The WTO and telecommunications servicesin China: three years on

Daniel Roseman

AbstractPurpose – To assess the impact of China’s WTO commitments on foreign investment flows, domesticregulation and industry performance in the telecommunications services sector.

Design/methodology/approach – Situates GATS disciplines in telecommunications in their historicalcontext, then reviews China’s specific commitments, and finally reviews available data on developmentsin China since accession.

Findings – China’s commitments on market access and national treatment in telecommunications servicesare rather modest, and China is lagging in the implementation of regulatory disciplines. Nevertheless, Chinahas gone a long distance toward a complete transformation of the telecommunications sector with littleoutside influence and no outside ownership or control. It is mainly because the prospect of joining the WTOand opening to the world galvanized government and industry into action. The overall thrust of those actions,however, has been to ensure that telecommunications plays its full role as a strategic economic sectorand helps deliver economic benefits to the Chinese people in order to legitimize Communist Partyleadership.

Research limitations/implications – Up-to-date and coherent data on industry performance (e.g.penetration rates, productivity increases, etc.) are lacking.

Practical implications – Very useful background and analysis relating to: relationship between, on theone hand, international trade commitments and, on the other hand, domestic reforms and industryperformance; and on-going issues in China’s efforts to implement its WTO obligations and to create astatutory, regulatory and institutional framework supportive of continued growth of thetelecommunications sector in China.

Originality/value – Responds to an identified information need with information and analysis ofpractical value.

Keywords International trade, Telecommunications, International investments, China

Paper type Research paper

Introduction

The commitments on regulatory behaviour and market access in the telecommunications

sector under the General Agreement on Trade in Services (GATS) are among the most

significant achievements of the World Trade Organization (WTO). They resulted in real

market opening and brought what had thereto been treated as a special sector governed by

bilateral arrangements under the disciplines of the multilateral trading system. These

disciplines are backed up by the possibility of resort to WTO dispute settlement to prevent

backsliding on market openings and regulatory reforms. Accordingly, these disciplines

afford increased stability and predictability in the policy and regulatory framework for

telecommunications and in the environment for investment in the sector of each participating

country.

China was willing, and required, to buy into these disciplines as part of its re-admission to the

multilateral trading club[1]. Key questions were:

B At what price?

B How would China implement its commitments?

B What impact would these commitments have?

DOI 10.1108/14636690510587207 VOL. 7 NO. 2 2005, pp. 25-48, Emerald Group Publishing Limited, ISSN 1463-6697 j INFO j PAGE 25

Daniel Roseman is Principal of

Roseman Associates, an

independent, Ottawa-based

consultancy specializing in

international trade in services,

strategic business development

in the communications sector

(telecommunications,

broadcasting, new media,

electronic commerce) and the

transitioning of companies

providing key infrastructure that

bear public service

responsibilities and universal

service obligations, from

monopoly environments to full

competition.

This article is based on an earlierstudy commissioned by the UnitedNations Conference on Trade andDevelopment (UNCTAD).

While China was a ‘‘mere observer’’ during the negotiations that produced these disciplines,

it was unable to influence the course or content of the negotiations. Beijing saw the price rise

twice: with the Uruguay Round and with the WTO negotiations on basic telecommunications.

Still it wanted to join. As an observer on the sidelines, Beijing had the opportunity to take note

of developments surrounding the negotiations and to recognize that their success reflected

fundamental forces that Beijing would need to accommodate in China itself, with or without

WTO membership. Despite great resistance within conservative circles in the government

and the party leadership over the potential loss of control over a strategic sector, Beijing

eventually mustered sufficient political will to produce a set of commitments that was

acceptable to other WTO members.

This paper assesses the impact of China’s commitments under the GATS on foreign

investment flows, domestic regulation and industry performance in the telecommunications

services sector. In order to address these issues, it is important, first, to situate GATS

disciplines in the telecommunications sector in their historical context, then to review China’s

specific commitments on telecommunications, and then to review the available data on

developments in China’s telecom sector since accession.

1. WTO/GATS disciplines on telecommunication services

From a chronological perspective[2], there are two sets of disciplines on

telecommunications under the GATS. First, there are the disciplines negotiated during the

Uruguay Round (1986-1994). Those negotiations produced specific commitments on

value-added services and the GATS Annex on Telecommunications regarding access to and

use of public telecommunications transport networks and services (PTTNS). Second, there

are the disciplines agreed after the Uruguay Round in the WTO negotiations that produced

the Agreement on Basic Telecommunications (ABT) (1994-1997). That agreement contains

commitments on market access, national treatment and pro-competitive regulatory

behaviour. These two set of disciplines are, however, inter-related and mutually

reinforcing, as the WTO dispute settlement panel report in Mexico –Measures Affecting

Telecommunications Services (WTO, 2004) makes abundantly clear.

These disciplines were not negotiated in isolation or overnight. Rather, they were the result of

a larger, global debate about developing appropriate policies to harness the benefits of

telecommunications that were growing as a result of pressures unleashed by discontinuous

technological and commercial innovations. This accelerating revolution challenged

established institutional and market relationships, such as state ownership and the

monopoly status of service providers, ties between service providers and regulators, ties

between equipment producers and service providers, and the interface between networks

and users. The negotiations channeled powerful pressures to liberalize telecommunications

markets.

From a user perspective, advances during the 1970s and 1980s in the application of

telecommunications and computer technologies (digital switching and transmission

systems, fibre optics, satellites, etc.) permitted the emergence of new

telecommunications-based services (data communications, value-added services, etc.)

that expanded the capability of telecommunications networks and service providers to meet

the diverse and specialized needs of users. People in the industry spoke of a transformation

from POTS (‘‘plain old telephone service’’) to PANS (‘‘pretty awesome new stuff).

Telecommunications and telecom network-based services were seen to facilitate domestic

and international trade in goods and other services, and to increase the ability of firms to

operate efficiently on a geographically dispersed basis. But looking beyond the developed

countries, one still observed that two-thirds of the world’s population had never made a

phone call, that half of the world’s population lived two days’ walk from the nearest

telephone, and that the waiting list for service in many countries was ten years or more.

From a network provider perspective, the accelerating pace of change required increasing

investments to keep up. Industry officials often had mindsets that favoured the status quo

over adjustment and renewal. In countries where the incumbent monopoly telcos

(telecommunications companies) were state-owned PTTs, governments often did not have

PAGE 26 j INFOj VOL. 7 NO. 2 2005

the money to invest in the roll-out of new infrastructure and services. Defensive PTTs sought

to continue to monopolize the provision of telecommunications, whether by the old or new

technologies, and to extend their monopoly rights to the new information (TI) services. There

was also a tendency to look at telcos as national champions who must be promoted or

defended at any cost. Accordingly, regulators (who were often the PTTs themselves) were

generally predisposed against competition. In very few countries did regulators consider

that their job descriptions included opening up market access to multiple operators.

Competition watch-dogs, in the few countries where they existed, whose normal concerns

would be to reduce the scope of monopolies and promote competition, had little or no

competence in the area of telecommunications.

From a policy perspective, these technological and market innovations were outpacing

governments’ ability to regulate and to invest. At the same time, telecommunications were

coming to be recognized as a key economic enabler of other economic activities, not merely

as an important sector in its own right, but as the nervous system and arteries of the

economy. It was increasingly realized that the old market structures – state ownership,

prohibitive regulation and the restrictive practices of incumbent monopolies – were stunting

the build-out of infrastructure, the development of new TI services, as well as imposing

disincentives to investment in other sectors of the economy. These old structures were a

drag on telecommunications development and a brake on overall economic growth, and

they failed to achieve social policy objectives, such as universal service. Policymakers

needed to find their way to strike a new balance among the interests of telecom service

suppliers, users, equipment manufacturers, software providers, the public at large, and

national treasuries. The choice for governments was not a stark black-or-white, all-or-nothing

decision. Rather, it was about: how far to go? how much to liberalize market access and

permit foreign investment? how to phase in reforms? how to balance, on the one hand,

entrenched domestic interests, and on the other hand, competing domestic and foreign

interests? how to strike a balance that would lead to a socially and economically optimal

outcome?

The pressures to liberalize telecommunications on a multilateral basis came to be channeled

into the Uruguay Round and WTO because trade officials were the only persons having an

institutional pre-occupation with market access[3]. Given the nature of the GATS, the issues

were articulated in the following terms:

B Market access – how many entrants in each sector?

B National treatment – should foreign services and suppliers be treated equally well (or

badly) with domestic services and suppliers;, e.g. with respect to investment rules and

universal service obligations and subsidies?

B Regulatory/competition policies – how best to ensure that when a market access

commitment is given, it can actually be used instead of being vitiated by the behaviour of

an obstructionist incumbent telco (e.g. a refusal to interconnect or make capacity

available)?

