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Written by: Staff

HONG KONG, Mar 22: China will grant third generation mobile licences this year, the chairman of number-two fixed-line carrier China Netcom said, in a high-level hint at the timetable for the long-awaited move on 3G.

In an interview with Reuters, Zhang Chunjiang, a former deputy minister of China's Ministry of Information Industry (MII), said he expected Beijing to dish out 3G licences in the second half of 2006.

''Beijing has to grant the licences this year, otherwise we can't guarantee 3G services for the 2008 Olympics. We need at least one year to build the networks,'' Zhang, 47, said.

Third generation mobile phone services offer faster Internet access and better multimedia features such as videoconferencing.

A number of industry watchers had predicted Beijing would grant 3G licences by June -- a move expected to trigger up to $12 billion in spending on equipment from the likes of Siemens, Motorola and Nokia.

But mixed signals, inadequate information and local interests have plagued an issue first broached years ago.

Netcom, the smallest among China's big four telecoms firms, runs fixed-line networks in the country's 10 northern provinces.

Like other fixed-line carriers, the company has suffered from mobile substitution -- its fixed-line net additional users stood at 2.56 million in January this year, down 20 percent from a year earlier and 41 per cent from the monthly average of 4.32 million in the first three months in 2005.

Even the net additions to its short-range wireless services ''Xiaolingtong'' -- or ''little smart'' -- dropped to 0.5 million in the last three months of 2005, versus 2.87 million in the first quarter of last year.

Analysts are gloomy on the company's outlook, despite it beating market forecasts with its 2005 results. Net profit soared 414 per cent to 13.9 billion yuan (US$1.7 billion), though that increase was boosted by one-time non-operating items.

''Netcom appears to be just six to 12 months away from seeing net profit growth slowing to mid-single digits,'' said Morgan Stanley analyst Lina Choi.


Zhang sees mobile telephony and Internet TV as the firm's salvation.

''There are two major developments in the telecom industry.

One is fixed-mobile convergence. The other one is the so-called triple play. That is the convergence of broadcasting networks, telecom networks and Internet,'' said Zhang.

''These businesses have been the major drivers for fixed-line telcos in other countries. That's why it is so important for China Netcom to have a 3G licence.'' But some market watchers are sceptical.

Investment bank Goldman Sachs, which helped China Netcom raise US$1.13 billion in a Hong Kong initial public offering in 2004, said winning a 3G licence could hurt its share price.

''China Netcom will share a TD-SCDMA network with China Telecom on a regional basis ... we believe this is negative for the firm,'' said Chen Haofei, Goldman's telecoms analyst, referring to China's homegrown 3G standard.

He said TD-SCDMA, which offers poorer economies of scale than the two other 3G standards -- WCDMA and CDMA2000, is unlikely to be ready for commercial deployment until late 2006 at the earliest.

He expects the parent firms of the two fixed-line operators -- China Netcom and China Telecom -- to buy China Unicom's GSM network to support the rollout of their listed firms' TD-SCDMA business.

China is the world's largest telecoms market, with almost 400 million cell phone users and about 350 fixed-line users at the end of January, according to official data.

But more than three years after China Unicom, the country's number-two mobile operator, launched its CDMA service, the network's utilisation rate is still only at about 40 per cent -- the major reason for the company's operating losses.

''China Unicom's difficult CDMA experience may provide good insight into the risks for 3G,'' wrote JPMorgan analyst Tim Storey in a recent report.

GSM and CDMA, developed in Europe and the United States respectively, are currently the dominant mobile standards.

China Netcom's Zhang said the company has to wait for Beijing to unveil its 3G policy before formulating its mobile business plan and figuring out how to pay for it.

China Netcom's debt-to-equity ratio was already 50 per cent in 2005, and the firm needs to arrange funding for rolling out the 3G services.

''We could launch a detailed 3G plan within a month of Bejing announcing China's 3G policy ... and our board will make sure the plan balances our need of development and shareholders' interests,'' Zhang said.

(US$1=8.02 yuan)


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