Telecoms industry stifled by foreign capital prohibition

After more than a decade of foot dragging, China is finally taking steps to open its telecoms sector to private and foreign investment. The Ministry of Industry and Information Technology (MIIT) announced that China will encourage private and foreign capital to invest in its telecoms sector on June 27. It is an exciting move that the country needs to take if it wants to create a cutting-edge industry that can compete with Western markets.

Despite hundreds of billions of dollars in investment and exclusive access to the world's biggest mobile market, China's three major telecoms carriers have performed disappointingly since Beijing began overhauling the former national phone monopoly about 15 years ago. The biggest factor behind the lack of progress has been an exclusion of private investment that has left the space monopolized by three bureaucratic State-run companies.

Such monopolies were common in the past throughout the world, but have become a dinosaur today in most Western markets where regulators realize they stifle competition and innovation. Most Western markets, including the US, now encourage and welcome new investment from both domestic and international players in their telecoms sectors, realizing such activity is critical to maintaining a healthy industry.

And yet China's insistence on maintaining such an oligopoly has created a stagnant sector at home, to the detriment of Chinese consumers who are often last to enjoy many of the products and services offered by their more innovative global rivals. China previously committed to opening the sector to foreign investment when it joined the World Trade Organization in 2001, but then erected numerous bureaucratic barriers that prevented nearly all private money from entering the area.

International companies that once held big hopes for China have now largely abandoned the market after strategic tie-ups involving names such as Vodafone and SK Telecom with big Chinese partners failed to produce results.

Finally waking up to this lack of progress, the MIIT started relaxing its grip on the sector over the last half year by allowing two major foreign firms, IBM and Microsoft, to enter the infrastructure space with its approval of new ventures allowing them to help build state-of-the-art cloud computing centers.

At the same time, the MIIT has sent out a steady stream of signals that it is preparing to open the broader market to a wide array of investment in both infrastructure and telecoms services. It sent the latest and clearest signal last week, when it released a draft plan detailing eight new areas for private investment within the telecoms sector.

The list was quite broad and marks an important start to revitalizing the sector. The MIIT needs to make sure that its final new rules open the door for private investment in all kinds of new products.

The regulator should not only announce such new rules, but also aggressively implement them and actively encourage foreign investment. If and when that happens, China's laggard telecoms sector could be set for a true rebirth that could quickly make it a leader on the global stage.