The first two categories of issues were clearly consistent with longstanding disciplines under

the GATT and other trade agreements, and they were reflected in the structure of GATS

schedules of commitments, which schedules contain columns for commitments and

reservations on market access and national treatment. The third category of issues was built

on practical experiences in countries that had introduced competition independently of

trade negotiations, and on the trade law concept of nullification and impairment of benefits,

seeking to ensure that there would be specific disciplines against regulations that subverted

commitments, rather than leaving aggrieved Members to seek to win a more difficult

‘‘non-violation’’ dispute.

The Uruguay Round and basic telecoms negotiations and other outside events taught

governments that did not have experience of competition in that sector that it was unrealistic

to leap from monopoly to open, unregulated markets and expect the full benefits of

liberalization to be realized. Market access commitments alone would not suffice to create

VOL. 7 NO. 2 2005 j INFOj PAGE 27

competitive markets in a highly complex industry with significant economies of scale and

scope. Rather, pro-competitive regulatory policies were needed as well.

During the Uruguay Round, the question of competition in the supply of public

telecommunications networks and services (PTTNS – i.e. basic infrastructure and

services, or basic telecommunications, for short) was too sensitive a matter for most

countries to discuss, let alone agree on common disciplines. Suppliers of basic

telecommunications (the telcos) generally opposed negotiations, while users and

suppliers of value added (or TI) networks and services sought seamless service on a

worldwide basis (e.g. global virtual private networks), in order to manage their globally

dispersed businesses. Consequently, the balance that was struck by participating

governments between the various interests of their constituents reflected largely the

demand-pull of users. Therefore, the outcome of the telecom negotiations was limited to

commitments on market access in value-added services and to the regulatory aspects of

questions relating to access to and use of public telecommunications transport networks

and services, including intra-corporate communications, in a GATS Annex on

Telecommunications[4].

The liberalization that resulted from these new multilateral disciplines stimulated demand for

basic telecommunications, while leaving the questions of market access and competition in

the supply thereof for further negotiations after the conclusion of the Uruguay Round.

The WTO/GATS negotiations on basic telecommunications commenced in May 1994 and

concluded with the Agreement on Basic Telecommunications in February 1997. In these

negotiations, the interests of users (and other stakeholders) were important, but they took a

backseat to the interests of companies from developed countries that believed they enjoyed

a competitive advantage in supplying basic telecoms, in particular advanced

telecommunications networks and services, on a multinational basis. These companies

insisted on the greatest freedom of investment and capital movement as a condition of

making their services available. During the negotiations the pressure to liberalize continued

to mount, and the negotiations themselves became a force that galvanized efforts to create

consensus on reform at international and national levels.

The outcome in February 1997 exceeded expectations of even just a few months earlier and

attested to the global momentum towards liberalization. A total of 70 members of the WTO,

representing over 90 per cent of global telecommunication revenues, gave full or partial

commitments to permit multiple suppliers, foreign ownership and cross-border competition.

All but six of those members undertook, in whole or in part, the additional commitments on

pro-competitive regulatory measures contained in the so-called ‘‘reference paper’’[5].

The GATS Annex on Telecommunications and the reference paper provide the outlines of a

regulatory framework for countries opening their telecom services markets. Since the

Telecoms Annex is an up-front binding obligation, all WTO members must take whatever

actions (legislative or regulatory) are necessary to bring its regime into conformity. As for the

reference paper, its provisions apply only to those members that adopt it via their schedule

of specific commitments under the GATS.

These documents represent a significant transfer of knowledge and experience from

developed countries that pioneered telecom liberalization, and they permit developing

countries to leapfrog decades of trial and error. In this regard, they shorten countries’

learning curve. However, the Annex and reference paper do not provide much detail. Rather,

they establish minima to be fulfilled, with very broad parameters for each member to work

out the details and the means of implementation.

GATS commitments provide some degree of harmonization of conditions around the world,

but every WTOMember does not open its market and regulate in the same way. Rather, each

strikes a compromise between exogenous and endogenous constraints, but each member

is dependent on its own institutional endowments and institutional stances for the path

ultimately chosen[6].

PAGE 28 j INFOj VOL. 7 NO. 2 2005

It is important to note that GATS commitments represent a floor: Members may not be more

restrictive than what is reserved in writing. However, it is possible for Members to be more

liberal in practice. Such autonomous liberalization is not covered by any WTO rights or

obligations, and it is not bound against backsliding. Consequently, autonomous

liberalization does not afford investors the predictability and security of bound commitments.

In parallel with the negotiations on basic telecoms, there were negotiations toward an

Information Technology Agreement (ITA). In December 1996, a number of WTO Members

accounting for 90 per cent of world information technology trade agreed to the phased

elimination of customs duties on covered categories of equipment, much of which was used

in telecommunications networks or as terminal equipment. The ITA worked on both the

demand and supply sides of the telecommunications sector.

These various negotiations and agreements raised the political and economic profile of

telecommunications in international relations. In turn, the negotiations on the Telecoms

Annex and reference paper raised the profile of regulation. Further, these achievements

raised the bar for all countries seeking subsequent admission to the WTO.

While China, as a developing country, might have avoided undertaking commitments on

telecommunication services if it had joined immediately after the Uruguay Round, this was

inconceivable after the Agreement on Basic Telecommunications, when the Chinese

economy was in full take-off mode (albeit on the verge of the short, but abrupt Asian financial

crisis of 1997-1998). For at the same time that China’s economy was growing, the WTO was

developing, with each successful negotiation in Geneva, higher levels of disciplines and

expectations as to the obligations China would undertake. As China’s accession

negotiations began to move into high gear after 1998, it was clear that the longer Beijing

dragged its heels over concessions on market access and regulatory reform, the higher the

price of ultimate entry would be. Still, in the end, as a developing country, China was in the

end able to offer less than developed country members of equivalent economic heft.

2. China’s commitments on basic telecommunications under the GATS

Telecommunications was identified as a strategic economic sector at the very beginning of

Deng Xiaoping’s economic reforms of the late 1970s and early 1980s. But in the hands of a

‘‘slothful state-run monopoly’’ (Kuo, 2003), telecommunications in China was a liability and a

hindrance to reform and growth:

As anyone who spent any time in China before 1980 can attest, placing a simple local phone call,

even in one of the more developed cities, used to be a frustrating ordeal. As late as the

mid-1990s, getting a residential landline installed was a costly proposition, and new customers

often had to wait months before service could be switched on (Kuo, 2003).

Still, until the last few years of its almost 15 year-long march into the WTO, China resolutely

resisted demands to undertake commitments on telecommunications as part of the price of

its accession. The resistance came not only out of the hidebound bureaucrats in the ministry

responsible for telecommunications, but also others in the government and the party

leadership who were concerned that commitments in telecommunications could spiral out of

control and undermine national security. The events of 1989 in Tiananmen Square, Eastern

Europe and Russia provided real ammunition to those resistant to reform.

However, President Jiang Zemin and Premier Zhu Rongji understood that China had no

choice but to ante up substantial telecom commitments if it wanted to join the WTO. They

also understood that commitments in the WTO would leverage domestic change and

galvanize the ministry, and the industry it controls, into making their full contribution to

China’s economic modernization:

WTO provides China with a path to market economics, which will help break local and

departmental monopolies that have proven so hard to crack from the inside (Brahm, 2002, p. viii).

With President Jiang managing the top-level political processes, Premier Zhu worked

through the dialectics of conflicting domestic and external forces. As the date of China’s

accession kept receding into the future, and developed countries kept raising the bar for

VOL. 7 NO. 2 2005 j INFOj PAGE 29

China’s admission, Jiang and Zhu used the spectre of WTO obligations to galvanize reform

efforts. The availability of time and increasing external pressures helped define a program

that would provide for competition and other reforms in the telecom sector, while retaining

government control.

By 2001, Jiang and Zhu produced both a domestic consensus in favour of reform and a

successful outcome in the WTO negotiations. WTO accession negotiations permitted them

to shake up behaviour in the state-owned telecom sector and to put a number of reforms in

train. By submitting schedules of commitments, they effectively locked in those reforms.

What was uncertain was how the trade-offs between economic and sectoral growth and

concerns over national security and control would play themselves out.

China’s schedule of commitments on market access and national treatment binds China to

allow a phasing-in of foreign minority investment in telecom joint ventures involving equity

over the first six years after accession. The following table sets out the commitments in a

clear manner (Table I).

Immediately on accession, foreign investment was to be permitted in the three cities of

Beijing, Shanghai and Guangzhou, up to the level of 25 per cent in mobile operators, and up

to 30 per cent in value-added services and paging. Those limits would be raised again by

December 2002 and 2003. The limits on foreign investment in value-added services and

paging operators reached 50 per cent nation-wide in December 2003 and are not scheduled

to rise further. By 11 December 2004, Beijing was to raise the limits on foreign investment in

mobile operators from 35 to 49 per cent in 17 cities, and finally foreign investment was to be

permitted in fixed line operators, up to the level of 25 per cent and in the three cities only. By

December 2006 the 49 per cent limit on mobile operators is to apply nation-wide. The limits

on foreign investment in fixed-line operators are to rise from 25 per cent in the three cities of

Beijing, Shanghai and Guangzhou to 35 per cent in 17 cities by December 2006 and to 49

per cent nation-wide by December 2007.

