SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 2 20549

FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission file number 1-15028

75 ^th Floor, The Center
99 Queen’s Road Central
Hong Kong
(Address of Principal Executive Offices)

Chu Ka Yee
Telephone: +852 2121 3220
Facsimile: +852 2121 3232
75 ^th Floor, The Center
99 Queen’s Road Central
Hong Kong
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

*		Not for trading, but only in connection with the listing on The New York Stock Exchange, Inc. of American depositary shares, or ADSs, each representing 10 ordinary shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None
(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

     As of December 31, 2008, 23,767,925,322 ordinary shares were issued and outstanding.

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

     U.S. GAAP o

     International Financial Reporting Standards as issued by the International Accounting Standards Board þ

     Other o

     If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

     Item 17 o Item 18 o

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

TABLE OF CONTENTS

		Page
Note Regarding Forward-looking Statements		iii
Certain Definitions		iv
Special Note on Our Financial Information and Certain Statistical Information Presented in This Annual Report		vi
PART I			1
Item 1. Identity of Directors, Senior Management and Advisers			1
Item 2. Offer Statistics and Expected Timetable			1
Item 3. Key Information			1
Item 4. Information on the Company			19
Item 4A. Unresolved Staff Comments			55
Item 5. Operating and Financial Review and Prospects			55
Item 6. Directors, Senior Management and Employees			74
Item 7. Major Shareholders and Related Party Transactions			85
Item 8. Financial Information			106
Item 9. The Offer and Listing			106
Item 10. Additional Information			107
Item 11. Quantitative and Qualitative Disclosures about Market Risks			118
Item 12. Description of Securities Other than Equity Securities			120
PART II			120
Item 13. Defaults, Dividend Arrearages and Delinquencies			120
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			120
Item 15. Controls and Procedures			120
Item 16A. Audit Committee Financial Expert			121
Item 16B. Code of Ethics			121
Item 16C. Principal Accountant Fees and Services			121
Item 16D. Exemptions from the Listing Standards for Audit Committees			122

		Page
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			122
Item 16F. Change in Registrant’s Certifying Accountant			122
Item 16G. Corporate Governance			123
PART III			124
Item 17. Financial Statements			124
Item 18. Financial Statements			124
Item 19. Exhibits			124
EX-1.2
EX-4.16
EX-4.26
EX-4.27
EX-4.28
EX-4.29
EX-4.30
EX-4.31
EX-4.32
EX-4.33
EX-4.34
EX-4.35
EX-4.36
EX-4.37
EX-4.39
EX-4.40
EX-4.41
EX-4.42
EX-4.43
EX-4.44
EX-4.45
EX-4.46
EX-4.47
EX-4.48
EX-4.49
EX-4.50
EX-8.1
EX-12.1
EX-12.2
EX-13.1
EX-13.2

Note Regarding Forward-Looking Statements

     This annual report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements may include, without limitation, statements relating to (i) our plans and strategies, including those in connection with our restructuring and integration after our merger with China Netcom Group Corporation (Hong Kong) Limited, mergers and acquisitions and capital expenditures; (ii) our plans for network expansion, including those in connection with the build-out of third generation mobile telecommunications, or 3G, digital cellular business and network infrastructure; (iii) our competitive position, including our ability to upgrade and expand existing networks and increase network efficiency, to improve existing services and offer new services, to develop new technological applications and to leverage our position as an integrated telecommunications operator and expand into new businesses and markets; (iv) our future business condition, including our future financial results, cash flows, financing plans and dividends; (v) the future growth of market demand of, and opportunities for, our new and existing products and services; and (vi) future regulatory and other developments in the PRC telecommunications industry.

     The words “anticipate”, “believe”, “could”, “estimate”, “intend”, “may”, “seek”, “will” and similar expressions, as they relate to us, are intended to identify certain of these forward-looking statements. We do not intend to update any of these forward-looking statements.

     The forward-looking statements contained in this annual report are, by their nature, subject to significant risks and uncertainties. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of our future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements as a result of a number of factors, including, without limitation:

	•		changes in the regulatory regime and policies for the PRC telecommunications industry, including changes in the structure or functions of the primary industry regulator, the Ministry of Industry and Information Technology, or the MIIT (which has assumed the regulatory functions of the former Ministry of Information Industry), or changes in the regulatory policies of the MIIT, the State-owned Assets Supervision and Administration Commission, or the SASAC, and other relevant government authorities of the PRC;
	•		results of the ongoing restructuring of the PRC telecommunications industry;
	•		changes in the PRC telecommunications industry resulting from the issuance of 3G licenses by the central government of the PRC;
	•		effects of tariff reduction and other policy initiatives from the relevant PRC government authorities;
	•		changes in telecommunications and related technologies and applications based on such technologies;
	•		the level of demand for telecommunications services;
	•		competitive forces from more liberalized markets and our ability to retain market share in the face of competition from existing telecommunications companies and potential new market entrants;
	•		effects of competition on the demand and price of our telecommunications services;
	•		the availability, terms and deployment of capital and the impact of regulatory and competitive developments on capital outlays;
	•		effects of our restructuring and integration following the completion of our merger with China

			Netcom Group Corporation (Hong Kong) Limited;
	•		effects of our proposed adjustments in our business strategies relating to the personal handyphone system, or PHS, business;
	•		effects of our acquisition from our parent companies of certain telecommunications business and assets, including the fixed-line business in 21 provinces in southern China, in January 2009;
	•		changes in the assumptions upon which we have prepared our projected financial information and capital expenditure plans;
	•		changes in the political, economic, legal and social conditions in the PRC, including the PRC Government’s policies and initiatives with respect to economic development in light of the current global economic downturn, foreign exchange policies, foreign investment activities and policies, entry by foreign companies into the PRC telecommunications market and structural changes in the PRC telecommunications industry; and
	•		the potential continued slowdown of economic activities inside and outside the PRC.

     Please also see “D. Risk Factors” under Item 3.

Certain Definitions

     As used in this annual report, references to “we”, “us”, “our”, the “Company”, “our company” and “Unicom” are to China Unicom (Hong Kong) Limited (formerly known as China Unicom Limited). Unless the context otherwise requires, these references include all of our subsidiaries. In respect of any time prior to our incorporation, references to “we”, “us”, “our” and “Unicom” are to the telecommunications businesses in which our predecessors were engaged and which were subsequently assumed by us. All references to “Unicom Group” are to China United Network Communications Group Company Limited (formerly known as China United Telecommunications Corporation), our indirect controlling shareholder. Unless the context otherwise requires, these references include all of Unicom Group’s subsidiaries, including us and our subsidiaries.

     All references to “China Netcom” are to China Netcom Group Corporation (Hong Kong) Limited, which merged with us in October 2008, and, as the context may require, its subsidiaries. References to “Netcom Group” mean China Network Communications Group Corporation which merged with, and was absorbed by, Unicom Group in January 2009 and, as the context may require, its subsidiaries, other than us and our subsidiaries.

     As used in this annual report:

	•		references to “China” or “PRC” mean the People’s Republic of China, excluding, for purposes of this annual report, Hong Kong, Macau and Taiwan, and references to the “central government” or the “PRC Government” mean the central government of the PRC;
	•		references to “our fixed-line northern service region” mean the 10 municipalities and provinces where we operate fixed-line business in northern China, consisting of Beijing and Tianjin Municipalities, and Hebei, Henan, Shandong, Liaoning, Heilongjiang, Jilin, and Shanxi Provinces, and the Inner Mongolia Autonomous Region;
	•		references to the “21 provinces in southern China” mean Shanghai Municipality, Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Hubei Province, Hunan Province, Guangdong Province, Guangxi Zhuang Autonomous Region, Hainan Province, Chongqing Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Tibet Autonomous Region, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region. We completed the acquisitions of

			certain telecommunications business and assets, including the fixed-line business in those 21 provinces in southern China, from Unicom Group and Netcom Group and/or their respective subsidiaries and branches in January 2009. See “A. History and Development of the Company — Recent Developments — Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China” under Item 4.
	•		references to “Hong Kong Stock Exchange”, “SEHK” or “HKSE” mean The Stock Exchange of Hong Kong Limited, and references to “NYSE” or “New York Stock Exchange” mean The New York Stock Exchange, Inc; and
	•		references to “Renminbi” or “RMB” are to the currency of the PRC, references to “U.S. dollars” or “US$” are to the currency of the United States of America, and references to “HK dollars” or “HK$” are to the currency of the Hong Kong Special Administrative Region of the PRC.

Special Note on Our Financial Information and Certain Statistical Information Presented
in This Annual Report

     Our consolidated financial statements as of and for the years ended December 31, 2007 and 2008 included in this annual report on Form 20-F have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB. These financial statements also comply with Hong Kong Financial Reporting Standards, or HKFRS, which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards and Interpretations issued by the Hong Kong Institute of Certified Public Accountants, or HKICPA. As applied to our company, HKFRS is consistent with IFRS in all material respects. Pursuant to the requirement under IFRS 1: First-Time Adoption of International Financial Reporting Standards, or IFRS 1, the date of our transition to IFRS was determined to be January 1, 2007, which is the beginning of the earliest period for which we present full comparative information in our consolidated financial statements. With due regard to our accounting policies in previous periods and the requirements of IFRS 1, we have concluded that no adjustments were required to the amounts reported under HKFRS as at January 1, 2007 or in respect of the year ended December 31, 2007. As such, we make an explicit and unreserved statement of compliance with IFRS, as issued by the IASB, with respect to our consolidated financial statements as of and for the years ended December 31, 2007 and 2008 included in this annual report on Form 20-F. PricewaterhouseCoopers, our independent registered public accounting firm, has issued an auditor’s report on our financial statements prepared in accordance with IFRS as issued by the IASB.

     In accordance with rule amendments adopted by the U.S. Securities and Exchange Commission, or the SEC, which became effective on March 4, 2008, we are not required to provide reconciliation to generally accepted accounting principles in the United States, or U.S. GAAP. Furthermore, pursuant to the transitional relief granted by the SEC in respect of the first-time application of IFRS, no audited financial statements and financial information prepared under IFRS for the year ended December 31, 2006 have been included in this annual report on Form 20-F.

     The consolidated financial statements included in our annual reports on Form 20-F previously filed with the SEC in respect of the years ended December 31, 2005 and 2006 were prepared in accordance with HKFRS. The consolidated financial statements included in our annual reports on Form 20-F previously filed with the SEC in respect of the years ended December 31, 2004 and before were prepared in accordance with Hong Kong GAAP.

     The statistical information set forth in this annual report on Form 20-F relating to the PRC is taken or derived from various publicly available government publications that have not been prepared or independently verified by us. This statistical information may not be consistent with other statistical information from other sources within or outside the PRC.

PART I

     Prior to our merger with China Netcom, China Netcom completed a disposal of the fixed-line telecommunications and related services in its Guangdong and Shanghai branches in February 2007. See “A. History and Development of the Company — History and Corporate Development of China Netcom” under Item 4. In accordance with IFRS/HKFRS 5, we recognized the fixed-line business in the Guangdong and Shanghai branches as discontinued operations, and the fixed-line business in the Guangdong and Shanghai branches are presented separately as discontinued operations in our audited consolidated statement of income and statement of cash flows for the year ended December 31, 2007.

     In this annual report on Form 20-F, we have translated certain Renminbi and Hong Kong dollar amounts into U.S. dollars at the rate of RMB6.8225 = US$1.00 and HK$7.7499 = US$1.00, the noon buying rates for these currencies in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2008. We translate these amounts solely for your convenience, and these translations should not be construed as representations that, on such or any other date, the Renminbi or Hong Kong dollar amounts could actually be converted into U.S. dollars at such rates or at all.

		As of or for the year ended December 31
		2007				2008				2008
		RMB				RMB				US$ (1)
		(in millions, except for per share data)
Consolidated Income Statement Data:
CONTINUING OPERATIONS
Revenue (2)
GSM mobile business
Service revenue			62,547				64,704				9,484
Sales of GSM mobile telecommunications products			12				550				81
Total GSM revenue			62,559				65,254				9,565
Fixed-line business
Service revenue (2)			87,200				82,548				12,099
Sales of fixed-line telecommunications products			928				1,104				162
Total fixed-line revenue			88,128				83,652				12,261
Total revenue			150,687				148,906				21,826
Total costs and expenses			(123,446	)			(140,765	)			(20,633	)
Income from continuing operations before income tax			27,241				8,141				1,193
Income tax expenses			(7,083	)			(1,801	)			(264	)
Income from continuing operations			20,158				6,340				929
DISCONTINUED OPERATIONS (3)
Income from discontinued operations			654				1,438				211
Gain on the disposal of discontinued operations			626				26,135				3,831
Net income			21,438				33,913				4,971
Earnings per share for income attributable to the equity holders of the Company during the year
-Basic earnings per share (4)			0.93				1.43				0.21
-Diluted earnings per share (4)			0.92				1.42				0.21
-Basic earnings per ADS (5)			9.29				14.28				2.09
-Diluted earnings per ADS (5)			9.19				14.16				2.08
Earnings per share for income from continuing operations attributable to the equity holders of the Company during the year
-Basic earnings per share (4)			0.87				0.27				0.04
-Diluted earnings per share (4)			0.86				0.27				0.04
-Basic earnings per ADS (5)			8.74				2.67				0.39
-Diluted earnings per ADS (5)			8.64				2.65				0.39
Earnings per share for income from discontinued operations attributable to the equity holders of the Company during the year
-Basic earnings per share (4)			0.06				1.16				0.17
-Diluted earnings per share (4)			0.06				1.15				0.17

Exchange Rate Information

     We publish our consolidated financial statements in Renminbi. Solely for the convenience of the reader, this annual report on Form 20-F contains translations of certain Renminbi and Hong Kong dollar amounts into U.S. dollars and vice versa at RMB6.8225 = US$1.00 and HK$7.7499 = US$1.00, the noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2008. These translations should not be construed as representations that the Renminbi or Hong Kong dollar amounts could actually be converted into U.S. dollars at such rates or at all.

     The noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York were RMB6.8360 = US$1.00 and HK$7.7500 = US$1.00, respectively, on June 19, 2009. The following table sets forth the high and low noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each month during the previous six months:

     The following table sets forth the average noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars in 2004, 2005, 2006, 2007 and 2008, calculated by averaging the noon buying rates on the last day of each month during the relevant year.

Average Noon Buying Rate

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Risks Relating to Our Business

We face intense competition in all our businesses from other telecommunications service providers, including China Mobile Limited and its affiliates, or China Mobile and China Telecom Corporation Limited and its affiliates, or China Telecom. Such competition may intensify and result in slower subscriber growth, lower tariffs and higher customer acquisition costs for us, which would materially

adversely affect our financial condition, results of operations and growth prospects.

     The telecommunications industry in China has been rapidly evolving. The PRC Government has implemented a number of measures to restructure, and to encourage fair and orderly competition in, the telecommunications industry. For example, in May 2008, in order to optimize the allocation of telecommunications resources in China and improve the competitive landscape, the PRC Government encouraged a wide-ranging telecommunications industry restructuring, following which we, along with China Mobile and China Telecom, have become full-service telecommunications service providers that operate both fixed-line and mobile telecommunications networks in China. See “A. History and Development of the Company — Restructurings of Telecommunications Industry” under Item 4. We face intense competition in each of our business lines from China Mobile and China Telecom and expect that this competition will further intensify and may also include other telecommunications service providers in the future. As a result of China’s accession into the World Trade Organization, or the WTO, which requires China’s gradual reduction of foreign ownership restrictions in the telecommunications industry and the gradual opening of the telecommunications market in China to foreign operators, we also expect to face competition from foreign-invested telecommunications service providers. As a consequence of operating in an increasingly competitive market, we have experienced and may continue to experience pressure on our results of operations for some or all of our telecommunications services.

      Competition in Mobile Business . China Mobile is the largest mobile operator in China and has competitive advantages over us in areas such as customer base, financial resources and brand recognition. We have been experiencing intense competition from China Mobile in our mobile service areas and this competition may continue to intensify. In addition, as part of the restructuring of the PRC telecommunications industry in 2008, we and our parent company, Unicom Group, sold the CDMA business and network, respectively, to China Telecom in October 2008. As a result, China Telecom has become the only operator offering CDMA services in China and a new competitor in the area of mobile telecommunications. In addition, China Telecom has taken over all of our previous CDMA subscribers along with the CDMA business, which has resulted in greater competitive pressure on us. Competition in the mobile business has resulted in significant decreases in our various effective tariffs and this trend may further intensify. Continued price competition among China Mobile, China Telecom, possible new telecommunications operators and us may accelerate the decline of the average revenue per user per month, or ARPU, of our mobile services, and adversely affect our profitability. In addition, competition may also result in a higher churn rate of our mobile customers and may cause a significant increase in our costs for retaining existing customers and attracting new customers of our mobile services.

