The competitive landscape of China’s telecommunications industry: Is there a need for further regulatory reform?

Utilities Policy 19 (2011) 125e133

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The competitive landscape of China’s telecommunications industry: Is there a need for further regulatory reform?q Yan Li* Department of Economics and International Business, Business School, Oxford Brookes University, Wheatley Campus, Wheatley, Oxford OX33 1HX, UK

a r t i c l e i n f o

a b s t r a c t

Article history: Received 15 February 2010 Received in revised form 15 August 2010 Accepted 27 December 2010

This paper evaluates the current regulatory status of China’s telecommunications industry in relation to China’s antimonopoly enforcement. It analyzes the difference of telecoms reform models in OECD countries and China, and highlights the important role of independent regulation, in particular given the concern about administrative monopolies in China’s telecoms industry. It questions the effectiveness of the new antimonopoly law alone in promoting telecoms competition by addressing three major issues in the sector: administrative monopoly, market competition and ownership. In conclusion, it suggests the need for further regulatory reform and calls for formal empirical research to provide more compelling evidence. Ó 2011 Elsevier Ltd. All rights reserved.

Keywords: Telecommunications Antimonopoly law Regulatory reform Independent regulation

1. Introduction After a long struggle e thirteen years of drafting and three revisions e a comprehensive Chinese Anti-Monopoly Law (AML) was finally enacted by the Standing Committee of the National People’s Congress (China’s top legislature) on 30th August 2007 and took effect on 1st August 2008. This is, however, just the beginning of the Chinese antitrust story. Inevitably, the Law has a long way to go in China. Whether the Law can fulfil its initial objectives, in particular, of achieving the real improvements/enhancements of performance and efficiency in the Chinese market economy will depend not only on how the Law’s enforcement (ex post) is consistent with the goal and how such consistent enforcement is pursued actively by the bureaucracy that enforces the new AML. It will also, more importantly, require a series of detailed rules and regulations (ex ante) to be issued and to work effectively together with the Law. The latter (ex ante) condition subsequently addresses the question of what the optimal regulation (in relation to, e.g., market structure, privatization and establishment of an independent regulatory authority) should be, given China’s unique economic, legal and regulatory contexts and its history and cultural heritage. This article aims to evaluate the current regulatory status of China’s Telecommunications sector in relation to the new AML

q The views expressed in this article are those of the author alone. * Tel.: þ44 (0)1865 485402; fax: þ44 (0)1865 485830. E-mail address: [email protected]. 0957-1787/$ e see front matter Ó 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.jup.2010.12.004

enforcement. In the following section, first, the telecoms reform models in the OECD countries will be reviewed briefly, before turning to more detailed discussions on the recent regulatory reforms in the Chinese telecoms sector in general, and its mobile sector in particular. This article then proceeds to examine the antimonopoly contexts (including legal, regulatory and economic aspects) of China’s telecoms sector. Such examination leads to the finding of three major issues in this sector: administrative monopoly, level of market competition and ownership. These findings suggest the need for further regulatory reform in China’s telecoms industry and call for formal empirical research to provide more compelling evidence. 2. Telecoms reform: the OECD experience In most OECD countries, the telecom industries (including the mobile sector) have undergone dramatic changes and developments since the mid-1980s. Some of them are the leading countries in terms of both telecom reform and mobile network development in the world (ITU, 2005). Therefore, observing the experience of telecom reforms in the OECD countries provides a useful reference and convincing policy implications for China’s ongoing telecom reform. The demise of the natural monopoly status of traditional telecoms began in the mid-1980s when, due to rapid technological changes and various combinations of political-economic circumstances, the break-up of AT&T in the United States proved extremely successful in terms of productivity growth and continuing scale economies, and the monopoly of telecoms was ended successively in Japan and the UK. The success in BT’s privatization in the UK

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(accompanied by the creation of price-cap regulation to enable the efficient price among privatized firms) was a powerful role model for telecoms acts in other countries (see Newbery, 2000, for comprehensive historical review on the utility reform and restructuring). In the early 1990s, fast privatization was deemed as the only realistic method of reforming state-owned enterprises in Eastern Europe and the former Soviet Union. Since then, the transfer of telecoms infrastructure from public to private ownership has become an important policy objective in many Western industrialized countries. Soon after, in the late 1990s, however, reformers in Eastern Europe and the former Soviet Union recognized that ignoring the competitive and institutional framework was a mistake in the method of reforming state-owned enterprises (i.e. privatization only). Academic researchers from different disciplines also argued that the success or failure of privatization is highly dependent on political and economic environments in general and the postprivatization regulatory framework in particular.1 Therefore, many countries around the world established an industry-level independent regulator in their utilities including telecoms to promote competition and effective regulations. Since then, the quality and impact of regulatory governance have received increasing academic and policy-makers’ attention. These specific issues have been fiercely debated and investigated in numerous studies with reference to both telecommunications and other utility sectors.2 The empirical findings from these studies consistently suggest that the existence of an independent regulator is one of the crucial institutional elements bearing on good regulatory governance that tends to be associated with higher levels of certain performance measures (such as fixed-line telecom network penetration or electricity generation).3 More recently, the empirical studies of mobile sector reform (Li, 2008, 2009b) further suggest that the existence of an independent regulator not only is a key element of ensuring good regulatory governance, but also has explicit effects by itself on certain performance measures, such as mobile network penetration and expansion, mobile carrier technical and scale efficiencies, total factor productivity growth, efficiency catch-up and innovation. In particular, when the market is privatized, the presence of an independent industry regulator plays an even essential role in promoting effective competition and signalling credibility of government’s commitments to private investments in product and service innovation, which can directly result in better sector/carrier performances.4 These findings provide profound policy and managerial implications to the ongoing reform of utilities including telecoms in the developing countries in the context of the increasing prevalence of industry privatization. In many developing countries, it is difficult or unrealistic to achieve a high quality of overall regulatory governance in a short time period when governments have just privatized or intend to privatize their telecom markets. Establishing an independent regulator, therefore, seems to be a good initial step to signal the credibility of a government’s commitments to private investments and the propensity to undertake effective pro-competition policies.

