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SCMP Reporter

Telecom stocks around the world have crashed this year but there is still one bright spot: China.

With a potential client base of 1.3 billion and a low penetration rate, it is easy to see why telecom companies see China as the opportunity of a lifetime.

The number of mobile telephone users rose 53.53 per cent year on year to 130.9 million in the first nine months of the year, according to a Ministry of Information Industry (MII) release.

That is a penetration rate of 9.2 per cent, compared with 40 per cent in the United States and 50 per cent in Europe. The number of fixed-line phone users increased 19.47 per cent year on year to 172.27 million in the first nine months.

Revenues and investment are booming. In the first nine months of this year, the sector generated 257.55 billion yuan (HK$239.5 billion) in revenues, while fixed investment in telecom assets totalled 139.6 billion yuan.

MII Minister Wu Jichuan has pledged the sector will grow at least 20 per cent annually over the next five years, doubling in size.

Yet potential foreign investors should not get overly excited. China is a magnet for foreign telecom operators but the sector will open only gradually after it joins WTO.

'We're not going to see a sudden change in the telecom sector immediately after [WTO entry],' Morgan Stanley Dean Witter Asia managing director Jonathan Zhu says.

The ultimate goal is to promote equal competition between domestic and foreign players, but that will take up to six years under the WTO agreement. The gradual approach is designed to allow domestic players to grow stronger.

Currently, foreign investment in the sector is highly restricted, with foreigners barred from providing telecom services and investment. They can provide equipment, but otherwise can participate only passively, through investment in China's two listed telecom operators - China Mobile and China Unicom. However, these bans will be lifted once China enters the WTO.

For basic mobile services, foreign operators will be permitted to take up to a 25 per cent stake in domestic cellular carriers upon accession. That ceiling will rise gradually to 49 per cent three years after accession.

The slowest to open will be fixed-line and long distance services, with 25 per cent stakes allowed after three years and 49 per cent after six years.

Foreign participation in core mobile and fixed-line telephony services is capped at 49 per cent.

'China's entry to WTO will bring both challenges and opportunities to us,' China Unicom vice-president and chief financial officer Shi Cuiming says.

Several changes will be seen in the next few years: an increase in competition; better clarity in telecom regulations; faster growth due to a sharp fall in telecom equipment costs and sharper competition; and more capital-raising activities.

Competition will rise when foreign players are allowed in, but pressure from outside will be limited. 'China has no commitment to issue new licences under the WTO agreement,' says Morgan Stanley's Mr Zhu.

The Chinese government launched massive restructuring eight years ago to expand, modernise and strengthen the industry for liberalisation.

Since then, Beijing has merged the Ministry of Posts and Telecommunications as well as provincial and municipal telecoms and administrative posts into a centralised body, the MII. The nation's telecoms operation was also split into four separate entities: fixed-line, mobile, paging and satellite communications.

New carriers such as China Uni-com, China Netcom, and Jitong Networks Commu-nications have been created with the MII's backing to compete with incumbent operators in all are-as of telecom services.

China Unicom, which was formed in 1993, is the country's second largest mobile operator, capturing nearly 30 per cent of China's cellular market and threatening the dominance of Chi na Mobile.

Mr Wu has said it is Beijing's plan to build strong domestic players that can compete on an equal footing with international carriers. 'China's te-lecom market will be dominated by the four big operators: China Mo-bile, China Unicom, China Tele-com and the new China Netcom,' says Mr Zhu.

More raising of capital is expected once China Telecom has been split up. Mr Zhu expects both China Telecom and China Netcom to launch initial public offerings within the next two to three years. 'I think there will be more business alliances in the region rather than equity investments.'

WTO membership will require changes in the regulatory environment. Beijing last September issued the mainland's first comprehensive telecom law, which has become the legal framework for telecom regulations.

The government is now drafting a detailed set of regulations which will be pro-competition, with higher transparency, clarity and enforceability.

It plans to set up a high-powered commission led by Premier Zhu Rongji to oversee the telecom and information industries. The new commission will be responsible for mapping out long-range development plans, while the MII will implement them.

Domestic operators such as China Unicom could benefit from liberalisation by bringing in strategic foreign investors with advanced skills in telecom technology, network construction and management, as well as capital, Mr Shi says.

Such developments are already under way.

Last year, dominant mobile operator China Mobile forged a strategic partnership with Vodafone, selling two per cent or US$2.5 billion worth of shares to the British cellular carrier.

'China Unicom is aggressively seeking international partnerships to strengthen our competitiveness so that we can better attract foreign capital, telecom talents, technology and management experience,' says Mr Shi.

'WTO will bring more operators to China, both foreign and domestic. Therefore more equipment purchases will happen and there will be more opportunities for equipment suppliers.

'WTO will also bring transparency and equal opportunity for everyone,' says Wu Ying, president of equipment vendor UTStarcom.



Putting the big call on hold