     Moreover, in January 2009, China Mobile, China Telecom and Unicom Group were granted licenses by the MIIT to operate 3G businesses nationwide in China with TD-SCDMA, CDMA2000 and WCDMA technologies, respectively. China Mobile and China Telecom have launched their 3G businesses in China and we have launched our 3G business on a trial basis. We expect that 3G will be one of the main focuses of business development for the three telecommunications operators in China and that our 3G business will face intense competition from China Mobile and China Telecom in the future. Because the TD-SCDMA technology that China Mobile uses to operate its 3G business is China’s homegrown technology and one of the three current major international 3G standards, the PRC Government has expressed its strong support for the TD-SCDMA industry and has announced numerous policies to promote its development in China. Moreover, due to the technical features of the CDMA network, China Telecom, unlike other Chinese telecommunications operators, was able to upgrade its CDMA network easily and quickly to the CDMA2000 3G network, which allowed China Telecom to launch its 3G business earlier than us. All of these factors may harm our 3G competitive position. The WCDMA technology that we use to operate our 3G business is a relatively mature technology which has been widely adopted and deployed around the world. Our 3G operations based on the WCDMA technology have also benefited from a well-developed WCDMA industry chain with diverse and ample supplies of WCDMA network equipment and facilities as well as handsets and applications. While we have been endeavoring to capitalize these advantages of the WCDMA technology and allocating significant resources to develop our networks, service products and customer service for our 3G business, we cannot assure you that we will be able to successfully compete in the emerging 3G service market in China. As a result, our financial condition, results of operations and growth prospects may be materially adversely affected.

      Competition in Fixed-Line Business. As a part of the PRC telecommunications industry restructuring in 2008, the former China Netcom, which was a major fixed-line service provider in China prior to the restructuring, merged with us and became our wholly-owned subsidiary in October 2008. China Network Communications Group

Corporation, or Netcom Group, China Netcom’s parent company, and China Netcom (Group) Company Limited, or CNC China, China Netcom’s wholly-owned subsidiary, also merged with, and were absorbed by, Unicom Group and China United Network Communications Corporation Limited (formerly known as China Unicom Corporation Limited), or CUCL, our principal operating subsidiary, respectively, in January 2009. See “A. History and Development of the Company — Sale of CDMA Business, Merger with China Netcom and Related Transactions — Merger with China Netcom and Related Transactions” under Item 4. Moreover, in order to become a nationwide full-service telecommunications operator in all of our business lines, we, through CUCL, purchased the telecommunications business across 21 provinces in southern China held by Unicom Group and Netcom Group. See “A. History and Development of the Company — Recent Developments” under Item 4. As a result, we are now offering fixed-line services, including fixed-line voice and value-added, fixed-line broadband, data communication and other services, nationwide in China. Our major competitors in various fixed-line service markets include China Telecom, a major fixed-line service provider in China with a leading position in the south, and China Mobile, which began offering fixed-line services after its acquisition of China TieTong Telecommunications Corporation, a relatively smaller operator in the fixed-line service market. Geographically, we are a leading fixed-line service provider in our fixed-line northern service region, but a relatively new entrant in 21 provinces in southern China. In our fixed-line northern service region, we face increasing competition from China Telecom and China Mobile as they continue to develop their fixed-line networks and boost their sales efforts in the region. In 21 provinces in southern China, we are selectively developing networks and increasing sales as our strategy, but we cannot assure you that this strategy will enable us to compete successfully against our competitors in the fixed-line market in this region. Moreover, other than China Telecom and China Mobile, we also face increasing competition from other competitors in a number of areas of fixed-line business. For example, in the long distance area, we have been experiencing competitive pressure from Internet phone service providers, such as Skype. This competition may become more intense if current restrictions on the provision of these services are liberalized. In the fixed-line broadband area, cable television companies, such as Beijing Gehua CATV Netcom Co., Ltd., and other emerging fixed-line broadband companies, such as Great Wall Broadband Network Service Co., Ltd., have imposed significant competition pressure on us in pricing, network coverage and quality, end-to-end connectivity and customer service. In addition, we expect that the convergence of telecommunications, Internet and cable television networks will be the trend for the future development of the telecommunications industry in China. Changes of regulatory policies under this trend may enable additional non-telecommunications operators to compete with us in our telecommunications businesses, in particular in our fixed-line business. Increased competition from China Telecom, China Mobile and other competitors in the fixed-line service market may force us to lower our tariffs and may reduce the size of our customer base and the usage of our fixed-line networks, which may materially adversely affect our financial condition, results of operations and growth prospects.

     Furthermore, the MIIT’s newly issued the Measures on the Administration of Telecommunications Business Licenses, which became effective on April 10, 2009, among other things, lowered the minimum amount of registered capital required for an applicant to enter the basic telecommunications business in the PRC. We expect this change to lower the entry barriers to the telecommunications industry and further intensify competition in the relevant service areas.

     Intensive competition from China Mobile and China Telecom, as well as other telecommunications service providers, could lead to slower subscriber growth, lower traffic volume of our telecommunications services, continued price pressure and higher customer acquisition costs, which may materially adversely affect our financial condition, results of operations and growth prospects.

We may further lose fixed-line and mobile subscribers and our doubtful debt ratios may increase, which may materially adversely affect our financial condition, results of operations and growth prospects.

     We continue to lose fixed-line subscribers due to the trend of mobile service substitution for fixed-line services. Consistent with trends in global markets in recent years, significant traffic from our fixed-line networks has been diverted to mobile networks, including mobile networks of other mobile operators. In 2007 and 2008, mobile substitution accelerated as a result of stronger pricing pressure from mobile operators, which increasingly reduced tariffs through various discount programs. For example, the usage volume of local calls in our fixed-line northern service region decreased by 7.2% from 202.5 billion pulses in 2007 to 187.8 billion pulses in 2008, mainly due to migration of local voice traffic to mobile services. The number of our fixed-line subscribers also decreased by 9.6% from 110.82 million at the end of 2007 to 100.15 million at the end of 2008. While we started providing a full range of telecommunications services after the telecommunications industry restructuring in 2008 and have been taking

various measures to retain our fixed-line subscribers, we cannot assure you that we will be successful in mitigating the adverse impact of mobile service substitution for fixed-line telephone services. Migration from fixed-line services to mobile services may further intensify in the future, which may materially adversely affect our financial condition, results of operations and growth prospects of our fixed-line voice services. In addition, as the 3G industry continues to develop in China, we expect that wireless Internet access will become another main form of broadband access in the future, which may result in decreased use of fixed-line broadband access, thereby resulting in loss of our fixed-line broadband subscribers.

     With respect to our GSM mobile services, we also experienced an increased loss of some existing mobile subscribers, although this loss was substantially exceeded by an increase in new mobile subscribers in 2008. Our loss of existing mobile subscribers is reflected in the increased churn rates of our mobile services in 2008. The monthly average churn rate of our GSM mobile services increased from 2.76% in 2007 to 3.08% in 2008, primarily due to further intensified competition from other service providers, a large proportion of our new subscribers being low-end subscribers and the effects of the global financial crisis. Increased churn rates of our GSM services may adversely affect our market share and increase our costs of additional customer acquisitions and bad debts, which would materially adversely affect our financial condition, results of operations and growth prospects.

     In addition, due to an increased loss of customers and the effects of the global financial crisis, our doubtful debt ratio, calculated as the amount of doubtful debt provided during a year divided by revenue in that year, also increased in 2008. Our doubtful debt ratio related to our GSM services was at 2.1% in 2008, compared to 2.0% in 2007. Our doubtful debt ratio related to our fixed-line services was at 1.8% in 2008, compared to 1.1% in 2007. If these ratios increase in the future, our financial condition and results of operations could be materially adversely affected.

Competition from foreign-invested operators and other new entrants may further increase the competition for employees, exacerbate price competition and increase our operating expenses, thereby adversely affecting our financial condition, results of operations and growth prospects.

     As a result of China’s accession to the WTO in December 2001 and the adoption of the Regulations on the Administration of Foreign-Invested Telecommunications Enterprises in January 2002, which implement China’s commitments to the WTO, the PRC Government has agreed to gradually liberalize the various segments and regions of the telecommunications market in China to foreign investors. Currently, foreign investors are permitted to own up to 49% of joint ventures that offer basic telecommunications services without any geographic restrictions in China and 50% of joint ventures that offer value-added telecommunications services without any geographic restrictions in China. More foreign-invested operators may enter China’s telecommunications market as a result of this liberalization. They may have greater financial, managerial and technical resources and more expertise in network management and sales and marketing than we do.

     Increased competition from these and other new entrants into the Chinese telecommunications market may further increase the competition for skilled and experienced employees, exacerbate price competition and increase our customer acquisition costs and other operating expenses, and thereby adversely affect our financial condition, results of operations and growth prospects.

Various difficulties involved and extensive efforts required in the ongoing integration process following our merger with China Netcom may adversely affect our financial condition, results of operations and growth prospects.

     Following our merger with China Netcom, we have been integrating the operations of the two companies. Our management has been making extensive efforts in the integration process, in particular the integration of the existing businesses, development strategies, management and personnel, subsidiaries and branches, accounting policies and procedures, internal control systems and information systems of the two companies. As the integration is ongoing, and due to various potential difficulties in managing a much larger business, our management expects that further efforts will be required in the continuing integration process, which may result in a significant diversion of our management’s attention from the operation of our businesses and may significantly restrain our management’s resources, thereby adversely affecting our financial condition, results of operations and growth prospects. In addition, an important aspect of the integration is the integration of personnel. We believe that we have maintained good labor

relations and have not experienced any significant loss of our employees since our merger with China Netcom. However, as the integration process deepens, we cannot assure you that we will be able to maintain existing labor relations or that we will not suffer from employee attrition, and our financial condition, operation of businesses and growth prospects may be materially adversely affected as a result.

We may not be able to fully realize the anticipated synergies of our merger with China Netcom as well as our acquisition of the fixed-line business in 21 provinces in southern China due to a number of factors, some of which are beyond our control, and our future financial condition, results of operations and growth prospects may be materially adversely affected.

     We believe that our merger with China Netcom represents an important transaction for us, consistent with the industry trend of convergence between fixed-line and mobile businesses within China. It allows us to benefit from increased economies of scale, reinforce our market position, improve our overall competitiveness and lay the foundation for sustainable long-term growth. We anticipate that through effective integration, synergies would occur in six key areas, including through: (i) a clear strategic positioning of our enlarged group; (ii) an improvement of the market position of our enlarged group; (iii) a combination of resources and strengths to achieve economies of scale and larger scope; (iv) technological and product innovation to address changing market trends; (v) enhanced human capital and organizational structure; and (vi) a more optimal capital structure and enhanced financial capabilities.

     Nevertheless, the scale, scope and nature of the integration and customer retention efforts required in connection with the merger present significant challenges. Although we have completed integration in a number of areas on a preliminary basis, we cannot assure you that we will be able to fully integrate our businesses on the expected timeline and fully realize the anticipated synergies as a result of numerous factors, some of which are beyond our control. These factors include, among other things:

	•		difficulties in integrating the operations of the two companies, including unifying their operating and accounting policies and procedures as well as their information systems, streamlining overlapping operations, consolidating subsidiaries and branch networks, and allocating human resources;
	•		unforeseen contingent risks or latent liabilities relating to the merger that may not become apparent until in the future;
	•		loss of personnel, including key management members;
	•		increase in competition in the PRC telecommunications industry resulting from the recent restructuring of the PRC telecommunications industry, which, among other things, may require us to increase our marketing efforts;
	•		the diversion of financial or other resources from our existing businesses; and
	•		potential loss of, or harm to, relationships with customers.

     Any of the above could adversely impact the full realization of our anticipated synergies from the merger with China Netcom and could materially adversely affect our future business performance, results of operations and financial condition.

     In addition, following the completion of our acquisition of the fixed-line business in 21 provinces in southern China, we have been integrating our existing business with the fixed-line operations in those 21 provinces in southern China. We cannot assure you that we will be able to implement the integration process smoothly or that this acquisition will meet our expectation to optimize our business and resources and enhance our overall competitive position.

Failure to respond to technological and industry developments in a timely and effective manner or failure to continually optimize, expand and upgrade our networks and infrastructure could materially adversely affect our competitive position and hinder our growth.

     The telecommunications industry in China and elsewhere in the world has been experiencing rapid and significant changes in the diversity and sophistication of the technologies and services offered. Such changes may render our existing services or technologies inadequate or obsolete. As a result, we expect that we will need to constantly upgrade our telecommunications technologies and services to respond to such changes in order to maintain our competitiveness, which involves substantial time, costs and risk. We cannot assure you that we will be able to respond to technological and industry developments in a timely and cost-effective manner, or at all. Our inability to respond successfully to technological or industry developments may adversely affect our financial condition, results of operations and growth prospects. Furthermore, if the new technologies adopted by us do not perform as expected, or if we are unable to effectively deliver new services based on these technologies in a commercially viable manner, our revenue growth may decline and our competitive position may be adversely affected.

     In addition, the growth of our business, particularly the mobile business, depends on whether we are able to continue to optimize the capacity, expand the coverage and improve the quality of, and upgrade our existing networks and infrastructure in a timely and effective manner. Our failure to do so could result in loss of our customers and thus materially adversely affect our competitive position and hinder our growth.

     Our ability to expand and upgrade our networks and infrastructure is subject to a number of uncertainties, including our ability to achieve the following on a timely basis and on acceptable terms:

	•		manage technology migration in an effective manner;
	•		obtain adequate financing;
	•		obtain relevant government licenses, permits and approvals;
	•		obtain adequate network equipment and software;
	•		retain experienced management and technical personnel;
	•		obtain sufficient spectrum frequencies, network numbers and other telecommunications resources controlled by the PRC Government;
	•		gain access to the sites for network construction or upgrade; and
	•		enter into interconnection and other arrangements with other operators.

     If we are not able to timely and effectively overcome the uncertainties and difficulties we may encounter in expanding and upgrading our networks and infrastructure, our competitive position, financial condition, results of operations and growth prospects may be materially adversely affected.

The successful development and introduction of our 3G network and services is subject to market demand, consumer acceptance, technological challenges, other uncertainties, expected benefits from investments in our 3G networks and technology may not be realized and our GSM mobile business may be adversely affected due to the competitive nature between 3G services and 2G services in the industry.

     In January 2009, Unicom Group was granted a license by the MIIT to operate a 3G business nationwide in China with WCDMA technology and, with the approval of the MIIT, has authorized CUCL, our wholly-owned subsidiary, to operate this 3G business. Our planned capital expenditure in 2009 for the development of our 3G business is estimated to be approximately RMB38.7 billion. We currently expect to provide 3G services in 284 cities in China by the end of 2009. As is common with undertakings of this scale and complexity, we may experience various difficulties in the development of our 3G business, including software, network, handset and other technical

issues. While we generally believe we are capable of solving these issues, we cannot assure you that we will be able to do so in a timely fashion or that we will not encounter other difficulties. Moreover, we cannot assure you that:

	•		we will be able to gain access to sufficient sites for 3G network construction;
	•		there will be sufficient demand for 3G services for us to deliver these services profitably;
	•		the commercial launch of our 3G services will proceed according to anticipated schedules;
	•		our 3G network and services will deliver the quality and levels of services as expected;
	•		we will be able to provide all planned 3G services or that we will be able to provide such services on schedule, or that developing and providing such services will not be more costly than expected;
	•		our 3G services will be more popular among potential subscribers than those of our competitors;
	•		we will not encounter unexpected technological difficulties in implementing the WCDMA technology; or
	•		our 3G services will generate an acceptable or commercially viable rate of return.

     Any failure or delay in the completion of networks and the launch of our 3G services, increases in the associated costs, or problems encountered in our operations of 3G business could hinder the recovery of our significant capital investment in the 3G business, which could in turn have a material adverse effect on our financial condition, results of operations and growth prospects. In addition, we expect that 3G services will compete with 2G services as an industry trend in the future. Therefore, while we are promoting our 3G business, we cannot assure you that our GSM business will not be adversely affected by the industry-wide competition between 3G and 2G businesses.