1 See Ramamurti (2000); Villalonga (2000); Levy and Spiller (1994, 1996); Yarrow (1986). 2 See for example, Stern and Holder (1999); Gutierrez and Berg (2000); Gual and Trillas (2003); Gutierrez (2003a,b); Cubbin and Stern (2006); Gasmi et al. (2006). 3 The existence of an independent regulator reflects also the existence of a strong and independent judiciary. In Li’s (2008, 2009b) studies, a regulator is claimed to be ‘independent’ if it satisfies the following minimum conditions: a) it is separated from industrial players and other governmental bodies; b) it has been created by legislation rather than executive decree; and c) it is able to make decisions without being subject to any other governmental bodies (i.e., be independent of other political powers). 4 See Li (2008, 2009b).

With the EU agreement to fully liberalise its telecoms markets and the similar agreement of the WTO, by the late 1990s, there was a widespread consensus that liberalisation and deregulation in the telecoms sector were essential. Since then, massive regulatory reforms have been seen in the worldwide telecoms markets, which have been dominated by mobile sector reforms more recently. As with other utility reforms, the programmes for mobile sector reform typically include three dimensions: introducing competition, privatizing the state-owned incumbent mobile network providers, and establishing an independent industry regulator. The mobile service markets in most OECD countries are, in general, featured by intense competition. By 2008, the oligopolistic market structure (with different degrees ranging from 3 to 6 mobile network operators [MNOs] in each national market) has been seen in most of the 29 OECD sample countries (Table 1). There were only two national mobile markets (New Zealand and Norway) run under a duopolistic competition (the same as the mobile market in China until 2009; see also Appendix A). In addition, all thirty sample countries (29 OECD countries plus China) passed reform-related telecoms legislation, after China e the last one e passed its “Telecommunications Regulations of the People’s Republic of China” on 25th September, 2000. Furthermore, since the latest full privatization in the Korean mobile market in 2002, there are only three countries (i.e. China, Mexico and Turkey) where the mobile incumbents remain state-owned. Regarding the regulatory environment, there has been a trend of establishing an independent regulator across national telecoms markets, given its pro-competitive merits as discussed above. By 2002, 26 out of these 30 sample countries had established an independent industrial regulator (Table 1). Among them, eighteen were established before or at least at the same time as the countries’ incumbent MNOs were privatized. So far, only China and Japan have no separate regulator for their telecom sectors,5 while in Denmark and Switzerland the separate regulators are still not independent decision makers. Given the above observations, until 2008, China’s mobile telecom sector ran under a rather different institutional and regulatory framework (i.e. state-run duopoly without an independent regulator), compared to the mobile sectors in most OECD countries listed in Table 1.6 An obvious policy question then is ‘Is it necessary for China to follow the western model, given China’s own unique economic, political and culture contexts?’ Or, put another way, ‘What would be a workable regulatory framework for the Chinese telecoms industry?’ In a global economy characterized by rapid technology change, massive trade liberalisation and increasing information needs, the telecoms sector is deemed as a crucial one that provides a basis for competitive advantage, relating to other businesses and the overall economic development (Röller and Waverman, 2001). The efficient delivery of telecoms services generates direct benefits through reducing transaction costs and indirect benefits through improving marketing information and accelerating the diffusion of knowledge, which can subsequently enhance national productivity (Antonelli, 1991; Greenstein and Spiller, 1995). As such, the telecoms sector reforms have been a priority for many governments and international development agencies. Inevitably, to foster a competitive landscape of the telecoms industry has been similarly listed on the top of the regulatory reform agenda by the Chinese government.

5 In China, the Ministry of Information Industry is both the regulator of the telecommunications sector and the owner of three major telecommunications operators; in Japan, the Ministry of Internal Affairs and Communications plays the same dual role. 6 Despite the latest restructuring in China’s telecoms industry in 2009, changing the landscape into a triopolistic market structure, the entire industry is still under the strict control of government and remains under state ownership. The industry regulator, MII, retains its dual role, policy-maker and owner of the major market players.

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Table 1 Summary statistics for mobile sector reforms across 29 OECD member countries and China. Country

Year incumbents privatized

Year independent regulator established

Year reform legislation passed

Number MNOs by 2008

Country

Year incumbents privatized

Year independent regulator established

Year reform legislation passed

Number MNOs by 2008

Australia Austria Belgium Canada China Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy

1997 1998 1996 Always N/A 1994 1991 1998 1997 1996 1996 1993 1997 1996 1998

1997 1997 1993 1976 N/A 2000 dep. 1988 1997 1998 1992 1999 1997 2002 1998

1974 1987 1991 1985 2000 1999 1995 1987 1990 1996 1994 1992 1999 1983 1997

4 4 3 5 2 4 4 3 3 4 3 3 3 4 4

Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Spain Sweden Switzerland Turkey UK US

Always 2002 1998 N/A 1994 Always 1998 1998 1995 1992 2000 1998 N/A Always Always

N/A 1997 1997 1996 1997 2001 1987 2000 1989 1996 1992 Dep. 2000 1984 1934

1984 1983 1997 1990 1988 1986 1995 1990 1989 1987 1993 1997 1924 1984 1890

5 3 3 4 3 2 2 4 3 3 4 3 3 5 6

1. N/A: the events have not occurred yet. 2. Dep.: a separate regulator is subject to several other governmental bodies in its decision making. 3. Privatization is recorded for those where at least 50% of assets of state-owned companies have been sold to the private sector; An independent regulator is recorded only if it is created backed by legislation and it claims to be independent in its decision making.Data source: Author compiled based on a variety of sources, including ITU-BDT online regulatory information database, countries’ telecom regulators’ websites and mobile network operators’ websites.