An OECD study of restrictiveness toward foreign trade and investment in the

telecommunications sector has rated China at 40. This is on par with Indonesia, for

example, which also rates 40 (by contrast, the US rates 100, and Canada rates 90 due to its

foreign ownership restrictions) (Dihel and Kalinova, 2004, p. 11).

For all these market access limitations, China is an example of a WTO Member that permits

more de facto than its schedule binds de jure. For instance, under Mode 1 (cross-border

supply) of its telecom commitments, China has inscribed ‘‘See Mode 3’’ (commercial

presence/establishment). Although the exact meaning of this inscription is moot, it would

appear from various discussions at the time of China’s accession negotiations and from

foreign government sources that China’s intention was that foreign firms would be allowed to

provide telecom services in China only through joint ventures having a commercial presence

there[7]. In other words, China would allow no right of non-establishment. Seen in this light

China’s schedule appears to provide that only telecom service suppliers established in

Table I Liberalization of foreign investment limits in China’s telecoms sector post-WTO accession

On 11 Dec.2001

By 11 Dec.2002

By 11 Dec.2003

By 11 Dec.2004

By 11 Dec.2005

By 11 Dec.2006

By 11 Dec.2007

Sector (%) (%) (%) (%) (%) (%) (%)

Mobile 25 35 49 49(3 cities) (17 cities) (17 cities) (nation-wide)

Fixed-line 25 35 49(3 cities) (17 cities) (nation-wide)

Value-added/paging 30 49 50(3 cities) (17 cities) (nation-wide)

Notes: The initial three cities are Beijing, Shanghai and Guangzhou. The 17 cities include the first three plus Chengdu, Chongqing, Dalian,Fuzhou, Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Shenzhen, Taiyuan, Xiamen, Xi’an and Wuhan)Source: Lovells (2002, p. 2)

PAGE 30 j INFOj VOL. 7 NO. 2 2005

China under Mode 3 (i.e. through a Chinese-owned and controlled entity or a

Chinese-foreign joint venture) may provide telecom services on a cross-border basis (e.g.

between the joint venture entity established in China and an affiliate/parent established

abroad). However, as a practical matter, non-established foreign firms do provide e-mail and

on-line information retrieval services on a non-established cross-border basis in China (e.g.

the Canadian internet service provider, Sympatico, via any internet connection in China). It

appears therefore, that China has taken a kind of ‘‘ceiling binding’’ (to use a customs tariff

expression), trying to reserve to itself the right to prevent services from being supplied on a

non-established cross-border basis, while allowing them to be supplied at the pleasure of

China’s authorities; i.e. for an indefinite period of time under currently prevailing conditions.

The key to understanding these various commitments is that Beijing has kept control of the

network and of international gateways in Chinese hands.

Regarding regulatory commitments, China became automatically on accession subject to

the disciplines of the GATS Annex on Telecommunications, and Beijing adopted the

reference paper of pro-competitive regulatory behaviour. It has worked to put in place a

regulatory regime that conforms to its obligations. These are discussed infra.

3. Impacts of GATS commitments on China’s telecoms sector

It is generally quite difficult to isolate the impact of liberalization commitments pursuant to

trade agreements from other causes and effects;, e.g. economic cycles, changes in taxes or

exchange rates, regulatory reform, the outbreak of war/peace or pestilence, or the onset of

drought or a good monsoon[8]. For example, the US International Trade Commission,

studying the impact of trade agreements on the US economy, was obliged to emphasize the

analytical difficulties ‘‘in quantitatively specifying many of the actual policies implemented

by the agreements, [and] in disentangling these effects from the many other changes that

have taken place...’’ (USITC, 2003, p. iii). While the USITC focused on the US market, the

same difficulties attend studies of other countries, and a fortiori developing countries, where

governments tend to lack the infrastructure for statistical data collection and analysis.

AChinese example is Ianchovichina andMartin (2003) on the impact of China’s accession to the

WTO. Using a GTAP model[9], they estimated a total welfare gain of US$40.6 billion or 2.2 per

cent of per capita income, most of which ($31billion) was realized ‘‘as a result of the massive

liberalization that took place between 1995 and 2001 and the restructuring of the automobile

industry that has been underway’’ (Ianchovichina and Martin, 2003, p. 20), with the balance of

the welfare increase coming during the period 2001-2007. These are not large numbers when

spread over a 12-year period. There is almost no discussion of services industries, but the

authors estimated a welfare gain of $1.2billion from services liberalization over 1995-2007

(Ianchovichina and Martin, 2003, p. 21). In a $1.3 trillion dollar economy, this is small change.

Generally speaking, trade agreements and other policy instruments work on the margins,

affecting marginal propensities of various kinds. (The marginal propensity of foreigners to

invest in developing countries is just one of them. One could also say that the WTO Agreement

on Basic Telecommunications affected the elasticity of foreign demand for domestic assets in

developing countries.) While the effects of such measures may be found at the margin of

overall sectoral behaviour and be difficult to measure, their cumulative effects may be

nevertheless significant in terms of accelerated growth and structural change in the economy.

The data and arguments presented in the studies examined in Roseman (2003) would

suggest that the overall economic benefits and welfare gains are greatest where the

investment restrictions eliminated had been greatest. Foreign direct investment increases

transfers of business know-how and technology more effectively than licensing and

franchising arrangements, thus increasing competition and efficiency. However, the USITC

and Ianchovichina and Martin would suggest that in the grand scheme of things, the

Uruguay Round and ABTcommitments on telecommunications will have had only a marginal

impact on FDI flows and welfare gains.

Moreover, the transformation of China’s telecommunications sector did not occur overnight with

WTO accession. There has been a long run-up since Deng Xiaoping’s reforms in the early

VOL. 7 NO. 2 2005 j INFOj PAGE 31

1980s. With greater political emphasis on telecommunications, funding for infrastructure

expansion and upgrades was sourced less and less from an often-times bare state treasury,

and increasingly from financial institutions and international donors (domestic banks, World

Bank, Asian Development Bank, and foreign development agencies). Since 1997 there has

been increasing recourse to capital markets, with preferences for stock issues over debt

financing and for foreign over domestic private capital (Wu and Zhu, 2003).

3.A. Foreign investment

Most developed and developing countries recognize the benefits and are increasingly

prepared to open their doors to foreign investment in order to attract the capital to build the

infrastructure that will help their economies to take off. However, ‘‘the simple act of

liberalizing FDI restrictions will not guarantee an inflow of investment capital.’’ (Roseman,

2002, p. 953). Countries must act on a number of fronts to make themselves attractive to

foreign investors, if they are indeed serious about attracting foreign capital.

All countries find themselves in a very competitive marketplace – a beauty contest – for foreign

investment, as even the largest firms must ration their financial and human resources and

prioritize. Fixed asset investors (more so than financial asset investors) tend to seek stable

situations yielding returns over a long period of time. Their decisions will depend on the

comparative long-run profit potential of potential target countries, balancing the costs, benefits

and risks of doing business in one country or anther. Firms examine and compare alternative

markets and, based on their assessment of the various factors (demographics, incomes, growth

rates, political stability, etc.), they place their bets. Generally, countries with rising economic

prospects will rank higher with foreign firms looking to invest abroad. From a user perspective,

multinational enterprises increasingly expect – and demand – a competitive

telecommunications market as a pre-condition of their establishment because it offers the

best assurance that they will obtain reasonably competitive prices and suppliers willing to

provide a choice of services and features. GATS commitments on market access and

pro-competitive regulatory disciplines can help make a country look relatively more attractive,

by ensuring greater legal certainly and predictability.

In telecommunications, this translates into a more intense interest in investing in countries with

high or potentially high growth rates in telecommunications services. A country that possesses

critical scale and other favourable conditions will rank highest. For example, any telecom

service provider with global ambitions must have a presence in the US market. Foreign telcos

will tolerate heavy-handed regulations and political pressures directed against foreign

operators in that country because the US is so important to their corporate strategies. To a

substantial degree the US is able to act like a market maker, maintaining laws that discriminate

against foreign investment in telecommunications and regulations that impose onerous

monitoring, reporting and compliance requirements that non-dominant US firms do not normally

experience (Roseman, 2002, pp. 947-948, 964, 968). But for countries whose markets are not

mission critical to many foreign service providers, governments are perforce market takers.

They must set rules that are favourable to investors and service providers, or see business go

elsewhere.

China is at present able to act somewhat like the US. Given China’s size, strong economic track

record, political stability and positive prospects, firms with Asian or global ambitions are willing

to jump through a lot of hoops in order to get in on the action. Many firms profess to be prepared

for a long wait for profits, thanks to mesmerizing mantras like ‘‘the twenty-first Century is China’s

Century’’. No other developing country at present matches China’s ability to attract foreign

investment.

