A new anti-monopoly investigation into China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU) over their broadband business has the business world buzzing, trying to figure out what it all means as one of China’s most powerful regulators pursues 2 massive state-owned enterprises. (English article; Chinese article) A number of key elements are at work here, but from my perspective this is largely a symbolic high-profile act by the central government designed to show the average Chinese citizen it can be just as tough against its own state-run companies as it can against private enterprises and foreign firms, which seem to be the target of its crackdowns most often. At the same time, I do think the government also wants to bring some price relief to the average Chinese person, who may feel that broadband fees are unreasonably high. Let’s review the facts. This anti-monopoly investigation, first hinted at in September (previous post), is significant for three major reasons. First, the government agency conducting the investigation is the NDRC, China’s state planner and one of its most powerful bodies, instead of the Commerce Ministry which usually handles anti-trust issues. Second, the NDRC has made a very high-profile confirmation of the investigation, again a sharp contrast for a central government that seldom confirms this kind of thing, let alone openly discusses it. Lastly, the whole issue of monopoly is really a bit of a farce here, as the current duopoly whereby China Telecom and Unicom control a big slice of the broadband market is a direct result of previous government policy, namely its restructuring of the country’s former fixed-line phone monopoly nearly a decade ago that saw it divide up China’s fixed line networks between Unicom and China Telecom. Considering all this background and the fact that a number of other broadband alternatives are fast emerging (previous post), the most logical conclusion I can reach is what I’ve already said, namely that this latest investigation is largely for show. At the same time, however, both China Telecom and Unicom will now come under heavy pressure to lower their broadband prices, which will result in some moderate profit erosion as broadband is one of their more lucrative businesses.
Bottom line: A new anti-trust investigation into China Telecom and Unicom is largely for show, but will also result in some profit erosion as both are forced to lower broadband fees.
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