3. Telecoms reforms in China The major restructurings and reforms experienced by the Chinese telecoms sector can be summarized briefly as follows. 1994 Liberalisation of the basic telecom services market with the grant of a second licence to China Unicom formed under decision of the State Council to compete with China Telecom, in particular, in the wireless paging and mobile service segments.7 1998 Establishment of the Ministry of Information Industry (MII), consolidating the Ministry of Post and Telecommunications (MPT), which controlled the incumbent operator, and the Ministry of Electronics Industry (MEI). This enabled the separation of regulating and operating activities of telecoms sector in China. China Telecom became separate from government management. 1999 Establishment of a third operator e China NetCom e founded by several government bodies, namely: Chinese Academy of Science (CAS), Ministry of Railways (MOR), State Administration for Radio, Film and Television (SARFT), and Shanghai Municipal Government (SMG) (i.e. a joint venture with Chinese capital).8 2000 Divestiture of China Telecom at the end of the year by splitting its business segments: mobile activities were split off to become China Mobile, paging services were incorporated into China Unicom, and satellite services were run by newly formed China Satcom. China Telecom continued to have a monopoly of fixed-line service. 2001 Establishment of China Railcom (the former China Tietong), a new wire-line operator using a fibre optic network deployed all the way along its railway tracks.9

7 Before 1994, China’s telecommunication industry was monopolized by China Telecom (a wholly state-owned enterprise), China’s only telecommunication provider. 8 The old China NetCom, due to China Telecom’s monopoly power over the fixed telecommunications market, closed its first round of private equity offering in February 2001. 9 China Railcom (the former China Tietong) was founded by the Ministry of Railway and tries to compete on the basic telecommunications services, but its market share is very tiny. In fact, its business involves only a small share of IP telephony services.

As part of the agreements accompanying China’s accession to the WTO on 10th December 2001, the telecoms sector was to be opened up to foreign capital with a six-year phasing-in schedule.10 Regulation applying to telecoms operators with foreign capital was to take effect on 1st January 2002. 2002 In May, the break-up of the old China Telecom, under the approval of the State Council. The monopoly in the fixed-line telecoms field was broken by splitting the old China Telecom’s network resources on a geographical basis into north and south: China NetCom was supplemented with 30% of the network resources of China Telecom-North (i.e. 10 northern and coastal provinces and municipalities) and the former Jitong Network, while China Telecom-South retained 70% of the network resources and operated under the original name China Telecom (Table 2). 2005 Spanish telecom giant Telefónica acquired a 5.5% stake in China NetCom. 2006 In June, Korean mobile operator SKT took a 6.6% stake in China Unicom. 2008 Overall restructuring of the telecom industry was driven by the long-awaited release of 3G (third-generation) mobile licenses. This latest restructuring was announced in May 2008, but delayed to be implemented in January 2009, directed by MII, the National Development and Reform Commission (NDRC) and the Ministry of Finance (MOF). It splits and merges the operations of the Chinese carriers, meanwhile creating three new state-run vertically integrated operators that all gain 3G licenses and engage

10 In the agreement, the Chinese telecommunications sector will be gradually opening up to direct foreign participation in the form of joint ventures. Finding a Chinese joint venture partner (preferably a major carrier) is mandatory for a foreign company wishing to access the Chinese market. For details on the schedule and scope of China’s telecoms opening-up, see ChinaeUS Agreement on China’s WTO Accession e Telecommunications, online available at: http://www. chinability.com/WTO.htm#telecommunications (last visited 15th June, 2009).

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Table 2 Geographical break-up of the old china telecom by network resources. China NetCom

China Telecom

10 Northern provinces/municipalities: Heilongjiang, Jilin, Inner Mongolia, Liaoning, Beijing, Tianjin, Hebei, Shanxi, Shandong, Henan.

21 Southern provinces/municipalities: Jiangsu, Shanghai, Zhejiang, Guangdong, Anhui, Jiangxi, Fujian, Guangxi, Sichuan, Chongqing, Hubei, Hunan, Hainan, Guizhou, Yunnan, Shaanxi, Ningxia, Gansu, Qinghai, Xinjiang, Tibet. Approx. population covered: 828.6 million

Approx. population covered: 430.5 million Backbone: 17 major cities and provincial capitals Fixed-line, IP backbone

