On October 26th 2021 the Federal Communications Commission (FCC), responsible for the governance and regulation of communications facilitators such as radio and television, ordered the China Telecom Americas Corporation (CTA) to cease its operations in the United States within sixty days. The released Order on Revocation and Termination comes following a recommendation submitted supporting such action from Executive Branch agencies (namely the Department of Justice (DoJ), Homeland Security, etc.) on April 9th 2020. Overall, the FCC’s order revokes the Chinese telecommunications provider’s authority to conduct business pursuant to Section 214 of the Communications Act (1934). This is defined, by the FCC, as a legal instrument which “ensures that the U.S. market is protected against potential anti-competitive behaviour by a carrier with market power in a foreign country”.
Due to the evolving technological landscape since the corporation’s license was authorised in 2007, the group of U.S. organisations deemed CTA’s operations to be a significant risk to national security and law enforcement. John C. Demers, Assistant Attorney General for National Security at the time of the DoJ’s recommendation, stated that the nation’s telecoms security “depends on our use of trusted partners from nations that share our values and our aspirations for humanity”. Not only is this a true statement of distrust and insecurity between U.S. authorities and CTA, but also the Chinese government by mere extension and association. The fact that there are links between CTA and the Chinese government is no secret; a simple search of China Telecom Corporation Limited’s parent organisations on Wikipedia suffices to generate results termed “State-owned Assets Supervision and Administration Commission” and “Government of China”.
The FCC outlined that the termination of CTA’s license to offer domestic and international services within its jurisdiction was as a result of the business’s compliance, or lack thereof, with its submitted Letter of Assurance (LoA) dated July 17th 2007. The LoA gave regulating bodies a guarantee that certain conditions with regards to the data of U.S. customers would be satisfied when operating in America. For example, a legal understanding was established that “for all customer billing records… and any other related information used… in the ordinary course of business relating to communications services offered…, the Company will make such U.S. Records available in the United States in response to lawful U.S. process”. Such terms were evidently breached upon detailed investigation and public interest analysis from the FCC, the proceedings of which commenced in officially in December 2020. This is perhaps unsurprising given a lack of corporate governance within the organisation. The Institutional Shareholder Services (ISS) Governance QualityScore, a metric used to measure the level of corporate governance within listed organisations, is 8 out of 10 correct as at September 26, 2021 (“A decile score of 1 indicates lower governance risk, while a 10 indicates higher governance risk”).
Despite the abandonment of revenue streams in America, the news regarding the FCC’s investigation appears to have only marginally impacted the share price of China Telecom Corporation Limited, CTA’s parent company, listed on the Hong Kong Stock Exchange. Between the 26th October and 10th November, the company’s share price only decreased by a maximum of 5.09%. It is noteworthy that CTA is the group’s largest international subsidiary. According to the company’s 2020 annual report, the outstanding capital in CTA (USD 43 million) was three times the average amount invested across the group’s 9 foreign operations, as declared in Note 9 of the consolidated financial statements.
The overall propensity for Chinese stocks not to react to news stemming from the United States is symbolic of investment tendencies in China generally. This behavioural phenomenon is explained through the concentration of Chinese public listed companies owned by domestic investors. Investopedia states that a meagre 5% of shares traded in Chinese markets are owned by international investors. This, complemented with the state’s influence on China Telecom Corporation Limited, certainly played a role in the share price’s resistance to the published order from the FCC.
CTA are not the first Chinese corporation to be banned from providing services in the United States. In May 2019, China Mobile faced such an order following an aggressive policy enforced during Donald Trump’s presidency to increase regulation of Chinese telecoms services within his domestic jurisdiction. Moreover, the more commonly known household brand ‘Huawei Technologies’ was also accused of posing a national security risk across many months of the former President’s tenure, which led to US companies being banned from using its networking technology.
The overall impact of the FCC’s actions CTA on the telecoms industry is best represented by the 350 million subscribers which will be affected by the business’s ceased operations, flooding the market with a demand for telecoms services predominantly specific to the far east. The question remains as to whether a telecoms organisation will be able to satisfy the needs of these customers into the future while simultaneously fulfilling the increasingly demanding regulatory criteria set by US authorities.
By Maxime Bailey
Edited by Dylan Buckley