According to UNCTAD, China overtook the US in 2003 to become the largest recipient of

foreign direct investment for that year (UNCTAD, 2004, p. 367). This represents a very small

per centage of GDP for China:

Rather like the US, China is a small recipient of FDI relative to its GDP, even though it dominates

the developing world as an FDI host (UNCTAD, 2004, p. 13).

PAGE 32 j INFOj VOL. 7 NO. 2 2005

(Unfortunately, UNCTAD does not break down its data on investment in the services sector to

identify stocks or flows in the telecommunication services sector.)

Despite all the attention focussed on China and the high levels of foreign investment flowing

into the country, the amount of foreign investment in China’s telecommunications sector

since WTO accession remains insignificant. There are a number of explanations for this.

First, China did not privatize its telecom companies. It corporatized them and spun off

subsidiaries there were listed on domestic and foreign stock exchanges in order to raise

capital from private sources to pay for network up-grades and expansion, rather than

opening them up to foreign investment directly (or instead of relying on the telcos’ own

revenues, which were inadequate to the task, or providing loans or grants from government

coffers or from government controlled lenders, which would have been a drag on

government resources).

Second, the timing of China’s accession in December 2001 meant that the telecom bubble of

1998-2001 was rapidly deflating by the time China’s commitments in the WTO took effect.

China therefore missed out on the most manic phase of the ebb and flow of the telecom

boom-and-bust experienced by countries that opened their telecom markets earlier.

Third, China’s commitments on foreign access to its telecom market may be substantial for a

developing country, but they are rather modest for a country of its economic heft and

potential. For the foreseeable future, foreign firms will continue to be limited to shareholdings

in joint ventures. Big carriers are especially avid to have majority positions in order to have

control, since many were burned in joint ventures abroad when the telecom bubble burst.

Without the security that comes with control, foreign telecom managers would have had

difficulty convincing boards to allocate scarce funds in China.

Fourth, independently of WTO commitments, although ostensibly in conformity with them,

China has set minimum financial standards for equity joint ventures, that are in addition to the

limits on foreign investment, rather than leave it for telecom investors to work out for

themselves the capitalization requirements of their ventures:

National or cross-provincial BTS/VATS [basic telecom services/value-added telecom

services]:

B FITEs [foreign-invested telecommunications enterprises] engaged in national or

cross-provincial BTS must have a registered capital of at least RMB 2 billion (US$247

million).

B FITEs engaged in national or cross-provincial VATS must have a registered capital of at

least RMB 10 million (US$1.24 million).

Intra-provincial, autonomous region, or municipality BTS/VATS:

B FITEs engaged in intra-provincial, autonomous region, or municipality BTS must have a

registered capital of at least RMB 200 million (US$24.7 million).

B FITEs engaged in intra-provincial, autonomous region, or municipality VATS must have a

registered capital of at least RMB 1 million (US$124,000, Morrison & Foerster LLP,

2002)[10].

Some observers have complained that these standards set the bar so high that they

discourage all but the big established fixed and mobile operators, and even they are

necessarily careful with their money since 2001:

. . . many transregional carriers have frozen or severely cut back spending in the last three years

after massively overbuilding capacity during the telecoms boom of the late 1990s (Young,

2004a).

Others find that the minimum capital requirements are not out of line with actual business

requirements:

. . . to be fair, the minimum capital requirements appear to be prudential in nature and not out of

line with actual capital requirements. . . (Lovells, 2002, p. 5).

VOL. 7 NO. 2 2005 j INFOj PAGE 33

However, while the big foreign fixed andmobile operators have that kind of money, they have

until recently been nursing their balance sheets since the telecom bubble burst:

. . . many transregional carriers have frozen or severely cut back spending in the last three years

after massively overbuilding capacity during the telecoms boom of the late 1990s (Young,

2004a).

Further, MII has established minimum financial adequacy standards for venture capital firms

wishing to invest in the telecom sector:

Before applying to set up wholly-owned or Sino-foreign cooperative venture capital firms in China,

one of the foreign investors must have managed assets of more than US$100 million in total,

invested more that US$50 million of these assets in the past three years, and own at least three

per cent of the new firm’s capital. They must also put at least US$20 million into the new venture

capital firm (Brahm, 2002, p. 215).

The recovery of corporate balance sheets and the revival of telecoms M&A activities in the US

and Europe at the beginning of 2004 will precede by mere months China’s further liberalization

of foreign investment caps inmobile and fixed networks by December 2004. If foreign investors

do not leap at the opportunity, it will likely be for reasons other than minimum capital

requirements. For example, China Media Intelligence observes an asymmetry of interests

between prospective Chinese and foreign telecom joint venture partners:

. . . a joint venture requires two parties and at present the Chinese side holds the upper hand in the

partnership in that it is more the foreign companies that want a share in the Chinese market than

Chinese operators that are looking to benefit from foreign experience, expertise or technology.

Indeed, it would be fair to say that there is often a rather defensive attitude on the part of Chinese

operators towards foreign involvement. Foreign participation in the sector is often seen as source

of competition not a source of help and joint ventures offer the competition a foothold in those still

fiercely protected birthright markets.

The changing market and nature of competition in the sector could have two opposite effects in

this regard. On the one hand, as Chinese telecoms operators find themselves increasingly facing

competition from their domestic rivals, including those from whom they were previously

separated, they are likely to become even more reluctant to consider joint ventures which would

effectively chip another chunk out of their increasingly threatened profit margins. If the problem is

increasing competition, why, they might ask, help new players join the fray? (CMI, 2004).

Fifth, the licensing process represents a substantial hurdle in and of itself. There is

considerable ambiguity about how the non-financial qualification standards for both the

principal Chinese and foreign investors in basic services would be assessed (Brahm, 2002,

p. 217). In addition, the regulations governing the licensing of foreign-invested telecom

services providers (‘‘Provisions on the Administration of Foreign Investment

Telecommunications Enterprises’’, FITE), are highly invasive of commercial business plans:

One of the requirements for the application process is that the principal Chinese investor turns

over a feasibility report outlining the basic conditions, service items, business projections,

development plans analysis of investment returns and anticipated business hours of the

proposed enterprise. MII officials have stated that if there is any change in the feasibility

study[,then] the whole application process must start again from the beginning. This creates two

problems: a feasibility study can be used for project approval or for investment approval, but it

does not seem reasonable to require it for licensing, especially since the MII tends to be very

specific with what a licence allows and does not allow; and the application process is so long that

it seems highly probable that the feasibility study would change during the process. As such, how

should potential JVs write their feasibility studies? (Brahm, 2002, p. 218).

Sixth, even if one can tolerate the various hurdles and ambiguity, one must ‘‘find a godfather

to look after your political connections’’ (Redding, 2003). This aspect remains essential to

doing business in China today, but a ‘‘godfather’’ is especially difficult to find in an industry

where the government does not want foreigners to do too well.

Seventh, the bottom line is that the Chinese authorities want foreign capital and know-how, but

they do not want foreign ownership and control of Chinese telecom service providers or foreign

competition in their domesticmarket.While the overall thrust is to ensure that telecommunications

plays its full role as a strategic economic sector and helps deliver economic benefits to the

PAGE 34 j INFOj VOL. 7 NO. 2 2005

people in order to legitimize Communist Party leadership – and competition is essential to those

goals to the extent that it serves as a goad to otherwise hidebound state-owned operators – the

government and party leaders take a cautious approach to competition where state assets are

involved, and they have given China’s telecom operators a mandate to ‘‘go out’’ and become

global, as well as domestic, players of consequence. From the perspective of the Ministry of

Information Industries, according to Kuo (2003):

China’s carriers are not ready for the world yet. Fortunately, the entry barriers are set so high that it

will be some time they before feel the heat of foreign competition.

Before 2001, China’s authorities maintained a ban on foreign investment in

telecommunications. After China’s Telecom’s monopoly was broken in 1994 with the

establishment of China Unicom and Jitong, and later with the creation of China Netcom, the

new entrants sought to circumvent this ban. Notably, Unicom and others raised capital from

foreign sources by means of indirect arrangements through Chinese shell corporations,

dubbed ‘‘China-China-Foreign’’; this brought in some $1.4 billion in cash as well as technical

assistance from foreign telecom firms eager to enter the growing Chinese market. However,

after Prime Minister Zhu Rongji declared these arrangements ‘‘irregular’’, foreign investors

were forced to unwind their holdings in 2000. Nevertheless, China Netcom in 2001 raised

$325 million from a group of foreign investors that included Dell, Goldman Sachs and News

Corp. Despite the ban, these investors were not forced to sell; rather, their holdings were

diluted in the restructuring of China Netcom in 2002[11].