Because we rely on arrangements with other telecommunications operators, changes to the terms or availability of these arrangements may result in disruptions to our services and operations and may result in customer dissatisfaction and materially adversely affect our financial condition, results of operations and growth prospects.

     Our ability to provide telecommunications services depends upon arrangements with other telecommunications operators. In particular, interconnection is necessary to complete all calls between our subscribers and subscribers of other telecommunications operators. We, either through ourselves or through Unicom Group, have established interconnection and transmission line leasing arrangements with other telecommunication operators, including our parent company, as required to conduct our current business. Any disruption to our interconnection with the networks of those operators or other international telecommunications carriers with which we interconnect may affect our operations, service quality and customer satisfaction, thus adversely affecting our business. Furthermore, we are generally not entitled to collect indirect or consequential damages resulting from disruptions in the networks with which we are interconnected. Any disruption in existing interconnection arrangements and leased line arrangements or any significant change of their terms, as a result of natural events or accidents or for regulatory, technical, competitive or other reasons, may lead to temporary service interruptions and increased costs that can seriously jeopardize our operations and adversely affect our financial condition, results of operations and growth prospects. Difficulties in executing alternative arrangements with other operators on a timely basis and on acceptable terms, including the inability to promptly establish additional interconnection links or increase interconnection bandwidths as required, could also materially adversely affect our financial condition, results of operations and growth prospects.

Interruptions to our networks and operating systems or to those with which we interconnect, including those caused by natural disasters and service maintenance and upgrades, may disrupt our services and operations and may result in customer dissatisfaction and materially adversely affect our financial condition, results of operations and growth prospects.

     Our network infrastructure and the networks with which we interconnect are vulnerable to potential damages or interruptions from floods, wind, storms, fires, power loss, severed cables, acts of terrorism and similar events. The occurrence of a natural disaster or other unanticipated problems at our facilities or any other failure of our networks or systems, or the networks to which we are interconnected, may result in consequential interruptions in services across our telecommunications infrastructure. For example, in January and February of 2008, certain areas of China experienced what was reportedly the most severe winter weather in the country in half a century. Our base stations in the affected areas suffered from power failures and our network equipment sustained other damage due to this severe winter weather. In addition, in May 2008, an earthquake registering 8.0 on the Richter scale struck Sichuan Province and its neighboring areas in China. Our network equipment, including our base stations, in the affected areas sustained extensive damage, leading to service stoppage and other disruptions in our operations in those areas. Any future natural disasters may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our services and operations. Moreover, our networks and systems and the networks with which we interconnect also require regular maintenance and upgrades. Such maintenance and upgrades may cause service disruptions. Network or system failures, as well as high traffic volumes, may also affect the quality of our services and cause temporary service interruptions. Any such future occurrence may result in customer dissatisfaction and materially adversely affect our financial condition, results of operations and growth prospects.

If we fail to achieve a smooth discontinuation of PHS services or retain our PHS subscribers to use our other telecommunications services, our financial condition and results of operations may be adversely affected.

     Upon the completion of our merger with China Netcom, we took over China Netcom’s PHS services, which we did not operate before the merger. PHS is a telecommunications technology that allows an operator to offer wireless local access services with mobility within an area with the same area code. PHS business historically contributed substantially to our revenues and customer base, but has experienced dramatic declines in recent years since its tariff advantage has been diminishing as a result of intense competition in the mobile service market in China. As of December 31, 2008, we had a total of 21.85 million PHS subscribers. Further, in January 2009, the MIIT announced its decision to reallocate the radio spectrum on which we currently provide our PHS services to the TD-SCDMA technology which China Mobile uses to provide its 3G services. The MIIT requested that current wireless access systems operating on 1900-1920 MHz spectrum be cleared and removed by the end of 2011. We expect that we will experience a significant decline in revenue and profitability for our PHS business in 2009 and onwards. Our PHS business would deteriorate significantly and discontinuing the PHS services may result in a substantial loss of our investment in this area. As a result, we recognized an impairment loss on the PHS-related assets of approximately RMB11.8 billion for the year ended December 31, 2008, leaving the carrying value of PHS-related assets of approximately RMB1.52 billion as of December 31, 2008.

     We intend to utilize our full-service operations platform to provide substitute telecommunications services to our existing PHS users. However, we cannot assure you that we will be able to achieve a smooth discontinuation of PHS services or effectively retain our PHS subscribers to use our other telecommunications services. As a result, our financial condition and results of operations may be adversely affected.

If we are unable to fund our capital expenditure and debt service requirements, our financial condition, results of operations and growth prospects will be materially adversely affected.

     We continue to have a significant level of capital expenditure and debt service requirements necessary to implement our business strategies. We plan to spend approximately RMB110.0 billion for capital expenditure in 2009, an increase of RMB39.5 billion from 2008. To the extent these capital expenditures exceed our cash resources, we will be required to seek additional debt or equity financing. Although currently we have a relatively low leverage in our capital structure (14.5% debt-to-equity ratio and 12.7% debt-to-capitalization ratio as of December 31, 2008), we cannot assure you that we will be able to obtain future financing on a timely basis and/or on acceptable terms, given the current conditions in the global financing markets, especially those outside the PRC, as a result of the current financial crisis. See “Liquidity and Capital Resources” under Item 5. Our failure to do so may adversely affect our financial condition, results of operations and growth prospects. Our ability to obtain acceptable financing at any time may depend on a number of factors, including, among others:

•

our financial condition and results of operations;

	•		our creditworthiness and relationship with lenders;
	•		the condition of the economy and the telecommunications industry in China;
	•		conditions in relevant financial markets in China and elsewhere in the world; and
	•		our ability to obtain any required government approvals for our financings.

We may experience further declines in ARPU for our telecommunications services.

     We have been experiencing declining ARPU for our mobile business and fixed-lined business in recent years, mainly due to (i) our decreasing effective tariffs, which mainly resulted from pricing competition with other telecommunications operators in China and downward adjustments on tariffs by the PRC Government (which may continue in the future); and (ii) the fact that a significant portion of our incremental market consists of users from rural areas in China, many of whom tend to have less usage of telecommunications services (mobile services, in particular) and are more cost-sensitive than users from urban areas. In addition, the spread of the global financial crisis has negatively affected the Chinese economy. Despite the PRC Government’s efforts in stimulating the economy, we cannot assure you that our businesses will not be significantly negatively impacted by current economic conditions. As a result of the above, our ARPU may continue to decline in the foreseeable future, which could have a material adverse effect on our financial condition and results of operations. Although we have been making efforts to mitigate those effects by allocating more resources to diversify our service offerings, particularly the value-added services, to encourage more usage of our services and developing our high-end customers, we cannot assure you that these efforts will be able to achieve the anticipated results.

If the economy of China deteriorates under the current global financial crisis, our financial condition, results of operations and growth prospects may be materially adversely affected.

     The current global financial crisis has swept the global economy and affected a number of countries, including China, to different extents. In response to this global financial crisis, the PRC Government has adopted a series of measures to stimulate the economy, including making significant investments in domestic infrastructure construction. While such measures may help create a positive policy environment for the economy in China, in the event that the economy growth of China significantly declines in the future, our subscribers’ usage of our services may decrease, our loss of subscribers may accelerate and we may experience increased difficulties in acquiring new subscribers. Futhermore, although the financial crisis has affected the financial industry in China to a lesser extent than that in certain other countries, if the Chinese financial industry becomes further adversely affected, our ability to obtain financing may be significantly constrained. All of these factors may materially adversely affect our financial condition, results of operations and growth prospects.

Our controlling shareholder, Unicom Group, can exert influence on us and cause us to make decisions that may not always be in the best interests of us or our other shareholders and may fail to provide services and facilities that we rely on to operate our business.

     Unicom Group indirectly controlled an aggregate of 70.40% of our issued share capital as of May 31, 2009 and all of our executive directors also serve as directors or executive officers of Unicom Group. As our controlling shareholder, subject to our articles of association and applicable laws and regulations, Unicom Group is effectively able to control our management, policies and business by controlling the composition of our board of directors and, in turn, indirectly controlling the selection of our senior management, determining the timing and amount of our dividend payments, approving significant corporate transactions, including mergers and acquisitions, and approving our annual budgets. The interests of Unicom Group as our controlling shareholder may conflict with our interests or the interests of our other shareholders. As a result, Unicom Group may cause us to enter into transactions or take (or fail to take) other actions or make decisions that may not be in our or our other shareholders’ best interests.

     In addition, our operations depend on a number of services and facilities provided by Unicom Group. For example, following our acquisition of the fixed-line business in 21 provinces in southern China in January 2009, we began leasing fixed-line networks from Unicom Group for our fixed-line business operations in those provinces. Unicom Group also provides us with international gateway services, interconnection services, sales agency and collection services and provision of premises. See “B. Related Party Transactions” under Item 7 and “A. History and Development of Our Company — Recent Developments” under Item 4. The interests of Unicom Group as provider of these services and facilities may conflict with our interests. Failure by Unicom Group to fulfill its obligations under any of these arrangements may have a material adverse effect on our business operations. We currently have limited alternative sources of supply for these services and facilities and, as a result, may have limited ability to negotiate with Unicom Group regarding the terms for providing these services and facilities. Changes in the availability, pricing or quality of these services or facilities may have a material adverse effect on our business and profitability.

The previous internal reorganization of Unicom Group for the A Share offering created a two-step voting mechanism that requires the approval of the minority shareholders of both our Company and China United Telecommunications Corporation Limited, or the A Share Company, for significant related party transactions between us and Unicom Group.

     In October 2002, Unicom Group completed an internal reorganization of its shareholding in our company and the initial public offering in China of its then newly established subsidiary, the A Share Company. As part of this restructuring, a portion of Unicom Group’s indirect shareholding in our company was transferred to the A Share Company, whose business is limited to indirectly holding the equity interest of our company without any other direct business operations. A voting mechanism was established to allow public shareholders of the A Share Company to indirectly participate in our shareholders’ meetings and a two-step voting mechanism was established for the approval of related party transactions. As a result, any significant related party transaction between us or our subsidiaries and Unicom Group or its other subsidiaries will require the separate approval of the independent minority shareholders of both our company and the A Share Company. Related party transactions approved by our independent minority shareholders nevertheless cannot proceed if they are not approved by the independent minority shareholders of the A Share Company. This adds another necessary step of approval process for those transactions. See “A. History and Development of the Company — Two-Step Voting Arrangements” under Item 4.

Investor confidence and the market prices of our shares and ADSs may be materially and adversely impacted if we are or our independent registered public accounting firm is unable to conclude that our internal control over financial reporting is effective in future years as required by Section 404 of the Sarbanes-Oxley Act of 2002.

     We are a public company in the United States that is subject to the Sarbanes-Oxley Act of 2002. Pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we include in this annual report a report of management on our internal control over financial reporting and an attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting.

     As of December 31, 2008, our management conducted an assessment of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting as of December 31, 2008 was effective. PricewaterhouseCoopers, an independent registered public accounting firm, expressed unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2008. However, we cannot assure you that, in the future, our management will continue to conclude that our internal control over financial reporting is effective. Even if our management concludes that our internal control over financial reporting is effective for future periods, our independent registered public accounting firm may disagree. If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our controls are documented, designed, operated, reviewed or evaluated, or if the independent registered public accounting firm interprets the relevant requirements, rules or regulations differently from us, then it may issue an adverse opinion. Any of these possible outcomes in the future could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our consolidated financial statements, which could materially adversely affect the market prices of our shares and ADSs.

     Moreover, internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal control over financial reporting, including through a failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed, we could fail to meet our reporting obligations and there could be a material adverse effect on the market prices of our shares and ADSs.

The PRC National Audit Office and other governmental or third parties may audit or investigate our ultimate controlling shareholder and us from time to time. The outcome of these governmental or third-party investigations may materially adversely affect our corporate image, the reputation and credibility of our management, our business and financial condition and the prices of our shares and ADSs.

     The PRC National Audit Office, or the NAO, from time to time performs audits on state-owned companies, such as Unicom Group, our ultimate controlling shareholder. If, as a result of an NAO audit, material irregularities are found within Unicom Group or if Unicom Group becomes the target of any negative publicity, there could be a material adverse effect on our corporate image, the reputation and credibility of our management, our business and financial condition and the market prices of our shares and ADSs. In addition, we may be the subject of other

governmental or third-party investigations or similar events that, depending on their outcome, could have a material adverse effect on our business and financial condition and the market prices of our shares and ADSs.

Risks Relating to the Telecommunications Industry in China

Extensive government regulation of the telecommunications industry in China may restrict our ability to respond to market conditions or competition, and may have a material adverse effect on our financial condition, results of operations and growth prospects.

     As a telecommunications operator in China, we are subject to extensive regulation by and under the supervision of, the MIIT, which is the primary regulator of the telecommunications industry in China. The MIIT is responsible for formulating policies and regulations for the telecommunications industry, granting telecommunications licenses, allocating frequency spectrum and numbers, formulating interconnection and settlement arrangements between telecommunications operators, and enforcing industry regulations. Other PRC Governmental authorities also regulate tariff policies, capital investment and foreign investment in the telecommunications industry. See “B. Business Overview — Regulatory and Related Matters” under Item 4. The regulatory framework within which we operate may constrain our ability to implement our business strategies and limit our ability to respond to market conditions or to changes in our cost structure. Moreover, we operate our businesses pursuant to approvals granted by the State Council of the PRC, or the State Council, and under licenses granted by the MIIT. If these approvals or licenses were revoked or suspended, our business and operations would be materially adversely affected. In addition, we are subject to various regulatory requirements as to service quality, pricing and other actions, and failure to comply with such requirements may subject us to mandatory penalties or other punitive measures, any of which could have a material adverse effect on our financial condition, results of operations and growth prospects.

Regulatory or policy changes relating to the PRC telecommunications industry or any future industry restructuring may materially adversely affect our financial condition, results of operations and growth prospects.

     The PRC Government continues to regulate many aspects of the telecommunications industry in China. Potential changes in regulations and policies and their implementation could lead to significant changes in the overall industry environment and may have a material adverse effect on our financial condition, results of operations and growth prospects. As part of the comprehensive plan to restructure the telecommunications industry in China, as approved by the State Council in 2001, the PRC Government stated its intention to further adjust and improve its regulatory oversight of the telecommunications industry, including gradual further deregulation of telecommunications tariffs.

     The MIIT, under the direction of the State Council, is currently preparing a telecommunications law to provide a uniform regulatory framework for the telecommunications industry in China. The proposed nature and scope of the telecommunications law have not yet been announced by the PRC Government. The telecommunications law and other new telecommunications regulations or rules, or future changes thereto, such as enforcement of existing regulations and policies, may materially adversely affect our financial condition, results of operations and growth prospects.

     Issues may also arise regarding the interpretation and enforcement of China’s WTO commitments regarding telecommunications services. Any future regulatory changes, such as those relating to the issuance of additional telecommunications licenses, tariff setting, interconnection and settlement arrangements, changes in technical and service standards, universal service obligations and spectrum and number allocations, may have a material adverse effect on our business and operations.

     The PRC telecommunications industry has been extensively restructured in recent years and may be subject to further restructuring. Such further industry restructuring may materially affect the operations of all telecommunications operators in China, including us. Accordingly, we cannot predict the scope and effect of any further restructuring on our financial condition, results of operations and growth prospects.

New regulations, regulatory changes or changes in enforcement policies relating to tariffs and other aspects of telecommunications services may materially adversely affect our competitiveness, business and financial condition, results of operations and growth prospects.

     Tariffs are the prices we charge our customers for our telecommunications services. We are subject to extensive government regulations on tariffs, especially those relating to our basic telecommunications services, such as mobile services, local and long distance fixed-line telephone services, managed data services, leased line services and interconnection agreements. We have experienced significant downward adjustments on tariffs of telecommunications services in recent years and our revenues have been adversely affected by reductions in tariffs promulgated by the PRC Government, such as the “Calling-Party-Pays” policy the MIIT promoted in the first half of 2007 and the reduction of charges for roaming services mandated by the MIIT and the National Development and Reform Commission of the PRC, or the NDRC, in February 2008.

