China splits its fixed line monopoly

By CNN's Kristie Lu Stout

BEIJING, China (CNN) -- China has split its fixed-line phone monopoly into two regional players, merging one with rival upstarts Jitong and China Netcom.

The official China Daily newspaper reported on Tuesday the State Council has approved the breakup of China Telecom, a move designed to boost the competitiveness of the telecom sector as it joins the World Trade Organization.

The move also seals the breakup of China's mammoth fixed-line monopoly, which had controlled more than 99 percent of the telecom market.

Telecom landmark

"This is a real landmark in the history of China's telecom industry," said Merrill Lynch telecom analyst Francis Cheung.

"The government was not happy with the level of competition existing in the fixed line market and some rationalization had to be done."

Chinese officials decided to split the state telecom heavyweight into two companies along roughly north-south lines.

According to China's official Xinhua news agency, one of the two new companies will merge with China Netcom and Jitong Network Communications, and operate in 10 northern provinces under the China Netcom name.

The other would keep the China Telecom name and operate in the south.

China Netcom, the only Chinese telco with direct foreign investment, focuses on IP and data transmission. Its investors include News Corp, Goldman Sachs and PC mogul Michael Dell.

China Netcom's staff of 3,000 is tiny compared with China Telecom's work force of 500,000.

The telecom giant controls more than 99 per cent of the market with about 169 million users as of August, according to official statistics.

Competition boost

After the breakup, the north and south entities will become the primary service providers of voice and data services in their respective areas. But they will also be permitted to jockey for customers in other markets.

The Chinese government hopes the breakup will reinforce China's telecom sector ahead of an anticipated flood of foreign investment.

As a condition of WTO membership, Beijing has promised to allow foreigners to own up to 50 percent of Chinese telecom ventures after two years, and 49 percent of mobile phone companies after five years.

"I'm cautiously optimistic that it will work out well for the industry," said Cheung.