"Although no final decision has been made the government believes that there is room to accommodate one to two more new network operators," said Bank of China International.

But "more noteworthy" is the emphasis on the introduction of resellers or virtual operators in the Chinese marketplace, said the report, published Sept. 28 after a meeting with senior ministry officials. That emphasis indicates the officials believe there isn't enough competition in a market with such enormous potential.

"The (Ministry of Information Industry) officials said twice that ultimately there could be more than 10 mobile service providers in the country," said the mainland brokerage firm.

Bank of China International said it predicts 10 or more mobile service providers will enter the market in 2003 or beyond. Some of these new players will be joint ventures with leading foreign mobile operators, the brokerage said.

Currently there are two mobile operators in China, China Mobile Communications Corp and China United Telecommunications Corp. China Mobile's China Mobile Ltd unit and China United's China Unicom Ltd unit are listed in Hong Kong.

In a separate report about China's mobile telecommunications industry, BNP Paribas Peregrine, which also met with the ministry officials, said China's operators could number in the "double-digits" in the future.

BNP said there should definitely be more than two backbone network operators -- which own their own network infrastructure -- but "not too many."

BNP also said the ministry's statements that it sees room for only two or three network operators but more than 10 service providers suggest that mobile virtual network operators will eventually be allowed in China.

Ministry officials also suggested it is unlikely that China will issue additional 2G cellular licenses in the near future. It considers next year an appropriate time to license 3G services, according to Bank of China International's report.

Analysts met with Su Jin Sheng, head of the Telecommunications Administration Bureau; Wang Zhan Fu, deputy head of the Department of Financial Adjustment and Clearing; Zhao Mei Zhuang, deputy head of the Department of Policy and Regulations.

Analysts also met with Lu Xiang Dong, vice president of China Mobile Communications Corp, and Dong Hui Yi, president of Beijing Mobile Communications Co.

The Bank of China International said the MII plans to designate a leading telecom provider as a universal service provider, with its obligations set by the ministry.

China Telecommunications Corp, the country's dominant fixed-line operator, is most likely to be designated, the Bank of China International said.

A fund will be established, to which other service providers will contribute, and it will be used to offset economic losses incurred by the USP, according to the bank.

It also said implementation of the USP and the fund are expected in 2003.

Meanwhile, according to BNP, MII officials said the government is unclear about the status of China Telecom's restructuring.

Talk in the market earlier suggested that restructuring proposals for China Telecom include separating it along functional or geographical lines, or splitting it into a company that owns the networks and another that provides services.

The Bank of China International report said there has been no decision on whether China Telecom will be split up into several companies.

Separately, BNP's report said that a proposed calling-party-pays, or CPP, system may not be implemented in the short term because mobile and fixed-line operators can't agree on tariffs.

The MII is considering cutting tariffs but retaining two-way charging, BNP said.

China's mobile users are currently billed for both sending and receiving phone calls.

The Ministry of Information Industry has said previously that CPP won't be implemented this year.

Some industry analysts expect implementation of the system to be gradual and completed by 2003.

A mainland paper reported in August that China Mobile subscribers in Zibo, Shandong province, are now being charged under a CPP pricing system. That report was denied by China Mobile (Hong Kong).

Concerns over implementing calling party pays have hurt the share prices of both China Mobile and China Unicom.

A report by CLSA, published Wednesday, said no decision has yet been made on whether CPP will be implemented.

Separately, analysts said they met management from China Mobile (Hong Kong) Ltd's parent China Mobile Communications Corp and Beijing Mobile, a unit of China Mobile (Hong Kong).

According to Bank of China, the two companies said they will focus on revenue and profitability and that subscriber growth isn't a very important performance target.

According to the BNP report, MII officials said the ministry has yet to define its role once a new government telecom sector commission has been established.

China said in mid-September that it plans to set up a new government commission to be headed by Premier Zhu Rongji to decide on major policies for the telecom sector.

BNP said the MII is likely to take the role of enforcing regulations.

Meanwhile, BNP said it remains cautious on the prospects of both China Mobile (Hong Kong) and China Unicom.

There are still many uncertainties ahead for these two companies, in particular the potential policy changes, BNP said. It added that earnings of the two telecoms are likely to be volatile.

BNP maintains an underperform rating on both stocks, with a target price at HK$19 for China Mobile and HK$6.3 for China Unicom.

Bank of China also maintains an underperform rating for China Mobile (Hong Kong), with a 12-month target price of HK$25, while CLSA maintains a top buy rating for China Mobile, with a price target of HK$24.8.

(Agencies 10/08/2001)