By most reliable estimates China has about 250 million people who could be considered middle class. And that number is expected to double by 2020. As a spokesman for United Parcel Service (UPS) noted, If you cant offer China to your customers, you are dead in the water.

Indeed, UPS, DHL, and FedEx have been very aggressive in China, often with the Chinese governments blessing. According to DMNews, UPS growth strategy in China involves taking control of Sinotrans Ltd, which provides air, ocean, road and rail freight forwarding. Sinotrans is a subsidiary of logistics giant Sinotrans Group, owned by the Chinese government.

When it comes to most businesses, China seems ready, willing and eager for investments. The media, however, are another matter. CBiz.cn and MPA China sources have reported that China has restated and clarified its existing ban on private and foreign investment in its media sector. The State Council, which is Chinas cabinet, issued a directive that non-public capital cannot set up and operate a news agency, a newspaper, a publishing house, a radio station, or a TV station. In addition radio and TV signal broadcasting and relay stations, satellites, and backbone networks are closed to non-public capital.

The regulation is extensive, including audio and video programs, and Internet news sites. The purpose seems to limit any control of content in the various media. The government has long been sensitive about control of news content, but this regulation appears more sweeping and emphatic than previous edicts.

According to preliminary reports the State Council has attempted to put media ownership within the context of socialist culture. The overriding, announced objectives are to direct the enthusiasm of the whole society to participate in cultural construction, to gradually form a cultural industry with public ownership the main part, and to improve the overall competitiveness of the culture industry.

The regulation, loosely translated as the State Councils decisions on guiding non-public capital into cultural industries has the following aims and intentions:

1. Encourage and support non-public investment in: entertainment, performance venues such as museums and exhibition halls, Internet connection service venues, cultural education and training, culture and art agencies, travel and culture service, arts management, production and distribution of cartoon and online games, advertisement, movie and TV drama, development and application of broadcast technology, newspaper and magazine distribution, audio visual products distribution, printing and packaging, etc.
   
   
2. Encourage and support non-public capital to operate cultural products and services.
   
   
3. Encourage and support non-public capital to join to assist in reforming state-owned cultural performance organization or performance venues with non-public capital taking controlling stake.
   
   
4. Allow non-public capital to enter the culture industry and areas of publication printing and laser disc production and copying.
   
   
5. Non-public capital can invest in the following state-owned cultural enterprises: publication printing, advertisement and distribution of news; production of musical, technological, sports and entertainment programs on radio and TV stations; production, distribution and showing of movies. The State must control at least 51% of these enterprises.
   
   
6. Non-public capital can construct and manage cable TV networks but State must control at least 51% of network operating on a national level. Non-public investors can hold controlling interest in cable network that operates at a local level.
   
   
7. Non-public capital can start and operate an advertising business, including outdoor or inside buildings or transportation. Outside investors can also provide video on demand in qualified hotels, with appropriate government supervision.
   
   
8. The infusion of non-public capital into the culture industry should be managed by current regulations. Businesses mentioned in points 5, 6, and 7 must be approved by appropriate administrative authorities. Approval will be based on The Decision of the State Council on Reform Investment Ownership (Circular No. 20, 2004).
   
   
9. Non-public capital can not invest in, set up or operate a news agency, newspaper, publishing house, radio station, broadcasting signal station, signal relay stations, broadcasting satellite, etc. Such capital cannot be behind the management of a newspaper content page, radio and TV frequency channels and programs. Nor can it operate import businesses such as book, newspaper, magazine, movie and TV drama, audio visual products. Non-public capital cannot have any ownership in a state cultural relic museum.
   
   
10. Based on these directives the Ministry of Culture, The State Administration of Radio, Film, and Television, and the General Administration of Press and Publication will compose regulations to clarify where investment is encouraged, allowed, limited, or banned. Regional and department authorities are encouraged to amend regulations that conflict with these new directives.
    

China deserves credit for viewing the media as a whole and bringing some clarity to a situation that is confusing to most foreign publishers. However encouraging this new clarity might be to some investors, it cannot be good news for companies such as Tom.com which has been trying to form a joint venture with a Chongqing newspaper. And there are many others in the queue who had been hoping for a more liberal investment climate. So this directive has ramifications for foreign companies as well as domestic Chinese investors.

The Chinese government has encouraged for the last five years foreign investment in printing, distribution, and advertising. The State Councils document underscores that commitment. The document is interesting because it so broadly encourages non-public capital investment in entertainment, museums and exhibition halls (with notable exceptions).

Similarly, the so-called travel culture service seems open for investment, a signal that China considers this a growth area and needs foreign support. The door has been opened also to artworks management, suggesting foreign capital can be involved in the management of art and presumably ownership.

Outside investment is also permitted in the production and distribution of cartoon and online games. Apparently cartoon content is still off-limits. According to this directive non-public capital can invest in just about any media in the production and distribution sectors. Foreign investors can control up to 49% of these venues.

The government appears to have more fully spelled out permissible investment in advertising, to include billboards, elevator ads, and VOD in qualified hotels. This seems an enormous opportunity, even within the limits of the presumed content regulation.

The State Council directive makes it very clear that non-public capital cannot invest in, set up or operate content in newspapers, magazines, radio, television, and Internet. This ruling is an emphatic restatement of government policy that has been in place for years.

On the bright side China has been very thorough in outlining where and where not outside investment is encouraged. The government knows that, broadly speaking there is enormous interest in Chinese culture. It makes sense that the state would open up some aspects of culture, travel and art for investment. Obviously China has a long history of inviting investments in areas that they need to develop. This is one of them.

In a similar manner China is very welcoming of investment in building its cable infrastructure and satellite technology. The emphasis is on outside construction and management of these systems.

It is fair to say that China has clarified a confusing area of media restrictions and regulations. Some areas of permitted investment, especially printing and distribution are simply restatements of existing policy. While some new areas of investment are offered, one cannot ignore how emphatic the State Council directive is about content ownership and control in any sector.

What that means to outside investors is not clear. Some international media companies have equity stakes, of sorts, in Chinese publishing companies. And these directives will be interpreted at the province, regional and local levels. In a country where some domestic publishing companies are quasi-private, what is meant by non-state capital will be the subject of much debate. Moreover, the fabled gray area of Chinese business will likely not be banished by new directives from the State Council. But there appears less wiggle room now.

Jeff Sprafkin, CEO, Media-Pacific, Shanghai reminds us that China is simply reinforcing many existing regulations. The big difference, he notes, is that the government makes clear it has the right to squeeze violators out the flourishing grey areas of publishing.

Sprafkin also suggests this clarification is a setback for those pushing for pioneering ventures in television production. It remains to be seen how the directive affects non-foreign, local Chinese entrepreneurs or non-State businesses engaged in media operations. (Jeff Sprafkin is a good friend of and advisor to MPA on China. He can be reached at jsprafkin@media-pacific.com).

The first half of 2005 was expected to be the time the government would announce new international magazine licenses. This has not happened and many companies are waiting for the news. Perhaps this new directive will clear the air.

CBiz.cn wrote that this directive is a serious setback to foreign media giants who have been trying hard to tap the enormous market. That seems somewhat overstated.

What is very clear is that the government is firmly in the drivers seat and appears unconcerned about offending Western sensibilities or denying business opportunities to foreign media companies. The State Councils regulations are not likely to diminish interest in the hottest market in the world.

Charles McCullagh
August 18, 2005