Once the rules became clearer, China Telecom, China Mobile, China Unicom and China

Netcom re-organized into 100 per cent state-owned holding companies and geographic

operating entities. In turn, subsidiaries would be incorporated in Hong Kong, and a limited

float of shares would trade on the Hong Kong and New York Stock Exchanges. Via the

majority control of the holding companies, the state remains by far the carriers’ largest

shareholder. All foreign shareholdings in the listed subsidiaries are merely portfolio

investment with no direct influence over corporate behaviour.

These Hong Kong subsidiaries have become important sources of capital for network

expansions and upgrades in the Chinese market. They raise both debt and equity capital in

order progressively to buy domestic assets (principally the geographic operating entities)

from their holding company parents. The assets being purchased were originally the

networks in the most developed regions, but subsequently they were the networks in the less

developed provinces. For example, regarding a secondary public offering by China

Telecom (HK), Lau and Tsui (2004) reasoned that funds going into underserved areas would

enhance both regional penetration rates and corporate growth rates:

. . . the new networks could . . . enhance the growth of the company as penetration was expected

to be lower than the 15 to 20 per cent penetration rate of its existing [wireline] networks.

China Netcom, which has a near monopoly of fixed-line infrastructure in the northern half of

China, raised at the end of 2003 some $600 million in bonds to fund network expansion, even

before it listed its stock in Hong Kong and New York in November 2004 and launched an initial

public offering that brought in US$1.14 billion for 16 per cent of its enlarged capital (Reuters,

2003; Lau, 2004). In addition, China’s three major internet-portals have listed on NASDAQ.

China Railcom is also understood to be planning a foreign stock market listing, although no

details have yet been released.

But China’s carriers are also able to raise capital via bonds and equity issues in the domestic

market, because of the large pool of domestic savings. The Chinese are big savers, more so

than people in most developed countries, despite higher incomes. A large pool of savings is

not common in most developing countries. Nor are the large foreign exchange reserves,

resulting from trade surpluses and inflows of foreign capital, which the government can draw

on if necessary.

Despite the influx of private capital fromdomestic and foreign investors, the state remains by far

the carriers’ largest shareholder, and the foreign capital comes with no major strings attached.

Thus, while ‘‘[t]he total transformation of China’s telecom sector over the last quarter century

VOL. 7 NO. 2 2005 j INFOj PAGE 35

has been nothing short of mind-boggling, . . . and the telecom landscape has an almost sci-fi

quality to it’’ (Kuo, 2003), foreign investment has had little to do with this transformation:

. . . the distinctive nature of China’s telecom development. No other market has completed such

massive network build-outs and gone so far down the liberalization path with such minimal direct

foreign input (Kuo, 2003).

Nevertheless, a few foreign telecom service providers have been permitted to establish a

presence of one sort or another. This allows the Chinese authorities and business partners to

learn by doing, while it permits the foreign partners to test the waters and acquire local

experience and contacts.

AT&T, already before China’sWTO accession, ‘‘became the first foreign enterprise to form a joint

venture in the telecom area . . . join[ing] with Shanghai Telecom and Shanghai Information

Investment to form Shanghai Symphony Telecom, a US $25 million project to provide

broadband value-added services to businesses in Shanghai’s Pudong [financial] area’’ (Brahm,

2002, p. 221). However, AT&Twas limited to a 25 per cent stake in the joint venture (CMI, 2004).

SK Telecom has a joint venture with Unicom (UNISK Information Technology) for the

provision of value-added mobile services and content over Unicom’s second general

cellular (CDMA) network (Clark, 2004; CMI, 2004).

Telstra settled for value-added services after seeking in vain a partnership to provide basic

services. (Clark, 2002) SingTel is collaborating with China Telecom to provide corporations

with global communications links (CMI, 2003). BT is building network nodes in Shanghai and

Beijing, for international corporate communications, as part of a services agreement with

China Netcom, the number two fixed-line carrier; BT is also looking at collaborating in call

centres (Young, 2004).

So far only one operator – Japan Telecom – has set up a totally foreign-owned telecoms

subsidiary in China, in January 2004. However, this would appear to be because it does not

challenge any of the actual limitations on the provision of basic or value-added services by

foreign operators in China:

. . . the company does not have any particularly well-defined longer term strategy for its China

operations and currently continues to offer network solutions and information services for its

existing Japanese clients in China (CMI, 2004).

While there is little foreign penetration of China’s telecom market, China’s companies have

themselves begun to dip their toes into foreign waters (see infra, Sector Performance).

In summary, while officially ‘‘China welcomes foreign telecom companies’’[12], overall

China’s behaviour vis-a-vis foreign participation in the telecommunications sector exhibits

both insecurity (i.e. a need for control by domestic authorities) and a mercantilistic attitude:

bring in the foreigners and their capital, not in order for them to establish operations to serve

the domestic market, but so that locals will have the resources and know-how to better serve

the domestic market and ‘‘go out’’ and become major world players.

3.B Regulation

As discussed supra, WTO disciplines – even the mere spectre thereof, prior to accession –

have been used to galvanize reform efforts in China’s telecom sector. A presentation by an

MII official, Yang Shaoli, at an APEC Telecommunications Working Group meeting on ‘‘WTO

and China’s Telecom Regulation’’ states that ‘‘to meet the needs of telecom regulation and

the new circumstances after China’s WTO accession, China has accelerated the legal

construction in [the] telecom sector’’ (Yang, 2003, p. 5). Yang goes on to list 27 legal

instruments that have been enacted since 2000 to this effect.

But such instruments are piecemeal responses to the need for reform. The piece maıtresse –

a Telecommunications Act that will tie everything together into a coherent and secure legal

construct – is still missing.

PAGE 36 j INFOj VOL. 7 NO. 2 2005

Critics say that China’s institutional set-up for the regulation of telecommunications has

reached its limits. As Kuo (2003) points out:

The relatively easy part – unleashing the pent-up entrepreneurial energies and consumer

aspirations of a billion plus Chinese – is over. . . Though they’ve come a long way, like nearly every

other sector of the Chinese economy, China’s telecom industry is still struggling to transcend the

legacy of its state-owned, command-economy past. . . Policy-makers and telco executives will need

to demonstrate even greater flexibility and adaptability as the terrain undergoes dramatic shifts[13].

A draft telecommunications bill is circulating in government and party offices at this time.

CMI (2004) reports that the bill ‘‘will most likely be published early in 2005’’. Until then, the

principal telecom measures of an overarching nature are the Regulations of the People’s

Republic of China on Telecommunications and the Administrative Rules on Telecom Service

Operation Licence.

CMI (2004) attributes the delay in publishing the bill (not to mention passing it into law) to

MII’s ‘‘desire . . . to retain flexibility in decision making’’. An aversion to the reining in of

ministerial discretion is a universal phenomenon among those on the inside of government,

but actually doing it is an important step toward the rule of law – as opposed to arbitrary

behaviour and the law of the strongest – which the new generation of leaders in China

profess to aspire to. However, bureaucratic political inertia and the doctrine of ‘‘socialism

with Chinese characteristics’’ inspired by Deng Xiaoping do not mean that the government

of China will wither away. Rather, leaders are seeking to raise living standards while

maintaining the Communist Party’s monopoly over state power and state dominance over

strategically important industries. As Brahm observes:

Accession to the WTO in itself will not shift the power behind China’s telecom industry from the

government to the market. The government has no intention of relinquishing control over this

sector, and will use WTO to fulfill its own development objectives (Brahm, 2002, p. 222).

WTO accession offers a two-way street of improved foreign access to China’s markets, in

return for more secure access by Chinese firms to foreign markets.

China’s leaders have ambitions for their telecommunications industry that reach beyond the

domestic market. Therefore, as mentioned above, the Ministry of Information Industry sees

itself as giving the local industry a push, so that home-grown operators will rise to be global

players:

One of the government’s major objectives is to useWTO to ready domestic enterprises, the ‘‘local

champions’’ for the international arena (Brahm, 2002, p. 222).

But the surest sign that a WTO member is taking GATS telecoms disciplines to heart is when

it inserts portions of the reference paper or Telecoms Annex in its domestic laws and

regulations. That is precisely what a number of countries did after the Agreement on Basic

Telecommunications.

There is at least one school of thought, based on institutional path dependency theory, that

says the WTO will have only a limited impact on China’s regulatory reform and liberalization

because old habits – specifically China’s institutional endowments and regulatory stance –

do not favour competition:

A pro-competitive institutional stance in the regulatory regime would actively and effectively

incorporate the WTO disciplines and would significantly boost the process of liberalization in the

telecommunications sector. But a domestic regulatory institution with a contrary view can

constitute a significant non-tariff barrier to market entry and effectively frustrate some of the goals

of the WTO (Zhang, 2001, p. 462).

Of course, Zhang’s prediction is quite right that China’s behaviour in implementing those

obligations will be largely a function of the predispositions of its institutions, which include

the top leadership, low ranking officials and everyone in between.

