According to the agreement, the two sides agreed that from May 17, all their regional telecom networks will be connected, with the firms now able to launch telecom businesses in each other's territory.

"It's a great step ahead in terms of network inter-connections," said Zhang Xinzhu, director of the Centre for Planning and Competition Studies under the Chinese Academy of Social Sciences.

After the former China Telecom was carved up on May 17 last year, China Netcom ran telecom businesses in northern China's 10 provinces and municipalities, including Beijing, Tianjin, Hebei and Shandong.

China Telecom, in turn, operated in 21 provinces and municipalities in southern and northwestern regions. Since then, disputes over inter-connections have become a major obstacle, preventing the firms from entering into each other's business territory.

"The agreement will enable both of us to easily explore businesses such as long-distance calls, data business, and Internet dial-up connection services in our competitors' regions," said China Telecom in a statement.

"Thus, we will both provide more options to customers when choosing their business providers," it said.

Analysts believe that the companies are initially likely to compete for major clients in each other's regions.

"However, it will take more time to set up network inter-connections among all the major telecom operators, given the complexity of inter-connection policy," Zhang said.

Zhang is also a member of the expert panel founded by the Ministry of the Information Industry (MII) early this year to work out inter-connection problems.

"We have already worked out a couple of solutions to inter-connection policy and sent them to the regulators for appraisal," Zhang said.

The proposal for the new inter-connection policy is based on the cost incurred by telecom operators to connect calls between networks, he said.

Zhang expected the MII to make a final decision before the end of this year.

He said the major problem concerning inter-connections lies in linking mobile and fixed-line networks.

Currently, inter-connections between mobile networks are free.

But transferring a mobile phone call to a fixed-line costs 0.06 yuan (US$0.007).

However, China Telecom and China Netcom calculate that it should cost 0.16 yuan (US$0.019).

"The disagreement on pricing is the main reason behind unsatisfactory development of inter-connections," Zhang said.

He said the expert panel is also trying to figure out new universal service and tariff policies for the sector.

With six major telecom operators in the domestic market, "enhanced government supervisions is needed to create a sound business environment for the industry," Zhang warned.

(China Daily May 20, 2003)