November 3, 1999 11:50 AM PST

Net firms walk a fine line in China

SAN FRANCISCO--Li Xiaoming wants to turn his telecommunications company into China's version of Qwest Communications International.

Li is a senior official with China Unicom, the leading telephone company taking on China Telecom, the country's former telecom monopoly. Speaking here at a conference yesterday on China's developing telecommunications and Internet market, he unveiled plans to bring Internet access to 300 cities by next year, with services like Internet telephony and high-speed connections.

"[Our] network should completely satisfy customer demand for voice, fax, data, video, and information services," Li said. "It will become…an important part of China's national infrastructure."

But like the rest of China's quickly developing Internet and telecommunications infrastructure, Li's company is struggling to find a way to balance its business goals with China's strict rules against foreign business ventures.

China has set its sights on creating an information economy that rivals any in the United States in the new millennium, and is now trying to create the infrastructure to support this aim.

This huge market potential has drawn attention from companies ranging from AT&T to Yahoo, all of which have faced sharply conflicting messages from Chinese officials about just how much they can work with local companies to provide Net service or build new networks.

But officials claim that some of the uncertainty may be cleared up soon.

"We haven't finished Chinese telecommunications reform, but I think by the end of the year we will finish," Chang Xiaobing, a senior official in China's Ministry of Information Industry (MII), said yesterday.

Ownership of telecommunications and Net firms has been a key component in trade talks between the United States and China, which wants to win membership in the World Trade Organization. According to a report in the New York Times yesterday, talks between U.S. and Chinese officials have intensified in the last several weeks, with an eye toward reaching some agreement on trade issues before the end of November.

Content games
Part of China's telecommunications reform will target the controversial area of Internet content. Although firms in the country have already garnered investments from Yahoo and America Online, new rules could derail these types of deals.

"They have said they will have an [Internet content] permit system," said Jeanette Chan, a partner in the law firm of Paul, Weiss, Rifkind, Wharton & Garrison and who works closely with foreign investors in China. "They have said rules were coming by the end of the year, though I'm not holding my breath."

Government regulators have broken up the state-run telephone monopoly, but have still barred foreign companies from investing directly in telephone or Internet service companies.

Nevertheless, the market's potential has drawn interest from the likes of AT&T, Deutsche Telekom, and Cisco Systems--companies that are doing everything in their power to break into the burgeoning market, often with complicated three-way joint ventures that skirt the boundaries of legality.

Chinese officials have cracked down on some of these ventures in recent months, forcing some of the companies involved to scramble to find ways to withdraw their investments.

"We know that competition is a good way to promote markets," Chang said. "But most people think we must play Asia football before we can play all football."

While the government has clearly barred most direct investments, Internet content companies have existed in a kind of regulatory murky area. Early in the year, ministry officials said they encouraged foreign participation, and later even appeared at a launch of Yahoo's Chinese operations.

But this fall, officials said direct foreign investment in content companies was not allowed, although attorneys say written law on this point is unclear.

"[Regulators] may not admit that they have changed their policy, but they've never been clear what [content] actually means," Chan said.

That hasn't prevented companies like Yahoo and America Online from setting up services in conjunction with local companies. But any new rules that require permits, or cap the amount of investment that foreigners can make in Chinese content companies, will likely affect ventures like Yahoo's and other locally based services.

Struggling into the information age
At the conference here, officials from the leading telecommunications companies detailed their own ambitious plans to roll out new high-speed Internet, wireless, and cable networks, including a hard look at providing widespread voice telephone service over the Internet. Trial projects are now underway in four cities, officials said.

The government is also trying to promote more use of the Internet. It reduced its state-mandated prices at the beginning of last month, the MII's Chang said. Net use doubled, from 2 million to 4 million users in the first six months of 1999, he noted.

Nevertheless, the number of people who can afford a personal computer is small, observers noted. A low-level $400 or $500 PC still costs close to half the average annual individual income, keeping PCs out of the hands of most citizens.

As an alternative, companies are looking at the quickly growing cable TV and wireless markets to make new Internet inroads.

Market research predicts China will have 175 million cable TV subscribers and 100 million wireless phone subscribers by 2003, noted William Kreuger, CEO of Xin De Telecom International Ventures, a joint venture between Deutsche Telekom, Siemens, and CITIC, a Chinese telecommunications company.

"It's much easier to expect access to come over mobile [phones] and cable infrastructure than to expect half the country to run out and buy PCs, as is happening in the U.S.," Kreuger said.

 

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