Fixed-line

Source: OECD and companies’ homepages

in both fixed-line and mobile businesses in China (Fig. 1).11 This restructuring aims to shift power among the Chinese telecoms players. It expects that the country’s dominant mobile services operator, China Mobile, could face stronger competition after China’s six telecoms operators are merged into three super-carriers offering both fixed-line and mobile services. China Mobile swallows China Tietong (Railcom) and takes over its fixed-line business. The country’s largest fixed-line operator, China Telecom, acquires China Unicom’s code-division multiple access (CDMA) network operations and moves into the mobile-phone business. China Telecom also acquires the basic telecom part of China Satcom, which offers satellite-based communications services. The remnants of China Unicom, mainly its global system for mobile communications (GSM) network operations, are merged with China NetCom (the second fixed-line operator). It is expected that weaker rivals China Unicom and China NetCom will become more formidable competitors in both fixed-line and mobile services after their merger. Eventually, the new landscape of the Chinese telecoms industry features three integrated network operators delivering full telecoms service (including both fixed-line and mobile), namely new China Mobile, new China Telecom and new China Unicom. Despite the fact that the Chinese telecoms sector has experienced several major reforms and restructurings, state-owned monopolistic status still remains at the core of the telecoms industry. The fixedline and the Internet (broadband) access markets are characterized by de facto geographical monopoly, due to the advantage of network resources in each operator’s (i.e. China Telecom and China NetCom) own territory. According to 2007 telecom carriers’ annual reports, for the fixed-line services market, China NetCom owned a 90.4% market share in its northern service region, and China Telecom dominated the southern market with an unbeatable 99% market share. For the Internet services market, China NetCom and China Telecom also exhibited strong market power in each of their own service regions, with market shares of 88.9% in the North and of 98.8% in the South, respectively. In fact, in February 2007, the two companies signed an agreement not to compete for fixed-line customers in one another’s territory e an arrangement seemingly taking advantage of the lack of any effective antimonopoly law at that point in time.12 Regarding the

11 Before the latest restructuring, the Chinese fixed-line operators (China Telecom and China NetCom) e which were split along geographical lines e were not permitted to offer mobile services, while mobile operators (China Mobile and China Unicom) could not offer fixed-line services. Given the fact that the new restructuring is still ongoing at the time of this study, there is a lack of statistics available for effective discussion in this work. Thus, this paper primarily discusses the situation of China’s mobile telecoms before the new Chinese telecoms restructuring was announced in May 2008 and took place in January 2009. 12 See China Telecom and China Netcom Reaching Agreement Not to Compete for Landline Customers, Beijing Morning Daily, February 27, 2007, http://tech.sina.com. cn/t/2007-02-27/01011391578.shtml (last visited 15th June, 2009).

Fig. 1. The Chinese Telecommunications Network Operators Reorganization (2008). Note: Icons listed on the left side represent the old Chinese telecom companies: China Mobile, China Tietong, China Satcom, China Telecom, China Unicom and China NetCom. Icons appeared on the right side represent the new Chinese telecom companies after the restructuring: new China Mobile, new China Telecom and new China Unicom. Source: MII 2008.

mobile services market, although it is dissimilar to the fixed-line services market that has a clear geographical division, there is still a severe imbalance in terms of market shares of the two mobile network operators (China Mobile and China Unicom) at the national level, with a 69.5% market share held by China Mobile.13 The 2009 restructuring, through splitting and merger, may not change much such an imbalance in either fixed-line or mobile operations, at least in the short run. It is even possible that this restructuring may create more asymmetric structures in both fixedline and mobile service markets. In particular, after splitting the former China Unicom’s network operations (CDMA and GSM), in the mobile sector, neither of the two newly created mobile network operators e the new China Telecom (acquires the CDMA operation) and the new China Unicom (retains its GSM operation and merged with former fixed-line operator China Netcom) e will be able to compete with China Mobile that still remains the largest mobile network operation in the market. At least, it will not be likely to see any effective competition in the short run. In addition, the ownership chain of those major telecom carriers (Fig. 2) reveals two interesting features. Firstly, most of the Chinese telecom carriers are owned by Chinese government bodies, including MII, MEI, MOP, MOR, SARFT and SMG. Thus competition in the telecoms market is actually competition among those government bodies, which differs from the competition in the developed world where private telecom carriers vie for market power. Secondly, the entire Chinese telecoms market is influenced by the MII through its control power over three leading Chinese telecoms network operators, namely China Telecom, China Mobile and China Unicom. The market competition is, in effect, managed by the MII, which embodies to a large extent de jure administrative monopoly. It should be also stressed that China’s latest telecoms restructuring may even enhance the administrative power of the MII, since the three newly created telecom super-carriers e the new China Mobile (i.e. old China Mobile þ China Tietong), the new China Telecom (i.e. old China Telecom þ China Stacom þ CDMA part of the old China Unicom) and the new China Unicom (i.e. GSM part of the old China Unicom þ China NetCom) e are all under the control of the MII. In other words, the former six telecom carriers are all under the MII’s control by the time of the new restructuring is completed.

13 In fact, due to wireless network technology, the mobile telecoms competition is usually observed at the national-market level. There is no regional division of the mobile services market within a single country in the sample.

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MII

China Telecom

China Mobile

China Satcom

Merged Jitong Communication

China Unicom

MEI

China United Telecommunications

SARFT

CAS

China NetCom

MOR

SMG

12% 1.6%

Hutchison Whampoa

100%

MOP

News Group

China Tietong

China NetCom (HK)

Bank of China

Goldman Sachs

Construction Bank of China

Fig. 2. Ownership Chain of the telecommunication network operators in China (2002e2008). MII: ministry of Information Industry; MEI: Ministry of Electronics Industry; MOR: Ministry of Railways;MOP: Ministry of Powers; SMG: Shanghai Municipal Government; CAS: Chinese Academy of Science; SARFT: State Administration for Radio, Film and Television. Source: Author edited based on telecom carriers’ published organization structure.