     We cannot predict with accuracy the timing, likelihood or magnitude of tariff adjustments by the PRC Government or the extent or potential impact on our business of future tariff adjustments. If the PRC Government substantially lowers the tariffs for our services, our business and our financial condition, results of operations and growth prospects may be adversely affected. In particular, monthly fees on fixed-line services have recently drawn attention from customers and the PRC Government. Revenues from some of our customers have decreased as a result of discounts on monthly fees that we offered through bundled service packages. Our revenues will be adversely affected if the PRC Government abolishes such monthly fees. In addition, the PRC Government may initiate new policies or regulations following the industry restructuring in 2008, such as those in connection with adjustments in interconnection settlement arrangement among telecommunications operators and those that allow mobile subscribers to switch to the networks of another telecommunications operator with their existing numbers. The potential new regulatory policies and regulations may materially adversely affect our financial condition, results of operations and growth prospects.

The telecommunications industry in China may not sustain its pace of rapid growth, which may adversely affect the growth and profitability of our business.

     The telecommunications industry in China has experienced rapid growth in the last several years, especially in the mobile communications sector. The total number of mobile subscribers in China increased from 43.3 million at the end of 1999 to 678.8 million in April 2009. Mobile service penetration increased from 3.5% to over 50.7% nationwide during the same period. The growth in mobile subscribers has been slowing down as mobile penetration continues to increase in our mobile service areas. In addition, ARPU for the mobile communications market in China continues to decline. For example, ARPU of our GSM mobile subscribers declined from RMB45.7 in 2007 to RMB42.3 in 2008. Any slowdown in the growth in China’s telecommunications industry, in particular, mobile communications sector and fixed-line broadband sector, may adversely affect the growth and profitability of our business.

The PRC Government may require us, along with other telecommunications service providers in China, to provide universal services with specified obligations, and we may not be compensated adequately for providing such services.

     Under the Telecommunications Regulations promulgated by the State Council, telecommunications service providers in China are required to fulfill universal service obligations in accordance with relevant regulations to be promulgated by the PRC Government authorities, and the MIIT has the authority to delineate the scope of universal service obligations. The MIIT, together with government finance and pricing authorities, is also responsible for formulating administrative rules relating to the establishment of a universal service fund and compensation schemes for universal services. These rules have not yet been promulgated, and there are currently no specific regulatory requirements relating to the provision of universal services in China.

     While specific universal services obligations are not yet clear, we believe that such services may include mandatory provision of basic telecommunications services in less economically developed areas in China and mandatory contribution by telecommunication service providers to a universal service fund. In addition, as part of the transitional measures prior to the formalization of a universal service obligation framework, the MIIT has required major telecommunications service providers in China, including Unicom Group, to participate in a project to provide telephone services in thousands of remote villages in China. See “B. Business Overview—Regulatory and Related

Matters — Universal Services” under Item 4.

     We cannot predict whether the PRC Government will specifically require us to undertake universal service obligations in the future. To the extent we are required to do so, it is currently uncertain whether we will be adequately or timely compensated by the PRC Government or by the universal service fund. We cannot assure you that we will be able to realize an adequate return on investments for expanding networks to, and providing telecommunications services in, those less economically developed areas due to potentially higher capital expenditure requirements, lower usage by customers and lack of flexibility in setting our tariffs. We also cannot predict whether we will be required to make a contribution to the universal service fund. Any of these events may adversely affect our financial condition and results of operations.

Actual or perceived health risks associated with the use of mobile devices could impair our ability to retain and attract customers of our mobile services, reduce mobile service usage or result in litigation.

     Concerns have been expressed in some countries that the electromagnetic signals emitted by wireless telephone handsets and base stations may pose health risks at exposure levels below existing guideline levels, and interfere with the operation of electronic equipment. In addition, mobile operators have been subject to lawsuits alleging various health consequences as a result of mobile handset usage or proximity to base stations or seeking protective or remedial measures. While we are not aware that such health risks have been substantiated, there can be no assurance that the actual, or perceived, risks associated with the transmission of electromagnetic signals will not impair our ability to retain customers and attract new customers, reduce mobile service usage or result in litigation.

Risks Relating to Doing Business in China

Our operations may be materially adversely affected by changes in China’s economic, political and social conditions.

     Substantially all of our business operations are conducted in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are affected to a significant degree by economic, political and social conditions in China. The PRC economy differs from the economies of most developed countries in many respects, including with respect to the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past three decades, growth has been uneven across different regions and among various economic sectors. The PRC Government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be materially adversely affected by government control over capital investments.

If the PRC Government revises the current regulations that allow a foreign-invested enterprise to pay foreign exchange in current account transactions, our operating subsidiary’s ability to satisfy its foreign exchange obligations and to pay dividends to us in foreign currencies may be restricted.

     The ability of our major operating subsidiary, CUCL, to satisfy its foreign exchange obligations and to pay dividends to us depends on existing and future foreign exchange regulations in China. The Renminbi is currently convertible by foreign-invested enterprises in China to settle transactions under the current account, which include

trade and service related foreign exchange transactions and payments of dividends and interest on foreign loans. The Renminbi currently cannot be freely converted without regulatory approval for transactions under the capital account, which includes outbound foreign investment and principal payments on foreign loans. CUCL, which holds substantially all of our assets and through which we conduct substantially all of our business, is a foreign-invested enterprise in China. This status allows it to purchase foreign exchange at designated foreign exchange banks for settlement of current account transactions without the approval of the State Administration for Foreign Exchange of the PRC, or the SAFE. However, there is no assurance that in the future the relevant PRC government authorities will not impose any limitation on the ability of foreign-invested enterprises to purchase foreign exchange to satisfy their foreign exchange obligations or to pay dividends. In that event, CUCL’s ability to satisfy its foreign exchange obligations and to pay dividends to us in foreign currencies may be restricted and the interests of our shareholders may, in turn, be affected.

Fluctuations in the value of the Renminbi could adversely affect the prices of our shares and ADSs as well as our profitability.

     Substantially all of our revenues and costs and expenses are denominated in Renminbi, while a portion of our borrowings, equipment purchases and other capital expenditures are denominated in foreign currencies. On July 21, 2005, the PRC Government changed its decade-old policy of pegging the value of Renminbi to that of the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies determined by the People’s Bank of China. As of December 31, 2008, the Renminbi has appreciated approximately 17.57% in value against the U.S. dollar since July 21, 2005. On May 19, 2007, the People’s Bank of China announced a policy to expand the maximum daily floating range of RMB trading prices against the U.S. dollar in the inter-bank spot foreign exchange market from 0.3% to 0.5%. With the increased floating range of the Renminbi’s value against foreign currencies, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar or other foreign currencies in the long term, depending on the fluctuation of the basket of currencies against which it is currently valued, or it may be permitted to enter into a full float, which may also result in a significant appreciation or depreciation of the Renminbi against the U.S. dollar or other foreign currencies in the future. Increased fluctuations of the Renminbi could adversely affect the value in foreign currency terms of cash flow generated from our operations or any dividends payable on our shares and ADSs, and therefore the price of our shares and ADSs. Any future Renminbi devaluations could also increase our equipment importation costs or lead to significant fluctuations in the exposure of our foreign-currency-denominated liabilities, thereby adversely affecting our profitability.

Uncertainties in the PRC legal system could limit the legal protections available to us and to foreign investors and materially adversely affect our financial condition, results of operations and growth prospects.

     Our wholly-owned operating subsidiary, CUCL, is organized under the laws of PRC and is generally subject to laws and regulations applicable to foreign-invested enterprises in China. The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases may be cited for reference but have limited precedential value. Since 1979, the PRC Government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, property, taxation and trade. However, because these laws and regulations are relatively new, and because of the relatively limited volume of published cases and their non-binding nature, interpretation and/or enforcement of these laws and regulations involves uncertainties, which may limit the remedies available to you as an investor and to us in the event of any claims or disputes with third parties. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Therefore, the PRC legal system may not afford the same legal protection available to investors in the United States or elsewhere. Furthermore, various uncertainties involved in the rulemaking, interpretation and enforcement process of the laws, regulations and rules in China that are related to our business operations, in particular, those in respect of telecommunications and enterprise income tax, may also materially and adversely affect our financial condition, results of operations and growth prospects.

Since we are a Hong Kong company, you will not have certain investor rights as our shareholder, such as the right to bring legal action against other shareholders on behalf of the company.

     We were incorporated in Hong Kong. The Hong Kong Companies Ordinance does not provide for any right for our shareholders, including our significant shareholders, to bring legal action against any other shareholder on our behalf to enforce any claim against such party or parties if we fail to enforce such claim ourselves.

You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management.

     Most of our current operations are conducted in China and most of our assets are located in China. In addition, five out of eleven of our current directors and all of our current executive officers reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these directors or executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of court judgments. Our Hong Kong counsel has also advised us that Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. As a result, recognition and enforcement in China of judgments of a court of the United States or any other jurisdiction, including judgments against us or our directors, executive officers, underwriters or experts, may be difficult or impossible.

New provisions of the PRC Employment Contract Law may substantially increase our labor-related costs in the future.

     A new labor contract law in China, which we refer to as the Employment Contract Law, became effective on January 1, 2008. The Employment Contract Law contains a number of provisions that are more favorable to employees than the prior labor laws and regulations in China. For example, an employee may terminate the employment contract without notice if his or her employer fails to pay regulatory social insurance contributions for the employee, or the employer has a workplace policy that violates PRC law and causes harm to the employee. In such case, the employee is entitled to compensation by the employer in an amount equal to his or her average monthly salary for the prior twelve months times the number of years the employee has served the employer. An employer is also obligated to compensate an employee if the employer decides not to renew an existing employment contract, unless the employee refuses the employer’s offer to renew the expiring employment contract with the same or better terms. In addition, an employer is obligated to provide an open-ended employment contract after an employee has completed two consecutive terms of fixed-term employment, under which the employer will be liable to pay damages to an employee if the employer terminates the employment without cause, until the employee reaches an age at which he or she is eligible for pension payment. As a result of the implementation of the new Employment Contract Law, we may have greater difficulty terminating under-performing employees and may incur higher levels of labor costs in order to comply with the provisions of the new law, which may adversely affect our business, financial condition and operating results.

Natural disasters and health hazards in China may severely disrupt our business and operations and may severely restrict the level of economic activities in affected areas which in turn may have a material adverse effect on our financial condition and results of operations.

     In 2008, we experienced severe sleet and snowstorms in southern China and a devastating earthquake in Sichuan province. Those natural disasters resulted in significant and extensive damage to our base stations and network equipment. Moreover, certain countries and regions, including China, have encountered incidents of the H5N1 strain of bird flu, or avian flu, as well as severe acute respiratory syndrome, or SARS, in the past. In April 2009, H1N1/swine flu was discovered in North America and has quickly spread to a number of countries. Although China has not been reported to be widely affected by the H1N1/swine flu as of the date of this annual report on Form 20-F, we cannot predict the effect, if any, that the H1N1/swine flu may have on our business. We are also unable to predict the effect, if any, that any other future natural disasters and health hazards may have on our business. Any future natural disasters and health hazards may, among other things, significantly disrupt our ability to adequately staff our business, and may generally disrupt our operations. Furthermore, natural disasters and health hazards may severely restrict the level of economic activities in affected areas, which may in turn materially adversely affect our business and prospects. As a result, any natural disasters or health hazards in China may have a material adverse effect on our financial condition and results of operations.

Risk Relating to our ADSs

Holders of our ADSs will not have the same voting rights as the holders of our shares and may not receive voting materials in time to be able to exercise their right to vote.

     Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs will receive proxy materials with respect to matters to be voted on at a meeting of shareholders through the depositary and may only exercise voting rights by appointing the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. Consequently, if the materials to be forwarded to holders of ADSs by the depositary are delayed or if the depositary sets deadlines by which holders of ADSs must give their instructions regarding how to vote that fall too soon after mailing of the proxy materials, the holders of our ADSs may not receive voting materials in time to instruct the depositary to vote. Thus, it is possible that such holders, or persons who hold their ADSs through brokers, dealers or other third parties, may not have the opportunity to exercise a right to vote.

Item 4. Information on the Company

A. History and Development of the Company

     We were incorporated under the laws of Hong Kong on February 8, 2000 under the Companies Ordinance as a company limited by shares under the name “China Unicom Limited.” In connection with the telecommunications industry restructuring initiated by the MIIT, the NDRC and the Ministry of Finance of the PRC in 2008 as discussed below, we merged with China Netcom and changed our name to “China Unicom (Hong Kong) Limited” with effect from October 15, 2008. Following our merger with China Netcom, we became an operator providing a full range of telecommunications services, including mobile and fixed-line service, in China.

     Our registered office and principal executive offices are located at 75th Floor, The Center, 99 Queen’s Road Central, Hong Kong (telephone number: 852-2126-2018).

Restructurings of Telecommunications Industry

     Since 1993, the PRC Government has implemented a number of measures to restructure and introduce competition in the telecommunications industry. Prior to July 1994, China Telecom was the sole provider of telecommunications services in China. In July 1994, Unicom Group was established in accordance with the State Council’s approval to introduce orderly competition in the telecommunications industry. Since then, the PRC Government has approved Jitong Network Communications Company Limited, or Jitong, and China Netcom Corporation Ltd., or CNCL, to provide Internet protocol, or IP, telephony, Internet and data services. It has also approved China Tietong to provide most telecommunications services other than mobile services.

     In 1999, the State Council approved a plan to restructure the former China Telecom along four business lines: fixed-line, mobile, paging and satellite communications. As a result of the restructuring, China Telecom retained the fixed-line, data and Internet businesses, while China Mobile assumed the mobile business previously operated by China Telecom. In 2002, the PRC Government further separated China Telecom into two companies, with the southern company retaining the name of China Telecom and assets and businesses in 21 provinces in southern China and the northern company retaining assets and businesses in 10 provinces in northern China and merging with CNCL and Jitong to form China Netcom. As a result of the PRC Government’s efforts to introduce competition in the telecommunications industry, there are currently more than one service providers in most of the sectors within the telecommunications industry.

     On May 24, 2008, the MIIT, the NDRC and the Ministry of Finance issued a joint announcement relating to the further reform of the PRC telecommunications industry. According to the joint announcement, the principal objectives of such further reform included, among others: (i) supporting the formation of three telecommunications services providers of comparable scale and standing, each with nationwide network resources, full-service capabilities

and competitive strength, in order to help optimize the allocation of telecommunications resources and foster market competition; (ii) promoting homegrown innovation by telecommunications services providers; and (iii) enhancing the service capabilities and quality of, and the regulatory framework governing, the telecommunications industry. To achieve these objectives, the three ministries encouraged the following restructuring transactions: (a) the acquisition by China Telecom of the CDMA network (including both assets and subscriber base) then owned by Unicom Group along with us; (b) the merger between China Unicom and China Netcom; (c) the transfer of the basic telecommunications services business operated by China Satellite into China Telecom; and (d) the consolidation of China Tietong into China Mobile. The detailed implementation plans relating to these restructuring transactions were subsequently formulated by the relevant parties and, as a result, China Mobile, China Telecom and we became the current three major telecommunications operators in China, each providing a full range of telecommunications services nationwide.

Sale of CDMA Business, Merger with China Netcom and Related Transactions

Disposal of CDMA Business and Related Transactions

     Pursuant to the 2008 telecommunications industry restructuring announcement, on June 2, 2008, we, CUCL and China Telecom entered into a CDMA business disposal framework agreement, under which CUCL agreed to sell, and China Telecom agreed to purchase, the CDMA business of CUCL, including (i) the entire CDMA business, which is owned and operated by CUCL, together with the assets of CUCL that are relevant to the CDMA operations and the rights and liabilities of CUCL relating to its CDMA subscribers; (ii) the entire equity interest in China Unicom (Macau) Company Limited, our wholly-owned subsidiary; and (iii) all of the 99.5% equity interest in Unicom Huasheng Telecommunications Technology Company Limited, a limited liability company incorporated under the laws of the PRC, held by CUCL.

     On July 27, 2008, we, CUCL and China Telecom further entered into a CDMA business disposal agreement which set out the detailed terms and conditions of the CDMA business disposal. The consideration for the CDMA business disposal was RMB43.8 billion in cash, payable in three installments. While the consideration was subject to a price adjustment mechanism based on the CDMA service revenues generated by us for the six months ended June 30, 2007 and June 30, 2008, as agreed with China Telecom, there was no subsequent adjustment to the consideration as a result of the price adjustment mechanism.

