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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.
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.
- The rapid advancement of AI and digital transformation is driving unprecedented demand for data centers in China, attracting substantial investment
- China recently eased restrictions on foreign ownership of data centers in designated free trade zones, creating opportunities
- Multinational corporations are taking steps to establish wholly foreign-owned entities and apply for VATS licenses to engage in data center business in China — but challenges remain, particularly around licensing approval, cybersecurity compliance and cross-border data transfer concerns