China’s entire telecoms service market will be even more influenced by the MII, which takes the dual roles of market players and industry regulator. Thus, China’s telecoms industry may exhibit even more severe administrative monopolistic conduct as a result of the latest restructuring, which seems to breach the previsions set in the new AML (Articles 8, 32e37 and 51 in particular).14 Apart from the aforesaid potential downside (i.e. strengthening administrative monopoly power), the perspective of the Chinese telecoms industry from the latest restructuring is rather ambiguous and arguable. According to the traditional merger theory, a horizontal merger involves the reduction in the number of firms in a market, which has the potential to impede competition and raise equilibrium price in that market (Farrell and Shapiro, 1990; Motta, 2004). Therefore, one may be sceptical that the latest telecoms restructuring will be beneficial to the Chinese market dynamics and its consumers, given the superficial fact that the number of telecom players has been reduced from 6 to 3e. When looking more closely at particular telecom service markets (e.g., fixed-line service market and mobile service market), however, the latest restructuring through splitting and merger increased the number of market players from 2 to 3 for each market. And the takeover of the two smallest telecom carriers (i.e. China Tietong and China Satcom) can be also argued, to a certain extent, to enhance allocative efficiency, given the fact that they brought only little effective competition in both fixed-line and mobile service markets in the past. According to the recent empirical study on mobile network penetration and expansion (Li, 2008), a third entrant maximizes consumer uptake; and the fourth and fifth entrants yield little additional benefit. This presumably balances the incentive to invest in a network against the value of competition. According to

14 The category of administrative monopolies encompasses conduct restrictive of competition which is to be attributed to government authorities. In the EU, such anticompetitive measures would be considered as barriers to trade and would fall outside the scope of competition law in the strict sense (see EC Treaty, Articles 28, 39, 43, 49 and 56 in particular). In contrast, the new Chinese AML addressed the prohibition of administrative monopolies in eight provisions. However, the conflicts between the recent telecoms reform and the AML provisions on administrative monopolies would only challenge the effectiveness of the AML enforcement and risk the prospect of the telecoms industry to pursue dynamic competition. See similar arguments in Li (2009a).

these empirical findings, the latest restructuring may be expected to enhance not only competition and consumer welfare, but also allocative efficiency in both fixed-line and mobile service markets. Furthermore, the latest restructuring features vertically integrating fixed-line and mobile network services to form three ‘full’ telecoms service providers, which completely differ from China’s previous telecom model e vertical separation. This new telecom model is, to a certain extent, introduced to enhance firms’ internal efficiency, since it gives firms more flexibility to use profit generated in one business segment to invest in the other. Thus, the new restructuring is expected to encourage firms to make better efforts in doing R&D in network technology and service innovation. In addition, equilibrium price is often lower in a triopolistic market than in a duopolistic market, as suggested by the recent empirical findings based on laboratory experiments (Fonseca and Normann, 2008), though asymmetry of capital distribution can dominate this effect. Thus, the latest restructuring may encourage more dynamic price structures (e.g., cost of outgoing relative to incoming calls; cost of on-net calls vs. off-net calls, including both mobile-to-mobile and fixed-line-to-mobile) in both fixed-line and mobile service markets, despite the fact that the telecoms service price is usually regulated by the government.15 Nevertheless, any conclusion drawn at this stage seems to be premature. Whether or not the latest restructuring can fulfil itself depends on whether the three newly created full telecoms service providers can realize economics of scale and scope and can compete vigorously with each other in a variety of markets, or, alternatively, it creates three stronger telecoms players who are only more capable of abusing their market power or colluding to prohibit potential new entrants into particular markets and reduce firms’ incentives in doing R&D and providing better service to the Chinese consumers. Whether or not these three vertically integrated telecoms service providers will compete effectively with each other will in the end depend on many factors, including (a)symmetry of capacity distribution, the pace of fixed-mobile substitution (or complementarity),

15 Theoretically, collusion becomes more difficult among the firms in a market as the number of firms increases in that market. Thus, even in a regulated market, price competition through various price packages is likely to occur when there are more firms compete in that market.

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diffusion of 3G technology and other regulatory restrictions. More thorough and dynamic analyses (including both empirical and theoretical) are urged to be undertaken on this issue. Given the above overall observation, there are several potential monopolistic conducts are of concern for China’s telecoms sector in relation to the regimes of the newly enacted Chinese AML: (i) certain monopoly agreements (restrictive agreements), (ii) abuses of dominant market position, (iii) mergers and acquisitions with the effect of restricting or eliminating competition, and (iv) abuses of administrative powers to restrict competition. Below I discuss briefly the Chinese antimonopoly context, compared mainly with the US and EU countries, so as to provide better understanding on those concerns. 4. China’s Anti-Monopoly context China’s newly enacted AML is comprehensive in scope. It incorporates broad principles generally found in competition law regimes across Europe and the United States. Similar to antitrust law in other countries, the Chinese AML aims to prevent and prohibit monopolistic conduct, protect market competition, promote efficiency, safeguard the interests of consumers and public welfare, and promote the development of China’s market economy.16 However, as stressed by Owen et al. (2007), the substance of the AML statutes itself has little significance unless the law can be enforced actively and effectively based on written guidelines, legal precedent, and/or other sources of predictability. In this context, the new AML is worrisome due to doubts about the effectiveness of its enforcement. Therefore, instead of discussing the substance of its statutes, below I provide a brief discussion of China’s antimonopoly context (from legal, regulatory and economic aspects) from which the issue arises. 4.1. The legal context Unlike antitrust law in the Western countries (e.g., the U.S. and EU member counties in particular), where antitrust law is associated with a particular legal system such as common law or civil law,17 the Chinese AML seems to lack judicial support from the existing legal system in China, where a civil law system leaves no formal place for ‘judge-made’ law. Similar to other active economic laws in China, the newly enacted AML is, in practice, reliant on administrative rather than judicial machinery as its primary enforcement mechanism, and this calls for the enforcement agency to issue detailed rules and regulations to implement the law.18 On one hand, this seems to be consistent with China’s current circumstances in which the administrative system is better developed than the court system under the context of its ongoing transition from a centrally planned economy to a market economy. On the other hand, doubts as to the effectiveness of administrative enforcement of the AML may impair, to a certain extent, the deterrent power of the Law in general. In this case, an administrative agency (the Antimonopoly Enforcement Agency [AMEA]) enforcing the AML rules is formed by three existing government bodies: the Ministry of Commerce (MOC),19 the

