BEIJING-“The investigation into China Unicom’s unprincipled and wrong foreign fund-raising practices has been completed,” Wang Jianzhou, director of the planning department of the Chinese Ministry of Information Industry (MII), announced at a press conference in Beijing on 1 December. That’s pretty close to saying it’s illegal.
It was the first official word-after months of feverish speculation in diplomatic and industry circles in China-since the first stories of a possible prohibition of foreign investment in telecommunications ventures operated by China Unicom began circulating in September.
What will happen next still is far from clear. Jianzhou did not elaborate on what, if any, measures would be taken to punish China Unicom. He did concede China is making efforts to open its telecom markets. That’s probably one of the reasons a house cleaning is in order.
Using the CCF (China-China-Foreign) formula, about 45 foreign companies from 11 countries invested US$1.5 billion, equivalent to 72 percent of China Unicom’s funding, in telecom ventures operated by China Unicom, whereby the foreign partner would be paid indirectly out of the operating revenue. The list includes such heavyweights as France Telecom, Deutsche Telecom, Sprint Corp. and NTT International.
The mechanics of the CCF scheme aren’t for the faint of heart as it involves complex management relations among the Chinese operator (China Unicom), the Chinese joint venture acting as an intermediary and the foreign investor. The complex web of equipment leasing, consulting fees, management fees and license fees is designed for the ultimate purpose of landing part of the operating revenues in foreign pockets.
The MII once again seems to have found a big stick with which to beat China Unicom, thereby eliminating any credible challenge to premier operator China Telecom, but unraveling the imbroglio of the joint ventures and ensuring foreign investors don’t get too disillusioned is a far more complicated task.
While the ministry has for the first time acknowledged the investigation into China Unicom’s business practices, it is not forthcoming with information as to what foreign operators will be permitted to do and when they will be allowed to do it. On the one hand, the issue is linked with China’s bid to join the World Trade Organization. Negotiations have been ongoing for 12 years, and one of the crown jewels that could seal the bid is access for foreign operators to China’s lucrative telecommunications market. The Chinese government already has promised to partly open the mobile telecom business five years after joining the WTO.
Another factor is how China Telecom will be split up. Apart from the guiding principle of separating government and business functions, nothing has been decided so far.
One proposal is a split along business lines, such as fixed-line, mobile, paging, data and long distance. Another calls for a break-up along regional lines, modeled after the Baby Bells in the United States.
A split-up along business or regional lines isn’t going to foster more competition if each operator is barred from stepping on another’s territory.
Still more questions remain as to who will manage the company, who will own the existing telecom infrastructure and how expansion would be financed in the future.
Foreign investment in telecom equipment manufacturing has been welcomed since 1983 with the establishment of the first telecom joint venture, Shanghai Bell. China Telecom benefited enormously from fierce competition among equipment suppliers bidding prices down to rock-bottom levels.
Foreign investment in the operating business, on the other hand, has been illegal all along.
China Unicom thought it discovered a legal loophole regarding the meaning of the word “foreign.” A foreign operator establishing a joint venture with a Chinese company-thereby creating a Chinese company that joins up with China Unicom to operate a network-doesn’t break the ban on foreign investment, it reasoned, as China is experimenting with a lot of things.
The problem was that China Telecom wasn’t going to let Unicom get loads of foreign money to spur real competition, certainly not with existing government regulations to back it up.
The next question on the agenda is how to compensate the foreign investors who entered into the ill-fated joint ventures during the past four years on the strength of China Unicom’s assertion that in the end things would work out.
Drafting a telecommunications law is long overdue and has been put on the agenda of the Ninth National People’s Congress, China’s parliament, whose term of office expires in 2002. It is slated to debate a draft of the law, but there is not yet any indication whether the draft also will be voted on and come into force during this period.
Apart from the cryptic announcement by the MII, most parties involved prefer not to offer any comments. Foreign operators do not want to offend the powers that will decide whether to compensate them for their investments, when ill-fated comments may cost them millions of dollars.
The ministry now is combing the contracts to determine which can be modified and which must be terminated. The local authorities approved most contracts since they didn’t exceed the investment ceiling above which central government approval is required. It is not excluded that some foreign operators may be allowed to continue after diluting their investments to less than 25 percent.
There also is some good news for China Unicom. The Bank of China approved a US$2.7 billion credit line, and the Administration of Telecommunications confirmed China Unicom received a license to operate mobile phone networks nationwide, a privilege China Telecom has enjoyed all along.
If sweeping away CCF is meant to clear the way for a legal entry of foreign operators into China’s telecom market, the future may still look bright. Officially that’s indeed the ultimate goal, but the million-dollar question is when. For now, that’s anybody’s guess.
