Wu Jichuan, who heads China's Ministry of Information Industry, told a gathering of policy makers and industry executives in Hong Kong that the wild days of the dot-com boom as well as the hype over third-generation data services helped prove that the telecom industry is a sector where "competition must be kept under regulatory control."

"The telecom industry emphasized competition to the neglect of necessary government regulation, which resulted in policy mistakes, such as 3G license auctions ... at astronomical prices," Wu said, during the first day of Telecom Asia 2002, an International Telecommunications Union event. "We have not introduced the so-called complete unrestricted competition, which has enabled us to avoid the mistakes made by other countries and has guaranteed the overall improvement of the nation's telecom strength," he said.

CHALLENGES AHEAD

Over the past decade, China has transitioned from a telecoms laggard to being the largest communications market in the world. From 1991-2001, it added more than 300 million telephone subscribers - more than half of Asia's total - and went from one in a hundred people having phone access to about 30 people per 100, according to an ITU report released Monday. It is the world's largest mobile market and second largest fixed-line market, trailing the US, for a total of more than 400 million users.

The country has also emerged as an important buyer of US telecoms equipment - absorbing 17 percent (32 percent, including Hong Kong) of the gear sent to the Asian-Pacific market in 2001, according to the US International Trade Commission. However, during the next few years, China is likely to face another, perhaps tougher, transition and may no longer be the shelter from the storm it has been for telecom network equipment providers.

For instance, at only 11 percent penetration for cell phones, there is still a huge market for new voice subscribers in China. Yet even as mobile subscribers increase, the average revenue per user is on the decline. And even though regulators may be keeping a critical eye on the market, intense competition (price wars) is already starting to erode the profits of the top incumbent mobile carriers -- China Mobile and China Unicom - as they struggle to find ways to compel users to sign on to higher value data services.

To make things tougher, as the mobile operators square off against each other, they are also being squeezed by fixed-line provider China Telecom -- which lacks a mobile license but still operates a short-range PAS-based network that allows users to tote a home cordless phone around their home town but doesn't support intercity roaming. With 10 million subscribers across 300 cities, the intra-city range limitations of the network don't seem to have retarded its popularity among low-end users looking for a deal. That, in turn, is forcing the mobile incumbents to cut rates to compete for new voice customers and raising worries that PAS-based mobile data services may eventually bring the price wars to a new frontier.

The shadow of doubt

Such developments are causing analysts to cast a more critical eye on the market's future, which, in part, led to a delay in China Telecom's IPO offering in both Hong Kong and New York at the end of October. After lowering the price to the legal limit, the IPO was eventually re-launched last month with lackluster results.

In his speech Monday, Wu indirectly chastised industry watchers for holding too high expectations for industry growth. "Having unrealistic goals and overbuilding only leads to the bursting of bubbles. With the advent of the Internet and multimedia technology, the telecom industry now finds itself in an even more complicated environment then at a time when voice communication was the sole focus," he said.

Still, he said China sees communications as a key enabler for increasing productivity and quality of life among its businesses and citizens. By 2005, the market will double from its 2000 size, he said, to hit 3 trillion RMB. "The number of fixed and mobile subscribers will have reached 500 million. The number of data multimedia users will amount to 200 million and teledensity will around 40 percent. On top of that, China's information industry is going to expand even further in the next 15 years to achieve the goal of quadrupling the 2000 national economy by 2020," he said.