A number of excellent blog postings, for example over at China Herald, have covered the nuts and bolts of China’s telecom restructuring announced in late May, but few have mentioned the ramifications the announcement is having on critics of China’s industrial policy. Such critics, it is fair to say, run the gamut from free-market Friedmanites to political appointees of the Bush administration, who inevitably say China’s telecom market is closed to outsiders and anti-competitive. After this restructuring, it turns out they are still half right.

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With the recent news of a reshuffling of China’s six major telecommunications providers, critics of China’s telecom industry have two less targets to shoot at, namely the de facto monopoly of China Mobile and the slow-pace of telecom industry reform in the post-WTO era. But these critics, including the offices of US and EU Trade Representatives, were firing blanks in the first place: China Mobile was never a true monopoly, and industry reform does happen, it just happens at China’s pace, not at the pace trade negotiators desire, as this implementation of pro-business government policy clearly shows.

On May 24 guidance on the telecommunications sector’s planned restructuring was finally made clear in a joint announcement by China’s Ministry of Industries and Information (MII), the National Development and Reform Commission (NDRC) and the Ministry of Finance: Where there were six operators before, now there will be three - China Mobile, China Telecom, and China Unicom - that will each have an existing fixed-line and a mobile phone business as a result of mergers and divestitures.

Furthermore, at the end of the process, new 3G licenses will be issued for each, on different technology platforms: China Mobile will get the home-grown and untested TD-SCDMA standard, China Telecom will get the stalwart CDMA 2000 system, and China Unicom will get a license for WCDMA technology, which has long been popular in Japan. The market will now decide which is best for China. Critics, however, have been fast to say that China Mobile’s long-dominant position stacks the deck and so it will likely emerge the winner anyway. This is not a foregone conclusion for two reasons.

A short history lesson can help to put this into perspective: Before restructuring, the dominance of a certain telecom provider was undisputed. It had the most subscribers and the largest cross-country network of telecommunications infrastructure, and its revenue and profits exceeded those of all of its smaller competitors combined. At its peak, it had more than one million employees. After deregulation the giant telecom provider would be forced to open its network to smaller competitors and have its competitive powers capped by the regulator, which would mandate rates for it and watch it much more closely than its younger, more nimble, adversaries. Does this sound like China Mobile? No, this was American Telephone & Telegraph, at the end of 1981.

AT&T, once the biggest telephone company in the world, was reduced to a mere shell of its former self following deregulation and the forced divestiture of seven regional operating companies in early 1982. After a few bad strategy decisions, parent AT&T ended up being bought by one of its own spin-off children twelve years later.

So, the first reason the critics are wrong: History shows that the preeminence of an incumbent is by no means assured. The second reason: Asymmetric regulation, whereby China’s regulators intend China Mobile to overcome greater obstacles than the other two, is going to be a burden for China Mobile. For example, it is being saddled with the smallest of the fixed-line operators, China Tietong, and receiving the TD-SCDMA 3G platform license, which is unproven in both its technology and market appeal. This means that China Mobile’s ability to maintain its monopoly is uncertain.

As to the slow pace of change that critics have leveled at China’s telecom deregulation process, it bears reminding that AT&T, the US’s dominant telecommunications provider for more than a century, with its dying breath, clung to its monopoly for more than eight years against a US Department of Justice antitrust suit lodged in 1974. Regional carriers in Canada have been known to drag proposed rate cuts through years of debate and court action to avoid changing their business practices, meaning Canada only started deregulation of its telecommunications industry in April 2007. In that light, the speed of China’s telecom restructuring has not been slow.

In fact, China’s telecom regulators have shown remarkable brevity when it comes to implementing a given proposed change. For example, China significantly reduced rates for all mobile phone users in the last two years, most recently by cutting roaming charges in March by up to 80 percent. China’s telecom industry has some way to go before it will be totally transparent and fully-competitive, but it is far from the unchanging, anti-competitive sector that US and EU trade representatives paint it to be.

One thing the critics get right: It is true that China continues to groom its national champions, much as the economies of Japan, Korea and, to a lesser extent, Malaysia and other Asian economies did in their high-growth periods up to 1997.

Yet while economists regularly point out the folly of governments picking winners versus a Darwinian policy of survival-of-the-fittest free-market selection, so far China has bucked the trend: It now has three formidable national competitors that will all undoubtedly become global companies fighting over the title, “The biggest telephone company in the world.”

Categories: Pro-business Policy