     On July 27, 2008, in connection with the CDMA business disposal, CUCL agreed (i) to waive its right to exercise its option to purchase the CDMA network from Unicom New Horizon Mobile Telecommunications Company Limited, or Unicom New Horizon, a wholly-owned subsidiary of Unicom Group, and (ii) to terminate the CDMA lease pursuant to which CUCL leased capacity on the CDMA network from Unicom New Horizon, in each case with effect upon the completion of the CDMA business disposal.

     At our shareholders’ meeting held on September 16, 2008, our shareholders approved the CDMA business disposal and our independent shareholders approved the waiver by CUCL of the option to purchase the CDMA network and the termination of the CDMA lease. As all of the conditions of the CDMA business disposal as specified in the CDMA business disposal agreement had been satisfied or deemed to have been satisfied, the CDMA business disposal was completed on October 1, 2008. On that date, China Telecom became the legal owner of the CDMA business and all the rights, interests, obligations and liabilities in relation to the CDMA business have been borne by China Telecom with effect from October 1, 2008. We recognized in our statements of income for the year ended December 31, 2008 a gain on disposal of the CDMA business of approximately RMB26.1 billion, net of corresponding income tax of approximately RMB9.0 billion. For further details, see “Operating Results — Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 — Income from Discontinued Operations” under Item 5.

     In connection with the CDMA business disposal, we had been notified by Unicom Group that on June 2, 2008 and July 27, 2008, Unicom Group, Unicom New Horizon and China Telecom entered into a CDMA network framework agreement and a CDMA network disposal agreement, respectively, which set out the terms and conditions, under which Unicom Group and Unicom New Horizon agreed to sell, and China Telecom agreed to purchase, the CDMA network at a consideration of RMB66.2 billion. The disposal of the CDMA network was completed concurrently with our CDMA business disposal, on October 1, 2008.

Merger with China Netcom and Related Transactions

Merger with China Netcom

     On October 15, 2008, following the approval of the merger by our shareholders and the shareholders of China Netcom at shareholders meetings held on September 16, 2008 and September 17, 2008, respectively, and the satisfaction of all other conditions, the merger between China Unicom and China Netcom by way of a scheme of arrangement of China Netcom under Section 166 of the Hong Kong Companies Ordinance became effective. Upon the merger becoming effective, all ordinary shares of China Netcom outstanding at 5:00 p.m., Hong Kong time, on October 14, 2008 and all outstanding options to acquire China Netcom shares granted under the share option scheme of China Netcom were cancelled and new China Netcom shares were issued to us. As a result, China Netcom became our wholly-owned subsidiary and the listings of China Netcom’s ordinary shares and ADSs on the HKSE and the NYSE, respectively, were withdrawn.

     In connection with our merger with China Netcom, each holder of China Netcom shares was entitled to receive 1.508 of our new ordinary shares for every cancelled China Netcom share and each holder of Netcom ADSs was entitled to receive 3.016 of our new ADSs for every cancelled China Netcom ADS. A total of 10,102,389,377 of our new ordinary shares (including ordinary shares underlying our newly issued ADSs) were issued to China Netcom’s shareholders as consideration for the cancellation of the China Netcom shares held by China Netcom shareholders.

     Furthermore, we adopted a special purpose share option scheme, pursuant to which we have granted new Unicom options to the holders of China Netcom options in consideration for the cancellation of their outstanding Netcom options (whether vested or not). The number of Unicom options granted and the exercise price of such options were determined in accordance with a formula which ensures that the value of the Unicom options received by a holder of Netcom options is equivalent to the value determined by deducting the exercise price of the relevant Netcom option from the value of HK$27.87 per Netcom share. See “E. Share Ownership — Stock Incentive Schemes — Special Purpose Share Option Scheme” under Item 6 for further details. As a result of our merger with China Netcom, we have become an operator providing a full range of telecommunications services, including mobile voice and value-added, fixed-line voice and value-added, fixed-line broadband, data communications and other telecommunications services, to our customers through our two business segments comprised of mobile services and fixed-line services. Following the merger, we have taken measures to combine the respective experience and technologies of Unicom and China Netcom and develop business strategies, taking into account current market developments, to promote business innovation and competitiveness and to improve operating and financial performance. By combining the resources and business strengths of Unicom and China Netcom in different areas, we seek to become a world-class provider of telecommunications services, in particular in fixed-line broadband communications and information services, establish competitive advantages in our technologies, products and services and provide professional and multi-tiered information services to satisfy the changing and diverse needs of the telecommunications market in the PRC.

Change of Company Name

     Upon our merger with China Netcom becoming effective on October 15, 2008, our name changed from “China Unicom Limited” to “China Unicom (Hong Kong) Limited”. Our stock trading code on the HKSE and our ticker symbol on the NYSE remain unchanged.

Related Transactions

     As part of our integration with China Netcom, our wholly-owned subsidiary, CUCL, merged with China Netcom (Group) Company Limited, or CNC China, a wholly-owned subsidiary of China Netcom, in January 2009, and upon that merger becoming effective, CUCL assumed all the rights and obligations of CNC China, and all the assets, liabilities and business of CNC China were vested in CUCL. In addition, in January 2009, Unicom Group, our parent company, merged with and absorbed Netcom Group, the parent company of China Netcom. Upon completion of the merger between Unicom Group and Netcom Group, Unicom Group assumed all the rights and obligations of Netcom Group, and all the assets, liabilities and business of Netcom Group have vested in Unicom Group.

History and Corporate Development of China Netcom

     China Netcom was incorporated in Hong Kong on October 22, 1999, under the Hong Kong Companies Ordinance as a company limited by shares under the name Target Strong Limited. The company changed its name to China Netcom (Hong Kong) Corporation Limited on December 9, 1999, to China Netcom Corporation (Hong Kong) Limited on August 4, 2000, and to China Netcom Group Corporation (Hong Kong) Limited on July 23, 2004 (the last name change in anticipation of its IPO in 2004).

     China Netcom’s principal operating subsidiary, CNC China, which merged with, and was absorbed by, CUCL in January 2009, was incorporated as a PRC limited liability company in August 1999 by its four founders and shareholders, the Academy of Sciences, INC-SARFT, CRTC and Shanghai Alliance, as a facilities-based telecommunications operator in China. China Netcom was established in October 1999 to facilitate investments by foreign investors, including CNC Fund, L.P., in CNC China. Shortly thereafter, the four founders, using their respective equity interests in CNC China as capital contributions, established China Netcom (Holdings) Company Limited, or China Netcom Holdings, which in turn contributed its entire interests in CNC China through CNC BVI to China Netcom. China Netcom, through China Netcom Corporation International Limited, established Asia Netcom in 2002. Asia Netcom remained inactive until it acquired substantially all the assets, including cash, and most of the subsidiaries, of the former Asia Global Crossing Ltd. by the end of 2003.

     China Netcom successfully completed its IPO in November 2004 with the listing of its ordinary shares on the HKSE and ADSs, each representing 20 of its ordinary shares, on the NYSE.

     In October 2005, China Netcom acquired from CNC BVI the entire equity interests of China Netcom Group New Horizon Communications Corporation (BVI) Limited, or CNC New Horizon BVI, which merged into CNC China in November 2006. As a result of the merger, China Netcom acquired the fixed-line telecommunications assets and related liabilities in Heilongjiang Province, Jilin Province, the Inner Mongolia Autonomous Region and Shanxi Province. In August 2006, China Netcom sold the entire equity interest in Asia Netcom, which then provided international telecommunications services in the Asia-Pacific region, to Connect Holdings Limited. In February 2007, China Netcom sold its telecommunications assets, liabilities and business operations in Guangdong Province and Shanghai Municipality to Netcom Group. In December 2007, China Netcom’s wholly-owned subsidiary, China Netcom Group System Integration Limited Corporation, or China Netcom System Integration, acquired the entire equity interest in Design Institute from China Netcom Group Beijing Communications Corporation, a wholly-owned subsidiary of Netcom Group, in order to develop two of its key information and communication technologies, or ICT, services.

Our Parent Company and Our Initial Public Offering

     Our ultimate controlling shareholder is Unicom Group, a company incorporated under the laws of the PRC and majority-owned by the PRC Government. Unicom Group was established in accordance with the State Council’s approval to introduce orderly competition in the telecommunications industry in 1994.

     Unicom Group transferred certain of its telecommunications assets, rights and liabilities to CUCL (which became our wholly-owned subsidiary in China) in April 2000 in preparation for our IPO. In June 2000, we successfully completed our IPO. Our ordinary shares are listed on the HKSE and our ADSs, each representing ten of our ordinary shares, are listed on the NYSE.

Unicom Acquisitions and Sales

     In December 2002 and December 2003, respectively, we completed our acquisitions from Unicom Group of 100% of the equity interests in Unicom New Century and Unicom New World, both of which held mobile telecommunications operations (including GSM assets and business and CDMA business) in various provinces and autonomous regions in the PRC. Subsequent to the completion of those acquisitions, Unicom New Century and Unicom New World merged into CUCL in July 2004 and September 2005, respectively.

     In March 2003, we completed the sale to Unicom Group of the entire equity interest of Guoxin Paging Corporation Ltd., which at the time of transfer was engaged in paging business.

     In September 2004, we acquired from Unicom Group of 100% of the equity interest in Unicom International, a limited liability company established in Hong Kong and engaged in voice wholesale business, telephone cards business, line leasing services, managed bandwidth services and mobile virtual network services. Unicom International’s wholly-owned U.S. subsidiary, China Unicom USA Corporation, is engaged in the wholesale business of voice traffic between the United States and PRC.

     In October 2004, we established China Unicom (Macau) Company Limited, or Unicom Macau, in Macau, which then provided CDMA mobile services to local CDMA users in Macau. In connection with the disposal of our CDMA business in October 2008, we sold the entire equity interest in Unicom Macau to China Telecom along with our other CDMA business and certain related assets.

     In July 2005, CUCL and Unicom Xingye Science and Technology Trade Co., Ltd., or Unicom Xingye, a subsidiary of Unicom Group, incorporated Unicom Huasheng. Unicom Huasheng was principally engaged in the sales of CDMA handsets and telecommunications equipment and the provision of technical services for us. In connection with the disposal of our CDMA business in October 2008, CUCL sold all of the 99.5% equity interest it held in Unicom Huasheng to China Telecom.

     In December 2007, we completed the acquisition from Unicom Group of the mobile telecommunications operations (including GSM assets and business and CDMA business) of its Guizhou Province branch. As a result of the acquisitions of Unicom New Century, Unicom New World and Unicom Guizhou, we extended our GSM and CDMA mobile businesses to all provinces, autonomous regions and municipalities across China.

Unicom Vsens Telecommunications Company Limited

     On August 19, 2008, CUCL established a wholly-owned subsidiary, Unicom Huakai Telecommunications Company Limited, as a limited liability company under the laws of the PRC. Unicom Huakai is principally engaged in the sales of handsets and telecommunications equipment and the provision of technical services. The paid-in capital of Unicom Huakai is RMB500 million. On December 26, 2008, the name of Unicom Huakai was changed to Unicom Vsens Telecommunications Company Limited.

China Unicom Mobile Network Company Limited

     On December 31, 2008, CUCL established a wholly-owned subsidiary, China Unicom Mobile Network Company Limited, as a limited liability company under the laws of the PRC. Unicom Mobile Network is principally engaged in construction and maintenance of our networks. The paid-in capital of Unicom Mobile Network is RMB500 million.

Recent Developments

3G License

     Subsequent to the telecommunications industry restructuring in 2008, the MIIT granted 3G licenses in January 2009 to China Mobile, China Telecom and Unicom Group to operate 3G businesses nationwide in China with TD-SCDMA, CDMA2000 and WCDMA technologies, respectively. Unicom Group, with the approval of the MIIT, has authorized CUCL to operate Unicom Group’s 3G business. We launched our 3G operations on a trial basis in 55 cities in May 2009 and expect to expand our 3G operations to approximately 284 cities in China by the end of 2009.

Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China

     Following the approval by our independent shareholders and the shareholders of the A Share Company and upon the satisfaction of all other conditions, in January 2009, we completed our acquisitions, through CUCL, of certain telecommunications business and assets from Unicom Group and Netcom Group (which merged with, and was absorbed by, Unicom Group in January 2009), including:

	•		the fixed-line business across 21 provinces in southern China operated by Unicom Group and Netcom Group and/or their respective subsidiaries and branches (but not the underlying fixed assets) and the local access telephone business in Tianjin Municipality operated by Unicom Group and related fixed assets (other than land and buildings) necessary for the operation of such local access telephone business and/or respective subsidiaries and branches;
	•		the backbone transmission assets in 10 provinces in northern China owned by Netcom Group and/or its subsidiaries;
	•		100% of the equity interest in Unicom Xingye, a limited liability company incorporated under the laws of the PRC and a wholly-owned subsidiary of Unicom Group;
	•		100% of the equity interest in China Information Technology Designing & Consulting Institute Company Limited, or CITC, a limited liability company incorporated under the laws of the PRC and a wholly-owned subsidiary of Unicom Group; and
	•		100% of the equity interest in Unicom New Guoxin Telecommunications Corporation Limited, or New Guoxin, a limited liability company incorporated under the laws of the PRC and a wholly-owned subsidiary of Unicom Group.

     The total consideration for the above acquisitions is approximately RMB6.43 billion, payable in cash. Following the completion of these acquisitions, the coverage of our fixed-line services expanded to all 31 provinces, autonomous regions and municipalities across China. We believe that these acquisitions will help integrate and optimize our business and resources and enhance our overall competitive position.

     In addition, in order to operate the fixed-line business in the 21 provinces in southern China, on December 16, 2008, CUCL entered into a network lease agreement with Unicom Group, Netcom Group and Unicom New Horizon, a wholly-owned subsidiary of Unicom Group, to lease on an exclusive basis the telecommunications networks in those provinces, which are held by Unicom New Horizon and are necessary for the operation of the fixed-line business in southern China. The lease became effective in January 2009 upon the completion of our acquisitions of the fixed-line business in southern China. This lease is for an initial term of two years effective from January 2009 and is renewable at the option of CUCL with at least two months’ prior notice on the same terms and conditions, except for the future lease fee which will remain subject to further negotiations between the parties, taking into account, among other things, the prevailing market conditions in southern China. The annual lease fee payable by CUCL for the years ending December 31, 2009 and 2010 is RMB2.0 billion and RMB2.2 billion, respectively. In connection with the lease, Unicom New Horizon also granted CUCL an option, but not an obligation, to purchase the telecommunications networks leased in southern China. The purchase option may be exercised, at the discretion of CUCL, at any time during the term of the lease. No premium has been paid or will be payable by CUCL for such purchase option. In the event that CUCL elects to exercise this purchase option, the parties will discuss and negotiate the purchase price with reference to the appraised value of the telecommunications networks in southern China, which is to be determined in accordance with applicable laws of Hong Kong and the PRC, after taking into account the prevailing market conditions and other factors. Under the network lease agreement, CUCL is responsible for the ongoing cost and expenses incurred in respect of the maintenance and management which may arise from the use of the leased telecommunications networks in southern China. See “B. Related Party Transactions — Acquisitions of Fixed-Line Business in 21 Provinces in Southern China and Other Assets from Parent Companies and Lease of Telecommunications Networks in 21 Provinces in Southern China” under Item 7.

Our Relationship with Unicom Group

     Unicom Group holds the licenses required for our telecommunications businesses and we derive our rights to operate our businesses from our status as a subsidiary of Unicom Group. Unicom Group undertook to hold and maintain all licenses received from the MIIT in connection with our businesses solely for our benefit during the term of such licenses and at no cost to us. In addition, Unicom Group undertook to take all actions necessary to obtain and maintain for our benefit such governmental licenses or approvals as we shall require to continue to operate our businesses. Unicom Group also agreed not to engage in any business which competes with our businesses other than

the then-existing competing businesses of Unicom Group and to grant us a right of first refusal in relation to any government authorization, license or permit, or other business opportunity to develop any new telecommunications technology, product or service. Finally, Unicom Group also gave us an undertaking not to seek an overseas listing for any of its businesses or the businesses of its subsidiaries in which we are engaged or may engage in the future, except through us.

