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Cablegate: China: Five Reasons for No Telecom

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PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #6374/01 2710829
ZNR UUUUU ZZH
P 280829Z SEP 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 2289
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHIN/AIT TAIPEI 6671
RUEHKO/AMEMBASSY TOKYO 1592
RUEHUL/AMEMBASSY SEOUL 0348
RUEHMO/AMEMBASSY MOSCOW 8805
RUEHGV/USMISSION GENEVA 1971
RUEAHLC/DHS WASHDC
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
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

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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

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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.

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