Ringing off

Telefonica, the only foreign telco left in China, halves its investment

The logo of Spanish telecom group Telefonica is seen on the facade of its flagship store in central Madrid

A less sunny outlook on China?

On the morning of November 15, 1999 Chinese hopes of joining the World Trade Organisation (WTO) were fading fast. Bilateral talks with the United States had broken down and the American delegation led by Charlene Barshefsky was preparing to take a flight back to Washington.

In a bold gamble, the then Chinese Premier Zhu Rongji told Barshefsky he would take part personally in the negotiations (such high-level intervention indicated Beijing’s eagerness to strike a deal). So Barshefsky put away her suitcase and an agreement was signed hours later, overcoming the major stumbling blocks to China’s WTO entry (which would occur in 2001).

Zhu made several key concessions, one of which was to open up China’s telecoms industry. After WTO accession, foreign entities would be permitted to buy stakes of up to 49% in Chinese telcos. Prior to that, foreign ownership was capped by Beijing at 25%.

Zhu’s compromise was contentious. Executives at state firms warned that it was a first step to losing control of a strategic industry – and one of the most profitable ones in China. Party hardliners criticised him for “selling the country”.

But these early concerns have proven overblown, with foreign telcos selling off their interests in China, rather than seeking to consolidate them. The latest indication came last week as Spain’s Telefonica disposed of half of its remaining 5% stake in China Unicom for about $860 million. It was the third exit of a major foreign telecom carrier from the Chinese market. Britain’s Vodafone bought a 2.18% stake in China Mobile in 2000 (the shareholding was raised to 3.2% two years later). It talked of a strategic alliance with the Chinese firm. But in 2010 it dumped its shares, walking away with a $3 billion profit but little in the way of strategic gain.

South Korea’s SK Telecom sold its entire 3.8% stake in China Unicom back to its partner in 2009 too.

The foreign firms saw their original shareholdings as footholds in a crucial market, or perhaps as launchpads for joint ventures with their Chinese partners in the region. But their options have been limited. “They’ve had few possible choices in a sector dominated by state firms, which have been growing in strength and holding onto management control,” points out Economic Information Daily.

Changes in policy have made life difficult for the outsiders, with China’s state-owned telcos undergoing three major regroupings since WTO entry. Telefonica’s China venture dated back to 2005 as a strategic alliance, this time with China Netcom. But the fixed-line carrier was merged into Unicom as part of an industry reshuffle in 2008, which grouped the Spanish firm ino the same entity as SK Telecom – an outcome that neither company had foreseen.

Telefonica is bucking the trend as the only foreign operator to hang onto a stake in a Chinese counterpart – albeit a smaller one than previously. In 2009 the two even tried to deepen their alliance, investing $500 million in each other’s shares. Telefonica held close to 10% in Unicom following the agreement, but has been cutting back its position since 2012.

Should Telefonica offload its remaining 2.5% stake in Unicom, it would signal the end of an era for foreign telco ventures in China, the Hong Kong Economic Times notes. The problem, the newspaper says, is that the foreign firms have found themselves as little more than passive investors, with no real strategic value evolving from their stakes.

In fact, the Spanish seem to be among the more patient foreign investors in China. Spanish lender BBVA sold 5% of its stake in Citic Bank late last year, at a time when most of the international banks had offloaded their entire shareholdings in the Chinese banks. Bucking that trend BBVA retains a sizeable 9.9% portion of Citic Bank, making it one of the few foreign banks still heavily exposed to the sector. Another is HSBC – it is the largest remaining presence via its 19.9% stake in Bank of Communications.

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