The Chinese government is mulling a merger between China Unicom (CHU) and China Telecom (CHA), according to Bloomberg, which could combine the country's second and third largest wireless carriers. Both companies serve fewer customers than market leader China Mobile (CHL).

China Mobile, China Unicom, and China Telecom are all state-backed enterprises. China Mobile served nearly 910 million wireless subscribers at the end of July, while China Unicom and China Telecom served 305 million and 287 million, respectively.

Buildings lit up at night, connected by lines with dots.

Image source: Getty Images.

The Chinese government exercises tight control over all three companies. It pushed the "big three" to sell their towers to China Tower in late 2015 to cut operating costs, then rotated the CEOs of the three companies to even out the competition. Therefore, merging the two laggards of the 4G market as the country moves toward 5G standards makes a lot of sense.

Why this could help China Unicom and China Telecom

Here's how fast the top three telcos are growing their wireless customer businesses.

Company July 2018 Monthly Growth Annual Growth
China Mobile 909.97 million 0.5% 4.6%
China Unicom 304.53 million 0.8% 12.5%
China Telecom 286.90 million 1.9% 23.2%

Number of wireless subscribers. Data source: Company monthly reports.

Within those totals, a growing percentage of wireless subscribers have upgraded to faster and pricier 4G plans.

Company July 2017 July 2018
China Mobile 69.7% 75.1%
China Unicom 53.6% 67.9%
China Telecom 67.5% 77.6%

Percentage of wireless subscribers on 4G plans. Data source: Company monthly reports.

However, those percentages indicate that a large percentage of Chinese wireless subscribers still use 2G or 3G plans -- which doesn't bode well for the government's plans to launch a nationwide 5G network. Those ambitions were widely cited as the reason the Trump administration blocked Broadcom's attempted takeover of Qualcomm earlier this year.

China Unicom is clearly the laggard in the 4G market, so merging the company with China Telecom -- which boasts much higher growth rates -- could even things out. Bloomberg's report, which cites sources close to the matter, claims that the proposed merger would "speed up the government's ability to push through its 5G ambitions" since a merged company could make bigger investments than two separate ones.

Another focal point is the wireline broadband market. China Unicom's wireline services are more popular in northern China, while China Telecom's are more widely used in southern China. China Mobile only entered the wireline market in late 2015 and early 2016, but its wireline unit is growing at a much faster rate than its peers.

Company July 2018 Monthly Growth Annual Growth
China Mobile 138.14 million 2.3% 44.3%
China Unicom 79.21 million 0.4% 2.9%
China Telecom 141.89 million 0.9% 10%

Number of wireline broadband subscribers. Data source: Company monthly reports.

Once again, China Unicom remains the laggard. Therefore, merging China Unicom and China Telecom could prevent China Mobile from dominating both the wireless and wireline markets. It could also make it easier for the government to oversee and regulate broadband internet connections across the country.

Should China Mobile investors be worried?

This proposed merger sounds like bad news for China Mobile, but investors should remember that China generally wants to maintain healthy competition between the three telcos. Moreover, it could be easier for China Mobile to deal with one competitor instead of two.

Shares of all three telcos rallied on the news, but the deal would definitely help China Unicom and China Telecom more than China Mobile. However, it shouldn't be considered a major headwind for China Mobile, which remains the country's biggest telco.