China's Telecom Bomb

The Chinese government is finally kicking off a long-rumored overhaul of its telecommunications industry. The news sent shocks through Asian markets, at one point knocking more than 13% off shares of China's largest mobile firm, China Mobile (NYSE: CHL  ) , as the restructuring would likely limit its dominance.

The new domestic telecom industry organization apparently will look a lot like the brave new world I've discussed before -- China Netcom, China Telecom (NYSE: CHA  ) and China Mobile will each be overhauled to encompass fixed and mobile services. The move is designed to increase competition in the market and pit the three big, capable entities against each other across all forms of telecom services.

In this form, the Chinese market will look like the U.S., where AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) both clamor to sign up wireless, broadband, and pay television customers served by their widespread networks. Increasing competition in the 1990s in the U.S. dramatically lowered prices for mobile services over time and helped make wireless affordable for the bulk of the population -- no longer just a pricey privilege for highly paid doctors and lawyers.

The reforms in China will also usher in a new wave of mobile services -- the government stated that the long-awaited licensing of next-generation services will follow the realignment of the companies. Equipment suppliers such as Nokia (NYSE: NOK  ) , Motorola (NYSE: MOT  ) , Alcatel-Lucent, and Ericsson have been waiting patiently for years, hoping to land new, multibillion-dollar network upgrade contracts across China's extensive networks.

So with all the good things that the reorganization is designed to bring, why all the pessimism around China Mobile? The government has already gone as far as to allow the much smaller wireless competitor China Unicom (NYSE: CHU  ) to underprice China Mobile's services to boost subscriber rolls. And the market expects the government to put even more uneven regulations in place that will take away from China Mobile and add to the other players.

As such, China Mobile's overwhelming dominance has actually set up a scenario where being bigger isn't necessarily better -- at least in the near term. But there's still an immense amount of detail missing in the new telecom industry plan, and only time will tell just how reforms will affect each company. Investors averse to volatility may be more inclined to watch this event unfold rather than participate.

For more Foolishness:

• Get Ready to Buy China
• The $75 Billion (and Growing) Opportunity
• Why These Stocks Didn't Burn Me