UPDATE: Report: China Clamping Down On Internet Telephony

Chinese regulators are clamping down on Internet telephony that isn't provided by one of the country's two state-owned telecommunications companies, a move that could make services like Skype SA unavailable in the world's most populous country, according to Chinese media on Thursday.

The Ministry of Industry and Information Technology said Voice-over-Internet Protocol, also known as VoIP, services are illegal on the Chinese mainland unless they are provided by China Telecom Corp. Ltd. (CHA, 0728.HK) and China Unicom Ltd. (CHU, 0762.HK), according to a Shanghai Daily report.

The ministry had not determined a timetable for implementing the ruling, according to the report, which was also published on the People's Daily website. The ministry's decision was released in a notice earlier this month.

Wang Baodong, a spokesman for the Chinese Embassy in the U.S., said he was unaware of the development, but added that it sounded consistent with the government's prior actions. "The Chinese government regulates the Internet according to its laws and by following international standards," Wang said.

The Chinese decision could become a roadblock for Luxembourg-based Skype, which last week suffered a global service disruption that lasted for roughly a day. The company is seeking new users, especially business customers that pay to use premium services, as it gears up for an initial public offering.

Skype is not banned in China, according to a Skype spokeswoman. Chinese Internet users can currently use Skype via the company's Chinese joint-venture partner Tom Online, she said.

The Chinese government's decision comes after a year in which tension mounted between the country's government and Internet businesses hoping to offer products and services to its population of 1.3 billion persons.

Earlier this year, Google Inc. (GOOG) sparked a standoff with Beijing when it said it was no longer willing to comply with China's self-censorship rules, a move that could have prompted the Chinese government to eject the Internet search giant from the country.

The standoff was diffused when Google routed some of its most popular services such as its search engine, images, finance, videos and maps through the company's Hong Kong site, which operates under different laws.

Google also operates a quasi-Internet phone service, called Google Voice. It is unclear whether that service will also be impacted by China's decision.

Google representatives did not immediately respond to a request for comment.

-By Ian Sherr, Dow Jones Newswires; 415-439-6455; ian.sherr@dowjones.com

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