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Joey Li
Dentons, Beijing
zhuoying.li@dentons.cn

 

Overview

During recent meetings, Chinese policymakers have been mulling over providing greater support for ‘new infrastructure’. This article will first explain why ‘new infrastructure’ push will bring opportunities for global service providers. It will then outline of the ‘new infrastructure’ move and explain specific future trends. Finally, it will discuss the possible role of the legal fraternity in this new era of growth.

What makes ‘new infrastructure’ special?

China is accelerating the development of new infrastructure in an effort to hedge against the impact of the Covid-19 pandemic and spur the economy amid mounting downward pressure, said government officials at a press conference of National Development and Reform Commission (NDRC) on 20 April 2020.

The concept of ‘new infrastructure’ was first discussed at the Central Economic Meeting in 2018. The Meeting is the highest level of the annual economic meeting between the Central Committee of the Communist Party and the State Council. Recent emphasis of this concept is aimed at expanding domestic investment and spending in the post-pandemic setting. It also reflects the Chinese government’s ambitions to move from an export-led manufacturing economy towards a high-tech, innovation-driven one. Although the Chinese economy is market-driven, its government plays a significant role through beneficial policies and management of state-owned enterprises (SOEs). I believe that this ‘new infrastructure’ push will bring positive prospects for the global service providers in the following ways:

• Huge spending on new infrastructure as facilitated by the government will broaden markets for global services providers, elevate the growth of new businesses such as livestreaming and accelerate the pace of upgrading traditional industries. A report released on 5 March 2020 by GF Securities highlights the need for increased infrastructure spending and forecasts that China would invest more than RMB1tn (approx. US$141bn) in new infrastructure projects in 2020.

• The new types of high-tech infrastructure are more likely to attract investment from private investors, whereas traditional infrastructures are largely dominated by the SOEs. Morgan Stanley’s report dated 22 March 2020, China’s Urbanization-New Infrastructure Opportunities Handbook, has projected that the average share of private investment is expected to increase to 38 per cent over the next decade (against 28 per cent in 2017-2019), and segments of industrial Internet of Things (IoT) and intercity HSR (High-Speed Railways) are expected to double in the private share as compared to 2017-2019.

• To achieve its ambition, the Chinese market will need to rely on talent and capital from all over the world. According to Synergy Research, by the end of 2019, there are 512 large scale data centres globally. In 2019, the operators which spend most in the areas of data centres are Amazon, Google, Microsoft, Facebook, and Apple. According to Global AI Industrial Data Report published by China Academy of Information and Communications Technology, by the end of March 2019, there are 5,386 active AI enterprises, among them, 2,169 are based in the US, 404 in the UK and 303 in Canada. According to MarketsAndMarkets, the global market scale of industrial IoT was approximately US$3.3bn in 2018.

Markets reacted positively to the NDRC 20 April press conference, which to some extent corroborated the opinions stated above. Share prices in new infrastructure-related companies traded in Shanghai and Shenzhen security exchanges rose on 21 April. According to Shanghai-based information provider Wind Info, shares in internet data centre companies have increased by 3.34 per cent, cloud computing firms by 1.97 per cent, and Big Data companies 1.47 per cent.

Scope of ‘new infrastructure’

According to Mr Wu Hao, director of the Department of High-Tech Industry at the NDRC, the new infrastructure can be divided into three categories:

• information-based infrastructure such as 5G, industrial IoT, satellite-based internet;

• converged infrastructure supported by applications of new technologies such as the internet, big data, and artificial intelligence; and

• innovative infrastructure that supports scientific research, technology and product development.

Specifically, according to the official definition, ‘new infrastructure’ includes seven segments: 5G base station infrastructure, industrial IoT, AI (artificial intelligence), data centres, UHV (ultra-high voltage), intercity HSR and rail transit, and EV (electric vehicle) charging points/stations.

Opportunities and future trends

SOEs will continue to dominate investments in 5G base stations and UHV therefore, global service providers who want to enter into the market will need to conduct more research into major SOEs in these areas. For 5G base station infrastructure, China Mobile, China Tower, ZTE and China Comservice are the main operators. The key developers of UHV are the State Grid and China Southern Grid.

For industrial IoT, the next task will be to build an industrial IoT ecosystem. As per the government’s plans, this should lead most manufacturing companies in China to raise production efficiency via data intelligence (AI, machine learning, Big Data analysis, etc). Major beneficiaries are those being selected as major industrial IoT platform providers and the edge hardware providers.

For AI and data centres, with support of the beneficial policies in the near future, leading data centre vendors will boost from the government’s encouragement, server vendors will also benefit from extended data centre construction.

As the NDRC’s approval is most significant for intercity HSR and Rail Transit, the key factor to play in the market in order to meet relevant requirements.

For EV charging stations, the SOEs, mainly the State Grid, are likely to maintain a stable market share of around 25 per cent, and private companies will still play a key role. On 26 March 2019, the Ministry of Finance, Ministry of Industry and Information Technology, Ministry of Technology, and NDRC announced a shift in subsidies from new energy vehicles to charging infrastructure and complementary operational services.

What we can contribute as legal professionals

To help global service providers benefit from the opportunities in post-Covid-19-pandemic growth era, legal professionals should have the following visions and skills:

First, they should be familiar with the relevant policies. For instance, there are some beneficial policies regarding different types of ‘pilot zones’ – to date, there are eight ‘national data comprehensive experimental zones’, based in Guizhou, Beijing-Tianjin-Hebei Region, Pearl River Delta, Shanghai, Henan, Chongqing, Shenyang, and Nei Mongol, and 11 'next-generation AI innovation and development experimental zones', in Beijing, Shanghai, Shenzhen, Hangzhou, Tianjin, Hefei, Deqing County, Chongqing, Chengdu, Xi’an, and Jinan.

Legal professionals and potential investors should also keep watching potential policy catalysts in the areas of:

• ‘pilot zones’;
• tax, eg, tax incentives for industrial IoT adoption and related R&D, and cuts in electricity charges for heavy power-intensive 5G base stations, data centres, and EV charging operators; and
• financing: this would entail more issuing of local government special bonds to support construction of HSR and railway transits, and continued market-oriented reforms to increase the attractiveness of new infrastructure to private investors.

Second, they should contribute to compliance and risk management for the market providers, especially for companies that are not familiar with China’s legal systems. To achieve this goal, except for the understanding of relevant policies as mentioned above, legal professionals should be equipped with the accurate judgment of the business model itself, as its application is more difficult than simply knowing what’s written on paper. For instance, crawler technology itself is not illegal, but if the data crawled contains protected contents (eg, personal information, trade secrets and user names and passwords) the use of crawler technology might contravene civil liabilities, or even result in conviction for criminal offence. Also, laws and regulations related to ‘data to be transmitted abroad’ and ‘national security reviews’ will highly affect the operations of relevant companies.

Finally, they should know how to use legal means and tactics to help their clients to achieve business arrangements. For instance, lawyers can help clients plan suitable share and equity structure for their business to enable balanced combination advantages of management team members, financial investors and other relevant parties receptively; to plan internal governance structure; to set-up binding and equal cooperative relationships between global services providers (ie, the client) and local government or SOEs by attending business negotiations and drafting relevant legal documents; and to arrange the exchange of foreign currency into (or from) RMB.

In conclusion, the recent ‘new infrastructure’ push will be the next point of growth and, with the help of legal professionals who have an international vision, global service providers could gain their share.