China’s telecoms regulators seem to have woken up to the benefits of allocating radio spectrum through a bidding process.

The country’s recently revised Radio Regulations, which went into effect 1 December, will allow the country’s 5G frequencies to be made available via a market-based approach, or auctions, rather than relying only on administrative approval as in the past.

The upside for the government is that it will be able to raise billions from selling spectrum to the three state-run mobile operators, which are eager to expand their spectrum holdings as bandwidth demands increase.

According to a report by C114.net, China’s 5G spectrum demand is estimated at more than 1GHz, which means each of the incumbent operators will need at least 300MHz to keep up with the soaring traffic new 5G services will deliver. China’s Radio Regulations released by the Ministry of Industry and Information Technology (MIIT) specifies that China will release no less than 500MHz of 5G spectrum.

That will likely translate into hundreds of billions of Renminbi outlaid in a 5G auction, the Chinese telecoms portal estimates. The questions are: when will the government hold the auctions, what spectrum bands will be made available and what will the reserve prices be?

Since China has no history of spectrum auctions, it will have to rely on international benchmarks. It can look to India, where seven operators paid $9.8 billion for 965MHz of spectrum in October as well as Thailand, which raised $6.5 billion from selling 50MHz of 900MHz and 1.8GHz spectrum in two separate auctions last year.

Chinese authorities are reportedly considering using the 3.3-3.4GHz, 4.4-4.5GHz and 4.8-4.9GHz bands. China Mobile, the world’s largest mobile operator with 850 million subscribers, recently outlined its 5G deployment schedule at a meeting of the IMT-2020 5G Promotion Group, and will initially focus on the sub-6GHz band.

Impact on bottom line
The other question is how will the huge spectrum bills impact the operators’ bottom line, which haven’t been as healthy as a few years back due to a number of factors, including pressure from the government to lower broadband prices and increase speeds.

The three operators reported mixed results for the first nine months of the year. China Mobile posted a net profit of CNY88.1 billion ($13 billion), up 3.1 per cent year-on-year, on revenue of CNY542.7 billion, which rose 4.3 per cent. China Telecom, the country’s smallest player, said its net profit for the period increased 7.2 per cent to CNY17.5 billion, with service revenue expanding 5.6 per cent to CNY233 billion.

Struggling China Unicom, the second largest player but a laggard in 4G, issued its third profit warning of 2016, stating a substantial increase in expenses led to an 80.6 per cent year-on-year drop in its net profit. Its revenue for the first nine months of the year fell 2.3 per cent to CNY207 billion, with mobile service revenue flat at CNY109.6 billion.

The prospect of a multi-billion dollar 5G auction comes at a time when the operators’ capex has finally started to decline as they near completion of their nationwide 4G network rollouts. Capex is forecast to drop by about 10 per cent next year, according to Fitch Ratings.

Chinese telcos, which face weaker competition compared with many other markets, will also benefit from lower marketing and handset subsidy costs and falling tower lease rental costs.

Fitch in October reported that these factors would help boost China Mobile and China Telecom’s ARPU next year (bucking the downward trend in most markets). However, that was before the rating agency factored in spectrum costs.

Regardless of the timing and the size of the pending 5G sale (if it actually materialises), there is no doubt that a market-based approach will put the Big Three on a more equal footing with their international peers, which have had to build in spectrum costs into their business plans for decades.

With the general industry consensus that 5G will come to the market in 2020, expect the Chinese government to start the conversation on auctions soon (Thailand earlier this week announced plans for an auction of 2.6GHz spectrum – a likely 5G band – by next June).

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.