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Fitch: China Telcos May Face Higher Regulatory Risks

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Fitch Rating cautions that China's telecoms industry may face growing regulatory risks as the government consults on proposals to force incumbents to open their networks to mobile virtual network operators (MVNOs).

This proposal in itself is unlikely to significantly affect the cash flows of China Mobile, China Telecom and China Unicom. The MVNO business model has not been successful globally with only a handful of MVNO operators, such as Virgin Mobile and Boost Mobile, being major surviving entities. Fitch believes that China will not be an exception and the introduction of MVNOs may not raise mobile competition significantly. Smartphone distributors are the most likely MVNO entrants.

However, China Mobile's and China Telecom's credit ratings may be affected if this development signals the beginning of a series of regulatory moves that may impinge on the incumbents' profitability. In this respect, Fitch points to the Ministry of Industry and Information Technology's plans to adjust interconnection policies, expand mobile number portability trials and tighten supervision and regulations over China's internet industry in 2013. The agency believes that any reduction in fixed-line and broadband interconnection rates may exert pressure on China Telecom's and China Unicom's profit margins, and a potential introduction of asymmetric mobile-to-mobile interconnection rates may hurt China Mobile's profitability.

Fitch also believes that there is a 50% chance of the government accelerating the schedule for LTE licensing, possibly by late 2013 or early 2014.

Given China's national hi-tech strategy, both China Mobile and China Telecom may face the risk of being tasked to adopt China's homegrown 4G technology -- TD-LTE -- which has limited global scale and suffers from a less than mature eco-system. However, Fitch is positive on the chances of China Telecom being awarded the globally deployed LTE FDD standard as its main 4G technology. The agency also does not rule out the less-than-ideal possibility that China Telecom may be awarded both LTE FDD and TD-LTE, which may lead to duplication of networks and inefficient capex.

Finally, Chinese telecoms operators may face the challenge of an on-going value-added tax (VAT) reform that is being rolled out across certain parts of the service sector in select cities. While the VAT reform - if extended to the telecoms sector - should not increase operators' overall tax burden, the outcome remains uncertain.

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Tags: mvno  lte  china mobile  china telecom  china unicom  China