China Netcom Group Buys Jitong Communications

China Netcom Group, China's third largest telecom group, has agreed to the purchase of Jitong Network Communications for RMB481.9 million yuan, or US$58.2 million.

Jitong shareholders will receive payment of one dollar for each dollar invested in Jitong.

This marks a further step along in the Chinese government's rationalization of the Chinese telecom industry. China's state council laid down a plan for the integration of the assets of China Netcom Group, Jitong Network Communications, and China Netcom Corp, which is also known in China as Little Netcom.

Because the telecom industry is a capital intensive industry which has relied heavily on state funding, China's state council plays a heavy deciding role in policy, working through the powerful Ministry of Information Industry (MII). MII is the regulator of the telecom and Internet industry, sometimes going as far as appointing government officials to company positions and setting fees for the industry.

In late April, MII appointed Zhang Chunjiang, a former MII vice minister, as the new head of China Netcom after it had made little progress in integration. Of China's four telecom groups, China Netcom is the only firm which is not yet listed, and it is believed that successful integration is an important milestone before China Netcom goes public. The former general manager of China Netcom, Xi Guohua, took Zhang's former job at MII.

In May 2002, China ordered the breakup of former fixed-line monopoly China Telecommunications Corp into two entities - China Telecom Group and China Netcom Group. China Netcom Group took over China Telecom's assets in 10 provinces in northern China. China Netcom Group was also ordered to merge the assets of two major broadband providers, China Netcom Corp. and Jitong. However, both are still operating independently.

The number of fixed line and mobile phone subscribers are approximately the same now in China, with between 225 and 230 million users each as of April. Mobile subscriber growth slowed to 4.23 million for the month of April. Recently, fixed line growth has grown slightly faster than mobile user growth.

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