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The Pennsylvania State University The Graduate School College of Communications CHINA’S TELECOMMUNICATIONS: ACCOMPLISHMENTS, PROBLEMS AND THE SHAPE OF THE FUTURE TO COME A Thesis in Mass Communications by Chun Liu Ó 2006 Chun Liu Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy December 2006 The thesis of Chun Liu was reviewed and approved* by the following: Richard D. Taylor Palmer Chair Professor of Telecommunications Studies and Law Thesis Advisor Chair of Committee Jorge R. Schement Distinguished Professor of Communications Krishna Jayakar Associate Professor of Communications Jun Shu Assistant Professor of Supply Chain and Information System John S. Nichols Professor of Communications Associate Dean for Graduate Studies and Research *Signatures are on file in the Graduate School iii ABSTRACT There is little doubt that China’s telecommunication service is now fairly affordable, very fashionable, and highly dynamic. In terms of market structure, although it is not perfect, the Chinese government has preliminarily created a competitive market structure. In each sector, theoretically, there are at least two carriers competing with each other. With regard to the regulatory regime, despite its complicated, if not mystic, policy- making process, telecommunication regulation is probably the most open policy issue in China. A regulatory agency has been set up after several government restructurings. Relevant laws and regulations are in place and are kept updated. Overall, China’s success has made it the envy of many developing countries. China’s telecommunications are unique. China’s achievement in telecommunications should be partly attributed to the old socialist economic system. The Chinese government designed the roadmap of the great reform and carefully implemented the plan of restructuring the industry and the regulatory regime, hoping to bring healthy competition into the market. Although it is open to debate whether this kind of managed reform is efficient or not, there is no doubt that, without the Chinese government’s strong and continuous support, China’s telecommunications could not possibly have achieved today’s success. At issue is whether China’s telecommunications development is sustainable in the future. The primary purpose of this study is to find out what regulatory approach the Chinese government should take to further advance China’s telecommunications service industry in the coming decade. More importantly, the regulatory model proposed in this iv study aims to retain the sustainability of China’s telecommunications industry. However, without understanding its history, any inquiry into the future is superficial. A great deal of this study is to understand what “Chinese characteristics” are and how they have shaped China’s telecommunications. The primary finding of this research is the identification of the objectives of China’s telecommunications policy: namely expanding telecommunications to serve the public interest and strengthening domestic carriers in the face of global competition. The consistent support from the government has helped China’s telecommunications industry successfully leapfrog to a relatively modern stage and potentially take the lead in some areas in the future. However, the ability of the current model of regulation to secure long term sustainability is questionable. This thesis also finds that that the combination of the “silo” type of regulation, the conflict of national and local interests and the dominance of state ownership are the key “Chinese characteristics”. However, it should be noted that “Chinese characteristic” is an evolving concept. Any policy measures that are in accord with the objectives of the Chinese government can be branded as “Chinese characteristics”. A model is proposed aiming to resolve issues identified in line with the Chinese government’s long term policy objectives. v TABLE OF CONTENTS LIST OF FIGURES .....................................................................................................x LIST OF TABLES.......................................................................................................xii ACKNOWLEDGEMENTS.........................................................................................xiii Chapter 1 INTRODUCTION......................................................................................1 1.1 An Overview of China’s Telecommunications .............................................1 1.2 Research Questions........................................................................................4 1.3 Organization of the Dissertation....................................................................6 Chapter 2 SURVEY OF LITERATURE ....................................................................9 2.1 Regulation and Deregulation Theories ..........................................................9 2.1.1 In the Name of the “Public Interest”...................................................10 2.1.2 The Theory of Regulatory Contract and New Institutional Economics ..............................................................................................13 2.1.2.1 Regulatory Contract ..................................................................13 2.1.2.2 New Institutional Economics ....................................................15 2.1.2.3 Application of the Regulatory Contract Theory to China .........17 2.1.3 Deregulation for “Development”........................................................18 2.1.4 The Objectives of China’s Telecommunications Regulation and Deregulation ...........................................................................................21 2.2 Chinese Characteristics..................................................................................23 2.2.1 Socialism with Chinese Characteristics...............................................24 2.2.1.1 Deng Xiaopin’s Theory.............................................................24 2.2.1.2 Jiang Zheming’s Three Representatives....................................27 2.2.1.3 Harmonious Society and Healthy GDP.....................................27 2.2.2 Telecommunications with Chinese Characteristics.............................28 2.3 Regulatory Models.........................................................................................29 2.3.1 The “Silo” Model ................................................................................29 2.3.2 The Layered Model .............................................................................31 2.3.2.1 The Problems of the Silo model................................................31 2.3.2.2 Theoretical Foundation for the “Layered model”.....................32 2.3.2.3 Benefit of the Layered Model ...................................................33 2.3.2.4 Design of the Layered Model....................................................33 2.3.2.5 Current Implementation of the Layered Model.........................35 2.3.2.6 Critics of the Layered Model ....................................................37 vi 2.3.3 Anti-Trust and Competition Law Model.............................................38 Chapter 3 METHODOLOGY.....................................................................................41 3.1 The Overall Approach and Rationale ............................................................41 3.1.1 Interpretive Paradigm ..........................................................................41 3.1.2 Exploratory Approach .........................................................................42 3.2 Research Design ............................................................................................43 3.2.1 Case study............................................................................................43 3.2.2 Collection and Analysis of Data..........................................................46 3.2.2.1 Collection of Data .....................................................................46 3.2.2.2 Analysis of the Data ..................................................................47 3.3 Limitations and Exclusions............................................................................48 Chapter 4 OVERVIEW OF CHINA’S MODERN TELECOMMUNICATIONS: HISTORY AND CURRENT DEVELOPMENT .................................................50 4.1 From “Lightning Wires” to “Information Super Highway”..........................50 4.1.1 The Introduction of the Telegraph.......................................................50 4.1.2 1949 to 1980: Slow Progress...............................................................52 4.1.3 Prepare for Take-off: 1981 to 1990.....................................................54 4.1.4 The Great Leapfrog: since the 1990s...................................................56 4.1.4.1 Restructuring the Telecommunications Industry ......................57 4.1.4.2 Restructuring the Regulatory Regime.......................................59 4.1.5 The Information Superhighway...........................................................62 4.1.5.1 Infrastructure .............................................................................62 4.1.5.2 Services .....................................................................................64 4.2 Overview of China’s Modern Telecommunications......................................65 4.2.1 Market Structure..................................................................................65 4.2.2 The Regulatory Regime.......................................................................68