China plays phone market musical chairs

The latest deals give China Unicom and China Telecom access to major new markets

China Unicom is to sell its CDMA network to fixed-line phone company China Telecom for $15.85bn.

At the same time, China Unicom will merge with smaller fixed-line operator China Netcom Group in a share-swap deal.

The moves are part of a government-choreographed game of musical chairs in which China's growing telecoms industry is being significantly restructured.

The latest deals give China Unicom and China Telecom access to major new markets, allowing the latter finally to offer mobile phone services to its hundreds of millions of fixed-line customers.

This expansion is critical for the firm, as infrastructure costs mean that mobile phones are gradually moving from being an adjunct to a potential replacement for fixed-line services.

The government may give China Telecom a multi-billion dollar handout to help it develop a 3G mobile network, local news service Sohu reported citing unnamed industry sources.

Earlier, the country's dominant mobile phone operator, China Mobile, announced plans to acquire another smaller fixed line operator, China Tietong, which was originally established as an offshoot of China's railway network.

In light of China Mobile's dominant 70 per cent share of the mobile market, the government is attempting to level the playing field through mandatory domestic roaming with fixed revenue sharing.

While apparently intended to help foster open competition, the series of alliances and transfers has had the paradoxical effect of reducing the number of major players in China's traditional mobile and fixed telecoms markets from six to just three.

The shift in policy comes as China belatedly begins to roll out 3G mobile coverage, and is being seen as a an attempt to set up a truly competitive local mobile market as 3G emerges.

In turn, analysts say that this is likely to boost local telecoms hardware markers, such as Huawei and ZTE, as they continue overseas expansion.