16

See AML, Article 1. For instance, antitrust law in the United States is associated with common law, one in which predictability of outcome is given high value, much law is created by judges, private parties have standing to sue to enforce law, and the major effects of public law enforcement are intended to be deterrent rather than direct. Moreover, antitrust is also practiced in ‘civil law’ jurisdictions, typically by administrative agencies of the executive power, guided by whatever policy aims the current government may have (Owen et al., 2005). 18 Owen et al. (2005). 19 MOC is the result of government restructuring that combined several cabinet level agencies in 2002, and is generally considered a powerful ministry, with jurisdiction over China’s domestic and international trade. 17

National Development and Reform Commission (NRDC) and the State Administration of Industry and Commerce (SAIC).20 In other words, the responsibility for AML enforcement is shared by three government agencies (see Zhang and Zhang, 2007 for detailed discussions on these three government agencies and their responsibilities). These three enforcement agencies are granted much greater power than those in western countries, and their actions usually are not subject to effective judicial review.21 To make the various government agencies of the central government subject to the AML, the AMEA is supposed to be able to bring AML enforcement actions against government agencies of the same or even higher rank.22 However, it still remains an open question, whether such an institutional arrangement can leverage power struggles among bureaucrats from different government agencies and among vested interests, which may risk undermining the effectiveness of the AML enforcement.23 4.2. The regulatory context Along with China’s ongoing economic reforms, China’s regulatory structure has also been undergoing fundamental changes, being transformed to be more compatible with the requirements of a market economy. Despite some positive developments, China’s regulatory system is still overwhelmed by abuses of government’s regulatory power (Shi and Dong, 2004; Owen et al., 2007). The most severe issue in those regulatory abuses is the so-called administrative monopolies (i.e., government-created monopolies). In the Chinese context, administrative monopolies refer to the abuse of administrative powers by administrative agencies to restrict, hinder and eliminate market competition among participants (Shi and Dong, 2004). Agencies that conduct administrative monopolies include agencies under both central and local governments at various levels.24 Using only the new AML to fight administrative monopolies faces a series of problems related to the current regulatory structure in China, two of which merit special attention. The first one is related to the aforementioned institutional structure of the AMEA. Given the current structural arrangement, it is hard to see clearly whether the enforcement authority will be truly independent in practice, despite the fact that the independence of the enforcement authority is one of the principles of the AML. In addition, the AML does not provide clear guidance on how the responsibilities are allocated amongst the enforcement agencies.25 If the various governmental agencies of the central government are made subject to the new AML, the AMEA has to take antitrust enforcement actions against government agencies of the same or even higher rank. Such an institutional arrangement of the AMEA may create confusion and conflicts within the political system and cause disruptive power struggles among different government agencies, unless there is a government system e which China currently does not have e based on clearly defined rules of law. The second is the

20 Article 9 states that the Anti-Monopoly Commission shall be “established” ) by the State Council, as opposed to the more ambiguous word “appointed” ( ) used in Article 10 referring to the Anti-Monopoly Enforcement Authority. ( AML, Article 10. See, also, AML, Articles 21e30, 38e45, 46e49 and 52e54. These three existing government bodies share responsibility in enforcing competition law rules, and are reported to be interested in assuming responsibilities under the AML. 21 For instance, the People’s Procurators in China enjoy much greater prosecutorial power than their counterparts in Western countries. Notably, the People’s Procurators have the authority to issue arrest warrants, whereas such power is usually exercised by courts in most Western countries. Moreover, the People’s Procurators can move for the People’s Courts to establish probable cause ex parte (without the presence of the defendants or their counsel). 22 See Article 9, 10, AML. 23 See Owen et al. (2007) for a detailed discussion. 24 Shi (1993), p. 51. 25 See Zhang and Zhang (2007) for discussions on the challenge facing the AML.

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so-called “central versus local governments” problem (i.e., the problem with enforcing the rules and policies of the central government at the local level) that seems ingrained in the current Chinese economy and polity.26 Enforcing the new AML against local governments to address local protectionism and “regional blockades” e whether by the AMEA or by the courts e may only exacerbate the “central versus local governments” problem. Furthermore, given the above concerns, the new AML faces another kind of credibility problem by including the prohibition of administrative monopolies in the law. In other words, if the government knows that administrative monopolies cannot possibly be prohibited and yet still includes such provisions in the law, it may send a signal to the public that strict enforcement of every provision of the law is not to be expected. Thus, the fact that the AML does include eight provisions on the prohibition of administrative monopolies27 should not lead one to expect an immediate success in dealing with administrative monopolies in China. Any success is likely to occur only incrementally.28 The elimination of administrative monopolies will necessarily require other reforms, such as constitutional and government structure reforms.29 Recent studies of antimonopoly policy in China (Wen, 2008; Zhang and Zhang, 2007) consistently suggest that the AML should not be seen as the sole vehicle or even the most important vehicle through which administrative monopolies are to be addressed; it is undoubtedly a significant improvement in the competition law in China, though.

