We have reached an inflexion point in the reform of the Chinese telecommunications sector. The last few months have seen structural changes that will define for the next decade the new market sectors in China. They also determine who is able to compete and for what.
China’s new leadership is acutely aware of the need to achieve not only sustained high levels of growth but also ensure that the benefits of development are widely distributed. Clearly this means a better distribution of income – a recent Beijing university study suggests that income at the richest 5th percentile are 34 times higher than those of the bottom 5th percentile. But it also means putting in the place an ICT infrastructure which supports further development, for example in smart cities and rural development.
It is in this context that the declarations of the November 2103 Third Plenum meeting (and other related statements) should be understood. For the telecoms sector, the Third Plenum set out a framework which would see managed competition in infrastructure yet allow market forces to drive other key market segments.
Since the third Plenum a number of significant policy announcements have been made, most notably the awarding of 4G licences, the confirmation of MVNO licensing rules and the award of licences and new rules governing foreign led investment in the telecoms sector (in the Shanghai Free Trade Zone). Furthermore, far reaching policy developments concerning the cable TV operators and begun and, in the Internet space, all three of the big players – Baidu, Alibaba and Tencent – have pushed forward innovative products, including quasi financial services such as high interest rate bearing deposits accounts. In consumer electronics the market for gaming consoles has been opened up to allow international competition. In combination these are all very significant moves defining new opportunities for firms across the ICT sector.
Although a new telecoms law remains languishing in the ministry, new policy directions are being made clear. New opportunities for investment and services are being created, including for new entrants to the sector – yet all within a framework of managed competition. The key message from the Plenum was allowing the full force of the market, as well as recognising the key role to be played by the state. The abstract principles of the third Plenum are finding concrete form in the ICT sector and spelling out new opportunities for firms in China.
This is important because there is so much at stake. Gaining traction in the Chinese telecoms market has been an elusive goal for many, but the potential rewards dwarf opportunities in other countries. On a simple evaluation, ARPU in China across all mobile services is at least 3.5 times the ARPU in India and this differential widens when considering broadband-led services. Moreover, the deepening (more spend per consumer) and the extensions (greater number of subscriptions) are likely to be more vibrant in China over the next decade than in many other emerging markets.
The creation of the Shanghai Free Trade Zone (FTZ) and associated special legislative frameworks gives an insight into possible new market opportunities. These have opened up certain features of the ICT sector, including telecoms, to majority owed foreign firms (up to 55 per cent in certain cases).
The Shanghai FTZ will open four new businesses to foreign capital: Call centre services; Internet access services; Multi-side voice and video communication services; and Domestic internet virtual private network businesses. And although the associated licence process may not follow quite as smoothly, all the telecom businesses in the Shanghai FTZ will be allowed to offer their services nationwide – except Internet access.
Tomorrow, in part two of our series, we investigate China Mobile’s 4G strategy. Part three will cover spectrum policy, and the final part will take a closer look at the details of the Third Plenum as they relate to telecoms policy.
Howard Williams is Emeritus Professor at the University of Strathclyde Business School.
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