China unveiled plans for a long-awaited shake-up of its telecommunications sector that could enhance competition among its carriers and lead to billions of dollars in new contracts for global wireless-equipment companies.
The restructuring, announced Saturday after years of preparation, will reshape China's telecom industry, one of the world's most lucrative with total revenue last year of 728 billion yuan ($104.9 billion). It will meld six main state-owned telecom companies into three full-service carriers offering fixed-line and wireless service nationwide. That will mean two more robust rivals for China Mobile Ltd., the world's biggest wireless carrier, with about 400 million subscriber accounts, which dominates its sole competitor.
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The plan was announced in a statement from three ministries posted on a government Web site. It gave no timetable for execution, saying only that the companies should "as quickly as possible" report detailed arrangements for carrying out the plan.
After the restructuring, the statement said, the government will issue licenses for advanced, "third-generation," wireless services that enable high-speed functions such as video downloads. China is one of the last major telecom markets to adopt such "3G" technology, and global telecom-equipment providers such as Telefon AB L.M. Ericsson, Alcatel-Lucent SA, and Huawei Technologies Co. have been waiting for years for it to begin building 3G networks.
"This restructuring is key to a 3G rollout, and there will be a lot of opportunities for domestic and foreign equipment providers," said Ian McGuinn, managing director in Shanghai for JL McGregor & Co., a China-focused consulting company.
The government's announcement highlights how dominant the state remains in one of China's biggest industries. The four biggest existing carriers have units that list shares in Hong Kong and New York: China Unicom Ltd., China Telecom Corp., and China Netcom Group Corp. (Hong Kong) Ltd., in addition to China Mobile.
The new industry structure has been determined entirely by government, which owns all of their parent companies, without say from outside shareholders. Although the statement said the government only "encouraged" companies to follow the plan, it is clear that companies have already begun to implement it.
A day before the announcement, the state-controlled Xinhua news agency reported the first major merger, saying China Mobile Communications Corp., parent of China Mobile, will take over China Tietong Telecommunications Corp., the smallest of three fixed-line operators. The report, which cited China Mobile officials, didn't disclose financial terms. China Mobile declined to comment. A Tietong official confirmed the merger plan but wouldn't elaborate.
While the initial phase of the restructuring will involve only the parent companies, the resulting mergers are certain to affect the listed companies, as well, and likely to create lucrative business for global investment banks.
Under the plan, fixed-line carrier China Telecommunications Corp., parent of China Telecom, will acquire one of two wireless networks owned by China United Telecommunications Corp., parent of Unicom. The remaining operations of China United will then merge with fixed-line carrier China Network Communications Group Corp., Netcom's parent. The sixth national carrier, China Satellite Communications Corp. will be folded into China Telecommunications.
Shares in the listed companies have been roiled in recent months by speculation over the timing and nature of the planned restructuring.
After the Xinhua report Friday, China Mobile shares fell 5.8% on the New York Stock Exchange, following a 3.8% decline in Hong Kong earlier in the day. China Mobile's Hong Kong shares then plunged a further 8.2% Monday, ending the session at 114.90 Hong Kong dollars ($14.73), as analysts warned about the growing competitive challenge it is likely to face.
Shares of the other three listed companies all surged Friday in New York and in Hong Kong before trading in them was suspended in Hong Kong midway through the session after Xinhua's report.
In statements Sunday, the three companies acknowledged the government's announcement the day before and said they were engaged in related merger negotiations, which they promised would "follow international practice." The three companies said trading in their Hong Kong shares will remain suspended while negotiations take place.
Numerous questions remain about how the industry changes will play out -- not least about how various 3G technologies will be deployed. Industry executives and analysts expect each of the three new carriers to use a different type of 3G technology, including two international standards and one that is homegrown in China.
China's government has been especially eager to promote the domestic 3G standard, called TD-SCDMA, as part of a broader push for "indigenous innovation" that officials hope will help wean the country from expensive foreign technologies.