Breakingviews - China's 5G fix reflects a costly global reality

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HONG KONG (Reuters Breakingviews) - It’s a 5G fix that reflects a costly global reality. The two smallest of China’s three state-owned carriers will join forces to build a next-generation network. Cooperation could shave about $50 billion off a bill likely to be several times that. The solution suits Beijing’s ambitions to take the lead; it’s a sensible one too.

China Telecom and China Unicom announced on Monday what had been long anticipated: they will “co-build and co-share” a 5G network. It was always going to be challenging for the two, with a combined market value of just under $70 billion, to compete with the $172 billion giant China Mobile on investment. Working together solves part of that problem.

There is no question that a rapid build-out of coverage, of the sort China wants to see, will be pricey. Total capital expenditure could range from 900 billion yuan to 1.5 trillion yuan ($126 billion to $211 billion) between 2020 and 2025, according to estimates from the Ministry of Industry and Information Technology. What’s more, there’s not yet a clear path for the carriers to recoup that investment. The project is a clear political priority in Beijing, though, and the state-owned carriers were always expected to execute on it anyway.

Working together solves part of that problem. China Unicom Chairman Wang Xiaochu said last month that network sharing could save his company between 200 billion and 270 billion yuan. Jefferies reckons the combined savings from the tie-up will be around 370 billion yuan from this year to 2026. And investors are clearly pleased: the two companies’ shares briefly popped around 6%. It will undoubtedly be less welcome news at China Tower, which leases mobile masts to the carriers, or for equipment makers such as Huawei and ZTE.

Spending pressures elsewhere have encouraged deals to increase budgets. China has found its own fix for Beijing’s problem. Others won’t be as lucky.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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