But the problem with this prediction is that it overstates the WTO’s autonomy for action. The

WTO is a forum for the negotiation of trade agreements and the settlement of disputes. Its

‘‘goals’’ regarding China’s telecom sector are limited to the terms of China’s accession

VOL. 7 NO. 2 2005 j INFOj PAGE 37

protocol, in particular China’s adherence to the GATS, the Annex on Telecommunications

and China’s schedule of commitments on trade in services, including the reference paper.

The Chinese authorities have sought thus far to develop the country’s telecommunications

capability by restructuring the industry, bringing in private capital, and introducing a little

competition. The creation of four main players (China Telecom, China Netcom, China Mobile

and China Unicom) and two second-tier players (China Railcom and China Satcom) is

independent of any WTO obligations. It reflects the Chinese leadership’s realization of the

limits of economic monopolies and the need to encourage a degree of competition, while

keeping the carriers subordinate to the central government.

MII’s vision since the late 1990s has been of competition among four main players, and it has

reconfigured the industry and rules so that there are four that can ‘‘work[] across the different

sectors of the telecoms industry (mobile, broadband, fixed line, etc.) where . . . there [had

been] an unbalanced division of labour’’ (CMI, 2002a). However, MII’s vision did not

encompass the entire industry, for there are also China Railcom and China Satcom. China

Telecom, China Unicom, China Mobile and China Netcom are all part of the ‘‘MII family’’. But

Railcom and Satcom are not ‘‘family’’, for they are affiliated with other ministries. Nor are the

increasing numbers of value-added and internet service providers all MII family members.

Affiliations and loyalties are important in most countries, but perhaps no where more than in

China. There are therefore complaints that MII is not a disinterested policymaker and regulator.

CMI (2004) reports that MII has publicly admitted that ‘‘the current regulatory structures have

not kept pace with the commercial and competitive development of the markets’’. CMI

singles out an MII report published in February 2004, Report on the Development of

International Competitivity in China’s Telecoms Industry 2003, which:

put the market competitivity of the Chinese telecoms market as second in the world but lamented

the fact that the sector’s ‘‘regulatory competitivity’’ (zhidu jingzhengli) and ‘‘enterprise

competitivity’’ (qiye jingzhengli) lagged a long way behind. Discussing the report, one if its

authors, market expert Chen Jinqiao, recently explained ‘‘compared to the developed countries,

the largest discrepancy in the Chinese telecoms industry is in the area of regulatory competitivity

and the deficiencies in regulation are extremely likely to be one of the factors that will affect the

future development of the telecoms industry’’ (CMI, 2004).

How MII will operationalize this self-criticism will probably become clearer when the

telecommunications bill is published.

However, Beijing’s ‘‘toying [in late 2004] with splicing some of the demerged operators back

together’’ (Financial Times, 2004) and shuffling the top executives of the four main carriers

from one firm to another indicate that views are shifting about the degree of competitiveness

and the ideal structure of the industry. Indeed, the executive shuffle is widely seen as a result

of concerns that the market has become too competitive for the government’s liking (see, for

example, Yeh and Lau, 2004). In terms of WTO, however, a reduction in the number of

players is just as much beyond the scope of China’s WTO commitments to prevent, as is an

increase in the numbers, for China gave no commitments of that nature.

While China’s government separated the telecom business and policy/regulatory functions and

createdMII in 1998, the continuing state-ownership of China’s facilities-based operators and the

close ties between government bodies and companies raise obvious questions about

compatibility with China’s WTO obligation under the reference paper to maintain an

‘‘independent regulator’’ that is ‘‘separate from, and not accountable to, any supplier of basic

telecommunications services’’ and whose decisions and procedures are ‘‘impartial with respect

to all market participants (see China’s schedule of GATS commitments, in WTO, 2001, p. 51).

As Roseman notes regarding the similar situation in Japan:

The establishment of an independent regulator is indirectly a liberalizing measure because it is

effectively a precondition for greater transparency and non-discrimination in regulatory

decision-making processes and outcomes (Roseman, 2003, p. 89).

This requirement is without prejudice as to whether the regulator should be separate from the

ministry that makes telecom policy. Some countries tended to favour a regulator that is separate

PAGE 38 j INFOj VOL. 7 NO. 2 2005

or at arm’s length from the government in order to insulate regulatory decisions from political

interference and to insulate government from pressures to make day-to-day interventions in the

market based on political and economic pressures, rather than in the context of broad public

interest, transparent processes, economic, legal and technical arguments, and specialized

expertise. . . . In Japan’s case, the Ministry of Public Management, Home Affairs, Posts and

Telecommunications (MPHPT) is regulator and policy maker, while the Ministry of Finance holds

the largest share in NTT, the former monopoly domestic service supplier (Roseman, 2003, p. 92).

The EU has threatened recourse to a disputes panel over the alleged lack of an independent

regulator in Japan, but it has not so far followed through (Roseman, 2003, p. 91).

Complaints that MII is not a disinterested policymaker/regulator are demonstrated first and

foremost in the area of interconnection, which is the heart of regulation in a competitive

market, as well as the focal point of the reference paper[14]. Yang identifies three sets of

rules that provide for and govern interconnection arrangements between service suppliers.

However, there are complaints that the regulations have been ineffective, for MII has been

slow to deal with the actual interconnection problems that come before it. This is seen to

favour China Telecom over other operators:

Interconnectivity is crucial for the full development of networks and services in China. What is

more it is crucial for maintaining and enhancing confidence in the MII’s policy of opening up the

telecoms sector to market competition and breaking down the power of the former China Telecom

monopoly . . . This calls for swift, decisive action on the part of the Chinese authorities against

those transgressing the interconnectivity rules. However, indications to date suggest that the MII

have not been taking the issue particularly seriously. Indeed, recent press reports have quoted

China Unicom officials urging consumers to sue them over poor service provision so that the

cause of the problems, which they insist is out of their hands, might be brought to light . . . with the

long-standing close relationships between officials at all levels in the MII and those within China

Telecom, there is an inherent inertia to act against China Telecom within the MII (CMI, 2002b).

There was hope that this would change with the appointment in July 2003 of the MII minister

Wang Xudong to the additional post of the director of the State Council [i.e. Cabinet]

Informatization Office, which oversees all telecoms and information policy. There were also

reports that ‘‘[a]nalysts concur that transparency has generally improved and continues to

do so, but that key decisions are still made entirely behind closed doors’’ (Kuo, 2003).

But old habits die slowly. Several recent regulatory decisions have helped create a level

playing field for competition, while others have maintained an uneven surface. For example,

MII has established a low mobile-to-mobile interconnection fee that ensures that traffic will

flow among the four mobile service providers. (Total Telecom, 2003a) Also, MII has moved

quickly to require SMS (short text data messaging) interoperability among the four main

carriers, which will ensure that China Telecom and Netcom are able to capture shares of this

market, which grew in revenues from $234 million in 2002 to $750 million in 2003, ‘‘as more

sophisticated SMS services became available’’ (Reuters, 2004). One case where MII has

re-regulated for the benefit of China Telecom and Netcom without levelling the playing field,

is its decision to allow these two operators to charge users of their PHS/Xiaolingtong mobile

services[15] only to send calls, while it dithers about changing the rules that require users of

China Mobile’s and Unicom’s mobile services to pay both to send and to receive (Reuters,

2004). Some observers have noted that these decisions benefit primarily China Telecom and

Netcom, the late-comers to mobile services (Reuters, 2004).

There needs to be ‘‘an independent watchdog with teeth’’ (CMI, 2002b) to ensure that the

various service providers that enter the market receive non-discriminatory treatment.

The GATS and reference paper also call for the public availability of licensing criteria.

However, transparent and impartial criteria do not yet exist. Zhang notes:

For basic telecommunications services, there currently is no criterion in China. Whether an

applicant can get a licence is a political decision subject to fierce bargaining. In fact, MII has

limited authority to approve or refuse a licence application, except for competitive services.

Approval from the State Council and SPDC [State Planning and Development Commission] is

crucial to get a license especially for a national carrier. Without detailed criteria and clear

procedures, license regulation is full of uncertainty and lacks transparency (Zhang, 2001, p. 19).

VOL. 7 NO. 2 2005 j INFOj PAGE 39

In this way both China Telecom and China Netcom were able to circumvent the

government-sanctioned mobile services duopoly of China Mobile and China Unicom, by

implementing PHSmobile services without a licence. MII’s approval was implied by its declining

to shut down these companies’ PHS operations. Eventually, once both Telecom and Netcom

were well established in the mobile market, they received formal clearance from the authorities.

As a WTOmatter, since foreign investors are prohibited from obtaining direct control over these

carriers, this lack of licensing criteria for China’s main carriers has little, if any, impact on

investment. It is therefore not a trade issue at this time, but it may become one when designated

market segments are opened up officially to foreign-invested entities, and if these firms are

frustrated in their attempts to become licensed to operate in competition with the big carriers.