     In connection with the restructuring of Unicom Group and the acquisitions of Unicom New Century, Unicom New World and Unicom International, we entered into a number of agreements with Unicom Group pursuant to the two-step process described in “A. Development and History of the Company — Two-Step Voting Arrangements” below. These include arrangements for interconnection services between the telecommunications networks owned by us and Unicom Group and for the provision or sharing of telecommunications and ancillary services and facilities between us and Unicom Group. Unicom Group also retains its interests in its other subsidiaries that provide ancillary services to us, including the procurement of telecommunications equipment and the supply of SIM cards and calling cards. Our existing agreements with Unicom Group were entered into in August 2008. In addition, in connection with our merger with China Netcom, CUCL and Netcom Group entered into various framework agreements in August 2008 to record the principles governing, and the principal terms of, various arrangements including interconnection services and the provision and sharing of telecommunications and ancillary services and facilities between us and Netcom Group (whose rights and obligations under such framework agreements have been assumed by Unicom Group, which merged with, and absorbed, Netcom Group in January 2009). Furthermore, as a result of the merger between Unicom Group and Netcom Group, Unicom Group assumed all rights and obligations under certain existing agreements entered into between CNC China (which merged with, and was absorbed by, CUCL in January 2009) and Netcom Group relating to various arrangements, including interconnection services, settlements and the provisions and sharing of telecommunications and ancillary services and facilities between CNC China and Netcom Group. See “B. Related Party Transactions” under Item 7 for a detailed description of our agreements with Unicom Group.

     Set forth below is our shareholding structure and subsidiaries as of May 31, 2009.

Two-Step Voting Arrangements

     As a result of a series of internal restructurings of Unicom Group’s shareholding in us following our IPO, Unicom BVI became our direct controlling shareholder, which in turn is directly controlled by the A Share Company and indirectly controlled by the Unicom Group. The A Share Company’s business is limited to indirectly holding the equity interest in Unicom without any other direct business operations. The A Share Company was listed on the Shanghai Stock Exchange in 2002. In order to allow public shareholders of the A Share Company to indirectly participate in our shareholders’ meeting, a voting mechanism was designed in accordance with the articles of association of Unicom BVI and the A Share Company. Under this voting mechanism, before Unicom BVI votes on certain proposals at our shareholders’ meeting, the A Share Company must first convene a shareholders’ meeting to consider the same proposals in order to direct Unicom BVI to vote the shares in our company indirectly held by the A Share Company through Unicom BVI. Unicom Group can similarly direct the voting in respect of its direct equity interest in Unicom BVI.

     The voting mechanism described above, however, will not apply to the approval process for any related party transaction between us or our subsidiaries and Unicom Group or its subsidiaries, on which Unicom BVI will not be permitted to vote under the Rules Governing the Listing of Securities on HKSE, or the HKSE Listing Rules. Those related party transactions would require the separate approvals of the public shareholders of each of our company and the A Share Company. We and the A Share Company therefore created the two-step voting arrangements, pursuant to which each related party transaction between us or our subsidiaries and Unicom Group or its subsidiaries will consist of an initial agreement and a further agreement. The initial agreement would be entered into by Unicom Group or its subsidiaries (excluding the A Share Company and its subsidiaries) on the one hand and the A Share Company or

Unicom BVI on the other hand. The initial agreement would contain the following terms:

	•		the closing of the initial agreement would be subject to (i) the successful transfer of all rights and obligations of the A Share Company or Unicom BVI under the initial agreement to us or our subsidiaries, and (ii) the approval of the further agreement by our independent shareholders; and
	•		Unicom Group or its subsidiaries (excluding the A Share Company and its subsidiaries) would agree and acknowledge that all rights and obligations under the initial agreement can be transferred to us or our subsidiaries without any further consent requirements.

     The initial agreement will constitute a related party transaction of the A Share Company and, if certain thresholds are met, will require the approval of the public or independent shareholders of the A Share Company under the rules of the Shanghai Stock Exchange. The further agreement would be entered into by the A Share Company or Unicom BVI, on the one hand, and us or our subsidiaries, on the other hand, and will provide for the transfer of all rights and obligations of the A Share Company or Unicom BVI under the initial agreement to us or our subsidiaries. The further agreement will constitute a related party transaction of our company and, if certain thresholds are met, will require the approval of our public or independent shareholders under the HKSE Listing Rules. We expect, to the extent the nature of a particular related party transaction allows, the two-step voting arrangements to apply as described above. However, when we or our subsidiaries are the providers, rather than recipients, of certain services, the two-step voting arrangements will need to be adjusted so that the process as described above is effectively reversed, such that the initial agreement is entered into by us or our subsidiaries rather than Unicom Group or its subsidiaries (excluding the A Share Company and its subsidiaries) with the A Share Company or Unicom BVI. Accordingly, Unicom Group or its subsidiaries (excluding the A Share Company and its subsidiaries), rather than us or our subsidiaries, will be a party to the further agreement. The arrangements (including the conditions) will apply correspondingly. This two-step structure will be applied in all related party transactions between us or our subsidiaries and Unicom Group or its subsidiaries and will effectively require the separate approvals of the public or independent shareholders of each of Unicom and the A Share Company for such related party transactions.

Capital Expenditures and Divestitures

     See “Liquidity and Capital Resources — Capital Expenditures” under Item 5 for information concerning our principal capital expenditures for the previous two years and those planned for 2009. We currently do not have any significant divestiture in progress.

B. Business Overview

General

     As a result of our merger with China Netcom in October 2008, we have become an integrated telecommunications operator in China providing mobile voice and value-added, fixed-line voice and value-added, fixed-line broadband, data communications and other telecommunications services to our customers through our two business segments comprised of mobile services and fixed-line services. Following our acquisition of fixed-line business in 21 provinces in southern China from our parent companies in January 2009, we have extended the coverage of all of our services nationwide. We, China Mobile and China Telecom are the three major telecommunications operators in China. See “A. History and Development of the Company — Restructurings of Telecommunications Industry.”

Mobile Business

GSM Mobile Business

     Following the disposal of our CDMA business to China Telecom in October 2008, we have been focusing on our mobile services using the Global System for Mobile Communications, or GSM, standard. Our GSM mobile business revenue, subscribers and usage maintained steady growth in 2008. We had a total of 133.37 million GSM mobile subscribers as of December 31, 2008, representing a 10.6% increase from 120.56 million as of

December 31, 2007. Revenue of our GSM mobile business increased by 4.3% from RMB62.56 billion in 2007 to RMB65.25 billion in 2008, and accounted for 41.5% and 43.8% of our total revenues from continuing operations in 2007 and 2008, respectively. At the end of 2008, our market share in terms of the number of subscribers in our mobile service areas was 20.8%, a decrease from 22.0% at the end of 2007.

     Our GSM mobile networks reach all cities, county centers, major towns, major highways and railways in our mobile service areas. After the acquisition of Unicom Guizhou on December 31, 2007, our mobile service area encompassed all 31 provinces, autonomous regions and municipalities in China. In 2008, we continued to focus on expanding the coverage of our general packet radio service, or GPRS. By the end of 2008, our GPRS services covered all 31 provinces, autonomous regions and municipalities in China. In 2008, we also continued to improve our GPRS network in 55 major cities in China and improved the GPRS connection quality in those cities.

     Our major brands for our GSM mobile services include “Worldwind”, “U-Power” and “Ruyi Tong.” “Worldwind” is a GSM service package with featured phone numbers to target mid- to high-end customers. “U-Power” provides diverse value-added services targeting young customers and “Ruyi Tong” focuses on mass market to provide basic mobile functions under flexible packages. In 2008, we actively developed incremental subscriber market, retained the existing subscriber market and improved customer service with a focus on those three major brands.

Mobile Voice Business

     Our mobile voice services enable our subscribers to make and receive phone calls with a mobile handset at any point within the coverage area of our mobile telecommunications networks. Our mobile voice services include local calls, domestic long distance calls, international long distance calls, intra-provincial roaming, inter-provincial roaming and international roaming. In 2008, our voice business continued to grow and our total voice usage volume increased by 10.3% from 2007 to 376,673 million minutes in 2008. Revenue from our monthly fees and usage fees of our mobile voice services decreased by 3.8% from RMB42.08 billion in 2007 to RMB40.46 billion in 2008, and accounted for 27.9% and 27.2% of total revenue from our continuing operations in 2007 and 2008, respectively.

     The following table sets forth selected historical information for our mobile operations and our subscriber base for the periods indicated.

      Subscriber Increase. Our total number of GSM mobile subscribers increased by 10.6% from 120.56 million as of December 31, 2007 to 133.37 million as of December 31, 2008. We believe that this growth was attributable to a number of factors, including, among others, the continued growth of the Chinese mobile telecommunications market, driven by economic growth and reduction in the cost of mobile handsets and services, and our sales and marketing efforts in retaining existing subscribers and expanding our subscriber base. The increase of our GSM mobile subscribers, together with the decreasing effective tariffs, also resulted in an increase of the total voice usage of our GSM mobile services by 10.3% from 341 billion minutes in 2007 to 377 billion minutes in 2008.

      MOU and ARPU . MOU decreased by 1.3% from 249.7 minutes in 2007 to 246.4 minutes in 2008, and ARPU decreased by 7.4% from RMB45.7 in 2007 to RMB42.3 in 2008. The decrease in our MOU is mainly attributed to the fact that a significant portion of our incremental market consists of users from rural areas in China, many of whom tend to have less usage of telecommunications services than users from urban areas. The decrease in ARPU was primarily attributable to (i) our generally decreased effective tariffs, which were caused by the further intensified competition among the telecommunications operators in China and downward adjustments on tariffs by the PRC Government and (ii) the fact that a significant portion of our new users consists of users from rural areas, many of whom tend to have less usage of telecommunications services and to be more cost-sensitive than users from urban areas.

      Churn Rate . The monthly average churn rate for our mobile voice services increased from 2.76% in 2007 to 3.08% in 2008, primarily as a result of intensified competition, a large proportion of our new subscribers being low-end subscribers and the effects of the global financial crisis. Our calculation of churn rate reflects those subscribers who switch to services of other operators and those whose services we terminate as a result of account inactivity or payment delinquency.

      Payment Delinquency. Payment delinquency increased in 2008. As of December 31, 2008, the doubtful debt ratio for our mobile voice services, calculated as the amount of doubtful debt provided in 2008 divided by revenue from GSM mobile services, was 2.1%, compared to 2.0% at the end of 2007, which is in line with the increased churn rate.

      Tariffs . Generally the categories of tariffs we charge our mobile subscribers include, among others, basic monthly fees and local usage charges, roaming charges, long-distance call charges and charges for value-added services.

     The mobile tariffs are set forth by the MIIT and tariff adjustments are subject to regulation by various government authorities, including the MIIT, the NDRC and the relevant provincial telecommunications administrations and price bureaus. The following table summarizes the present tariff rates for post-paid and pre-paid mobile services:

     Intensified competition in our mobile service areas has resulted in tariff discounts and service promotions offered by us and our main competitors from time to time, which may reduce the effective tariffs. These discounts and promotions have taken many forms, including promotional tariff rates, free call minutes, reduced roaming charges, off-peak discounts or discounts for high-usage subscribers and package service plans with fixed monthly fees.

     We have introduced a number of package service plans. Under these plans, subscribers typically pay a fixed monthly fee for a specified number of call minutes. The plans vary at the levels of fixed monthly fee, number of specified call minutes and tariff rates for call minutes in excess of the specified call minutes. The terms of these plans also vary depending on the local markets.

     In 1997, the PRC Government granted us preferential treatment by allowing us to reduce our tariffs by up to 10% below the State-guidance tariff rates. In the past, this preferential treatment has helped us capture a significant number of mobile subscribers by allowing us to market our mobile services at discounted rates. As we and our main competitors introduced various package service plans and other promotional programs, the tariff structure has become more complex, which, to some extent, has made our price advantages less obvious to subscribers compared to previous tariffs that were largely based on simple per-minute charges.

     In 2007, the former Ministry of Information Industry started implementing “Calling-Party-Pays” billing arrangements. In February 2008, the former Ministry of Information Industry and the NDRC jointly promulgated the Notice in Relation to Reduction of Tariff Cap for Domestic Mobile Roaming Services, or the Tariff Notice, to require, among other things, equalizing domestic roaming charges with charges for long distance calls made during domestic roaming, equalizing roaming charges for pre-paid mobile subscribers with those for post-paid mobile subscribers and setting different tariff caps for callers and receivers in the context of domestic roaming.

Mobile Value-Added Services

     By leveraging our integrated telecommunications operations and advanced network system, we offer a broad range of mobile value-added services nationwide, including SMS, personalized ring-back tone services, wireless Internet services and other wireless information services. Our value-added services continued to grow and the contribution to our revenue from mobile services continued to increase in 2008. In 2008, revenue from our mobile value-added services increased by 20.2% from RMB13.53 billion in 2007 to RMB16.26 billion in 2008, and as a percentage of total mobile revenue reached 24.9%, representing an increase of 3.3 percentage points from 2007. Revenue from our mobile value-added services accounted for 9.0% and 10.9% of total revenue from our continuing operations in 2007 and 2008, respectively.

     The volume of our SMSs continued to increase in 2008. A total of 76.33 billion SMSs were transmitted by our mobile subscribers in 2008, representing an increase of 4.6% compared to 2007. The revenue from SMSs in 2008 represents 40.0% of our revenue from value-added services in 2008.

     We market our mobile personalized ring-back tone service under the brand name “Cool Ringtone.” As a mature service, Cool Ringtone service has maintained a high growth rate since its introduction. As of December 31, 2008, we had a total number of 44.13 million subscribers to our Cool Ringtone service, representing 33.1% of the number of our total mobile subscribers as of December 31, 2008.

     In addition, we also focused on developing GPRS value-added services, which are a new contributing factors to our revenue from value-added services and include WAP, JAVA and point-to-point multimedia message services. As of the end of 2008, we achieved a nationwide coverage of our GPRS network in all 31 provinces, autonomous regions and municipalities and had also enriched the offerings of GPRS applications. For example, in 2008, we rolled out applications such as the SMS version, real-time quote version and trading version of “Stock Market in Palm” services. As of the end of 2008, we had active GPRS international inbound roaming services with 133 operators from 69 countries and had active GPRS international outbound roaming services with 46 operators from 27 countries. As of December 31, 2008, our total number of GPRS subscribers reached 31.22 million, representing a net increase of 22.33 million in 2008, an increase of 251.1% from 2007, and the penetration rate increased from 7.4% in 2007 to 23.4% in 2008.

3G Mobile Business

     In January 2009, our parent company, Unicom Group, received a 3G license to operate a 3G business based on the WCDMA technology nationwide in China and, with the approval of the MIIT, authorized our major wholly-owned subsidiary, CUCL, to operate this business. We launched our 3G operations on a trial basis in 55 cities in May 2009 under the brand “WO” and expect to expand the 3G operations to approximately 284 cities in China by the end of 2009.

Fixed-Line Business

     We are a leading fixed-line broadband and communications operator in China. Following our merger with China Netcom in October 2008, which previously provided mainly fixed-line services in 10 provinces in northern China, and our acquisition of the fixed-line business in 21 provinces in southern China from our parent companies in January 2009, we offer a wide range of fixed-line services nationwide in China, including fixed-line voice and value-added, fixed-line broadband, data communications and other services.

     The fixed-line services that we offer include:

	•		fixed-line voice services (including PHS services), including local, domestic long distance and international long distance services;
	•		fixed-line value-added services;
	•		fixed-line broadband services, including XDSL, LAN, broadband content and applications services; and
	•		data communications services, including managed data, leased line services and ICT services.

     In 2008, with decreased effective tariffs, downward adjustments of mobile roaming tariffs and the further implementation of the mobile “Calling-Party-Pays” policy, the mobile substitution of fixed-line business intensified. In addition, our internal reorganization, the macroeconomic downturn and fixed-line inter-regional tariff downward adjustments have all negatively impacted the fixed-line business. By accelerating our implementation of an upgrade of our fixed-line broadband network with increased access speed, developing content and application services and promoting multi-service bundling and voice service packages, we achieved continued growth in 2008 in fixed-line broadband and data communications business, which partially mitigated the decline in the fixed-line voice business.

     Revenue from our fixed-line business decreased by 5.1% from RMB88.13 billion in 2007 to RMB83.65 billion in 2008. Revenue from our fixed-line business accounted for 58.5% and 56.2% of our total revenue from continuing operations in 2007 and 2008, respectively.

