China Telecom in investor talks

China Telecom, the country’s largest fixed line carrier, is understood to be in talks with five foreign telecoms operators interested in taking a stake in the company.

Although overseas investors are only allowed to take minority stakes in Chinese firms, many foreign operators see a local partnership as the only way of cracking the lucrative Chinese market. The country’s attractiveness is further intensified by the forthcoming licensing of 3G spectrum, allowing operators to launch high speed mobile data services.

China Telecom has not identified the interested parties and an article in the Financial Times on Wednesday suggests that no deal will be struck until the country tenders 3G licenses, probably sometime within the next six to eight months.

China’s wireless players, China Mobile and China Unicom have already secured overseas investment. Vodafone has been a long time investor in China Mobile holding a 3.3 per cent chunk of the player, while South Korea’s SK Telecom recently acquired bonds convertible into a 6.7 per cent stake in Unicom. Spain’s Telefonica holds a 5 per cent stake in China’s other fixed line operator, China Netcom, leaving Telecom as the only operator yet to take a foreign partner.

China Telecom is facing serious challenges from intensifying market competition on traditional voice revenues and anticipates that its non-voice business is to become the major revenue growth driver. On Wednesday the company reported that EBITDA for the first half reached RMB44.217bn (£2.9bn), representing a year on year increase of 4 per cent. Revenue from non-voice services increased to RMB23.244bn from RMB19.046bn in first half 2005.

But the playing field is likely to change with the allocation of 3G licenses. Only three licenses are expected to be awarded, with speculation suggesting that Unicom, which operates both CDMA and GSM networks, will be split and the respective parts merged with the two fixed line carriers. The licenses are thought to be technology neutral, but it is expected that at least one operator will be obliged to roll out China’s homegrown TD-SCDMA technology.