Telefonica, which owns O2 in the UK, is spending €750m (£610m) to raise its stake in one of China's biggest telecoms groups, ensuring it has a foot in the door of the world's biggest and fastest-growing market.

The Spanish giant is already set to raise its 5 per cent holding in China Netcom, the country's second largest fixed-line comp-any, to 7.2 per cent. Under the new plans, two tranches of acquisitions will take its holding up to around 12 per cent, although the Chinese group's imminent merger with China Unicom will leave Telefonica's share of the combined group at 5.5 per cent.

"China is an increasingly important market, both in terms of size and growth, and we also believe we can bring our expertise and technical know-how, particularly with regards to the integration of fixed and mobile services," a spokesman for Telefonica said.

China's mobile market is booming. In 1997, there were 10 million subscribers. By 2004, this had risen to 312 million. By last year, it was an eye-watering 530 million. From 2004 to 2007, total revenues doubled from $32.7bn (£18.5bn) to $61.5bn, and it now represents 1.8 per cent of GDP.

But, like everywhere else, the fixed-line providers are doing less well. Half-year figures published last week show China Mobile's profits up by 45 per cent to $8bn on the back of 82 million new subscribers. In contrast, China Telecom, which relies on fixed-line voice calls for more than half its revenues, was down 4 per cent to $1.7bn.

All Chinese telecoms companies are state-owned and run, notwithstanding minority listings in Hong Kong; and in May, the government published plans to restructure the industry and level the playing field. Under the proposals, the three major fixed-line providers – the incumbent China Telecom, China Netcom, and China TieTong – will be merged with their mobile counterparts. China Mobile, by far the largest, is to pair up with China TieTong. China Unicom will be split, half going to China Netcom, half to China Telecom.

Even at half a billion subscribers, mobile penetration is running at just 46 per cent, leaving healthy room for growth – hence the interest from global carriers like Telefonica and Vodafone, which owns slightly over 3 per cent of China Mobile.

Their financial incentive is clear. Vodafone's initial stake of $3.3bn is now worth $11bn. But there are also technical advantages. Chinese telecos tend to use their own network protocols, whereas global agreements would better suit foreign companies both in terms of breaking into the Chinese market and in the access to the country's handset manufacturers. Vodafone is already collaborating with China Mobile and Verizon Wireless on the next-generation LTE protocol.

But there are difficulties. "There is a serious question about whether China will allow anything more than a very small stake because telecoms is one of its stellar industries," Tom Mowat, from Analysys Mason, said. "The opportunity for the global carriers is enormous, but there are a number of uncontrollables, such as the influence of the state, and how the restructuring will work."

Source:independent