Rumours highlight uncertainty over 3G

Investors in Chinese telecommunications stocks have been biting their nails this week as they await the dawning of Monday, August 1, when, according to a barrage of internet-fuelled rumours, Beijing will announce a major restructuring of the sector.

Even though the state body that controls China's four big foreign-listed telephone companies has expressed ignorance of any such plan and the operator most affected has denied its existence, the rumours have highlighted expectations that Beijing is preparing for action.

And while investors are keen to find out the fate of some of China's biggest companies, what they really want is an end to the uncertainty that has clouded the sector in the past year.

“I care about what the changes will be, but what I care more is whether this will be it,” says John Koh, fund manager at Daiwa Asset Management which holds shares in China Mobile, the biggest wireless operator, and in China Telecom and China Netcom, which control the country's fixed-line market.

According to the most popular speculation of sectoral restructuring, Beijing will break up China Unicom, the country's second-largest mobile operator, and transfer its two wireless networks to Telecom and Netcom.

In an unusually detailed report on the government's telecoms plans, Sohu.com, one of China's biggest internet portals, this week reported that Beijing would announce details of the restructuring on August 1.

Many in the telecoms sector have heard similar talk, and few doubt that notoriously secretive government departments responsible for the telecoms sector have been thinking seriously about a major shake-up.

Such thinking reflects in part concerns about the long-delayed introduction of “third-generation” mobile services. Officials are worried that if all four leading operators get licences to operate 3G wireless services, they will rush to build expensive national networks of unproven commercial merit.

Beijing has already moved to strengthen its control over the listed operators, last November rotating the chief executives of China Telecom, China Mobile and China Unicom.

Dividing China Unicom between Telecom and Netcom would immediately create stronger competition in wireless services for the dominant China Mobile, while also ending the strange situation of one company operating two networks based on different technical standards.

“I think this is the best plan because China only needs three telecom groups. There is too much competition already and Unicom is the weakest link,” said Daiwa's Mr Koh.

Unicom, however, is less enthusiastic. The company said it had checked the report of an August 1 restructuring announcement and found it to be “pure rumour” that would “disturb people's hearts and disrupt normal management order”.

China Telecom, Mobile and Netcom have also said they have not received any notice of a restructuring.

But talk of impending telecoms reorganisation, however unfounded, has already deterred some investors and made it hard for others to value the companies.

“It does not matter what [changes] we want to see, as long as they stick to the changes and then we can value the companies accordingly,” said Khiem Do, head of Asian equities at Baring Asset Management, which owns Chinese telecoms stocks but declined to reveal which companies.

He said his firm had not been trading the stocks actively this year because of the potential changes.

Other investors hope a restructuring might bring an end to heavy state control of the telecoms sector that was highlighted by November's executive “merry-go-round”.

“I want China to get it over quickly, give us more transparency and less regulation,” said Choo Yoon Lai, fund manger at Comgest Far East, which holds stocks in China Mobile.

Although China Telecom and Netcom would compete directly with Mobile if the rumours proved true, she said she would stick with her holdings.

“[China Telecom and Netcom] will need a few years to roll out the [new networks]. They will then have to try and win over subscribers. There would be a lot of upheaval,” she said.

Despite all the high-profile rumours, investors said they would not be very disappointed even if nothing was revealed on Monday.

“In China, uncertainty is a risk that we will always have to take,” said Daiwa's Mr Koh.

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