China Sets Limit on Unicom-Invented "Chinese-Chinese-Foreign" Investment Model, Impact Hotly Debated at China Telecom 2000 Conference in New York
The Chinese government has issued a decree calling for the ban of "Chinese-Chinese-Foreign (CCF)" or the "Zhong-Zhong-Wai" investment model used by the country's second operator, China Unicom, to finance telecom network buildout without breaking rules barring foreign equity ownership. The move is viewed as a major setback to China Unicom and foreign investors who are using the CCF model to circumvent the Chinese government ban on foreign participation in telecom network ownership, operations and management. The impact of this policy change is not clear yet and it is a hotly debated topic at China Telecom 2000 conference held last week in New York.
The CCF investment model has been used mainly by China Unicom to finance its GSM mobile network buildout. According to Chinese statistics, Unicom has raised US$1.4 billion through CCF financing structure as of the end of 1997, which represents 72 percent of Unicom's funding. The funds raised are used to construct 23 GSM networks, some of which are still under construction.
In a CCF arrangement, a foreign investor (Foreign) forms a joint venture with a Chinese partner (Chinese) which may or may not be a company related to China Unicom. The joint venture will build the network and sign revenue sharing and other network services agreements with China Unicom (Chinese). The foreign investor typically contributes the majority of the funding needed for network construction and in return shares the revenue allocated to the joint venture from China Unicom. In this way, the foreign investor can reek 'equity-like' returns without breaking the Chinese government rules.
While this latest change in government policy is certainly not welcome by foreign telecom companies doing business in China, opinions differ on the impact and damage to foreign investors. Some observers, mainly analysts and lawyers working in China, consider the damage done to foreign investors will be limited. They point out that the Chinese government has not made any official announcement banning the CCF model, and contend that many of the comments made in the foreign press are based on unofficial sources. In addition, they report that Mr. Wu Jichuan, Minister of China's Ministry of Information Industry, has told U.S. government officials that China has not changed its policy toward foreign investment.
Not all people at the conference were convinced by this rosy analysis of the situation. They argue that this policy change is a major blow to China Unicom and to global investors. This ban would effectively close the door on foreign strategic and financial investors wishing to participate in China's telecom service sector.