     Tariffs for some of our services are regulated by the PRC Government, including the MIIT, the NDRC, and provincial telecommunications administrations and price bureaus in China. For a discussion of government-fixed tariffs and guidance tariffs, such as those for fixed-line telephone services, see “—Regulatory and Related Matters — Tariff Setting and Price Controls” below. Prices for some of our services may be subject to promotional discounts.

Fixed-Line Voice Business

     We are a leading provider of fixed-line telephone services in our fixed-line northern service region, with a market share of 89.1% as of December 31, 2008, based on the number of fixed-line subscribers.

     Our fixed-line voice services consist of local telephone, domestic long distance, international long distance, value-added, interconnection and PHS services. As domestic mobile operators launched service packages at competitive prices, mobile roaming tariffs were lowered, and the mobile “Calling-Party-Pays” policy was further implemented, the migration from fixed-line to mobile communications has further accelerated. The number of our fixed-line subscribers (including PHS subscribers) decreased by 9.6% from 110.82 million at the end of 2007 to 100.15 million at the end of 2008. Of the total number of fixed-line subscribers, as of December 31, 2008, approximately 61.2% were residential customers, 10.6% were business customers, 6.4% were public telephones and 21.8% were PHS subscribers. In 2008, revenue from usage fees and monthly fees from our fixed-line voice business decreased by 15.6% from RMB44.23 billion in 2007 to RMB37.32 billion in 2008 and accounted for 29.3% and 25.1% of our total revenue from continuing operations in 2007 and 2008, respectively.

     In 2008, we continued to promote “Family1+” bundled services as our leading service package for family subscribers by increasing the brand recognition of “Family1+”, enriching the content of services under the “Family1+” brand and offering various services to satisfy family customers’ multimedia needs. By bundling broadband with value-added services, offering competitive prices and selecting different services based on different customer needs, we have mitigated the decline of our fixed-line telephone voice businesses. In 2008, as a full-service telecommunications operator, we promoted fixed-line packages bundled with our GSM mobile voice services. We believe that, with the increasing penetration rate of “Family1+” and the increased ability of “Family1+” to satisfy the multimedia needs for our family subscribers, we could further enhance revenue contribution by our fixed-line voice customers.

     We have in the past selectively built wireless local access networks based on PHS technology to offer PHS services as a supplement to our fixed-line services. Our PHS services have been introduced in most cities in our fixed-line northern service region, where we have rolled out our PHS networks as an extension to our existing fixed-line networks. PHS services are wireless telephone services that have certain features similar to mobile

telephone services. Compared to mobile telephone services, PHS services are subject to various limitations. For example, PHS services have smaller mobile coverage and do not permit nationwide or international roaming. However, due to their lower tariffs compared to mobile services, PHS services were previously quite popular among subscribers and contributed significantly to our revenues.

     Beginning in 2006, as mobile operators continued to launch more aggressive tariff packages, the tariff advantage of PHS services diminished, and our PHS subscribers as of December 31, 2008 decreased to 21.85 million from approximately 26.19 million as of December 31, 2007. In January 2009, the MIIT issued the Notice on Matters Relating to Wireless Access Systems Operating on 1900-1920 MHz Spectrum, requiring the current wireless access systems operating on the 1900-1920 MHz spectrum, which is used by our PHS services, to be cleared and removed from such spectrum by the end of 2011. See “D. Risk Factors — Risks Relating to Our Businesses — If we fail to achieve a smooth discontinuation of PHS services or retain our PHS subscribers to use our other telecommunications services, our financial condition and results of operations may be adversely affected.” under Item 3. After considering the expected significant decline in revenue and profitability for our PHS business in 2009 and onwards, we recognized an impairment loss of RMB11.84 billion for our PHS business-related assets. In responding to this requirement, we intend to utilize our full-service operations platform to provide substitute telecommunications services to our existing PHS users.

     We also operate a network of approximately 6.45 million public telephones located in our service region. We provide local, domestic long distance and international long distance call services and Internet services through our public telephones.

     The following table summarizes key information regarding our local telephone services in our fixed-line northern service region as of the dates indicated:

      Local Telephone Services

     Our local telephone services, which represent the largest portion of our fixed-line voice services in terms of revenues, experienced declines in 2007 and 2008. The following table sets forth information regarding usage of our local telephone services provided in our fixed-line northern service region for the periods indicated:

     In 2008, total usage in local telephone services was 187,836 million pulses, which included 2,936 million pulses of Internet dial-up usage. Total usage of local telephone services excluding Internet dial-up usage decreased by 7.0% from 198,887 million pulses in 2007 to 184,900 million pulses in 2008, reflecting increasing migration of local fixed-line voice traffic to mobile services.

      Domestic Long Distance Services

     We offer traditional long distance services and VoIP long distance services in our northern service region. The following table shows the total minutes of domestic long distance calls carried through our long distance networks for the periods indicated:

     In 2008, the usage of our domestic long distance calls decreased by 3,227 million minutes, or 11.2%, from that in 2007, primarily due to the reduction of the number of fixed-line subscribers and increased competition from mobile service providers in the form of decreased roaming charges and usage fees for domestic long distance calls. In addition, as other alternative means to make long distance calls, such as software applications that allow users to make long distance calls over the Internet, became increasingly more popular in the past few years, our long distance business was also adversely affected.

      Tariffs . In 2001, the PRC Government abolished regulatory controls on tariffs for VoIP long distance calls and allowed operators to set their own rates. We currently charge RMB 0.30 per minute in addition to a local usage fee for our VoIP domestic long distance services.

      International Long Distance Services

     The following table sets forth certain information related to the usage of our international long distance services for the periods indicated:

     In 2008, the usage of our international long distance calls decreased by 28 million minutes, or 8.1%, from that in 2007, primarily due to the reduction in the number of fixed-line subscribers and the substitution of mobile services for fixed-line services. In addition, as alternative means to make long distance calls, such as software applications that allow users to make long distance calls over the Internet, became increasingly more popular in the past few years, our international long distance business was also adversely affected. The usage of our VoIP international long distance services as a percentage of the total usage of our international long distance services decreased from 55.0% as of December 31, 2007 to 54.1% as of December 31, 2008.

     We offer international long distance services through international gateways that we lease from Unicom Group, and pay for the use of networks of operators in foreign jurisdictions for outgoing international calls. We negotiate bilateral settlement arrangements and rates with operators in foreign jurisdictions based on international settlement standards in the telecommunications industry.

Fixed-Line Value-Added Services

     In addition to fixed-line telephone voice services, we offer a wide range of value-added services on our fixed-line networks. Our value-added services generate additional usage on our networks and increase our average revenues per fixed-line subscriber. Revenue from our fixed-line value-added services decreased by 2.5% from RMB6.76 billion in 2007 to RMB6.59 billion in 2008, and accounted for 4.5% and 4.4% of our total revenues from continuing operations in 2007 and 2008, respectively. This decrease was mainly due to the decrease in total usage of our caller identification and PHS SMS services as a result of the significant reduction of our fixed-line telephone subscribers, including PHS subscribers.

     Our fixed-line value-added services include “Personalized Ring”, “Phonemate” and caller identification services. “Personalized Ring” services enable our fixed-line subscribers to personalize the ring-back tone for incoming calls. “Phonemate” is a service that provides voice messaging, speed dial and other value-added services. In 2008, we bundled “Personalized Ring”, “Phonemate” and “Telephone POS Terminal” (which enables our customers to swipe their bank cards on a telephone point of sale (POS) terminal for self-services, such as making payments, transferring funds and checking balances) services with services under “Family 1+” packages. As of December 31, 2008, the number of our “Personalized Ring” subscribers reached 29.11 million, representing an increase of approximately 3.4% from the end of 2007. The penetration rate of caller identification services amounted to 73.2%, increasing by 1.0 percentage point over that of 2007.

     For small and medium-size enterprises, or SME, customers, we bundled “corporate switchboard”, corporate “Personalized Ring”, virtual fax and Internet hard disk services with “CU Connected” fixed-line broadband service. Virtual fax services allow the users to send and receive facsimiles through the Internet. We provide Internet hard disk to users so that they can store documents, emails and facsimiles online.

      Tariffs . We charge RMB3.00 to RMB6.00 per month, depending on the region, for our caller identification service. We charge RMB2.00 to RMB10.00 per month for using our “Personalized Ring” and charge separately for downloading “ring tones”.

Fixed-Line Broadband Services

     Fixed-line broadband services are one of our emphases as part of our strategy to focus on high growth services. This growth has been driven by the increasing affordability and rising use of personal computers and other Internet access devices, gradual recognition by businesses of the importance of information and the proliferation of content and applications, such as online games and video-on-demand. We are a leading provider of fixed-line broadband services in our fixed-line northern service region and we seek to maintain this leading position by capitalizing on our extensive fixed-line network, large customer base, experienced sales force and established brand.

     In 2008, we further upgraded our broadband network, improved access speed and promoted broadband services bundled with voice or computer terminals. Our broadband subscribers increased to 25.42 million as of December 31, 2008, representing an increase of 28.6% from 19.77 million as of December 31, 2007. Our broadband ARPU declined by 6.1% from RMB69.5 in 2007 to RMB65.2 in 2008. While the number of our broadband subscribers grew significantly in 2008, we continued implementing our marketing strategy to offer integrated broadband content, applications, access and services. Revenue from our broadband services increased by 26.9% from RMB14.27 billion in 2007 to RMB18.11 billion in 2008 and accounted for 9.5% and 12.2% of our revenue from continuing operations in 2007 and 2008, respectively.

     The following table sets forth selected information regarding our fixed-line broadband services.

      DSL Services . We promote DSL services as the primary broadband service means for residential customers and small and medium-sized enterprise customers in our service regions, especially our northern service regions. We provide DSL services by upgrading our existing copper-based local switching network. DSL technology allows us to roll out our broadband networks at lower incremental costs than other types of broadband networks. In our fixed-line northern service region, the number of subscribers to our DSL services has grown steadily in recent years, with approximately 20.51 million DSL subscribers as of December 31, 2008, compared with approximately 15.78 million DSL subscribers as of the end of 2007. As of December 31, 2008, our DSL subscribers accounted for 80.7% of our total number of broadband subscribers in our fixed-line northern service region.

      LAN Services . In addition to DSL technology, we also use Ethernet technology-based local-area networks, or LANs, to provide our customers with broadband services, especially in our southern service regions. LANs use fiber-optic technology and Ethernet protocol to connect our users to a telecommunications network and greatly expand capacity of the access network. As of December 31, 2008, we had 4.79 million subscribers of our LAN services, representing 18.8% of our total broadband subscribers.

      Tariffs . We charge an upfront installation fee to both DSL and LAN subscribers. Both DSL subscribers and LAN subscribers may choose monthly packages for unlimited usage, or monthly packages with limited usage, with additional fees charged for overtime usage.

      Broadband Content and Applications Services

     In 2008, we increased our promotional efforts for broadband contents and applications, including “CU Max,” which is a family-oriented software for broadband services with comprehensive Internet browsing functionality, and “CU View” video monitoring system, which provides long distance collection, transmission, storage and rebroadcast services of cross-boundary pictures, voices and various kinds of alarm signals to users based on our broadband

network. In addition, we continued to provide integrated communication and information services under the brand “CU Connected,” including information technology application, communication value-added services and basic communication products, to small and medium enterprise customers of different industries and with different needs.

     As of the end of 2008, the number of our broadband content and application subscribers reached 4.39 million, representing 17.3% of the total number of broadband subscribers. With the increased penetration of our broadband contents and application services, the revenue contribution by our broadband customers was further improved.

Data Communications Services

     We are a leading provider of data communications services in our fixed-line northern service region. We offer managed data products, such as those based on digital data networks, or DDN, frame relay, asynchronous transfer mode, or ATM, and Internet protocol-virtual private network, or IP-VPN. We also offer leased line products, including domestic and international leased circuits. In addition, we offer such ICT services as system integration and outsourcing. Our customers for these services include government entities, large financial institutions and other domestic and multinational businesses, Internet service providers and other telecommunications operators.

     We have established business cooperation relationships with more than 160 overseas operators to provide various international data communications products and services, such as international voice, international dedicated leased lines (such as international private leased circuits, or IPLC, and international Ethernet private lines or IEPL), international data (such as multiprotocol label switching-virtual private network, or MPLS-VPN, and ATM/frame relay) and international Internet (such as IP transit/paid peering, dedicated Internet access, or DIA, and IP roaming). In 2008, we used our post-merger domestic and international resources to meet the demands of domestic and international customers for data communications. We have also improved our capabilities to offer cross-border data communications and integrated information services.

      Managed Data Services

     We provide a variety of managed data services to our business customers, including DDN, frame relay, ATM and IP-VPN services. Revenue from our managed data services decreased by 19.3% from RMB1.28 billion in 2007 to RMB1.04 billion in 2008, and accounted for 0.9% and 0.7% of total revenue from our continuing operations in 2007 and 2008, respectively.

      DDN Services . DDN systems, composed of fiber-optic cables, digital transmission paths and digital nodes, are capable of providing high-quality private circuits and other services at various speeds to satisfy the multimedia communications needs of customers. Our DDN services provide high quality and reliable transmission at speeds ranging from 9.6kbps to 2Mbps to meet the increasing demand for low- to medium-speed transmission capacity from business customers and government agencies.

      Frame Relay and ATM Services . We offer advanced high-speed data communications services based on frame relay and ATM technologies to major business customers, including multinational corporations, government agencies and financial institutions. These services enable flexible and cost-effective use of bandwidth resources. Our frame relay services provide high-speed, cost-effective data transmission services linking different business sites for high volume data traffic. ATM is a type of data transmission service using high bandwidth and multiplexing technology intended to handle high bandwidth, integrated voice, text, data, video and Internet traffic. Many of our customers are increasingly using frame relay and ATM services to form virtual private networks, or VPNs, to link their local area networks in different locations. VPNs enable large companies to link multiple sites and offices through a single network that uses existing switched lines to reduce cost but has capabilities comparable to a dedicated private circuit.

      IP-VPN . Our IP-VPN services target business customers that require direct IP connections between multiple sites. These customers are provided with private networks intended for securing data transmission, connected to our Internet backbone network.

      Leased Line Services

     We are the major provider of dedicated leased line services to businesses, government agencies and other telecommunications operators in our fixed-line northern service region. These leased lines allow point-to-point connection for voice and data traffic. Leased lines are used by business customers to assemble their own private networks and by telecommunications operators to establish their service networks. We lease network elements, including digital circuits, digital trunk lines and optical fibers, to business and government customers as well as other telecommunications operators.

     Revenue generated from our leased line services has grown steadily in recent years. Revenue from our leased line services increased by 22.9% from RMB3.74 billion in 2007 to RMB4.60 billion in 2008, and accounted for 2.5% and 3.1% of total revenue from our continuing operations in 2007 and 2008, respectively.

      ICT Services

     We began offering ICT services in 2006 to our government and corporate clients to improve their information and management system. To exploit the opportunities from the accelerated informatization development in China, we actively promoted our customized data communications services and integrated solutions to a number of large government and corporate clients. In 2008, we completed several network construction and service projects for key customers, such as China National Petroleum Corporation and the Ministry of Civil Affairs of the PRC.

Interconnection and Roaming Arrangements

Interconnection

     Interconnection refers to the arrangements that permit the connection of our telecommunications networks with other networks. Our mobile and fixed-line networks interconnect with Unicom Group’s networks. Under current arrangements, settlement between Unicom Group and us is based on an internal settlement standard that takes into account either the internal costs of the relevant networks or the government standard applicable between third-party operators, whichever is the more favorable to us.

     We earn interconnection fees for terminating or transiting calls that originate from other domestic telecommunications operators’ networks and pay interconnection fees to other operators for calls originating from our networks that are terminated on their networks. We earn and pay such fees in respect of mobile calls, local and domestic and international long distance calls and Internet services, except for the interconnection by fixed-line subscribers calling our mobile subscribers in the same region where no interconnection fee will be charged. We are required to pay the interconnection fees regardless of our ability or inability to collect the tariff from our subscribers. Interconnection charges are accrued on a monthly basis based on the actual call volume and applicable tariff rates.

     All interconnection and settlement arrangements among domestic telecommunications operators in China are governed by the Telecommunications Regulations and the rules on interconnection arrangements and settlement promulgated by the MIIT. Most of the agreements pursuant to which we interconnect with other domestic operators were entered into by Unicom Group. We have entered into an agreement with Unicom Group pursuant to which we have agreed with Unicom Group that the costs and benefits arising under these agreements, as they relate to our operations, will be incurred to our account.

