Chapter 3 Telecommunications Development in China
3.1 Restructuring Institutes and the China’s
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Chapter 3 Telecommunications Development in China
This chapter provides a brief overview of telecommunications
development in China and makes an evaluation of the relationship between telecommunications industry and economic growth. As China became the single largest telecom market in 2002, it has been the most successful
developing country for spreading telecommunications access in a remarkably short period of time. To understand the evolution and complex internal
mechanisms of the extremely competitive scenario are essential for this study.
3.1 Restructuring Institutes and the China’s Telecommunications Development
The dynamism of global telecommunications markets is widely attributed to rapid technological development and an increasingly liberal policy
environment. Over the past decade, a large number of developing economies have embarked on reform paths, and witnessed significant expansion of their telecommunications networks and striking improvements in productivity.8
Most developing countries nationalized telecommunications services in the 1960s. By the 1980s it was clear that nationalized monopoly
telecommunications firms in developing countries could not effectively provide services. Since the inception of the so-called “Open Door Policy” in China, China gradually shifted its priority from political struggle to economic
8 Fink, C., Mattoo, A. and Rathindran, R. (2002), “An Assessment of Telecommunications Reform in Developing Countries,” Policy Research Working Paper Series 2909, The World Bank.
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development, and its economy has achieved the highest growth in the world.
With the three major forces effects: state concerns, foreign influence, and market forces. China’s telecommunications market has experienced from central-and-command, highly protected mechanisms towards a
pro-competitive market orientation.9 Wallsten (1999) noted that these countries began to reform their telecommunications industry spurred by changes in technology and other international organizations.10
In China, the structure of public telecommunications is a government monopoly under the Ministry of Posts and Telecommunications (MPT) which was established in 1949. MPT as an executive agency directly managed and controlled the operations and productions. But from the early 1980s, China’s telecommunications development has caught up with the rest of the world because of the lower quality service and unsatisfactory capacity compared with countries. In 1998, the MPT was replaced by the new Ministry of Information Industry (MII) due to reorganization.
The MII took two large scale reshuffling actions targeting the inefficient state-monopoly. The first restructuring split China Telecom’s business into fixed-line, mobile and satellite in 1999. China Mobile and China Satcom were created to run the mobile and satellite business respectively but China
Telecom continued to be a monopoly of fixed-line services. The second
restructuring in 2002 split China Telecom geographically into North and South:
China Telecom (North) kept 30% of the network resources and formed China Netcom (CNC) and 70% of the resources were retained by China Telecom
9 Loo, P. Y. (2004), “Telecommunications Reforms in China: towards an Analytical Framework,”Telecommunications Policy.
10 Wallsten, S. (1999), “An Empirical Analysis of Competition, Privatization, and Regulation in Africa and Latin America”.
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(South) or simply the new China Telecom.11
Eventually, China does not yet have a telecommunications law, although the government has indicated that the relevant bodies are working on drafting one. The Regulations on Telecommunication issued in September 2000 (State Council Directive 291) provide the overall legal framework for the sector. The regulations stipulate the separation of the government from the business of providing telecommunications services; the requirement for a licence for basic telecommunications and value-added services; the process of negotiating interconnection between networks for new service providers; the management of service tariffs; and the standards for the quality of services. Other basic rules governing the sector include the Regulations for the Administration of Foreign Invested Telecom Enterprises and the Administrative Measures for
Telecommunications Business Operating Permits, which entered into force in 2002.
In 2008 Ministry of Industry and Information Technology (MIIT) has been established by the State Council replaced MII to formulate and implement telecommunications policy subject to State Council approval of important strategic policy documents which is the state agency responsible for regulation and development of the postal service, Internet, wireless, broadcasting,
communications, production of electronic and information goods, software industry and the promotion of the national knowledge economy. The new ministry is built around the core functions of the old MII that includes
formulating the government's development strategies, guidelines, policies and overall plans as well as promoting the informatization process of the national
11 International Business Publications (2007), “China: Telecommunications Industry Business Opportunities Handbook”.
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economy and the social service.
China owns the world’s largest telecommunication networks in terms of both network capacity and number of subscribers, and its industry has experienced double-digit growth in the past decade. China’s 11th Five Year Plan started from 2006 stated that in the coming five years the Chinese government expects the telecommunication services to grow at an average annual growth rate of 10% and the revenue generated by the service segment to reach USD 114 billion by 2010.12 Also by 2010, the number of total
telephone subscribers is expected to reach 1 billion and Internet subscribers to reach 200 million. Telephone service is expected to be available in each and every village in China by the end of 2010. In 2008 pushed by the Chinese government aimed at restructuring the domestic telecommunications industry has brought around a wave of rapid development and deployment of
telecommunications infrastructure throughout the country. In May, plans were announced to restructure and merge its telecommunications operators, and the purpose of shakeup in China is planned to achieve the aim to promote full competition. It is despite the fact that "no one single operator will gain all the benefits" and "internal competition between the merged entities may exist".13
Under the planning, the government has reconsolidated and reorganized carriers: China Unicom and China Netcom merged; China Mobile acquired China Tietong; and China Telecom acquired the basic mobile services unit of China Satcom as well as the assets and customers of China Unicom’s Code Division Multiple Access (CDMA) network. Besides, the restructure also
12 U.S. Commercial Service (2006), “Doing Business in China: A Country Commercial Guide for U.S. Companies”
13 http://www.businessweek.com/globalbiz/content/may2008/gb20080529_310359.htm
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emphasizes three key areas for reform:14
The first area of reform concerns competition in the mobile service markets. Upon the completion of the reorganization, the government issued three third-generation (3G) licenses to the remaining three carriers. New regulations will govern roaming fees and settlement. It also highlights the need to maintain China’s involvement in
developing fourth-generation (4G) wireless technology standards.
Second, the notice promotes domestic innovation through a combination of financing practices, government assistance, and administrative oversight. Finally, the state owned assets supervision and administration authorities are urged to examine independent innovation as a performance measure in assessments of
telecommunications carriers.
Finally, the notice seeks to balance different government priorities.
The notice aims to promote Chinese telecom carriers’ global leadership while also ensuring national security. The state-owned carriers are urged to reduce redundant build-outs and allocate resources more efficiently, thereby promoting the value of state-owned assets. As for foreign direct investment, the notice emphasizes the respective strengths of Chinese and foreign telecommunications companies, and urges them to cooperate in research and development in order to open new markets, both foreign and domestic, and achieve mutual benefits.
The new structure married the fixed line and mobile operators each other.
14 Hogan & Hartson LLP (2008), "February 2008 China Update", China Update.
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Such a step is expected to generate renewed demand for foreign equipment suppliers, and lead to the issuance of third generation, 3G licenses. More specifically, these developments are expected to create new opportunities for manufacturers of mobile, data, and optical communications equipment.15 In 2009, The MIIT formally issued 3G mobile phone licenses to three mobile operators, a move that is expected to lead to billions of dollars being invested in building new networks: China Mobile was awarded a license for TD-SCDMA, the domestically-developed 3G standard; China Telecom and China Unicom received licenses for the U.S.-developed CDMA2000 and Europe's WCDMA, respectively. The MIIT also issued 23 regulations on the requirements of 3G network operation, covering such aspects as market competition, consumer rights, subscriber information security, telecommunication charges
management and facility building. It is estimated the 3G mobile phone sales would top RMB 300 billion and the network investment would lead to RMB 2 trillion in private-sector investment during the period of 2009 to 2011.