Telcos poised to pounce on Chinese markets

U.S. Commerce Secretary William Daley and U.S. Trade Representative Charlene Barshefsky are in China this week in "final negotiations" for the country's entry into the World Trade Organization (WTO), a body that aims to push for the liberalization of several sectors of the tightly regulated Chinese economy.

American officials still caution that significant negotiating differences remain, but Daley said today he was optimistic that U.S. companies would for the first time officially be able to buy into Chinese telecom firms.

This is good news for companies like Sprint and Bell Canada that have tried to skirt existing Chinese laws against foreign ownership by setting up joint ventures with local firms.

The Chinese government has recently taken a sharply critical tone toward these investment strategies, but a trade deal liberalizing the telecommunications sector might save the Western companies' efforts. The companies are eager to unlock the potential of the quickly growing Chinese market that has long been promised, but has yet to be realized.

"We're cautiously optimistic about the current negotiations," said Peter Burn, vice president of Bell Canada International. "Pending notification, we are on hold."

Citing a senior Chinese trade official, Daley said U.S. and other foreign companies would probably be allowed "a range of 30 to 40 percent" ownership stake in Chinese telecommunications companies. Although the policy would be phased in over the next five to six years, it still marks a huge win for foreign companies in China.

Recent events have given some international firms added reason to be optimistic about opportunities in the Chinese market.

On Monday, Chinese officials confirmed that they would allow wireless companies to begin using the U.S.-backed CDMA wireless standard. That was good news for companies like Motorola and Lucent, which are the main infrastructure and equipment manufacturers for CDMA.

Chinese officials have said they want to reach 10 million CDMA subscribers, out of an estimated 38 million total wireless subscribers, by the end of next year.

"They are very excited," said Hui Pan, director of Asia Pacific research at the Information Gatekeepers Group, a consulting firm that specializes in emerging telecom markets. "But that is too ambitious. There's a lot of hype there."

Getting in the game
The role of foreign companies in reaching these goals is still unclear, however. Under current law, foreign firms are not allowed to own or operate domestic Chinese telecommunication networks.

To combat this, some companies have established wireless or small-scale traditional telephone joint ventures with competitors of the state telecom monopoly. Most notably, a company called China Unicom was set up originally to encourage competition in the communications market.

Until very recently, Unicom has struggled to wrestle even a small piece of the market from the state-owned China Telecom, however.

Bell Canada and Sprint were among the early investors in China Unicom. Bell Canada is part owner of two cellular operations that it has the right to expand this year, but executives say investments are on hold pending the result of the trade negotiations.

"We've heard different things from different people," Burn said. "There's a certain amount of confusion."

As a part of the ongoing WTO negotiations, Chinese officials have reportedly suggested that foreign companies be allowed up to a 35 percent stake in domestic telecommunications networks. While far from the 100 percent that U.S. companies are pushing for, this would finally allow Sprint, Bell Canada, and others to solidify their foothold in the Chinese market.

U.S. companies will also have to walk a tightrope when it comes to government policies. There are strict government controls over Internet content, and the country has had a less-than-spotless record on human rights. Considering that U.S. policymakers have repeatedly criticized the Chinese government on its censorship stance, companies may find it difficult to juggle business and politics in China.

Other signs of competition
After several years of only marginal commercial success, Unicom has finally been given a new vote of confidence by the central Chinese government.

Pan said that a senior government official was transferred to head the company last month, and several other officials were moved into the upper ranks of management. Meanwhile, the government has reorganized its regulatory structure so that both Unicom and the monopoly China Telecom report to the same ministry.

"China wants to introduce competition," Pan said. "I think this time it's for real."

Trade officials are trying to reach a close to the WTO negotiations by April 6, when Chinese Premier Premier Zhu Rongji will visit the United States for a summit meeting with President Bill Clinton.

Daley and other U.S. officials caution that other trade issues such as agricultural tariffs may still derail the negotiations.

"They've got to be settled before any sort of package could be approved,'' Daley said during a conference call with reporters in Washington. "I think there's still a lot to be covered.''

Congress also has presented an increasingly hostile face towards China, sparked most recently by allegations of Chinese spying in U.S. nuclear weapons facilities. This climate could eventually unravel any trade agreement.

But some of the companies involved say this week's negotiations aren't necessarily the only venue for opening up China's telecommunications market.

"I'm not sure this has to be tied to the WTO, although I would suspect that's a factor in the domestic [regulatory] revision process," Burn said.

"I haven't heard anybody say these things have to happen at such and such a date or at such and such a time," he added. "That's not the way things work in China."

Bloomberg contributed to this report