4.3. The economic context Administrative monopolies can pose a far more serious problem to China’s market economy than monopolies created by private enterprises, as China highly relies on state-owned enterprises (SOEs), and in SOEs the government is more likely to play a dual role: the owner of the market players and the industry regulator (China’s telecommunications industry serves as a typical example).30 Today, SOEs in China still are largely concentrated in certain key industries, such as electricity, petroleum, railroads, aviation, telecommunications, and banking. Also, just before the new AML was enacted, the Chinese government (State Assets Management Commission, on 18th December, 2006) made it a stated goal to maintain the dominant role of SOEs in its so-called “strategic” industries (including all the aforementioned ones).31

26

See, for example, Zhang and Zhang (2007) and Owen et al. (2005, 2007). Articles 8, 32e37 and 51. 28 See Owen et al. (2005, 2007) and Shi and Dong (2004). 29 In most developed countries, such as in the U.S., administrative monopolies are dealt within the general antitrust law only to the extent that they are results of the action of the state as market participant. In dealing with monopolistic conditions created by the state as sovereign and market regulator, the U.S. generally leaves the job to the democratic legislative processes at both the federal and state levels, while using certain important legal mechanisms e such as the “Dormant Commerce Clause” and the federalism doctrine e to correct any failures of the democratic processes in this regard. In the European Community, administrative monopoly can be prohibited by European Commission under Articles 86 and 87 of the EC Treaty. 30 See Wen (2008). 31 The Chinese government aims to increase the state capital infusion in seven “strategic” industries (including national defense, electric power generation and grids, petroleum and petrochemicals, telecommunications, coal, civil aviation, and waterway transportation), and seeks to maintain “absolute control” of them by SOEs. The SAMC also announced that it was China’s goal to foster 30e50 large “internationally competitive” SOEs in those industries by 2010. See State Assets Commission, Guidance on the Restructuring of State Capital and State Owned Enterprises, December 18, 2006, http://finance.sina.com.cn/g/20061218/11133173443. shtml (last visited 15th June, 2009); see also SOEs to Maintain Overwhelming Control in Seven Sectors, XINHUA NET, December 19, 2006, http://news.xinhuanet. com/fortune/2006-12/19/content_5504591.htm (last visited 15th June, 2009). 27

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Private enterprises, in contrast, are still mostly small in size, despite the increasing importance of the role played by the private sector in China’s market economy.32 Accordingly, the new AML has to subject SOEs to a regulatory measure unlike that of the antitrust laws in the U.S. and EU e which seek to promote private competitive markets as alternatives to state-owned monopolies or regulated monopolies. Albeit China has made efforts to introduce competition in sectors previously monopolized or state-dominated, the effectiveness of competition in those strategic sectors is often very limited and the consumers are still all too often left at the caprice of the SOEs. The restructuring of China’s telecoms industry and the remaining de facto geographical monopoly status in its particular service markets provide a convincing example. Besides, the new AML alone seems to be not sufficient for China to achieve a goal of opening up the sectors currently dominated by SOEs to effective competition. Even if SOEs were all to be subject to the new AML, the response to market competition by SOEs would also be dependent on other aspects of SOE reforms, in particular, the reforms of ownership structures and management. However, China’s steps toward allowing private investments to enter certain sectors that were previously off limits to them have been very slow. For instance, foreign investors like Vodafone, Telefónica and SK Telecom still hold only minority shares of below 7% in the Chinese telecoms operators,33 seven years after the regulation applying to telecom operators with foreign capital.34 Many legal commentators also identified the new AML as a warning for overseas acquirers and a new fact of protectionism.35 The failure of Coca-Cola’s bid to acquire China Huiyuan Juice Group has been argued as a blatant example on this point. Moreover, the lack of competition in sectors controlled by SOEs is, to a large extent, caused by the tight control (restriction) of market entry by the government (i.e. administrative monopolistic conduct). Therefore, there is no effective way of promoting competition in those sectors, unless the government undertakes certain self-initiated measures to relax its control on market entry.36 However, SOEs frequently have stronger incentives to engage in anticompetitive acts (Sappington and Sidak, 2003a,b). And given the fact that administrative monopolies are ubiquitous in China and unlikely to be handled in short order by the new AML, it

32 See National Bureau of Statistics, Report on the Second National Census on Basic Economic Entities, 17th January, 2003, http://www.stats.gov.cn/tjgb/jbdwpcgb/ qgjbdwpcgb/t20030117_61467.htm (last visited 15th June, 2009). 33 Spain’s largest telecom operator, Telefónica, previously had a 5% stake in China Netcom. After the new restructuring e China Unicom and China Netcom merge e SK Telecom and Telefónica will see their stakes in the new company shrink to 3.8% and 2.1%, respectively. Today, Vodafone’s stake in China Mobile is a paltry 3.23%. See Tschang (2008), “Chinese telecom: Who wins, who loses?,” (11th July, 2008), BusinessWeek, online available at http://www.zdnetasia.com/insight/specialreports/ china/0,3800003266,62043670,00.htm (last visited 16th June, 2009). 34 This is part of China’s WTO commitments. According to the original agreement (a six-year phasing-in schedule), by the end of 2007, foreign investors in joint ventures should have been allowed to invest up to 50% in value-added and Internet services, up to 49% in the mobile sector and up to 49% in fixed-line basic services in the whole country. In addition, China also agreed to be bound by the obligations in a WTO “Reference Paper” to establish an independent, impartial regulatory authority and a pro-competitive regulatory regime. See for details, http://www.chinability.com/WTO.htm#telecommunications (last visited 16th June, 2009). 35 For details, see news, online available at: http://www.financierworldwide.com/ article.php?id¼4266; and http://www.huffingtonpost.com/anu-bradford/chineseantitrust-law-the_b_116422.html (last visited 16th June, 2009). 36 See, Sappington and Sidak (2003a,b). For SOEs to compete efficiently, competition must be an explicit goal of the government as equity owner in the firms.

