EU-China Comprehensive Investment Agreement – Cloud (Services) on the Horizon?

On December 30, 2020, the European Commission announced an in principle agreement with China on the terms of an EU-China Comprehensive Agreement on Investments (“CAI”).  It contemplates what the Commission’s press release described as an “ambitious opening by China to European investments” that includes market access commitments across a wide range of sectors – including cloud services and other online services. 

This is exciting news for European technology companies.  The press release explains that China has agreed to:

• an opening of its cloud services sector to EU investment, up to a 50% equity cap, and
• a “technology neutrality” provision so that equity caps applicable to value-added telecoms (“VATS”) investments will not apply to services in other sectors merely because they are offered online. 

Chinese rules governing foreign investment in cloud and other online services remain restrictive and both of these would be material changes.  However, it is too early to pop the champagne.  The legal agreements are still to be drafted and the details of these general principles still to be agreed.  A fully-negotiated CAI may be a year or more away, and will need to be formally adopted by both sides (involving, in the EU’s case, consent from the European Parliament). 

Meanwhile, the regulatory environment in China continues to evolve, presenting foreign tech companies – not just EU companies – with new opportunities and challenges when investing in cloud and other online services.  Well-known changes include pilot programs at the local level, such as in Hainan Free Trade Zone, where a new negative list with more permissive market access rules in the telecoms sector will come into effect on February 1, 2021.  Less well known are evolving interpretations of current VATS regulations by telecoms regulators in different localities that in some cases allow greater room for foreign investment in certain online services, and in others further restrict it by extending the requirement for VATS licenses to operate certain free services that were previously considered non-commercial. 

Look for Morrison & Foerster’s upcoming analysis of foreign investment opportunities in VATS and online services.