Overseas investors held up
(China Daily)
Updated: 2005-01-07 10:29

A vaguely-defined regulatory framework is hampering overseas investors' presence in China's booming telecoms service sector.

And much effort is needed to improve the environment for overseas investments which will offer long-term benefits to the domestic telecoms industry, analysts said.

"Foreign investors are quite interested in China's telecoms service market which they think offers a lot of potential," said David Hoffman, managing director of the Greater China InfoComms Advisory Services practice of PricewaterhouseCoopers (PwC).

"However, as some related laws, regulations and rules are not well defined, making an investment risks failure. Against such a backdrop, foreign investors would hardly be willing to make investments."

Hoffman made the remarks at a recent Beijing forum on overseas investors' opportunities in China's telecoms industry.

The analyst, who has been active in China's information industry for almost two decades, said the tariff policy related to network interconnection issue is "ill-defined, which is putting off foreign investors."

China's telecoms sector has long been beset by poor network resource sharing and interconnection, with established players reluctant to let smaller rivals access the network.

There have been disagreements between operators over the settlement of tariffs incurred by calls made between different networks.

Larger operators complain it is unfair to provide cheap or free network access.

That is because larger operators have invested huge sums on network construction, while small or new operators can get a share of these network resources at very little cost.

Such disputes are now starting between mobile operators and their fixed-line counterparts.

When a mobile phone call is transferred to a fixed-line, only the mobile phone user is charged.

As the call takes up the fixed-line operator's network resources, the mobile operator pays the fixed-line operator 0.06 yuan (US$0.007) per minute under a government-set scheme.

But this fee should be 0.16 yuan (US$0.019) per minute, according to fixed-line operators China Telecom and China Netcom.

Disruptions to network interconnections between China Telecom and Netcom are also frequent.

"Without well-defined regulations concerning interconnections, the only partners that overseas investors can choose are larger State-owned operators," Hoffman said.

That means overseas investors will spend much more to acquire a stake.

If they choose smaller firms,"without network resources and reasonable tariffs, the investment will be a failure," Hoffman said.

The Ministry of Information Industry (MII) has already put the interconnection issue the top of its agenda and has established an expert panel to solve the problems.

But so far, little real progress has been made.

'Go slow'

Hoffman maintained that policies related to China's telecoms service sector are unfriendly to overseas investors.

The MII has traditionally been reluctant to open the market as it fears that "opening the floodgate" would lead to great losses for domestic operators.

Chen Jinqiao, director of the Institute of Telecommunication Policy under the MII's China Academy of Telecommunication Research, said the country should attract more overseas investment to the telecoms service sector, which will offer long-term benefits to the industry.

"The earlier development of China's domestic telecoms industry was largely the result of strong government backing," Chen said.

"But now deregulation of the market is increasingly limiting the government's role."

The telecoms service market should take a leaf out of the book of the successful overseas investment in China's IT sector.

Overseas investment provided a greater stimulus to China's IT market, developing and popularizing the IT services, Chen noted.

"For example, many online firms and e-commerce trading houses are backed by overseas investments.," he said.

"Also overseas investment have helped nurture a number of top-notch domestic firms."

Three years after China'a accession to the World Trade Organization (WTO), the presence of overseas investment in China's telecoms service market is far below what was expected, Chen noted.

According to Li Guobin, deputy director-general of the MII's Department of Laws and Regulations, 18 overseas firms had applied to the MII to establish foreign-invested telecoms enterprises by November 2004.

But only two firms secured licences, with some being disqualified.

The MII currently reviews applications largely in accordance with a set of regulations drawn up by the State Council, which took effect on January 1, 2002.

Chen said the regulations are somewhat "rigid" in terms of the qualifications of overseas investors and the licence application process.

That has in fact erected some regulatory barriers, he added.

For example, the regulations limit the stake which can be owned by overseas investors and require them to have previous "outstanding achievements and experience" in operating telecoms services.

The regulations also have "excessive capitalization requirements," analysts said.

For example, a foreign-invested telecoms enterprise operating nationwide basic telecoms services is required to have a registered capital of no less than 2 billion yuan (US$240 million).

Hoffman added that even "what constitutes a basic services network is ill-defined."

Basic service in China usually refers to services like fixed-line and mobile voice, but it remains unclear how big the scope of the basic service is.

Opening wider

The Chinese Government is now under increasing pressure to expand the scope of telecoms services that are open to overseas investors.

The mainland-Hong Kong and mainland-Macao Closer Economic Partnership Arrangements (CEPA) have given the two special administrative regions a head-start over other overseas investors in the opening of the mainland's telecoms market.

Chen revealed that Hong Kong and Macao businesses are lobbying the central government to give them more preferential treatment in gaining access to the telecoms market.

They hope the central government can scrap the cap on the stake they can control in telecoms joint ventures, allow them to expand the scope of permissible services, and treat the Pearl River Delta as a special economic zone, Chen said.

"The central government is reviewing such requests and has yet to make any commitment," he said.

An expanded scope of opened services as well as the elimination of geographic limitations would release a huge amount of overseas investment, said Hoffman.

From December 11, 2004, overseas investors have been allowed to establish joint ventures in Shanghai, Guangzhou and Beijing to deal in domestic and international fixed-line businesses with a stake of up to 25 per cent.

In 2006, overseas investors will be granted the right to hold a 35 per cent stake in operations in 14 cities.

In 2007, their stake will be increased to 49 per cent without geographic limitations.

Understanding policies

Wang Xuebing, a senior fellow with the Economic Research Institute under the National Development and Reform Commission, said overseas investors should become familiar with related policies in China when considering entering the country.

"As far as I know, many overseas investors are not doing well in terms of understanding China's policies," Wang said.

"They don't understand some policies which can be easily understood in China but cannot be expressed very explicitly."

Ironically, Wang's suggestion points to some vagueness of policies related to the telecoms sector.

For example, regulators have been vague in their attitudes towards the development of the limited mobility service xiaolingtong, or personal handset service (PHS).

The MII never clarified whether it allowed the deployment of xiaolingtong, except when former ministry chief Wu Jichuan said it "neither encouraged nor supported" it.

In China that should be interpreted as "you can go ahead with it," analysts said.

As a result, the number of xiaolingtong users soared to 70 million by 2004 and is expected to hit 100 million at the end of this year.

But for greenhorn companies, guessing regulators' attitudes is a quite risky business, analysts said.

Chen said some overseas firms, which are bold enough, already entered the market by skirting limitations and stringent requirements on direct foreign investment in the sector.

"For example, some unqualified overseas firms registered shell firms before entering the mainland market," Chen said.

That would pose a headache for regulators, the researcher said.

Chen urged regulators to modify laws and regulations to attract overseas investment to establish foreign-invested telecoms enterprises in the less-affluent regions.

"The government can consider special policies to channel overseas investment to these regions," he said.

Close