogue. In 2008, however, the government suspended the MIIT’s issuance of IDC Service licenses to combat rampant internet obscenity in China. At the time, the suspension order applied to both domestic and foreign service providers.
The ban lasted for almost five years up until the end of 2012, after which the suspension was lifted by the Notice of MIIT on Further Regulating the Market Access of Internet Data Center Service and Internet Access Service (《工信部关于进一步规范因特网数据中心业务和因特网接入服务业务市场准入工作的通告》) (“IDC/ISP Notice”). However, the ban was only lifted for domestic investors and those investors from Hong Kong or Macau, foreign companies (including companies from Taiwan) are precluded from investing in China’s IDC industry.  The newly promulgated policy for the Shanghai Free Trade Zone is even more stringent to foreign investment in the IDC industry. As such, although the IDC/ ISP Notice is expected to promote the development of the cloud computing industry, foreign investors are still restricted from operating in this area.
Collaboration with Chinese Partners
At the present stage, the opportunities for foreign investment in the cloud computing service sector are still very limited. Therefore, some foreign service providers have decided to seek foothold in the Chinese market by collaborating with local Chinese enterprises that have already obtained the required telecommunication operational licenses. For example, in order to provide its cloud-based platform Windows Azure in China, Microsoft entered into a three-party agreement with Shanghai Municipal Government and 21Vianet Group Inc. (世纪互联), a Chinese Internet infrastructure provider, in 2012.Chinese clients use the Windows Azure platform to run corporate programs, websites and applications from Windows Azure data centers (operated by 21 Vianet). Although the detailed arrangements for the Microsoft-21 Vianet partnership are not publicly available, it seems that this collaboration is unlikely to be challenged on grounds that it circumvents existing restrictions on foreign service providers because the Shanghai Municipal Government is also a party to the arrangement.
The rapid development ofChina’s cloud computing industry has offered great opportunities for foreign cloud computing service providers. However, since the telecommunication (internet in particular) sector is, and has always been, highly regulated in China, foreign companies providing (or that want to provide) cloud computing services in China still face stringent regulatory challenges from the telecommunication regulation perspective. It will be interesting to see what the future has in stall for the cloud computing industry inChina.
Special thanks to Ge Yibo, Rebecca Brust and Yang Xiande for their contributions to this article.
See the Article titled The Message Conveyed by the Investigation Report on the Development of China’s Public Cloud Computing Services （《<中国公共云服务调查报告>传递出的信息》）(http://www.chinacloud.cn/show.aspx?id=12508&cid=18, last accessed on October 28, 2013). However, the Investigation Report on the Development of China’s Public Cloud Computing Services (2012) (《中国公共云服务发展调查报告（2012年）》) issued by the China Academy for Telecommunication Research of the Ministry of Information and Industry Technology (“MIIT”), which is the data source of this article, is not publicly available on the Internet.
See http://usa.chinadaily.com.cn/epaper/2013-09/12/content_16963392.htm, last accessed on October 28, 2013.
See http://en.wikipedia.org/wiki/Cloud_computing, last accessed on October 28, 2013.
See http://www.inforisktoday.com/5-essential-characteristics-cloud-computing-a-4189, last accessed on October 28, 2013.
NIST is a non-regulatory agency of the United States Department of Commerce. The institute’s official mission is to promote U.S. innovation and industrial competitiveness by advancing measurement science, standards, and technology (http://en.wikipedia.org/wiki/National_Institute_of_Standards_and_Technology, last accessed on October 28, 2013).
See Guidelines on Security and Privacy in Public Cloud Computing (http://www.nist.gov/customcf/get_pdf.cfm?pub_id=909494, last accessed on October 28, 2013).
See page 14 of A Quick Start Guide to Cloud Computing, by Dr Mark I Williams, published in 2010 by Kogan Page Limited.
See page 10 of A Quick Start Guide to Cloud Computin, by Dr Mark I Williams, published in 2010 by Kogan Page Limited.
Promulgated by the State Council on September 25, 2000 and effective as of the date of promulgation.
According to Article 8 of the Telecommunications Regulations, telecommunication services are classified into two categories, i.e. basic telecommunication services (“BTS”) and VATS. BTS refers to the provision of basic public network facilities, public data transmission and basic voice communication services, whereas VATS refers to the provision of telecommunication and information services using basic public network facilities.
