Chapter 26  Telecommunications Services

China’s WTO accession has promoted further reform on the country’s telecommunications services. The past three years have witnessed deepening reforms in the sector with the result that the four leading telecommunications operators have all gone public after successful structural reforms. There has been fast development in national networks, significant upgrading of equipment as well as services, and dramatic increase in the number of subscribers. More and more foreign telecom enterprises are seeking their opportunities in China in the areas of value-added services, fixed and mobile phone services, etc.

I. The implementation of commitments

According to the commitments of China, a phase-in liberalization process is adopted and China shall follow the principles of Reference Documents. In the Schedule of Concessions made by China regarding telecommunications services, detailed conditions for liberalization are laid down concerning the ownership requirement and geographic restriction. Besides, the Schedule also stipulates for national treatment to be granted to foreign telecom services or services providers when they offer telecommunications services to Chinese consumers in the form of joint venture.

As part of the efforts to deregulate the sector, the State Council adopted regulations to ensure the implementation of the commitments. Provisions on the Administration of Foreign-invested Telecommunications Enterprises, effective as of January 1, 2005, allow foreign investors to establish telecommunications enterprises in China to provide basic and value-added telecommunications services.

According to the timetable of China’s commitments, value-added business is the sector that enjoys the fullest liberalization at the moment. Foreign investors are allowed to establish joint venture enterprises with no geographical restriction, however, the proportion of their investment limited to no more than 50%. Due to easier market access to the sector and a large room for profit, the value-added services have become the most promising sector from the perspectives of foreign investors. An example of such would be UNISK, the first joint venture in value-added telecommunications between SK Telecom, South Korea and Unicom, China.

 With regard to foreign investment in basic telecommunications, foreign telecom operators made their presence in the basic telecommunications sector mainly in the form of strategic investment in domestic operators. In other words, many foreign operators have formed various kinds of strategic partnership with domestic operators though there is no foreign direct investment in the sector. The expected inflow of foreign capital into the telecom market in China will be well over USD100 billion.

The manufacturing industry for telecom equipment has been fully liberalized. All tariffs and fees imposed on ITA products have been phased out. This, according to the commitments, shall be achieved by 2005. Besides, China will carry out TRIMs to the letter by revoking requirements for balancing foreign exchange and trade, for local content, and for export performance. In terms of granting investment and import licenses as well as determining quota and tariff quota, no exception shall be made of the Measures to protect the domestic industry from possible foreign competition. With no tariffs or fees on all ITA products, there is a full integration of the domestic market into the international market for the manufacturing of telecom equipment. One of the milestones of foreign investment in the telecommunications equipment is the establishment of Shanghai Bell Alcatel Mobile Telecommunications System Co., Ltd.

Therefore, a lot of efforts have been devoted to liberalize the telecommunications sector over the past three years. Most recent efforts include the listing of companies abroad and the setting up of joint ventures. Much more is going to take place as foreign investment is penetrating the Chinese market. As a matter of fact, such trend of development in the sector was well predicted by the Telecommunications Research Institute under the Ministry of Information Industry in 2001. As market opens wider, the implications of foreign investment on the industry will become more prominent.

II. Reform on telecommunications sector driven by the accession

The past three years after China’s entry into the WTO is a period witnessing deepening reform in the sector. As is mentioned in the introduction part, the four leading telecommunications operators have all gone public after successful structural reforms. There has been fast development in national networks, significant upgrading of equipment as well as services, and dramatic increase in the number of subscribers. More and more foreign telecom enterprises are seeking their opportunities in China in the areas of value-added services, fixed and mobile phone services, etc.

1. The accession to the WTO has exerted a profound impact on China’s telecommunications services

China has been following its commitments regarding the liberalization of the telecom sector. With regard to commercial existence, a steady and prudent liberalization is introduced, starting from value-added services to basic telecommunications services, relaxing restrictions on business locations and ownership gradually. With regard to the introduction of foreign capital, it started with efforts to help state-owned enterprises go public so that they are now in a better position to meet the challenges of the market.

Over the past three years, remarkable achievements have been made in the following aspects: firstly, as a result of China’s WTO membership, reforms on telecommunications sector have been accelerated. Enterprises in the sector have been reengineered, restructured, and listed, which has greatly enhanced their competitiveness in terms of the coverage of their network, the number of subscribers, and operating efficiency; secondly, relevant laws and regulations are either being drafted or have been adopted; thirdly, the consumers in China have enjoyed substantial benefits brought by technological upgrading and better services as a result of the increasing competition.

