Beijing Gets Green Light to Open VPN Services to Foreign Investors

The municipal government of Beijing has won approval from the State Council to give foreign investors limited access to virtual private networks (VPNs), a sector the Chinese government has been closely monitoring since 2017 over cybersecurity concerns.

The State Council, China’s cabinet, announced on its website (link in Chinese) Monday a decision to allow foreign telecoms companies to establish joint ventures, their ownership capped at 50%, to provide VPN services to foreign businesses operating in Beijing.

The State Council also lifted foreign ownership cap on information services for app stores at the Zhongguancun Science Park, known as Beijing’s Silicon Valley

The access approval is part of a strategy unveiled by China’s capital in August last year to open up the service sector and dedicate zones for its further restructure. Its aim is to achieve freedom of investment and cross-border cash flows in the sector by 2030. 

Multinationals and international institutions operating in China use VPNs to enable employees and staff to securely log into their internal networks. In China, without approval from telecoms regulators, any self-constructed or leased lines including VPNs are prohibited from engaging in cross-border business operations. Also, except for office use, international lines offered by basic telecoms service providers are not allowed to be used to connect to data centers at home and abroad for telecoms business operations.

Opening up the VPN sector to foreign players provides a new legal and unified internet connection service channel that foreign companies operating in China can use to build a corporate network infrastructure for their China operations, thus enhancing their management efficiency in the country, said Yang Guang, a telecoms industry analyst at research firm Strategy Analytics.

Yang predicted that the VPN access approval would have a limited impact on China’s overall telecoms industry, saying that VPN services are a segment of the telecoms industry and are far smaller than the scale of basic telecoms services which are highly off-limits to foreign investors.

Since January 2017, telecom and internet service providers have been required to obtain licenses from the Ministry of Industry and Information Technology (MIIT) before offering VPN services in China. The ministry has since launched a 14-month crackdown on unauthorized internet connection services, including VPNs.

In January 2019, Britain’s telecom giant BT Group PLC became the first international company to gain nationwide internet service provider licenses from the MIIT and a license to provide VPN services in China.

The VPN access rule announced Monday is part of the 2020 edition of the Special Administrative Measures for Foreign Investment Access, known as the negative list. It stipulates that foreign investors can own as much as a 50% stake in joint ventures that provide value-added telecoms services, except for e-commerce, domestic multi-party communications and call center services, according to Monday’s announcement.

Joint ventures engaged in basic telecoms services must be majority owned by Chinese companies.

As of September, about 2.5% of companies, or 649 in total, offering authorized value-added telecoms services had received foreign investment, compared with 0.8% in January 2020, according to statistics from the China Academy of Information and Communications Technology, a think tank affiliated with the MIIT.

Contact reporter Ding Yi (yiding@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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