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RHMCSUU/FBI WASHINGTON DC

UNCLAS SECTION 01 OF 03 BEIJING 006374 
 
SIPDIS 
 
State for EAP/CM - JYamamoto and PSecor 
USDOC for DAS Estrada and DAS Kassof 
USDOC for MAC and 6920/ITA/MAS/MFG/EDWARDS 
STATE PASS USTR 
USTR FOR STRATFORD/WINTER/MCHALE/WINELAND/MAIN 
TREASURY FOR OFFICE OF INTERNATIONAL INVESTMENT 
TREASURY FOR OASIA/ISA - DOHNER AND KOEPKE 
GENEVA PASS USTR 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECPS PGOV ASEC WTRO CH
SUBJECT: CHINA: FIVE REASONS FOR NO TELECOM 
LIBERALIZATION 
 
Ref: 06 Beijing 22500 
 
THIS REPORT IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
HANDLE ACCORDINGLY. 
 
¶1. (SBU) Summary.  On September 13, Deputy Assistant 
United States Trade Representative (DAUSTR) for 
Telecommunications and Electronic Commerce Policy 
Jonathan McHale, accompanied by Econoffs, met with 
Chinese Ministry of Commerce (MOFCOM) Director General 
of WTO Affairs Wang Zhen to discuss JCCT and WTO 
telecom issues.  After offering a number of theories 
and reasons why there has been no visible telecom 
liberalization in China since accession to the World 
Trade Organization (WTO) in 2001, DG Wang admitted 
that he had no mandate to make any new liberalizing 
offers in bilateral talks in Geneva.  He suggested, 
however, that China might be more flexible on the 
issue were the United States to make a "generous 
offer" on China's three main WTO interests: maritime 
transport, space transport, and Mode Four.  End 
Summary. 
 
No Liberalization Since 2001 WTO Accession 
------------------------------------------ 
 
¶2. (SBU) On September 13, Deputy Assistant United 
States Trade Representative (DAUSTR) for 
Telecommunications and Electronic Commerce Policy 
Jonathan McHale, accompanied by Econoffs, met with 
Chinese Ministry of Commerce (MOFCOM) Director General 
of WTO Affairs Wang Zhen to discuss JCCT and WTO 
telecom issues.  McHale proposed that the meeting 
agenda focus on two issues: first, China's progress on 
reducing the telecommunications capitalization 
requirement and provisions on value-added services 
under the Joint Commission on Commerce and Trade 
(JCCT); and, second, whether China would submit a 
liberalization offer, including the reduction or 
elimination of equity limits for foreign ownership of 
telecom service providers in China, at WTO 
negotiations in Geneva the week of September 24.  In 
addition, McHale reminded Wang that there has not been 
a single new entrant into China's telecom market - and 
therefore no apparent liberalization impact - since 
China's accession to the WTO in 2001. 
 
¶3. (SBU) Wang's first response was to question the 
purpose of McHale's visit, pointing out that the 
bilateral WTO consultations were only two weeks away, 
and that any discussion at MOFCOM would not differ 
from the Chinese message delivered in Geneva.  Wang 
then said that, since China in 2001 was granted a six- 
year transition period for the gradual phase-in of 
telecom liberalization, no new liberalization 
requirements would be established until the end of 
¶2007.  Wang added that China's WTO commitments in 
telecoms are different from those of other countries, 
and even tougher than those of some developed 
countries.  Finally, he said China must act 
"prudently" on this issue, and will continue to allow 
its experts to analyze potential impacts of 
liberalization. 
 
China's Five Reasons for no Telecom Liberalization 
--------------------------------------------- ----- 
 
¶4. (SBU) Wang continued by delivering a series of 
reasons why China's current telecom market is 
satisfactory, and why liberalization will be difficult. 
First, he asserted that no foreign operator has 
 
BEIJING 00006374  002 OF 003 
 
 
approached MOFCOM to indicate their interest in 
entering the Chinese telecom market.  As such, he 
described liberalization as "a chicken-and-egg 
problem" in which a liberalized market requires new 
market entrants, but new entrants aren't interested 
until the market has been liberalized.  He wondered 
"why don't they just come and talk to us?"  Second, he 
ascribed the dearth of foreign competitors in China to 
the "telecom industry recession" earlier this decade, 
describing foreign companies as unwilling to risk the 
"huge investment" for "uncertain returns" that China 
market entry requires. 
 
