Telephone Charges: Do The Numbers Add Up?

The move reflects earlier comments by regulators that China would introduce greater market-based pricing for certain telecom services. According to Section 3 of the PRC Telecommunications Regulations (中华人民共和国电信条例)(the Telecom Regulations), which came into effect on September 25 2000, telecom charges are divided into those regulated by the market, those guided by the government and those fixed by the government. The Telecom Regulations provide for more market-determined pricing in such areas as value-added services offered on telephone networks, resale of basic telecom services, paging and other related services. The MII is designated as the authority responsible for formulating and disseminating major service tariffs, but it can only do so after it has sought the opinion of the SDPC and other relevant departments in charge of pricing such as the MOF.

Cost of doing business

The tariff reductions will begin to bring China's telecom charges in line with those of other markets, and will significantly help to bring down the increasing cost of doing business in China. Telecommunications costs for businesses operating in China will fall, producing a situation where China compares favourably with many of its Asian neighbours in terms of the cost of telecom services. The cost of international telephone calls will be reduced by more than 50% and there are similar reductions in the cost of internet link-up, paging fees and rental of leased lines. According to the Notice, the monthly cost of a 64 kbps lease line between the PRC and Hong Kong will fall from Rmb56,700 to Rmb5,200 - good news for business users, who have previously complained about the high cost of lease-line rental.

Decrease could mean increase

The impact on China's main operators appears mixed. China Telecom controls over 90% of the country's fixed-line traffic but has faced stiffer competition over the past few years. It is unlikely that the tariff reductions have caught China Telecom by surprise. While investment bankers and other professionals may be tempted to revise the operator's profit forecasts, the new adjustments to the pricing system were inevitable. The rate cuts have been seen as an attempt by the MII to increase the competition facing China Telecom, but China Telecom and its other more established competitors would also benefit from the expected increased in usage that the rate cuts will bring. Common wisdom has it that a decrease in tariffs generally results in higher usage and a better use of capacity. According to one report, an MII official has suggested that the tariff reductions will help to boost the number of telephone users by 10% and the volume of long-distance calls by 5% in 2001. China Telecom will be working hard to ensure that the expected revenue loss will be made up by a higher number of users and more telephone use.

Where's the money coming from?

For China's other telecoms operators, the slashing of the fees for leased lines will be beneficial in the short term, but there may be a negative impact on the growth in revenue required to expand or upgrade their network infrastructure. The inability of competitors to finance backbone investments through sales revenue could put a heavier burden on outside investors to help raise the funds necessary to keep these operators competitive. China Telecom, China Netcom, and CRT are all said to be looking to raise capital abroad.

New kid on the block

The financing issue will be particularly acute for the late-comer, CRT. Dubbed as China's second-biggest telecom company and the only one with the potential to challenge China Telecom, CRT grew out of the restructuring of China's railway system. CRT has promised to offer lower rates for domestic long-distance services in comparison to the rates charged by its rival China Telecom. But with the release of the new tariff rates, CRT's entry into business has been made more challenging since the new operator will need to play catch up with China Telecom without the luxury of offering significantly lower charges. CRT's arrival in the market has also begun to fuel talk of M&A activity in China's telecom industry.

Into the future

Inevitably, the Notice will encourage a number of market-based pricing strategies to surface. The Notice permits operators to adjust their charges for domestic long-distance calls during national holidays and non-peak hours in accordance with market needs. However, as a reminder of the central planning process, such discount schemes must be registered with both the MII and the SDPC before they are introduced. Although the operators have a grace period until March 1 2001 to implement the changes, and in some cases, can seek approval from the MII to extend the grace period until June 1 2001, many operators have already announced pricing changes. It seems that the bureaucrats at the MII, SDPC and the MOF have unleashed new market forces on the telecom industry, with recent news reports that some Chinese mobile carriers have also announced significant price cuts.

By Nancy Leigh,
Baker & McKenzie,
Hong Kong