Another key regulatory issue is universal service. The design and financing of a program to

improve basic teledensity rates, as well as access to more advanced services, has gained

political importance in China because of the widening gulf between, on the one hand, the

economically advanced coastal zone and some major cities in the interior, and on the other

hand, remote and rural areas that are so far largely untouched by modernization. The

western regions of China have limited telecom infrastructure and bandwidth, contributing to

a have/have-not divide within China.

The Regulations of the PRC on Telecommunications provide at present the general

framework for a universal service program. Towards this end, the Ministry of Information

Industry in January 2002:

. . . announced that it would establish a universal service fund using contributions from telecom

operators, including foreign firms, to develop networks in rural and western areas. Now that China

is a member of WTO, all telecom operators – foreign as well as domestic – will be required to

participate in national development . . . It still remains to be seen what services the MII defines as

constituting universal service and how it plans to administer the utilization of the funds (Brahm,

2002, pp. 207-8).

The first concern enunciated by Brahm – i.e. the definition of universal service – has been

addressed. For China the basic objective is to install public payphones or public call offices

in at least 95 per cent of rural villages by the end of 2005 (Dang, 2004, p. 5). The

medium-term goal is to connect all ‘‘villages with [a] definite number of residents, [as well as]

schools, hospitals and other organizations’’ to the public telecom network by 2010 (Dang,

2004, p. 6). The long-term goal is to connect all organizations and families to the public

network by 2020 (Dang, 2004, p. 6).

The second concern – i.e. the disbursement and use of funds – is only partially resolved. All

six state-owned facilities-based operators will share universal service obligations. But a

universal service fund will be established only ‘‘in the long term’’ (Dang, 2004, p. 7). It

remains to be determined whether the ‘‘long term’’ means establishment by 2020 as it does

for long-term goals. This will presumably be clarified in the Telecom bill, when it is tabled.

From a WTO perspective the key issue will be whether this universal service program is

consistent with the reference paper requirement that universal service programs be

‘‘competitively neutral’’. However, as long as all facilities-based service providers remain

Chinese owned or controlled, it will be moot whether there is any WTO incompatibility, for no

foreign party will have sufficient interest to press a complaint.

3.C. Sector performance

China was fortunate to miss the telecom and dot.com booms and busts of the late 1990s and

early 2000s. The most obvious reason is that China was still barely open to foreign capital in

telecom carriers at the time. Wu and Zhu also attribute it:

. . . to the cautiousness of some senior officials [i.e. both government and operators], careful

consideration and strong decisions in terms of financing and investment. [S]ome senior

managers in the telecom industry pointed out that there was a bubble in the rise of share prices

. . . They disapproved of large-scale financing and investment in the telecom industry at that time.

. . . [In addition,] senior officials at the Ministry of Information Industry went against tide of

auctioning 3G licen[ces] and frequency resources (Wu and Zhu, 2003, p. 144).

PAGE 40 j INFOj VOL. 7 NO. 2 2005

By avoiding the bubble, China’s telecom industry found itself unburdened by heavy debts

and potentially attractive to foreign investors. At the same time the Chinese government of

course needed to overcome inertia so that the industry could play its full part in China’s

development.

During the decade 1993 to 2003, China’s average GDP per capital rose from less than

US$400 to $1,000. Over that same period the telecommunications industry has grown even

more spectacularly: two to six times faster (Figure 1).

In 1993, fixed-line penetration in China stood at 3.3 per cent (Qiang, 2004, p. 10), and there

were virtually no mobile services. By the end of 2003, fixed and mobile penetration rates

combined exceeded 40 per cent of the population, and mobile subscription numbers were

growing some 40 per cent faster than fixed-line subscriptions[16].

The following list (adapted fromDang, 2004, p. 8) summarizes the uptake of various services

at the end of January 2004:

(1) Mobile service (mainly China Mobile and China Unicom):

B mobile subscribers reached 276.8 million, with an increase of 8.1 million during

January. The penetration rate is 20.9 per cent.

(2) Fixed line (mainly China Telecom and China Netcom):

B fixed line telephone subscribers reached 268.9 million, with an increase of 5.63 million

during January;

B urban area: 145.7 million lines; and

B rural area: 93.1 million lines.

(3) Internet connections (the physical connections are mainly provided by China Telecom

and China Netcom):

B Broadband: 11.8 million; and

B Dial-up: 55.38 million.

(4) Leased-line connections (mainly provided by China Telecom and China Netcom):

59,000.

Figure 1 Growth rate: telecom sector vs GDP

VOL. 7 NO. 2 2005 j INFOj PAGE 41

Like in so many other areas, China has become the world’s biggest market in terms of

subscribers of both the fixed and mobile telecommunications services.

China clearly constitutes a major source of growth in the global telecommunications market.

IDATE (2003) attributed 27.5 per cent of overall growth in 2002 to China. In the mobile sector

alone, according to IDATE (2004), ‘‘[i]n 2003, the world’s mobile user base grew by over 17

per cent to reach a total 1.354 billion subscribers’’. Overall, developing countries accounted

for three quarters of the increase. By itself, China accounted for over one quarter of the year’s

new subscribers.

In 2003 China reached the point where the curves on graphs representing mobile and

fixed-line subscribers numbers crossed over (See Figure 2 and Table II). Here too China is

catching up with the rest of the world. For 2002 was the year in which the number of mobile

subscribers around the globe surpassed the number of fixed telephone subscribers; at that

time 97 mostly developing countries had more mobile than fixed phones (ITU, 2003, 2004).

If China counted PHS as mobile instead of a fixed service, the preponderance of growth in

the mobile sector compared to the fixed sector would be even greater. For most new

fixed-line subscriptions are in reality for the use of PHS, the limited radius mobile access to

fixed services offered by China Telecom and Netcom. By the end of April 2004, there were

‘‘well in excess of 50 million’’ PHS subscribers, ‘‘growing at a rate of approximately 28 million

per year’’ (CMI, 2004).

With mobile services also being more profitable, China Mobile has grown to the point where

it is the largest of the 6 telecommunications carriers in China, based on revenues (Figure 3).

That mobile subscription numbers have exploded in recent years, almost doubling in China

from 2001 to 2003, is attributable to a number of factors:

The shift comes as China’s mobile phone companies increase their efforts to win new subscribers

and younger people increasingly turn to mobile phones as a substitute for, rather than in addition

to, home telephones (Total Telecom, 2003b).

Mobile phones are utterly ubiquitous, and in the cities it’s rare to meet anyone between 16 and 60

who doesn’t own one. Many of them come equipped with bells and whistles undreamed of back

Figure 2 Fixed and mobile lines in operation, 1993-2003 (in thousands)

Table II Fixed and mobile lines in operation, 1993-2003 (in thousands)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Main telephonelines in operation 17,332 27,295 40,706 54,947 70,310 87,421 108,716 144,829 180,368 214,420 263,270Cellular mobiletelephonesubscribers 638 1,568 3,629 6,853 13,233 23,862 43,296 85,260 144,820 206,620 268,700

PAGE 42 j INFOj VOL. 7 NO. 2 2005

when they were called ‘‘dageda’’ [early handsets used by China’s high-rollers]. High-resolution

screens, digital camera ports and MP3 players are commonplace on handsets that cost a fourth

of what better cell phones did seven years ago. The SMS craze has created a mobile data market

so lucrative that China’s three major NASDAQ-listed internet portals have ridden it to profitability

and skyrocketing stock prices (Kuo, 2003).

But there are other factors as well:

Mobile networks are cheaper and faster to rollout, especially in terrain that is mountainous and

hard to reach, such as parts of western and northwestern China (Brahm, 2002, pp. 207-208).

And:

. . . mobile is the service with the greatest margins (Clark, 2004).

These characteristics, plus the high growth rates, explain why MII tolerated, and eventually

authorized, the entry of China Telecom and China Netcom into the mobile market via PHS.

Consequently, MII has ended the duopoly in fixed-line services (China Telecom and Netcom)

and in mobile (China Mobile and Unicom) and authorized the four to compete on one

another’s turf, albeit using different technologies. This is one more sign of growing

confidence on the part of the government in its own ability to manage competition and in the

industry’s ability to compete.

An oligopoly of four in mobile services also makes it easier for MII to find at least one operator

willing to use China’s home-grown TD-SCDMA standard when the government eventually

grants 3Gmobile licences. However, general resistance among carriers to MII’s pressures to

use TD-SCDMA may be a motivator behind MII’s rumoured thoughts on splicing some or

parts of the companies back together; i.e. if they will use TD-SCDMA at most only in

complement with WCDMA, and not as an alternative to WCDMA or CDMA2000, then maybe

there do not need to be so many players.

At the same time as all this growth in mobile services, fixed-line networks are being

expanded into China’s interior and upgraded to provide not only PHS mobile access, but

also broadband capability, which is available in all major cities:

For a fraction of what it cost five years ago to install a regular phone line, anyone in a major city

can get ADSL broadband service and tap into the increasingly diverse content offered along

China’s 2.4 million kilometers of optical trunk (Kuo, 2003).