¶5. (SBU) Third, Wang continued that, given the 
development aspect of the Doha Round, China has the 
right to determine the pace and scope of opening up 
this sector.  He added that even the United States, 
with its very open market, maintains a 20 percent 
foreign equity limit in telecoms.  He said that China 
is technologically underdeveloped, and has no 
experience with convergent technologies (voice, video, 
data).  Fourth, he said that China has national 
security concerns when it comes to liberalizing 
telecoms.  And finally, fifth, Wang asserted that 
capitalization requirements are an issue of domestic 
regulation and should not be included in the JCCT. 
 
¶6. (SBU) DAUSTR McHale responded to each of Wang's 
arguments in turn.  He said that the lack of foreign 
companies in China's telecom market was unrelated to 
an industry recession, and that if there were some way 
for foreign companies to enter the market, including 
through talks with MOFCOM, then they would already be 
there.  To Wang's point on foreign equity limits in 
the United States, McHale explained that foreign 
companies enjoy meaningful market participation 
through wholly-owned subsidiaries in the United States, 
and that United States industry would be very happy 
with a similar solution in China.  McHale continued 
that China's telecom infrastructure is not 
underdeveloped and that China Telecom and China Mobile 
are the world's largest fixed and wireless operators, 
and China's broadband market is also the biggest in 
the world.  Finally, McHale pointed out that security 
concerns are mutual, but that both China Telecom and 
China Netcom both operate in the United States. 
 
China's Three Asks for U.S. WTO Liberalization 
--------------------------------------------- - 
 
¶7. (SBU) In response to McHale's arguments in favor of 
China's increased telecom liberalization, Wang 
suggested that the United States should address some 
of China's priority WTO requests.  He said these 
include commitments on maritime transport, satellites 
and space transport, and Mode Four (cross-border 
movement of persons), which Wang added is one of 
China's utmost priorities.  McHale suggested that 
China make a conditional telecom liberalization 
proposal that includes these requests, and emphasized 
the importance of China identifying its long-term 
telecom liberalization plan. 
 
Telecom Liberalization a "Red Light" for China 
--------------------------------------------- - 
 
¶8. (SBU) In response to DAUSTR McHale's repeated 
requests to outline China's long-term liberalization 
plan for the telecom industry, DG Wang finally said 
that China's long-term plan is to conduct further in- 
depth research before any decisions are made.  Wang 
 
BEIJING 00006374  003 OF 003 
 
 
said "China finds this to be a most difficult area." 
China, Wang said, already has many WTO commitments to 
fulfill without making new ones, and as such telecom 
liberalization is currently a "red light" for China. 
Wang added that "our message is clear" on this matter: 
he has no mandate to offer anything new in the WTO 
services negotiations in Geneva.  (Note: Wang's 
position tracked with statements made by Ministry of 
Information Industry officials in a separate meeting 
on September 14 (septel).  End Note.)  In closing, 
however, Wang did suggest that China's position might 
be less firm if the United States were to make "a 
generous offer" on the issues of priority interest to 
China: maritime transport, space transport, and Mode 
Four. 
 
¶9. (SBU) Comment.  The position MOFCOM WTO Affairs DG 
Wang articulated against telecom liberalization is a 
reiteration of arguments that the Ministry of 
Information Industry (MII) consistently makes against 
liberalization in both the WTO and the JCCT fora.  The 
capitalization requirement was discussed at the August 
2006 JCCT Telecommunications Dialogue meeting in 
Beijing (reftel) and the Chinese side used nearly 
identical talking points.  Since MII does not have the 
regulatory authority (or likely the interest) to offer 
any type of trade-off for items not under their 
purview, such as maritime transport, space transport, 
and Mode Four, it is possible that MOFCOM DG Wang was 
delivering a message on the behalf of other Chinese 
Government ministries.  However, it is unclear whether 
he proposed to make such a trade-off because he knows 
these are areas in which it would be difficult for the 
United States to make concessions, or because he was 
serious about there being some flexibility in China's 
telecom liberalization position.  End Comment.