No major shake-up after China Telecom split


China's long-suffering telecom consumers will also enjoy the fruits of the break-up.

CNN's Kristie Lu Stout

HONG KONG, China (CNN) -- Thursday marks the end of China Telecom, the mammoth fixed-line monopoly.

China is finally splitting the state-owned giant into two regional players, but analysts doubt the break-up will introduce any real competition to the long-stagnant sector.

"They've created two regional monopolies where there was one national monopoly," said BDA telecom analyst Ted Dean.

"I don't anticipate any immediate change in the competitive environment."

Sealing the deal

One of the two new companies is merging with rival upstarts Jitong and China Netcom to focus on the northern market. The other is keeping the China Telecom name and will operate in the south.

Thursday's launch ceremony in Beijing will seal the deal, which took six months to complete.

Restructuring the sector though is expected to take up to two more years, with many roadblocks ahead.

"It's a huge engineering process because they need to reallocate all the assets including switch stations, cables, etcetera," said Tai Fook Securities senior analyst Shea Kai Ming.

"So for the immediate future, we expect this admin work to be carried out rather than real competition between the two. Competition will not be intensive for the next one to two years."

A fair split?

With the new China Telecom commanding the lucrative southern region and 70 percent of the fixed-line market, the long-awaited carve-up is not a 50-50 split.

But China Telecom will be saddled with the responsibility of bringing telecommunications infrastructure to China's western region.

"The southern company is much larger, but it also has to provide service in Tibet," said Dean.

"That is the intention of the Chinese government to take care of the less developed part of the country," added Shea.

China Telecom's rural networks will be a handicap to the new company that is inheriting them. According to China's Ministry of Information Industry, the number of rural phone subscribers has dropped 40 percent in the first three months this year compared to the same period a year ago.

It also remains to be seen how the two firms will gain access to each other's networks as they compete.

Reinforcing the sector

The government hopes the breakup will spur more competition and help reinforce China's telecom sector ahead of an anticipated flood of foreign investment.

As a condition of membership into the World Trade Organiziation, Beijing has promised to allow foreigners to own up to 50 percent of Chinese telecom ventures after two years.

The break-up of the mammoth monopoly is already seen as good news for telecom equipment vendors eager to boost sagging earnings in the fastest growing economy in the world.

"Restructuring and ongoing uncertainty has slowed down spending at China Telecom. This won't turn the tap on, but the fact that the uncertainty is over is good news," said Dean.

But the impact will depend on how much capital both companies can gather to upgrade their networks.

Both companies are planning to list in the near future, with China Telecom slated to seek a $3 to $5 billion overseas listing in New York and Hong Kong later this year.

Sooner or later, China's long-suffering telecom consumers will also enjoy the fruits of the break-up.

In the past, China Telecom's 144 million subscribers had to accept sub-par fixed-line service with no added features such as call-waiting or voice mail.

But with the eventual introduction of competition and capital, the new companies will better cater to their needs.