However, remote and rural regions are lagging further and further behind, for the gap

between developed coastal areas and less developed interiors regarding the availability of

traditional telecommunications networks and services is compounded by the race to roll out

the basic infrastructure needed to provide more advanced ICTs. As Qiang points out:

Figure 3 Market share by revenue (January 2004)

VOL. 7 NO. 2 2005 j INFOj PAGE 43

Taking internet as an example, half of the total users live in two municipality cities and five

provinces, while the other half are spread over in the rest 24 provinces (Qiang, 2004, p. 29).

The performance of the telecom services industry in China corroborates the findings of Fink

et al. (2002) regarding the relative importance of privatization and competition and the

sequencing of such events:

We find that both privatization and competition lead to significant improvements in performance.

But a comprehensive reform program, involving both policies and the support of an independent

regulator, produced the largest gains . . . Interestingly, the sequence of reform matters: mainline

penetration is lower if competition is introduced after privatization, rather than at the same time.

We also find that autonomous factors, such as technological progress, had a strong influence on

telecommunications performance, accounting for an increase of 5 per cent per annum in

teledensity and 9 per cent in productivity over the period 1985 to 1999 (Fink et al., 2002, p. 1).

In the same vein, an earlier study by Fink et al. (2001), limited to Asia alone, found:

Where comprehensive reform – including privatization, competition and regulation – has been

implemented, there are significantly higher levels of main line availability, service quality and

labor productivitity (Fink et al., 2001, p. 1).

Fink et al. (2001) note that competitive markets have contributed substantially to increased

service penetration rates, service quality and labour productivity in Asia (Fink et al., 2001,

p. 13)

Similarly, Roseman notes the positive ‘‘impact of liberalization [on] the growth of network

externalities, which increase with higher telecom penetration rates and usage. . .; i.e. where

telecom penetration rates are lowest and rise quickly over time, the benefits would be

greatest, due to network externalities’’ (Roseman, 2002, pp. 974-975)

Thus, while China has retained state-ownership of the telecom holding companies – only

spinning off minority interests in the operating entities – the oligopolies in the telecom

services industry do betray signs of real rivalry. Moreover, this rivalry can be pretty fierce at

the street level, with employees regularly sabotaging their competitors’ networks. Aside from

such excesses, this is managed competition, with the companies constantly having to push

the envelope. But there is no doubt that users are benefiting.

In addition, China’s telcos are also testing the waters abroad. This is not surprising; indeed, it

is part of ‘‘the Chinese government’s broader ‘‘Go Out’’ policy of pushing leading domestic

companies . . . to expand overseas’’ (Dickie, 2004):

Accession to the WTO in itself will not shift the power behind China’s telecom industry from the

government to the market. The government has no intention of relinquishing control over this

sector, and will use WTO to fulfill its own development objectives. . . . One of the government’s

major objectives is to use WTO to ready domestic enterprises, the ‘local champions’ for the

international arena (Brahm, 2002, p. 222).

China Telecom leases lines and has network nodes in the US and other countries that permit

such investment in order to provide international telephone and internet data services. In

2002, Netcom led a consortium that bought the bankrupt operator Asia Global Crossing with

its pan-Asian fibre-optics network (Young, 2002). Netcom has since taken full control.

Renamed Asia Netcom, the subsidiary provides international telephone and internet data

services, and it uses Singapore as its hub between East Asia, South Asia, the Middle East

and Europe. There are also reports that China Telecom has considered buying Indonesian

cellular operator Excelmindo and investing $1 billion in submarine cable capacity

(TelecomAsia, 2003).

Conclusions

China has made – and continues to make – spectacular progress in telecommunications. It

has gone a long distance toward a complete transformation of the sector with little outside

influence and no outside ownership or control.

PAGE 44 j INFOj VOL. 7 NO. 2 2005

To the extent that this transformation is attributable to WTOmembership, it is mainly because

the prospect of joining the WTO and opening to the world galvanized government and

industry into action.

The overall thrust of those actions, however, has been to ensure that telecommunications

plays its full role as a strategic economic sector and helps deliver economic benefits to the

Chinese people in order to legitimize Communist Party leadership.

WTO accession offers a two-way street of improved foreign access to China’s markets, in

return for more secure access by Chinese firms to foreign markets. So far results are

tentative in both directions. China’s carriers are testing foreign waters, and at least two have

obtained licences to operate abroad. However, foreigners are limited in China to minority

holdings in joint ventures, of which there are few to date.

China’s commitments on market access and national treatment are rather modest. For as a

developing country, China was able to offer less than developed country members of

equivalent economic heft. However, for all its market access limitations, China is an example

of a WTO Member that permits more de facto than its schedule binds de jure. But the

bottom-line is that control of the network and of international gateways remains in Chinese

hands.

In contrast, China has no derogations from the obligations on regulatory behaviour in the

GATS Annex on Telecommunications and the reference paper. In areas governed by these

two documents, China is lagging in implementation (e.g. independent regulator, licensing

and universal service) and the long-awaited Telecommunications Act is still outstanding.

Critics say that China’s institutional set-up for the regulation of telecommunications has

reached its limits.

As a WTO matter, since foreign investors are prohibited from obtaining direct control over

these carriers, as long as all facilities-based service providers remain Chinese owned or

controlled, it will be moot whether there is any WTO incompatibility, for no foreign party will

have sufficient interest to press a complaint.

Notes

1. China was an original signatory of the General Agreement on Tariffs and Trade (GATT), but withdrew

after the Communist take-over of the mainland in 1949. China submitted its application to rejoin the

GATT/WTO in 1986 and did not complete the necessary multilateral negotiations, domestic

ratification and WTO notification procedures until 11 December 2001.

2. This section draws on Roseman (1988); 1989; 1997; 2003, as well as the author’s experience as

Canada’s negotiator for telecommunications during the Uruguay Round and WTO basic telecoms

negotiations, 1988-1995 and a consultant to corporations and governments since then.

3. Even for trade officials from countries with strong mercantilist traditions, the basic question is the

same: to open or not to open market access?

4. For a short summary of the Telecommunications Annex, see Roseman (2003), pp. 85-87.

5. For a short summary of the reference paper, see Roseman (2003, pp. 88-89).

6. See discussion of institutional economics theory in relation to China’s telecom commitments in

Zhang (2001).

7. For example, USTR (2001) refers only to joint ventures in telecommunications.

8. It is well known from trade in goods that sudden import surges may be directly connected to

measures of liberalization. There is every reason to believe that trade agreements may similarly

occasion major changes in services markets as well. However, import surges tend to be extreme

cases, and they have a negative connotation in the GATT; they are something against which

Members have the right to protect themselves through ‘‘emergency safeguard’’ actions. In the

GATS, this concern is less common, given that governments often hope that commitments will help

attract foreign investment. However, many governments worry about potential dominance of their

financial sectors by foreign investors (as opposed to domestic firms) as a result of GATS

commitments, lest the lending practices of such firms be less easily brought into line with

VOL. 7 NO. 2 2005 j INFOj PAGE 45

government priorities. This anxiety is much less common in telecommunications, because one can

regulate the operation and use of the physical infrastructure no matter who owns it. However,

governments with strong national security concerns tend to try to retain national control, through

public or private ownership, whether they are of communist or capitalist traditions.

9. Global Trade Analysis Project (www.gtap.org).

10. Other measures particularly relevant to foreign investment in Chinese telecom services providers

are the Regulations of the People’s Republic of China on Telecommunications and the

Administrative Rules on Telecom Service Operation Licence (Yang, 2003, p. 19.)

11. For further details, see Brahm (2002, pp. 197-202, 216-221), as well as Greenberg (2002).

12. Yang (2003, p. 19) states that: ‘‘China welcomes foreign telecom companies with both financial,

technological capabilities and experiences in market development and business administration, to

strengthen cooperation with Chinese telecom operators to invest and operate in Chinese telecom

market according to China’s commitments on WTO accession and related Chinese laws and

regulations’’.

13. See also Young (2004b).

14. The provisions of the Telecoms Annex relating to access and use deal in fact with forms of

interconnection, particularly with the linking of private networks with public networks, for purposes of

intra-corporate communications, as well as the supply of scheduled services (e.g. value-added

services). These rights also remain unclear in Chinese law. Absent knowledge of any specific

complaints, one must wonder whether users have had difficulty maximizing the benefits of their

leased lines.

15. PHS stands for Personal Handiphone System, a technology pioneered in Japan. It is also known as

PAS, Personal Access System. Xiaolingtongmeans ‘‘little/cute smart’’ communications. The generic

term at present is WLL-M for limited radius mobile access to wireless local loops.

16. Based on data provided by Dang (2004, p. 8).

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Further reading

Reuters (2002), ‘‘Battered foreign telcos avoid China – MII official’’, Total Telecom, 14 August.

PAGE 48 j INFOj VOL. 7 NO. 2 2005