Second-tier Australian telecommunications company New Tel has announced ambitious plans to invest A$600m ($381m) in new shares and cash establishing China’s foremost internet service provider (ISP) and Chinese/English language portal.
A company statement to the Australian Stock Exchange, signed by managing director Peter Malone, said the company will work with Xinhua Holdings Company Ltd which will proceed to form a new company being the owner of a number of internet and related company interests in China.
Once Xinhua has formed the company, which has yet to be formally named but is provisionally being called Newco, New Tel will take control of it and at the same time issue 200 million new $2 shares in New Tel to Xinhua Holdings which will give the Hong Kong-based company a 49% stake in the Australian firm.
The effect of this would be to have a foreign company owning 100% of a Chinese internet venture. This is not only illegal under current Chinese law – as forcibly spelt out to the internet industry two months ago by Minister of Information Industry Wu Jichuan – but would still be illegal under the concessions China made in its World Trade Organization bilateral agreement with the US earlier this month.
If and when China joints the WTO, it has agreed to an initial maximum of 49% foreign ownership in telecoms service operations, including internet service and content provision, growing to 50% within two years. Chinese officials have since said there may be a longer timeframe for internet services than other telecoms services, and Wu himself has said there is no guarantee of foreign management control.
In a detailed business plan which accompanies the statement to the ASX, New Tel devotes one factually incorrect paragraph to the regulatory situation. The internet has been heavily controlled and regulated in China, with international access traditionally available through only official gateways and ISPs, it correctly says. But it continues: Foreign companies were prohibited from investing in joint venture companies in late 1998 until recently this year, when the Chinese government agreed to a number of economic reforms as part of its agreement in joining the World Trade Organization, with major concessions being in the telecommunications sector.
ComputerWire asked New Tel to comment on the apparent stumbling block to its plans. A spokesperon said: We are not investing in the internet industry but in a holding company. She also pointed out that the deal is with the Chinese government.
In its literature the company names several official Chinese government web sites which Newco will work with, including sites owned by the Ministry of Foreign Trade and Economic Co-operation (MOFTEC) and a subsidiary of the Ministry of Information Industry.
However the company which is party to the deal with New Tel is the Hong Kong-based investment arm of the official government news agency Xinhua, not the Beijing parent itself.
The Ministry of Information Industry is the regulatory body for the Chinese telecommunications and information technology industry, and the only exception it has publicly made to the ban on foreign investment is AT&T’s specialized new venture in Shanghai.
If New Tel is trying to use the holding company as a loophole to get into the Chinese internet industry, it would do well to heed the experience of many of the world’s top telecommunications providers including Deutsche Telecom and NTT, which used the so-call CCF (China-China-Foreign) loophole to invest via joint ventures in China United Telecommunications’ (China Unicom) mobile networks – with the tacit approval of several Chinese ministries. Late last year the MII declared the more than $1.4bn invested in this way to be illegal and ordered about 40 foreign telcos involved to disinvest, taking out only the amount invested and a small interest payment. And leaving behind state-of-the-art networks for state-owned Unicom to take all the profits from.
Other problems New Tel could face include the not inconsiderable competition, which indirectly includes its partner Xinhua. China.com, at present the only Nasdaq-listed Chinese internet service company, has Xinhua as one of its major shareholders with another being America Online. Malone was quoted in the Australian Financial Review as saying: We aim to be the America Online of China because in this business you either get big or you get out. With American Online as an already-established competitor, not to mention Sina.com and other popular portals which are planning Nasdaq listings, this may be easier said than done. But there is a big pie to slice up, with estimates of the number of internet subscribers in China suggesting more than 30 million within three years.
New Tel, which is already 5% owned by Xinhua Holdings whose managing director Zhou An is a board member, says in addition to the A$400m in new shares going to Xinhua it plans to raise a further A$200m. After formal due diligence is completed and with the approval of shareholders, New Tel will then seek to raise a further $200 million on the Australian stock exchange and the Nasdaq stock market, with the issue of 100 million $2 shares, Malone’s statement to the ASX said. The company is already listed on both exchanges. The money will be used to develop the new business in China, he said, with $1m a week being spent on advertising and promoting Newco in China according to one report.
Unless it is able to provide shareholders and potential new investors with some reassurances about its legal status in China, it may find raising the extra money to fund the exercise more difficult than it envisages. However with China internet fever raging unabated in the US, where investors are still piling into anything which combines the words China and internet, reality checks may not be required.
According to New Tel’s spokesperson, the only person able to answer the difficult questions which the written literature does not address is managing director Malone. Unfortunately he was not available for comment.