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is rather doubtful that the AML could force the government to permit more market entry. 5. Conclusion Given the above analysis, the effectiveness of the AML enforcement, and in turn the law’s deterrent power, remains questionable to a certain extent. In relation to China’s telecoms industry, three issues should be addressed and call for further examination. The first one is the issue of administrative monopolies, given the fact that China still does not have an independent industry regulator in its telecoms sector. The MII plays a dual role e the largest owner of telecoms incumbents and the industry regulator. Also, its power to conduct administrative monopolies seems to be further enhanced through the latest telecoms restructuring. The second one is the level of market competition. Despite the triopolistic market structure created by the recent telecoms restructuring, the de facto monopolistic status cannot be changed (at least) in the short run in both fixed-line and mobile services markets. Whether the three newly created telecom super-carriers will compete effectively with each other remains an open question. Many other factors, including (a)symmetry of capacity distribution, the pace of fixed-mobile substitution (or complementarity), diffusion of 3G technology and other regulatory restrictive

conducts, are required to be taken into account for the competition analysis. The last but not the least one is related to the ownership of incumbent telecoms providers. The Chinese telecoms sector is classified as one of the seven national strategic industries where state ownership remains dominant. However, whether or not state ownership works the best for China’s telecoms development to achieve international competitiveness remains another open question here. This seems to give rise to the age-old controversy of the relative effectiveness of state versus private ownership. To address the above three issues in China’s telecoms industry requires a comprehensive understanding of the impact of ownership structure (state vs. private), firm numbers and independent regulation on the measures of market/firm performance and efficiency.

Acknowledgements The author would like to thank Catherine Waddams, Bruce Lyons and Russell Pittman for useful comments and suggestions on earlier versions of this paper. Financial support of the ESRC Centre for Competition Policy is also gratefully acknowledged.

Appendix A The number of mobile network operators by country from 1991 to 2008. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

China Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Spain Sweden Switzerland Turkey United Kingdom United States Total Average

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

1 1 1 1 2 1 1 1 2 1 0 1 1 1 1 2 1 1 2 1 1 1 1 1 1 2 1 1 2 2 36 1.2

1 1 1 1 2 1 1 1 2 1 0 1 1 1 1 2 1 1 2 1 1 1 1 1 1 2 1 1 2 2 36 1.2

1 1 1 1 2 1 2 2 2 2 2 1 1 1 1 2 1 1 2 1 1 1 2 2 1 3 1 1 2 2 44 1.5

1 3 1 1 2 1 2 2 2 2 2 1 1 1 1 2 1 1 2 1 2 2 2 2 1 3 1 1 3 2 49 1.6

2 3 1 1 2 1 2 2 2 3 2 2 1 1 1 2 1 1 2 1 2 2 2 2 2 3 1 2 4 2 55 1.8

2 3 1 2 2 1 2 2 2 3 2 2 1 1 1 3 1 1 2 1 2 2 2 2 2 3 1 2 4 3 58 1.9

2 3 1 2 3 2 2 2 2 3 2 2 1 1 2 4 2 1 2 2 2 2 2 2 2 3 1 2 4 6 67 2.2

2 3 2 2 4 2 2 2 2 3 2 2 1 2 2 4 5 1 2 2 2 2 2 2 2 3 1 2 4 6 73 2.4

2 3 3 2 4 2 4 4 2 4 3 2 2 2 2 4 5 2 2 4 2 2 3 3 2 3 2 2 4 7 88 2.9

2 4 3 2 4 2 4 4 2 4 3 2 2 2 3 4 5 2 3 5 2 2 3 3 3 3 3 2 4 7 94 3.1

2 4 3 3 4 3 4 4 3 4 3 4 2 3 4 4 5 3 4 5 2 2 3 3 3 4 3 2 4 7 104 3.5

2 4 3 3 4 3 5 4 3 4 3 3 3 3 4 4 3 3 4 5 2 2 3 3 3 4 3 2 4 7 103 3.4

2 5 3 3 4 3 5 4 3 4 3 3 3 3 4 4 3 3 4 5 2 2 3 3 3 4 3 2 4 7 104 3.5

2 4 3 4 4 3 5 4 4 4 3 3 3 3 4 4 3 3 4 5 2 2 3 3 3 4 3 2 5 7 106 3.5

2 4 5 5 5 3 5 4 4 4 3 3 3 3 4 5 3 3 4 5 2 2 3 3 3 4 4 3 5 6 112 3.7

2 4 4 5 6 4 4 4 4 4 3 3 4 4 4 5 3 3 4 5 2 2 3 3 3 4 4 3 5 6 114 3.8

2 4 4 3 5 4 4 3 3 4 3 3 3 4 4 5 3 3 4 4 2 2 4 3 3 4 4 3 5 6 108 3.6

2 4 4 3 5 4 4 3 3 4 3 3 3 4 4 5 3 3 4 3 2 2 4 3 3 4 3 3 5 6 106 3.5

Data source: author compiled based on a variety of sources, including OECD regulatory database, countries’ telecoms regulators’ websites and mobile network operators’ websites.

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