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As China’s digital economy continues to grow, data centers — critical components of digital infrastructure — are playing an increasingly vital role. Although data centers have attracted significant capital, foreign investment in the sector has been constrained. Because data center services fall within the regulated value-added telecom services (VATS) sector, foreign investors have traditionally been limited to forming joint ventures with Chinese partners and holding no more than a 50% equity stake.
Navigating rules and regulations
In April 2024, the Chinese government introduced a pilot scheme aimed at fully liberalizing foreign investment in data center services within designated free trade zones (FTZs) in Beijing, Shanghai, Shenzhen and Hainan. By early 2025, the authorities began to accept and process applications under the new framework.
This regulatory easing has been welcomed by multinational corporations. Some have responded by establishing wholly foreign-owned enterprises within the designated FTZs and applying for the requisite VATS licenses.
As this is the first time China has fully opened its data center sector to foreign ownership, its telecom regulators are taking a cautious and thorough approach to reviewing VATS license applications. Areas of focus include the source of funding, server location, proposed data protection and cybersecurity frameworks, and the center’s energy and water efficiency measures. Accordingly, applicants must ensure that their submissions are comprehensive, accurate and aligned with all regulatory expectations.
Cross-border data transfers present another complex area. China imposes strict controls on outbound transfers of important data and personal information, governed by the Cybersecurity Law, Data Security Law, and Personal Information Protection Law. Where cross-border transfers are necessary, companies must follow an appropriate legal mechanism under Chinese law. These include: (i) a security assessment by the Cyberspace Administration of China (CAC), (ii) signing of the cross-border data transfer agreement based on CAC’s template and filing of the signed agreement and impact assessment report with CAC, or (iii) certification by a qualified third-party institution. Non-compliance can expose a company and its senior executives to serious legal consequences, including regulatory investigations, dawn raids, monetary penalties, revocation of licenses and permits, and in the worst-case scenario, criminal liability.
Companies keen on investing in data centers in China should closely monitor national and local policies and adjust their strategic plans accordingly. Large-scale data centers are especially encouraged in provinces or cities where national hub nodes are located. Companies operating in these locations benefit from favorable treatment, including easier land acquisition, tax incentives and other forms of financial support. Energy efficiency is also a key consideration; companies with expertise in green and smart technologies for building and operating data centers are well positioned to take advantage of these incentives and maximize return on investment.
Conclusion
China’s data center sector continues to be a compelling destination for both domestic and international investment. The FTZ pilot scheme marks a significant step forward in liberalizing the market. However, foreign investors must proceed with care: capitalizing on these opportunities requires not only evaluating the business potential, but also rigorously addressing legal and compliance obligations — particularly regarding licensing, data governance and cross-border transfer requirements — to position themselves for long-term success.
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