Chinese Telecom Reform: Busy Signal?

Zhu's shakeup may still leave foreigners shut out

By Chinese standards, it was a hard-hitting news story. In mid-April, state-owned broadcaster CCTV attacked Chinese regulators for blocking the progress of China Unicom Corp., a local provider of phone services. The report charged that regulators were protecting China Telecom, the big state phone company, at the expense of Unicom, which had been launched by a rival ministry and has ties with foreign companies such as Sprint Corp.

The CCTV report may have been an attempt by reformers to prod regulators into acting more impartially. U.S. negotiators hope China will open up its telecom sector to competition before it joins the World Trade Organization, and Premier Zhu Rongji has started a dramatic restructuring of the state regulator, the Ministry of Posts & Telecommunications (MPT). Yet Zhu's moves will probably not create a level playing field any time soon. "It's a mistake to see this as an opening," says one Western diplomat. "China wants to introduce competition for Chinese companies, not for foreign companies."

Here's what's happening. The MPT used to run China Telecom outright. Now, Zhu is setting up China Telecom as a separate, state-controlled company with no official ties to the MPT. And the MPT has merged with two rival ministries, the Electronics Industry Ministry (which started up Unicom) and the Radio, Film & TV Ministry. The idea is to create a single Information Industry Ministry that will impartially regulate all telecom and media companies. "We hope the [ministry] will treat China Telecom and us equally," says Li Huifen, president of Unicom. "I expect the domestic market to be liberalized from one competitor to many." The new ministry is also crafting a new telecom law that is expected to clarify the role foreign telecom operators play in China. At the moment, the government bans foreigners from directly running telecom services in the country. Companies such as Sprint now operate in a legally gray area in China. They hope the new ministry will formally approve their local operations.

Sounds good. But some unsettling developments have occurred as well. First is the choice of the new ministry's chief, Wu Jichuan. He's the former head of the old MPT, a bureaucrat known for his closed-mindedness. "Many see him as the main obstacle to reform and foreign participation," says one diplomat. Already, Wu has announced that foreign telecom companies cannot have a free hand until domestic competitors are strong enough to compete with them. He says that is unlikely until 2020, a date clearly inconsistent with the desires of the U.S. and other WTO-member countries.

Some Western executives fear the new ministry will just build up local companies while confining foreigners to a supporting role. Foreign telecom equipment providers, which have done good business with both China Telecom and Unicom, now worry that both companies will feel pressure to buy domestic equipment. "Anything they can source domestically, they will," says one Western telecom analyst. "It's the MPT reincarnated as a much more powerful player. And it's all in Wu's hands." This doesn't sound good for reform in China.

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