China Telecommunications Report Q1 2007

On the one hand, China's telecoms market can be characterised by enormous growth potential in its mobile and broadband industries, whilst on the other hand it is a market dominated by delays in 3G licensing, a lack of competition and state-owned enterprises in need of reform. This goes some way to explaining why, despite scoring maximum points for growth potential in BMI's Telecommunications Business Environment Rankings, China appears so close to the bottom of our table, and below markets such as India and Pakistan. There, inward investment and competition is encouraged. China's fixed-line market, whilst still growing a little in terms of subscriber numbers, is close to saturation, and BMI does not expect penetration to rise much above 30%, which should be reached in 2009. With consumers migrating to wireless and broadband technologies, China Telecom and China Netcom are looking to win mobile 3G licences and invest more in their data services. Indeed, China Telecom witnessed 35% y-o-y growth in its broadband subscriber numbers in 2006 to 28mn. Overall mobile penetration in China is 35%, but the key to the market is that teledensity in rural areas, where approximately 750mn of China's population resides, is just 12%. Both China Mobile and China Unicom have invested considerably in network improvements, especially in rural China, resulting in the number of net additions in both December 2006 and January 2007 exceeding 6mn. BMI projects that China's mobile subscriber numbers will rise by on average 19% per year until the end of 2011, by which time there should be 900mn subscribers. Because of continued delays in the testing of China's home grown 3G TD-SCDMA technology, commercial deployment of next-generation mobile services is now unlikely to start before 2008. We project fast growth especially in Beijing at the time of the Olympics, with about 40mn 3G subscribers by the end of that first year. By the end of 2011, we estimate that about a third of all mobile subscribers in China will have access to TD-SCDMA, WCDMA or CDMA2000 EVDO technology.

With China Telecom and China Netcom attempting to offset falling fixed-line revenues, both operators are encouraging broadband substitution in place of slower dial-up internet usage. This is beginning to happen, and China is now home to over 50mn broadband subscribers. We forecast that this figure will have doubled by the end of 2009 and that by the end of 2011, there will be 194mn high-speed internet subscribers in China. Many of these, in time, will be mobile broadband users. BMI expects to see a frantic couple of years of growth in China as the country's rural areas become hooked on mobile telephony, and 3G usage begins to take off in China's larger cities during and immediately after the Beijing Olympics.