Promulgated by MIIT on February 21, 2003 and effective as of April 1, 2003.
See Article 9 of the Telecommunications Regulations.
In this regard, MIIT issued the draft Administration Provisions for Trial Operation of New Type Telecommunication Services (《试办新型电信业务管理办法（征求意见稿）》) on April 27, 2013 seeking public comments, which have not taken effect yet. According to Article 9 of the draft Provisions, as long as the relevant filing-record procedures are duly complied with, for those companies that have obtained a BTS license, the trial operation of new services for providing basic public network facilities, public data transmission and basic voice communication services is permissible, for those cpmpanies that have obtained a VATS license, the trial operation of new services for providing telecommunication and information services using basic public network facilities is permissible.
For example, compared with the Annex 9’s committed service types, the scope of VATS service in the 2003 Classification Catalogue is borader and included several categories such as IDC Service and IP-VPN Service which are not listed in Annex 9.
The most current version was promulgated by the National Development and Reform Commission and the Ministry of Commerce on December 24, 2011, and effective as of January 30, 2012.
Promulgated by the State Council in 2001 and last revised on September 10, 2008.
See the “Restricted Category Section” of the Foreign Investment Catalogue.
See Article 2 of the FITE Provisions.
See Article 6 of the FITE Provisions.
See Article 10 of the FITE Provisions.
Seehttp://bzxx.miit.gov.cn:8080/datainfo/miit/miit10063.jsp, last accessed on October 28, 2013.
See the Twelfth Five-years Special Plan for Cloud Computing Technology Development of the PRC (《中国云科技发展“十二五”专项规划》) (http://www.gov.cn/zwgk/2012-09/18/content_2227470.htm, last accessed on October 28, 2013).
Promulgated by the National Development and Reform Commission on March 7, 2013.
The deadline for soliciting public comments has been ended on June 24, 2013 ( http://www.miit.gov.cn/n11293472/n11293832/n12845605/n13916913/15422632.html, last accessed on October 28, 2013).
The Ministry of Information and Industry (“MII”, the predecessor of MIIT) issued the Circular of MII on Working Plan of Special Action for Combating Internet Obscenity Legally (《信息产业部关于依法打击网络淫秽色情专项行动工作方案的通知》) and the Circular on Further Carrying Out the Relevant Requirements on Combating Internet Obscenity Legally (《关于进一步落实信息产业部依法打击网络淫秽色情专项行动有关要求的通知》), which in fact led the suspension of the IDC Service license.
Promulgated by MIIT on November 30, 2012 and effective as of December 1, 2012.
See the MIIT’s answer to Question 7 in the document Frequently Asked Questions Concerning the Application for IDC/ ISP License (https://tsm.miit.gov.cn/pages/PublicInformationList.aspx?id=2321, last accessed on October 28, 2013). Also, with the signature of the Closer Economic Partnership Arrangement and the Supplements related thereto that are entered into between Mainland China and Hong Kong Special Administrative Region and between Mainland China Macau Special Administrative Region respectively, IDC Services, subject to certain requirement and conditions, are open to the FITEs jointly established by the service providers incorporated in Hong Kong and Macau Special Administrative Region and their Chinese partners.
Accoridng to the ‘Negative List’ for Foreign Investment in the Shanghai Free Trade Zone, IDC Service is listed as a category in which foreign investment is prohibited (http://www.shanghai.gov.cn/shanghai/node2314/node2319/node12344/u26ai37036.html, last accessed on October 28, 2013).
According to the statistics posted on the officialwebsite of MIIT, there are hundreds of companies have passed the technical evaluation, a precondition for issuing the IDC Service license (https://tsm.miit.gov.cn/pages/PublicInformationList.aspx?id=2281, last accessed on October 28, 2013).
See http://www.shanghai.gov.cn/shanghai/node2314/node2315/node15343/u21ai676727.html, last accessed on November 8, 2013.
Seehttp://www.shanghai.gov.cn/shanghai/node2314/node2315/node4411/u21ai748324.html, last accessed on November 8, 2013.
It is also reported that Microsoft will license certain technology to 21Vianet and the latter will operate Windows Azure and Office 365 and provide the related services to Chinese users (http://it.sohu.com/20121101/n356390130.shtml, last accessed on October 28, 2013).
Supra note 31.