China's Brave New Telecom World?

It has been years in the making, but that's what you'd expect when the government of the world's most populous nation tries to overhaul its entire telecommunications market. Last weekend, Chinese news sites reported that the Ministry of Information Industry (MII) has finalized a new structure involving every major fixed and mobile telecom player in the People's Republic.

According to the rumors -- based on unidentified sources -- the structure would essentially create a trio of giants competing in both fixed and mobile communications categories. For starters, China Mobile (NYSE: CHL) would apparently be combined with fixed-line provider China TieTong Telecommunications. Much smaller mobile rival China Unicom (NYSE: CHU) would be split in two, combining its GSM wireless business with China Netcom (NYSE: CN) and its CDMA network business with China Telecom (NYSE: CHA).

A similar structure that creates more competition has been rumored for years, but exactly when it will happen is more of a mystery. When I was in China in 2005, I had discussions with the media and industry players about telecom reorganization and soon-to-be-issued third-generation (3G) licenses. Many thought changes were imminent or, at the very least, to be announced in 2006.

Of course, what's also important to investors is how any shake-up would affect the companies involved. I've already characterized the potential reforms as China Mobile's biggest looming threat -- because it already holds the dominant position in China's fast-growing wireless segment.

But I'm less certain about the effect reforms will have further down the value chain. Third parties providing wireless value-added services, like KongZhong (Nasdaq: KONG) and SINA (Nasdaq: SINA), may have terms of their partnerships dictated anew. But this might not be a bad thing. Web advertising and gaming firms such as Sohu.com (Nasdaq: SOHU) may even benefit significantly from any plan that helps spread services farther and wider in the underserved nation.

So while the near-term effects of any restructuring are less certain, the long-term effects should help grow the overall market. As long as the government takes a light approach to regulation, I'd expect many more great investment opportunities to surface in the coming years.

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