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By Root 397 0

through overseas stock listings. The initial public offering (IPO) of China Telecom (HK) in Hong Kong and New York in 1997 netted $4.2 billion.40 China Netcom was floated on the U.S. Nasdaq market in 2000. China Unicom received a staggering $5.7 billion at its IPO during the tech bubble of 2000. Following its reorganization in 2002, China Telecom, the fixed-line operator, sold 20 percent of its shares in an IPO in Hong Kong but raised only $1.66 billion due to a lack of interest from investors.41 China Network Communications Group, which was formed in 2002 after the breakup of China Telecom, planned to launch its own IPO in Hong Kong and New York in 2004 to raise $2 billion.

Thus, almost a decade after China began to liberalize its telecom service sector, the underlying dominance and exclusive control by the state over the vital industry has hardly changed. In 2002, six telecom service firms, all state-owned or controlled, divided the telecom service market among themselves. With revenues of 150.9 billion yuan, China Mobile claimed 36.7 percent of the market; China Telecom had 136.3 billion yuan in revenues and took 33.1 percent of the market; China Netcom, with 67.6 billion yuan, had 16.4 percent of the market. These three former entities of MPT still retained 86 percent of the market share. The two new telecom firms, China Unicom and China Railcom, had 12.4 and 1.2 percent of the market, respectively.42 The state’s direct control over the telecom firms contributed to their poor performance. In the judgment of a State Council think tank, state ownership and control encouraged them to “expand investment, seek market power, and increase insiders’ income ... these firms have distorted competitive behavior, such as excess debt and price wars.”43

The monopoly of the state in the telecom sector was also responsible for the failure of the National People’s Congress to pass the competition laws required to liberalize the sector. Although reformers in 1998 proposed telecom legislation that would have established a regulatory commission modeled after the U.S. Federal Communications Commission (FCC), the proposal was not enacted by the national legislature due to strong opposition from the telecom bureaucracy. As of 2003, the proposed legislation was still in limbo. Because MII, the succcssor to MPT and patron of the telecom monopolies, was put in charge of drafting the telecom legislation, prospects for real reform appeared dim.

Analysis

The persistence of the state’s monopoly and control in the telecom service sector has led to high inefficiency and poor service and impeded further technological development in the sector. Official data show that the government’s massive investment in the sector has yielded low returns. In the late 1990s, the net income/expense ratio in China’s telecom sector was 1.14:1, compared with the international average of 3.3:1 and the U.S. average of 7.7:1. This comparison suggests that China’s telecom sector is half as efficient as that of an average country and almost six times less efficient than the telecom sector in the United States. The transmission capacity utilization rate in China was below 40 percent, as opposed to the international average of 74 percent.44 The management of the telecom industry was poor by international standards as well, resulting in inefficient utilization of equipment and high prices for end-users.45 China Telecom’s anticompetitive practices were also blamed for the poor interconnection that stunted the growth of the Internet in China.46 Crossnational comparison of the performance and competition in the telecom service industry indicates that China lagged behind most transition economies and other large developing countries. A World Economic Forum survey of telecom industries in eighty-two countries conducted in 2002 placed China among the bottom quarter or third of the group in terms of competition, infrastructure quality, and costs of service.47

The troubled history of reform in the telecom service sector provides another illustration of the limits of gradualism.