China Regulatory Outlook

Pyramid Research has released a report covering the regulatory environments of key Asia-Pacific markets.  This release provides an update on the main regulatory initiatives being introduced in the region. The aim is to highlight regulatory advances on such key issues as local loop unbundling, VoIP, tariff regulation, number portability and others.

The Chinese telecoms market is set for a landmark year in 2005 with the government’s pending announcement regarding 3G policy, regulatory changes following China’s admission to the World Trade Organization (WTO), and the National Congress’ approval of the long-awaited Telecommunications Law finally comes into play.  Additionally, China could potentially award two valuable pieces of real estate – 3G spectrum and 450 MHz spectrum licenses – in 2005.

Implementation of the new Telecommunications Legislation will resolve issues of tariff regulations, spectrum management, and the establishment of a competitive regulatory framework. This will provide increased transparency, thereby increasing the chance of foreign direct investment in the sector over the short term.
 
While four of China’s telecom operators are currently traded publicly, all remain mostly state held.  WTO requirements will open the ownership structure and allow foreign investors to hold up to a 25% stake in joint ventures with Chinese companies providing fixed-line services in Beijing, Guangzhou, and Shanghai. The maximum holding will be gradually raised to 49%, and the geographical constraint (to date joint ventures are allowed in 17 cities) will be removed by 2006.

Also of note, Pyramid Research expects China’s regulators to announce the recipients of 3G licenses in 2005. The anticipated scenario includes the award of three 3G licenses, two to China’s mobile operators and one to a fixed-line player, (with the entry of a third mobile operator adding more dynamism to the market by the end of 2006). Since all three operators would be government-owned, their ability to expand quickly within their networks leads to higher overall penetration for China’s mobile market. Contrary to expectations of a less competitive market with fewer players, we believe that 3G-backed businesses will become more competitive, particularly in the more urban provinces. Operators may differentiate themselves on higher quality, efficient provision of services, bundling and packaging, and opening the doors for services from vendors.

In the 450MHz band, Pyramid Research believes the government’s circular banning is correlated to their efforts in clearing out the spectrum for future 450 MHz license awards. The most likely scenario is for 450 MHz licenses to be awarded to players barred from the 3G spectrum auction as a means to enter the wireless data market despite lacking 3G licenses. Among the top contenders for these licenses are China Tietong, China Satcom, and China Unicom. Huawei and ZTE, major providers of 450 MHz spectrum, stand to secure attractive contracts from both the 450 MHz awards as well as the 3G TDS-CDMA awards.