2. There has been a change in the way government regulates the sector.

Instead of maintaining a paternalistic attitude towards the administration of the sector in the past, the government now attaches greater importance to social welfare and the establishment of a level-playing field. At the central government level, the Ministry of Information Industry, as a watchdog for the sector, realizes that the crucial step ahead is to further define its responsibilities. In Shanghai, competent department of the local government has made fairly successful attempts to transform its function from the one that used to intervene in the business activities of enterprises to the one that promotes fair play as well as market demand. It is also their business to seek better opportunities and terms for Chinese enterprises in international trade. Apart from that, they are expected to attract private investment to the value-added telecommunications services so as to help raise the efficiency of the existing state-owned enterprises. They may also consider reducing state ownership in the state-owned companies.

3. Foreign investment over the past three years is not so aggressive as it was expected to be.

According to China’s commitments, basic telecommunications services will be gradually deregulated after the full liberalization of the value-added services. However, foreign investment over the past three years is not so aggressive as it was expected to be. The reasons are as follows: firstly, global telecommunications industry was in low ebb around the year 2000 and started to pick up in 2003; secondly, Provisions on the Administration of Foreign-invested Telecommunications Enterprises, promulgated at the time of the accession, require foreign services providers to enter the sector in the form of joint venture, which collides with the business strategies of foreign investors. With regard to this, competent department are thinking of making proper changes about some of the provisions; thirdly, foreign investors are not so sure about their market potential when they find their Chinese counterparts have become competitive.

4. Foreign investors are going to make their way into the market through value-added services within the coming two to three years.

With the recovery of the global telecom market, enterprises around the world are losing no time in upgrade their business structure, including network upgrading and business innovation. Once they have finished the upgrading, a new round of integration of businesses will take place in the market. At that time, foreign investors will not neglect the largest potential market in the world and ice will be broken eventually.

5. The competitiveness of state-owned enterprises is being enhanced.

The state-owned telecommunications enterprises are constantly improving themselves over the past years. The opening of the market is in the interests of both sides. Despite the challenges following the opening of the market, the state-owned telecommunications enterprises are now able to choose those foreign partners that will help them make headway to the overseas market. Besides, foreign operators have advantages in marketing as well as research and development. This has set a good example for Chinese enterprises.

Box 26.1 No applications have been submitted with the opening of the basic telecommunications services

Starting from December 11, basic telecommunications services are open to foreign investment in Beijing, Shanghai, and Guangzhou. However, no applications have been submitted by overseas operators or investment institutions for setting up joint ventures in this area.

As basic telecommunications services cover such areas as fixed, mobile, and satellite services, China exercises strict control over the qualifications of the applicants. Starting from December 11, 2004, foreign investors are allowed to establish joint ventures engaged in national and international basic telecommunications services with foreign ownership no more than 25%, which shall rise to 35% in 2006 and 49% in 2007. By 2007, geographical restriction shall be lifted.

Owing to the uniqueness of the industry, it seems that foreign investors are taking their time to enter the market. Some experts hold the view that business cost is too high for FDI to gain foothold in a market that has not been fully liberalized and has been dominated by four leading Chinese operators. After all, the global telecommunications business is still under recovery and China hasn’t issued the 3G license yet.

However, 2005 might expect a peak of foreign investment in the industry as there are going to be more opportunities for partnership between Chinese and foreign operators. At the same time, China is probably going to issue three 3G licenses. Before that, there is need to integrate operators, for example, the two mobile communications networks of Unicom might integrate with two other operators, which will involve huge capital. This might be a good opportunity for overseas operators.

Notwithstanding the situation mentioned above, foreign telecommunications companies have already entered the basic telecommunications sector in other forms. They are holding the shares of four leading Chinese operators, which have gone public. For example, Vodafone bought 3.27% of the shares of China Mobile in 2002 at the Hong Kong Stock Exchange and has declared to hold 5% of the shares in five years’ time. Besides, there are also R & D centers co-founded by British Telecom and China Netcom, French Telecom and China Telecom.

Presently, foreign investment has found an affinity for value-added services. Following the first joint venture in this area between SK Telecom in South Korea and Unicom, a dozen others are going through the relevant application process.