China - The world's largest telecom market and more to come
By Isabelle Paradis and Miranda Yi
May 2006

China's telecom sector has exploded in the last 10 years and is now the world's largest telecom market, ahead of the United States. China's telecom industry has been growing leaps and bounds during the past few years, and the trend remained unchanged in 2005.

According to the report released by the Ministry of Information Industry (MII), the Chinese telecom sector saw stable increase in 2005, with total revenues of $71.9 billion, representing an 11.7% growth from the previous year. The boom was spurred by an increase of nearly 100 million fixed and mobile subscribers. China posted total telecoms revenue of Rmb50.2 billion in January 2006, up 10.7% over the same period in the previous year.

At the end of 2005, the country boasted a total of 350 million fixed lines and 374 million mobile subscribers, translating into penetration rates of 26.7% and 28.5% respectively. Wireless local access phones (known under the name Xiaolingtong) are continually increasing in popularity, with 85 million subscribers at the end of 2005, representing 24.3% of all fixed connections.

Xiaolingtong is expected to add 15.3 million customers in 2006 to take its total to 101 million. Government statistics show that approximately 60% of new fixed line subscribers in 2005 were wireless local access phone users.

Fixed and mobile growths have now peaked and we should see a deceleration in new subscribers in the coming years. The number of fixed lines is therefore forecasted to reach 440 million by the end of 2010, representing an average growth of 4.7% and a penetration of 32.5% at the end of the forecasted period.

Mobile services should follow a similar trend with the number of mobile subscribers forecasted to grow by an average of 9.7% to reach 593 million at the end of 2010, representing a penetration of 43.9%.

The total number of telephone lines in China (fixed and mobile) is forecasted to surpass the 1 billion mark in 2009.

China is also becoming one of the world's largest Internet markets with 76 million subscribers and 111 million users at the end of 2005. There were 12.6 million more users with access to broadband Internet services in that year alone, bringing the total broadband connections to 37.5 million, representing 49.4% of all Internet customers.

Internet services should continue to grow at a steady pace in the next 5 years to reach 110 million customers at the end of 2010. Broadband services should also continue to grow in popularity and the number of broadband connections is forecasted to reach 89 million by 2011, and should represent 80.7% of all Internet customers.

The WTO agreement signed in December 2001 was the start of China's telecom market liberalisation, committing it to:

Immediately open, upon accession into the WTO, the key telecom service corridor in Beijing, Shanghai, and Guangzhou, and 30% foreign ownership in value-added services.

Phase out all geographic restrictions for value-added services within two years of accession, mobile services within five years, and domestic fixed service within six years.

Allow 49% foreign ownership in mobile services within 3 years of WTO accession in seventeen major cities and within five years for all of China, 49% in international and domestic fixed line services within six years, and 50% in value-added services within two years.
Starting in December 2003, foreign investors can own up to 50% of a value-added and paging company in all of China. From December 2004, a large part of China's basic telecom industry - fixed lines, mobile and satellite services - was opened up to foreign investors in Beijing, Shanghai and Guangzhou. Investors are now able to set up joint ventures in domestic and International telecom businesses in the mainland, with a foreign-investment cap limitation of 25%. That figure will be increased to 35% in 2006 and 49% in 2007, by which time the territorial restriction will also be relaxed.

The Chinese telecom services market has been gradually restructured over the past decade. The former Ministry of Post and Telecommunications' monopoly status (through China Telecom) ended in 1994 when the China State Council approved the creation of China Unicom. It also established China Jitong Corporation in that year as a data telecom supplier.

Further restructuring occurred in 1999 when the Ministry of Information Industry (MII), which had been created by a merger of the MPT and the Ministry of Electronics Industry (MEI) the year before, spun off China Telecom's wireless network into a new entity, China Mobile, and its satellite operations into China Satellite. MII also launched China Netcom later that year as China's third telecom service provider and gave the Ministry of Railways a license in 2000 to provide fixed telecom services, through the newly established China Railcom.

The market liberalisation and competition levels increased again in 2002 when the State Council split China Telecom once more in May, allowing the company to retain its local loop networks in twenty-one of China's southern provinces and municipalities, and combining China Netcom and China Jitong into a much larger China Netcom, called China Network Communications Group Corporation, which would handle the local loop networks in ten northern provinces and municipal areas.

The next step of the reorganisation came in September 2002, when additional China Telecom assets were spun-off in a new entity, China Telecom Corp Ltd. This new entity now provides fixed services in 20 Chinese provinces.

In April 2004, China Netcom started a series of restructuring in anticipation of its public offering, which was completed in November 2004 and created China Netcom Corp. Hong Kong. The next Chinese company in line for public offering in the next 2 to 3 years is China Railcom, which was recently re-branded to China TieTong. A graphic presentation of China's market evolution can be found on page 14 of this report.

The reforms have breathed life into the industry and driven its spectacular expansion. However, the competitive structure needs further optimisation as the competition level among the six telecom operators is not sufficient.

More than 10 years after the split of China Telecom and the introduction of competition in the fixed sector, the former incumbent still controls the lion's share of the market, while China Netcom and China TieTong are much weaker.

A similar situation is found in the mobile sector, where China Mobile (which was the mobile operation of the incumbent) still possesses a significant advantage over its only competitor China Unicom.

The next major telecom market reorganisation might come in preparation for the 3G license allocation. Amidst all the speculation about the launch of 3G, there have also been numerous reports on a possible industry-wide reshuffle. It's said that China plans to take advantage of issuing 3G licenses to optimize the competition structure and to push the growth of domestic telecom equipment manufacturer.

Some claim that China Unicom, the second largest mobile carrier, will be split between two fixed operators, China Telecom and China Netcom, before 3G licenses are issued. However, others reported that China Netcom may be merged into China Unicom, with the new entity receiving two 3G licenses. After many delays by the ministry, the award of 3G licenses his set to take place before the end of 2006.

Recent announcements by the ministry suggest that the planed re-organisation might take place only once 3G licenses have been awarded.

It is also expected that China would merge three major networks, namely Internet, telecom and broadcasting within five years. The merger of these three networks has been included into the government's 11th Five-Year Program (2006-2010), which is still in the making. However, with the broadcasting network under one supervisor and the other two under another, their integration is expected to receive resistance.

As proposed in the five-year program, China is to enhance the construction of its broadband, digital television and next generation Internet, so as to achieve their merger in the future and prepare for triple play services. The merger will optimize the structure of China's telecom industry and facilitate its network upgrade and reform.

For more information on this telecom market, see our new China country profile 2006: More info >>