China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [63]
The largest restructuring of the sector occurred in 2002 when the government broke up China Telecom into two entities. The part that controlled fixed-line networks in the more prosperous twenty-one provinces, including the coastal regions, retained the China Telecom name. The networks in the other and less prosperous ten provinces were combined with China Netcom and Jitong Communications to form China Networks Communications Group. This restructuring effectively transformed a national monopoly in fixed-line services into a geographically based duopoly. In terms of market share, China Telecom remained the dominant fixed-line service provider in 2002, with 133 million users or 62.1 percent of the market; the newly combined China Netcom had 77 million users or 36 percent of the market. China Railcom had only 1.4 percent of the market. In the judgment of a government think tank, access to the fixed-line market was as closed as ever. Despite the breakup of China Telecom into two entities, there was no competition in this sector. The situation was hardly better in the wireless market. China Mobile, which was split from China Telecom in 1999, had revenues of 151 billion yuan in 2002, or 77.3 percent of the market; China Unicom, the upstart, claimed 22.7 percent.37
Throughout the reform era, the state not only successfully kept domestic private firms out of the telecom service sector, but also managed to prevent foreign investors from penetrating the sector. Despite their efforts, foreign telecom firms failed to crack the Chinese market. Even ingenious schemes—such as the Chinese-Chinese-Foreign equity investment model, under which a Chinese firm formed a telecom joint venture with a Chinese-foreign joint venture to bypass regulatory hurdles—eventually proved unsuccessful. Such a model was tried in the case of China Unicom, when twenty-one foreign investors—including the biggest multinational telecom firms such as Sprint, Nippon Telephone and Telegraph, Cable and Wireless, and France Telecom—poured $1.3 billion into China Unicom through their joint ventures in China. But in late 1999, under government pressure, China Unicom unilaterally forced these investors to withdraw their equities at a very low rate of return on their investments.38 During its WTO accession negotiations, China’s major trading partners, the United States and the European Union, forced China to make key concessions on the opening of the telecom service sector.
According to China’s WTO accession agreements, the country would open the telecom service sector to foreign competition in stages. Foreign companies can get up to 50 percent of ownership in value-added services in 2005, and 49 percent ownership in both mobile and fixed-line services by 2007. China’s tough stance on refusing to cede foreign telecom operators majority control almost caused its WTO negotiations to collapse. But this position reflects the Chinese government’s determination to maintain its control of the telecom sector despite international pressure.39 Indeed, foreign telecom operators appeared to get the message and did not take advantage of China’s WTO concessions. In the two years following China’s WTO accession, only the U.S. firm AT&T acquired a 25 percent stake for $25 million in a joint ISP venture with the Shanghai city government.
While strenuously trying to keep foreign competition from its telecom service sector, the Chinese government was eager to attract foreign portfolio investment in its state-owned telecom firms