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December 11 marks the fifth anniversary of China's accession into the World Trade Organization (WTO) and in these five years, China's telecom industry has accelerated its pace of opening-up through overseas public offerings and joint ventures.

 

Foreign investors are penetrating the Chinese market and increasing their involvement gradually and it is expected their participation in the world's largest telecom market in terms of subscribers will be higher and higher. In all telecom service categories, value-added service is a priority.

 

In 2002, the State Council released a regulation on foreign investment into telecom enterprises in China to provide good and clear policy guidance to foreign investment and honor its commitment to WTO members.

 

The coming Telecommunications Law is expected to provide a better environment for fair competition and a regulatory guaranty to foreign investment and operations.

 

Gradual opening

 

The Annex 1B of the Final Act of the WTO stipulating the principles on general agreement on trade service, the Agreement on Basic Telecommunication Services and China's commitment on telecom service are the three main legal documents set to facilitate opening up of the sector.

 

According to the regulation of the State Council in 2003, foreign investors can establish foreign-invested telecom service entities, for both basic and value-added services, with approval from the Ministry of Information Industry and the Ministry of Commerce.

 

China's commitment stipulates the ceilings of stakes foreign investors can hold in a period of time and the process of opening region by region. It also says foreign investors should be treated equally as domestic companies, when providing services to consumers.

 

This July, the Ministry of Information issued a circular, reiterating China's commitment to the WTO on telecom services: foreign investors can not establish solely owned enterprises and must work in the form of a Sino-foreign joint venture. One main reason was that some foreign investors had been circumventing the rules in cooperation with local firms to carry out value-added services.

 

Value-added service

 

Value-added service is one area that China has committed to opening up most in telecom service areas. At present, foreign investors can form joint ventures without regional restrictions, as long as they hold no more than a 50 percent stake. It is also because value-added service has a low entry barrier and big room for development in China.

 

However, foreign investors are not very active in this business and most of them adopt a wait-and-see attitude. The reasons are: they can't get an absolute majority in a joint venture of value-added services; and the market consolidation is almost completed.

 

One additional factor is that there are about 10,000 telecom value-added service providers, but they have to rely on the six national basic telecom service operators. So foreign investors do not want to accept a situation that it is working with small and medium firms but without an absolute say, but if they want to work with the six operators, they must have the financial and technological strengths to attract the Chinese companies and also consider their needs.

 

The best choice for foreign investors is to work with the operators and a secondary consideration is influential large State-owned enterprises.

 

By September, a total of 29 foreign companies applied to establish joint ventures in value-added services. With continued opening, foreign businesses can also enter the market through acquisitions.

 

Among those applications, UNISK (Beijing) Information Technology Co Ltd is the most noteworthy, the first value-added service joint venture between a Chinese basic service operator and a foreign investor.

 

The value-added telecom service has been growing very fast, but its share in the whole telecom industry is still quite small and far from a backbone of the industry. At the same time, the variety, content, quality, and billing systems are also quite limited, so this business is still at a primitive stage of its development.

 

Besides establishing joint ventures, foreign businesses can also invest in Chinese telecom value-added service providers, when they make overseas initial public offerings (IPOs), such as the Hong Kong-listed instant messaging provider Tencent and the NASDAQ-listed online game operator The9 Ltd.

 

Basic telecom service

 

In the basic telecom service, foreign telecom operators already participated in the basic telecom service market, before China's WTO accession in 2001 and its model was to enter as a strategic investor.

 

In terms of operation, investing in basic telecom services involves a huge amount of capital and with a clear industry scenario with six main players, foreign investors won't enter blindly.

 

At present, the top four operators China Mobile, China Unicom, China Telecom, and China Netcom all made overseas IPOs and most of them have foreign strategic investors like Vodafone in China Mobile. This is the best example of foreign involvement in China's basic telecom service market.

 

Besides, while the opportunity for direct investment into basic service is not mature, some foreign telecom operators chose an indirect way, such as developing large accounts, training, technology testing together with Chinese counterparts. A typical example is the strategic partnership between British Telecom and China Netcom and a joint research centre between France Telecom and China Telecom.

 

Within the coming years, we can expect to see more heavyweight foreign telecom operators entering the Chinese market and promoting the prosperity of the industry.

 

Telecom equipment industry

 

When China joined the WTO, it was also committed to endorsing the Information Technology Agreement, which requires all members to elevate tariffs on information technology products. China has fully complied with that agreement.

 

Besides, China also lifted requirements on foreign currency exchange, trade balance, local content, and export performance.

 

Thus in the telecom equipment market, the domestic market is already integrated with the global market, so there is no fundamental difference in operating in this market between domestic and foreign companies.

 

A landmark event in the opening of this area is the establishment of Shanghai Bell Alcatel, the first foreign-invested telecom equipment company in China and the first one that foreign investors had an absolute majority.

 

The author is an analyst with the research center of China Galaxy Securities Co Ltd.

 

(China Daily December 4, 2006)