China Telecom set to be postponed until 2002

High-level political manoeuverings at the Ministry of Information Industry (MII) may lead to the postponement of China Telecom''s IPO until next year.
While there has been no official decision yet, China experts report that the Mainland government is starting to favour a 2002 listing date for China Telecom. Initially, the government had hoped to list the country's dominant fixed line player in Hong Kong and New York this July, but the huge restructuring job in hand for bookrunners Merrill Lynch, Morgan Stanley Dean Witter and China International Capital Corp (CICC), had always made the fourth quarter a more realistic target.

Now, however, observers say that the schedule may be pushed back again because of a re-shuffling at the MII. In particular, speculation has been growing that MII head Wu Jichuan may finally step down under pressure from premier Zhu Rongji. Such rumours have existed for well over a year, but are said to have re-surfaced with a vengeance over the past few days.

Among industry specialists, it is well known that the two men hold divergent views on the development of the Chinese telecommunications industry. Wu is said to maintain a monopolistic stance and favours China Telecom as the main conduit for the improvement of penetration rates. Zhu, by contrast, is said to believe that competition should be the chief dynamic for stimulating growth and providing customers with a better service.

Wu's replacement, or continuing uncertainty about his tenure, has massive implications for China Telecom’s flotation. As one insider puts it: "Getting this deal done at an attractive price will come down to how clearly the regulatory environment can be set out in the prospectus."

The potential for sudden policy switches and a lack of consensus or clarity among the country's many and overlapping regulatory bodies has been a growing source of stress for international investors. The issue last came to a head in late November when shares in China Mobile and China Unicom plummeted on concerns that the government was about to radically cut tariffs.

Investors began to re-examine just how far they could ever trust what they were hearing. The about-turn followed a series of remarks from Mainland officials concerning plans for tariff cuts across the cellular sector which would have benefited China Telecom, but been detrimental to Unicom and Mobile. To many it seemed that the PRC government could only be relied upon to plump up whichever privatization it was in the process of bringing to market. Once proceeds had been counted, on the other hand, it was on to the next candidate with regulations to suit, no matter how this might impact any predecessor.

In a global call with 100 of the world's investors on December 1, Wu managed to limit the damage by categorically stating there would be no reductions until 2002. In order to avoid similar misunderstandings in the future, the government also appeared to have learnt its lesson and made sure it undertook necessary tariff re-balancing in the fixed line sector before rather than after China Telecom's IPO. Consequently, domestic fixed line charges, international fixed line charges and internet charges were all reduced on December 25.

In the domestic long distance market, for example, a scale of four different charges was replaced by one flat rate, while the cost of international calls was dropped by 47% and the cost of using the internet by over 50%. However, Xinhau reported that while the new charges would come into effect on January 1, China Telecom would not have to implement them until June 1, because it would be the "most affected".

Many observers believe that the government would be well advised to let Bank of China list ahead of China Telecom for two other reasons. "This is a very big deal and one that has been key to the money the Chinese government was hoping to raise this year," says one. "But the government is very conscious that it needs to get the deal right. Given there is absolutely no indication that the market for telecom-related paper will be any more attractive at the end of the year than it is now, it would certainly be difficult to price the thing well."

So too, few doubt that the restructuring will take longer than initially envisaged. China Telecom controls 95% of the fixed line sector and is said to employ 530,000 - an employee per telephone ratio 10 times that of developed nations.

At the end of 2000, the People's Daily reported that the country had 127 million fixed line subscribers and 72.5 million cellular subscribers. Overtaking Japan last year as the world's second largest telecoms market, analysts believe that China will outstrip the US to become the largest by the end of this year. Officials have estimated that the market will continue to record overall growth rates of 20% per annum, helping to propel overall penetration from 20% to 40% by 2005.

It has been provisionally envisaged that China Telecom’s listing vehicle will encompass only six provinces including Guangdong, Shanghai and Beijing. The amount likely to be raised is still said to be a moving target, with the leads having not yet undertaken any detailed valuations. Previous reports have suggested that the deal will come in between $8 billion to $10 billion, making it Asia's largest offering ex-Japan.