Will Beijing answer BT's phone call?

The success of a merger with Cable & Wireless hangs on the word of the Chinese government

ONLY a few people took note when British Telecom organised a press conference in Hong Kong just over a year ago to announce that it was "turning its full attention to the Asia Pacific".

"We are going to have our work cut out for us," admitted Graham Moore, BT's managing director for north-east Asia.

He was equally frank in conceding that the company had come rather late to a market where other leading international players were busy putting down roots. But now BT appears to be planning a dramatic short cut by merging with Cable & Wireless, the de facto cable carrier for the British Empire and the dominant player in Hong Kong.

"Essentially we are an Asian company," said Lord Young last year when he was still C&W chairman. "It just so happens we are in the world's fastest-growing region, and that helps me sleep at night." He did not say how dependent C&W was on Hong Kong, which returns to Chinese rule next year.

The colony generates about 70 per cent of the company's operating profit, mainly through a 57.5 per cent controlling interest in Hongkong Telecom, which makes its money from a network monopoly that is fast being eroded.

Anyone wanting to buy into C&W, such as its current suitor BT, needs to take a crash course in Chinese politics. It is far from sure that Hong Kong's new Chinese masters will allow Hongkong Telecom to retain its valuable franchises, particularly the international network monopoly which lasts until 2006. And it is not even clear that the current administration will permit a change of ownership, because the franchises were explicitly granted to C&W, which cannot simply pass them on to a new owner without obtaining the administration's permission to do so.

That is why BT's deputy chief executive, Alan Rudge, was in Beijing last week, although Dong Jianming, who runs the company's Beijing office, insisted that the visit was planned three months ago and had nothing to do with the merger. Earlier in the month BT played host to senior officials from China's Ministry of Posts and Telecommunications.

C&W has been playing the China game far longer. Lord Young joined in with gusto and his successor, Brian Smith, hardly paused to warm the chairman's seat before rushing off to Beijing in January for impressively high-level meetings with Chinese officials, including President Jiang Zemin.

The local arm of China's main investment company, CITIC, was brought into Hongkong Telecom as a major shareholder, in a move widely seen as buying political insurance. However, the value of that insurance came into question last year when CITIC sold down its stake.

Just over two years ago, C&W finally bit the bullet and installed Linus Cheung, a local Chinaman, to head Hongkong Telecom. It is clear that one of his prime tasks is to keep the Chinese government on side. He was quick to cultivate Wutji Chuan, the minister of post and telecommunications, and he hired Lu Gang, the son of Lu Ping, the official in charge of Hong Kong affairs, to head his China telecoms team.

Much is at stake. China has a population of 1.2 billion and little more than three telephone lines per 100 people. Beijing plans to install 114 million lines by 2000. The economy is among the fastest growing in the world and demand for telecommunications is enormous.

In 1994, when C&W was talking to the Chinese government about establishing a mobile-telephone network in Beijing, James Ross, the company's then chief executive, could hardly contain his enthusiasm for the market potential.

"China is attempting to create the equivalent of a new BT every two years," he said.

However, the going has been far from easy. China still refuses to allow foreign companies to operate networks. Last year, with great fanfare, C&W announced that it had agreement to build a fibre-optic link between Hong Kong and Beijing. However, the financing remains unclear, as are details of whether C&W will have any operating role once the link is up and running. The company has, however, been successful in getting two similar links running in neighbouring Guangdong province. Meanwhile, plans for the mobile-telephone operation in Beijing appear to be stillborn.

Despite these difficulties, C&W is widely seen as the foreign telecoms- market leader in China. However, whether any money is actually being made by foreign companies in China is open to question.

That question hardly applies to Hong Kong where Hongkong Telecom's profits (HK$4,813m ($411m) for the first half of 1995) are never modest. So it is the Hong Kong operation which remains the prime attraction for BT.

As if anticipating the current change in ownership, Linus Cheung said last year that if this were to happen, "I am quite sure that the Chinese would have a view, and their views count." So far, however, there has been silence from Beijing.

Stockbroker Merrill Lynch in Hong Kong issued a briefing on the merger saying: "We can only assume that either the BT management is extremely rash, or more likely, they have conducted due diligence on the consequences of the bid at the highest levels of the Chinese government." That may be what was happening last week.

However, this is far from certain. What is known is that British companies are hardly the flavour of the month in Beijing and there is no shortage of contenders only too ready and willing to seize parts of the Hongkong Telecom empire if they should become available. On Friday, Deutsche Telekom denied it was interested, but some of the most powerful and politically best-connected businessmen in the colony are active in telecommunications.

They include Li Ka-shing, probably the richest man in Hong Kong, Peter Woo, who controls the late Sir YK Pao's Wharf conglomerate, and Cheng Yu Tong, a prominent property developer.