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China’s Ministry of Industry and Information Technology (MIIT) recently issued a policy that will open the Chinese telecommunications industry to private investment. The sector is currently dominated by state-owned companies, but the government’s national economic strategy, which was released in May 2010, proposed using more private investment to stimulate the economy, increase competition, and improve outcomes for customers. Private investment in the telecoms industry will be essential if the Chinese government is to realize its ambitious convergence plan and its soon-to-be-released broadband plan.

The MIIT’s new policy only identifies the areas of the telecoms industry that will be opened to the private sector. Private investors will require more clarity about the rules for investment before they decide to risk their capital. More specific policies must be released by the MIIT and other government departments if they are to ensure the flow of private funds into the telecoms sector.

Eight areas opened up to private investment

In its new policy, titled “Measures to Encourage and Guide Further Investment of Private Capital in the Telecommunications Industry”, the MIIT has opened eight areas up to private investment:

• mobile telecoms service resale
• network access and customer premises network services
• managed network services
• telecoms value-added services
• engineering project design, implementation, management, network systems integration, and project bid brokering
• infrastructure construction, operations, and maintenance for areas including base stations and communications towers
• allowing private capital to enter the basic telecoms market through the purchase of equity
• expanding investment in international telecoms services in order to develop the international capacity market.

While foreign ownership was not directly addressed in the policy, we expect that the MIIT will follow China’s existing foreign ownership rules by requiring foreign companies to set up joint ventures with local companies that are limited to 50% foreign ownership.

The MIIT’s policy has been released ahead of similar policies for other industries. In Ovum’s view, the MIIT’s aggressive approach is due to the capital requirements of China’s telecoms industry, which needs private investment to achieve the goals of the government’s convergence and broadband plans. Both plans will require considerable investment and innovation from the private sector if they are to deliver on their goals of nationwide broadband coverage and cable network upgrades over the next few years.

A good start, but more certainty is needed

In our recent report “Fixed Broadband Overview: China”, we recommended that the Chinese government should do more to encourage private investment in the telecoms industry. The MIIT’s announcement is a step in the right direction, but there are still a number of uncertainties that it will need to resolve if it is to attract the required levels of private capital. All of the eight investment areas will begin with trials before they are expanded across the country in the next few years. However, this will not yield the required results if private investors don’t have the certainty and clarity needed to ensure their investments.

The MIIT needs to release the timetables and geographic coverage of the trials, and clarify the entry criteria and procedures for entry. The telecoms regulatory framework will also need to be reformed. For example, the MIIT must address mobile wholesale access before private companies can enter the mobile resale business. Without a number of detailed policy changes, the private investment needed to support competition in the telecoms market will not materialize.

The MIIT requires cooperation from other agencies

Private sector companies that are looking to enter the Chinese telecoms industry will also encounter challenges that require action from other government agencies. As telecoms services are typically capital intensive, they require private enterprises to invest large amounts of capital. This requires favorable macroeconomic and microeconomic conditions.

The National Development and Reform Commission, which regulates prices in China, will need to collaborate with the MIIT to regulate interconnection prices for basic telecoms services in order to create a fairer competitive environment and support returns on private investment. The Ministry of Finance will also need to address relevant financing policies to support private enterprises, which is an increasingly difficult task in the current global financial environment.

While the MIIT has opened the door to for private investment, much more work is needed if the government is to attract sufficient levels of investment to support its ambitious plans. This announcement is just the first step.