Telefónica of Spain on Thursday broke into China's state-run telecommunications sector by agreeing to pay €240m ($290m) for a 3 per cent stake in China Netcom, the Hong Kong and New York-listed operator.

The Spanish company, the world's third-biggest telecoms group by market value, said it had signed a broad strategic alliance with Netcom, China's second-largest fixed-line operator. It said it hoped eventually to lift its stake to the maximum 5 per cent and qualify for a seat on the board.

Telefónica has for some time been seeking to break into China, where only one in four people uses mobile phones. Vodafone of the UK has a 3.3 per cent stake in China Mobile, the country's largest wireless operator.

Although international groups are banned from operating networks or offering value-added services, Vodafone has worked with China Mobile on the development of network systems. Telefónica officials on Thursday played down the deal's financial side, saying their main interest was “learning as much as possible about the Chinese market”.

The two companies are expected to co-operate on equipment purchasing, research and development, marketing and business strategies. Telefónica will also bring its vast experience in Latin America, where Chinese companies have been busy forging strategic links. China Netcom is widely seen as weaker than China Telecom, its larger rival, as it mainly operates in the less affluent northern regions. However, it is confident of being awarded a third-generation mobile phone licence, which should shore up its long-term growth.

Netcom has been relying on broadband and a limited wireless service as its key growth engines. It is also dipping its toes into broadband television.

China's telecoms industry is expected to undergo a significant reshuffle ahead of the introduction of 3G services, with some analysts predicting that Netcom could merge with China Unicom, the country's second-largest wireless operator.

Netcom's parent company bought a 20 per cent stake in PCCW, the Hong Kong phone company, for HK$7.9bn ($1bn) in January. Netcom earned Rmb9.2bn ($1.1bn) in 2004, against a loss of Rmb11.1bn in 2003. Its subscriber numbers rose 15 per cent to 80.4m last year.

Telefónica paid HK$11.45 per share for the stake. Netcom closed at HK$11.30 in Hong Kong.

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