The rules also require message providers to offer a local service hot line, make it easier to cancel subscriptions to short message newsletters, and ban companies from sending unsolicited fee-based messages.

The announcement from the Shanghai Communications Administration comes at a time when demand for short message services are soaring in the city.

Last year, users of Shanghai Mobile, the larger local mobile operator, sent more than 7.8 billion short messages, while Shanghai Unicom handled 1.1 billion messages through its network. As each mobile short message costs at least 0.1 yuan (1.2 US cents), the huge market has attracted hundreds of companies offering short message services - mainly over the Internet.

Some of the smaller companies, however, are providing services that government is none too happy with.

"Some providers send unsolicited promotional messages to users without advising them of subscription fees and some bury information about canceling subscriptions deep into their Website to maintain users," said Yu Zhe, a spokesman for the administration. "Many service providers don't offer local service hot lines, while their call centers in other provinces are hard to reach."

The new rules, which also cover fixed-line short messages, require service providers to have a registered capital of more than 1 million yuan, ban them from sending mass promotional messages, and ask them to maintain records of each short message sent through their Websites for 60 days.

To tighten its control over the sector, the authority also suspended operations of "Short Message Union" launched by leading Internet portals, including Sohu, Sina and Netease - all Nasdaq-listed firms which have seen their bottom lines boosted by message revenues.

By joining the union, smaller Websites can charge users via the larger portals' revenue-sharing mechanism with China's two mobile operators. However, some Websites used the system to charge viewers for watching pornographic movies online.

"It's very difficult to monitor the actual business of our smaller partners - more than 90,000 Websites have teamed up with us," said Zhao Yurun, the local marketing manager for Sohu. "But I don't think the new move will influence our profit much, as they contribute no more than 10 percent of our total short-message revenue."

Industry analysts said the new regulation is a temporary setback for the short-message industry, but the whole market will benefit from it in the long run.

"If other provinces follow Shanghai's suit, message service providers will have to set up call centers across the country or have to offer nationwide toll-free hot lines. It's quite costly," said Gu Xianli, of Analyses Consulting Corp Ltd.

"But as more customers are comfortable with the quality of this service, the actual market size will grow faster."

(eastday.com June 27, 2003)