THE LONG-AWAITED decision on the dismemberment of China Telecom comes as U.S. and Chinese negotiators held down-to-the-wire talks in Washington on China's bid to join the World Trade Organization. Access to the $28 billion telecommunications sector, 95% of which is controlled by China Telecom, has become a deal breaker.
China Telecom will be divided into four companies each specializing in a separate service: fixed telephone, mobile communications, paging and satellite telecommunications, the Ministry of Information Industry, which regulates the sector, said in a statement.
Between two giants
An interactive guide to details of U.S.-China disputes
U.S. -China disputes
“The breaking up of China Telecom is aimed at smashing the telecommunications monopoly in China and introducing competition to set up a fair and orderly market,” Minister of Information Industry Wu Jichuan said in the statement, carried by the state-run Xinhua News Agency.
According to negotiators, China proposed lifting its ban on foreign investment in telephone companies before Premier Zhu Rongji set out for his U.S. visit this week. Foreigners would be allowed a 35% stake in phone companies, although U.S. negotiators are still pushing for 51%.
Such a move would reverse a policy that largely excluded foreign participation to equipment sales.
In the past, some companies such as Sprint Corp. evaded the ban on foreign investment by setting up complicated joint ventures that allowed them effective control, a gray-area investment that was technically illegal but tolerated by investment-hungry officials.
Why China can't be ignored
Future superpower: China is viewed as a potential rival to the United States in the 21st century.
Military muscle: China has the world's largest army with some 2.9 million personnel. It's navy, air force and armored divisions are obsolete by western standard but are in the process of modernization.
Size matters: China is the world's third-largest country by area and the largest by population with 1.2 billion people.
Asia's economic engine: China has the world's largest and fastest growing developing economy. China's GNP grew at 7.8 percent in 1998, an amazing rate considering the collapse of growth in the rest of Asia.
Trading places: China is expected to surpass Japan soon as the largest source of the American trade deficit. The $57 billion trade gap with China in 1998 was second only to the $55.69 billion deficit with Japan.
China proposes that such deals wouldn't be allowed in the future but that existing ventures would be protected, although foreign companies would probably have to reduce their stakes to 35%. Mr. Zhu has also told Western negotiators that “buy local” orders have been rescinded and that China will adhere to the International Telecom Agreement by 2005, which calls for ending import tariffs on telecom equipment.
On Wednesday, Xinhua quoted Mr. Wu as saying that China will introduce foreign capital to the telecommunications sector, but “in an active and steady manner.”
The Xinhua report gave no time frame for the China Telecom breakup. Mr. Wu said new regulations for the telecommunications sector would be put in place in the first half of the year. He added that his ministry is drafting a law that will replace the regulations.
However, Zhou Qiren, a professor at Peking University who tracks the industry, said the break-up of China Telecom won't introduce immediate competition to the sector since each of the four free-standing companies dwarf all viable competitors.
But Mr. Zhou said the government may start permitting Chinese-foreign joint ventures as part of efforts to liberalize the industry and gain entry into the WTO.
“It could become the legal partnership structure,” Mr. Zhou said.
Chinese Premier Zhu is in the U.S. trying to improve China's chances for membership with market-opening concessions in agriculture, financial services and also telecommunications. Mr. Zhu indicated last week that China would open a new mobile phone technology, code digital multiple access, to foreign investment, but no plans have been formally announced.
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