Doing Business with China

At first glance, it may be surprising that (other than Shanghai Symphony Telecom JV, which has yet to prove itself) there has been no rush of foreign capital or foreign operators to enter China's telecommunications sector following China's accession to the WTO, as many people had predicted before the event.

One explanation for this is that China's commitments in the liberalization scheme do not go far enough ( essentially still preventing foreign companies from gaining management control), or are too slow in the lifting of foreign ownership limits.

However, apart from foreign ownership limits, there are other specific reasons that are holding back development in the sector. Both the external and internal environments have contributed to holding back overseas investment in the Chinese telecommunications sectors.

The external environment has been dominated by the global economic downturn which has particularly affected the worldwide telecommunications markets. The economic downturn in the market is compounded by over-supply of network capacity and accounting fraud within some of the newer international carriers . As a result, international capital has not favoured the telecommunications industry, and, in general, existing telecommunications companies are paring back their investment plans. Inevitably, this has led to limited financial and human resources being allocated to develop emerging markets such as China.

This external investment environment is largely beyond the control of Chinese policy makers . However, the following internal factors within China's own regulatory environment require policy attention if foreign investment in the Chinese telecommunications sector is to thrive. These issues are the ones on which future policy development should ideally take place:

• Lack of a transparent regulatory regime in China, adding insecurity to foreign carriers. Basic issues yet to be resolved include:

  • the status of telecommunications law;

  • lack of a truly independent and transparent regulator to implement the government's policy objectives (independent of both the industry players and political institutions);

  • detailed policies on universal service and interconnection (which will impact the cost base of companies), competition, and non-discrimination by vertically integrated dominant suppliers (for example, the availability of local network facilities to all parties on equal terms and conditions, including vertically integrated companies' own downstream operations).

• The state-owned nature of the current Chinese carriers results in protracted periods for partner selection and the building of mutual trust and corporate structures within JVs.

• Foreign carriers are naturally reluctant to initiate a JV when there is currently no possibility of them ever being able to gain management control.