     For information about our domestic and international telecommunications arrangements, see “B. Business Overview — Regulatory and Related Matters — Tariff Setting and Price Controls” under Item 4 and “B. Related Party Transactions” under Item 7.

Roaming

     As of the end of 2008, our GSM network had international voice roaming arrangements with 344 operators in

204 countries and regions, GPRS international inbound roaming arrangements with 133 operators from 69 countries and regions and GPRS international outbound roaming arrangements with 46 operators from 27 countries and regions.

     A mobile subscriber using roaming services is charged at our roaming usage rate for both incoming and outgoing calls, plus applicable long distance tariffs. With respect to international roaming, we settle roaming charges with international operators in accordance with roaming agreements between Unicom Group and each of the international operators. See “B. Related Party Transactions — Our Roaming Arrangements” under Item 7 for further information regarding prior roaming arrangements between Unicom Group and us.

     In February 2008, the former Ministry of Information Industry and the NDRC jointly promulgated the Tariff Notice, to require mobile telecommunication companies in China to adjust their mobile roaming charges where necessary in order to:

	•		equalize domestic roaming charges with charges for long distance calls made during domestic roaming;
	•		equalize the charges for pre-paid and post-paid mobile subscribers;
	•		set different tariff caps for callers and receivers in the context of domestic mobile roaming, with the tariff cap for callers being set at RMB0.6 per minute and the tariff cap for receivers being set at RMB0.4 per minute; and
	•		abolish the additional charge for use of the long distance network in the context of domestic roaming.

     The Tariff Notice also required telecommunications companies in China to upgrade their existing billing systems to comply with these new requirements by March 1, 2008, which could be extended to May 1, 2008. We finished adjusting our charges and upgrading our billing system by March 1, 2008 in response to the requirements set forth in the Tariff Notice. See “D. Risk Factors — Risks Relating to the Telecommunications Industry in China — Regulatory or policy changes relating to the PRC telecommunications industry or any future industry restructuring may materially adversely affect our financial condition, results of operations and growth prospects.” under Item 3.

     On June 2, 2008, the MIIT, the NDRC and the Ministry of Finance of the PRC jointly issued the “Announcement on Deepening the Reform of the Structure of the Telecommunications Sector,” pursuant to which the PRC Government seeks to promote the integration of telecommunications services and networks of different service providers, including the offering of roaming services across different mobile telecommunications networks.

Networks

     We operate an advanced network system to support our integrated operations. The backbone of the system is a nationwide fiber optic transmission network, which serves as the common platform for our mobile, fixed-line telephone, broadband and data services. We generally utilize a centralized network planning and equipment selection process, which ensures uniform nationwide design and network compatibility. After our merger with China Netcom in October 2008, we actively integrated our network resources to improve our network quality and capacity.

     In October 2008, the MIIT and SASAC jointly issued the Urgent Notice on Promoting Joint Construction and Sharing of Telecommunications Basic Facilities, which requires telecommunications operators in China to share certain of their existing telecommunications facilities and jointly construct certain new telecommunications facilities in the future, to better utilize telecommunications facilities and reduce repetitive construction. We believe that this notice, if successfully implemented, will be beneficial to our future business operations and we have been complying with the notice in respect of our facilities construction and management. In December 2008, we entered into a cooperative agreement with China Telecom and China Mobile to share our existing telecommunications infrastructure and jointly build telecommunications infrastructure in the future.

GSM Mobile Networks

     A mobile network generally consists of:

	•		cell sites, which are physical locations, each equipped with a base station that houses transmitters, receivers and other equipment used to communicate through radio channels with subscribers’ mobile handsets within the range of a cell;
	•		base station controllers, which connect to, and control, the base stations;
	•		mobile switching centers, which control the base station controllers and the routing of telephone calls; and
	•		a transmission network, which links the mobile switching centers, base station controllers, base stations and the public switched telephone network.

     Currently our GSM mobile network mainly operates at 900 MHz. We have deployed GSM technology that operates at 1800 MHz in major metropolitan areas to supplement the capacity of our existing mobile network. We have the right to use 6 x 2 MHz in the 900 MHz frequency spectrum and 10 x 2 MHz in the 1800 MHz frequency band for our GSM network. Our mobile networks are supported by an advanced SS7 signaling system, which fosters efficient use of network capacity, reduces call setup time and enhances transmission capabilities. We have also installed intelligent networks that enable us to provide pre-paid services and a wide range of call features and value-added services.

     In 2008, we focused on constructing new base stations in 55 provincial capital cities and other economically developed cities in China to improve our GSM network quality. We also commenced preparation for 3G network deployment. For example, all of the new base stations in those 55 key cities were designed to be compatible with 3G operations in the future. In those 55 key cities, we also improved our indoor network system to enhance the indoor mobile reception quality. As a result, as of December 31, 2008, our GSM network switching capacity increased by 38.1% and the number of GSM base stations increased by 35.3% from the end of 2007. Our GSM service connection rate increased to 94.44% from 93.33% at the beginning of 2008 and the call-drop rate decreased to 0.54% from 0.63% at the beginning of 2008. We also completed the GPRS network upgrade and significantly improved the configuration of static packet data channels. As of the end of 2008, we achieved nationwide coverage of our commercial GPRS network in all 31 provinces, municipalities and autonomous regions.

     On May 17, 2009, we launched the commercial operation of 3G services based on the WCDMA technology in 55 key cities on a trial basis and we aim to expand our 3G network coverage to approximately 284 cities by the end of 2009.

Fixed-Line Networks

     We operate fixed-line networks which provide extensive coverage in China. These networks are technologically advanced and conducive to the introduction of the next generation fixed-line network and 3G technologies. These networks support a wide range of end-to-end fixed-line telecommunications services and enable customized products to be delivered to meet a variety of telecommunications needs in “real-time.”

     Our fixed-line networks consist of fixed-line telephone networks, broadband Internet and data networks, transmission networks, value-added service platforms, IT support systems and related infrastructures. Our transmission networks consist primarily of fiber-optic based networks, which cover our major service regions, supplemented by satellite transmission and digital microwave links.

     In 2008, we continued deploying our optical network to replace our existing copper networks. In addition, we also integrated our resources to optimize and improve the transport capabilities of our IP networks and improved our long-distance soft-switch network capability. Our broadband network capacity was also substantially enhanced as of the end of 2008. The number of our IP access ports increased by 35.94% from the end of 2007, our international outbound bandwidth increased by 108% from the end of 2007, our interconnection bandwidth with China Telecom increased by 40.7% from 2007 and our backbone trunk bandwidth of IP network increased by 120.41% from the end of 2007. The percentage of broadband subscribers with 2M and over 2M access speed reached 57.5%, representing an increase of 5.5 percentage points from the end of 2007. Since our merger with China Netcom, we have become one of

the most resourceful telecommunications operators in China in terms of international networks, owning 27 cross-continental cable systems with total bandwidth of 675Gb/s and 19 international submarine systems with total bandwidth of 526Gb/s.

     In addition, in 2008, as an official partner with the Beijing Olympics, China Netcom also strengthened its network servicing and maintenance for the telecommunications systems in various Olympic stadiums, arenas and offices and ensured uninterrupted communications during the Olympics period.

Marketing, Sales and Distribution

Marketing and Sales

     We centrally plan our nationwide marketing and sales strategies, but the implementation of these strategies is carried out at the provincial level by operating branches tailored to their specific markets. Our marketing strategy is to establish our image as a full-service telecommunications service provider and utilize our comprehensive services platform and nationwide sales and distribution network. By using various sales channels, our marketing strategy can be targeted at different customer segments and adjusted timely in accordance with the demands of different markets. In 2008, following our merger with China Netcom, we utilized the opportunity for internal reorganization and established a segmented marketing system targeting individual customers, family customers and government and corporate customers, based on the characteristics of product lines and customer groups. In addition, we optimized our resource allocation and increased speed of response to market demands. Our marketing model also transformed from product-centric to customer-centric.

Distribution

     We have a diversified distribution network, which consists of self-owned sales outlets, agent/distributor sales outlets, direct sales forces and electronic distribution channels, such as online e-sales stores. We distribute our services to our individual and family customers through our self-owned sales outlets, other retail outlets as well as electronic distribution channels. We distribute our services to government and corporate customers through our direct sales forces and agents. At the end of 2008, our self-owned distribution channel system had over 19,500 self-owned sales outlets and approximately 122,800 direct sales personnel and online e-sales stores. We are also supported by approximately 87,400 cooperative sales outlets and approximately 308,000 distribution agents. In 2008, we increased the usage of low cost e-channels such as “customer care centers,” online e-sales stores, SMS sales offices, mobile phone sales offices and self-service terminals. The usage of those multiple electronic channels improved our service efficiency and enhanced our customer relationship.

Customer Service

     We have developed a tiered customer service system based on our service brands, and launched a uniform service brand of “Unicom 10010” to consolidate all customer service resources and unify the service standards and processing procedures adopted in our outlets, customer service centers, customer clubs and other customer service channels. Our customer service centers in each provincial service area can be accessed by our customers by dialing a nationwide hotline number “10010.” Our nationwide customer service system allows us to provide personalized and diversified services through customer service representatives or automated systems, including service inquiry, billing inquiry, response to customer complaints and suggestions, service initiation and termination, payment reminder services, emergency and club membership services. Our customers can access our customer services through various means, including telephone calls, faxes, e-mails and SMSs.

     Our headquarters and provincial centers have set up hotlines for customer complaints. We also implemented a customer service responsibility system to require all levels of our branches to resolve customers’ problems within a prescribed period of time. In addition, we also analyze our customer segments in detail, and tailor our services to the requirements of different customer segments. While we are focusing on the retention of our individual and family customers, we pay regular visits and provide one-on-one personalized services to our institutional customers and VIP customers and, through “customer clubs,” provide high-quality and differentiated services for high-net-worth individual customers and important corporate customers. For mass-market customers, we offer standardized services

that aim at enhancing customer experience.

     In 2008, in an effort to improve our customer service, we promoted the Nationwide Mobile Recharging Card and electronic channels across the country among GSM customers and customer appointment services among fixed-line customers. According to a customer satisfaction survey conducted by the MIIT on the telecommunications industry in 2008, the satisfaction level of our full-service customers continued to improve, and our customer service center “Unicom 10010” was once again awarded the title of “Top Ten Influential Brands in Customer Service Centers in China.” Furthermore, prior to the merger with us, China Netcom, as an official partner of Beijing Olympic Games, launched a campaign of “Olympic Gold Medal Service” across China during the Olympic Games period in the summer of 2008. As a result, China Netcom further improved its services by shortening service process and expediting response to customer inquiries. In addition, in January 2009, we completed our acquisition from Unicom Group of New Guoxin, which is mainly engaged in providing customer service. We believe this acquisition will help integrate our customer service resources.

Information Systems

     We have established comprehensive information systems in each province, autonomous region and municipality to support our business and management. For our business support, we have established core systems composed of a customer relationship management system, a comprehensive billing and accounting system, a comprehensive settlement system and an operation analysis system to support services and marketing of our mobile and fixed-line businesses. In 2008, supported by our nationwide service support platform, we implemented nationwide electronic channel inquiry-based business application and mobile charging services. For our management support, we have focused on developing a human resource management system and a financial management system to enhance the efficiency of our control and management over our resources. In addition, we have established a nationwide billing and customer relationship management system at our headquarters, which has effectively supported the development of our domestic and international roaming services and our nationwide services.

Billing, Collection and Bad Debt Controls

Billing and Collection

     Leveraging on our strengths as a full-service provider, we plan to offer integrated billing and collection services to our customers in the near future. We plan to integrate the billing systems for different services and distribute unified recharge cards that can be used to recharge various pre-paid services, including pre-paid mobile services. Once our plan is implemented, our billing system will be able to distinguish between customers based on the marketing method and service package plans applicable to each customer. These additional functions would allow us to analyze customer data in more detail, thereby improving our ability to analyze the age of our accounts and control bad debts.

     For post-paid GSM mobile services, we centralized the billing at the provincial level and generally bill our subscribers on a monthly basis. Subscribers may pre-deposit their service charges with us, commercial banks or China Post or make payment in person at our service centers or branches of China Post or through commercial banks. For pre-paid GSM mobile services, we centralized the billing on our nationwide intelligent network. Subscribers can purchase and/or recharge pre-paid cards through various channels. They can also recharge cards by telephone.

     For fixed-line services, we bill our residential customers on a monthly basis and payments are usually due, depending on the location of the customer, within a month of the last date of the billing period. We provide a range of payment choices for the convenience of our customers, including a direct-debit service, which automatically deducts the monthly payment from the subscriber’s designated bank account.

Bad Debt Controls

Mobile Services

     Post-paid subscribers must register with us before they can begin using our mobile services. Customer

registration allows us to better manage customer credit. If subscribers do not pay their bills on time, we charge a late fee and will either call or send SMSs to the delinquent subscribers to remind them to pay. We generally suspend a post-paid subscriber’s account if the account is more than 30 days overdue and terminate the account if it is overdue for more than three months after that. When an account is terminated, we will seek other remedies to collect the overdue payment, including personal visits to the subscribers or legal actions against them. At the same time, we encourage our subscribers to pre-deposit service charges with us, to be deducted against charges incurred in the future, or use our pre-paid services. We have also developed a customer credit management system at the provincial branch level to enhance verification of the personal information of new subscribers and tighten credit control for new subscribers.

Fixed-Line Services

     We charge a late payment fee on subscriber accounts that are not paid by the monthly due date. We generally deactivate services for subscribers whose accounts are more than 30 days overdue. These subscribers whose services have been deactivated must pay all overdue amounts, including applicable late payment fees, to reactivate their services. We will terminate services to a subscriber and will remove him or her from the subscriber list if his or her account is overdue for more than three months. We have implemented certain subscriber registration procedures. We also actively promote our prepaid telephone services as a means of controlling bad debts. We have completed the upgrading of our local network to include intelligent functionalities, and have started to gradually provide customers with detailed breakdown of fee charges.

Research and Development

     We focus on technology innovation in coordination with our various business departments, in order to provide technical support to the development of our various businesses. Our research and development activities are focused primarily on 3G technologies and their further development, next generation Internet technologies and businesses, operational planning and development of value-added services. In addition, part of our research and development requirements is fulfilled by our parent company, Unicom Group, in return for a service fee. See “B. Related Party Transactions” under Item 7 below. With respect to research and development for our broadband business, we mainly rely on Unicom Group’s National Laboratory of Next Generation Network in Broadband Application, which is China’s only national level engineering laboratory in the information and telecommunications industry, focusing on the research of next generation Internet IPv6, Triple-Play and 3G operating and supporting systems. We have applied for a number of patents and software copyrights in China. In 2008, we undertook numerous projects, including establishing China Unicom Research Institute; continuing the construction of the first postdoctoral program in China’s telecommunications industry; commencing the construction of a new technology innovation system responsive to the latest technological development; conducting 2G/3G inter-operations and experiments on handset TV service management platform and near field telecommunication; demonstrating applications from China’s next generation Internet, or CNGI, experimental engineering project; and building local access networks. In light of the increasingly competitive and rapidly evolving telecommunications market in China, we plan to continue to strengthen our research and development for new products, services and technology applications.

     In January 2009, we completed our acquisitions of CITC and Unicom Xingye from Unicom Group. CITC is one of the first and largest top-grade comprehensive designing institutes founded by the former Ministry of Posts and Telecommunications of China and is engaged in, among other things, design and development for information networks. Unicom Xingye is engaged in, among other things, research and design of SIM cards and other telephone cards in the PRC. We believe that these acquisitions will strengthen our research and development in the areas of information networks and telephone cards.

Competition

     As a result of the telecommunications industry restructuring in 2008, the Chinese telecommunications market now has three key providers of basic telecommunications service — China Telecom, China Mobile and us — in addition to thousands of value-added service providers. We compete with China Mobile and China Telecom in virtually all aspects of our business, including mobile services, fixed-line services, broadband and data communications services. We believe that the telecommunications industry restructuring in 2008 has provided an opportunity for us to integrate our various resources with those of China Netcom to create business synergies for the post-merger

Unicom. However, we also believe that the restructuring may cause the competition in the telecommunications industry in China to be more intensified and complex in the future. See “D. Risk Factors — Risks Relating to Our Business — We face intense competition in all our businesses from other telecommunications service providers, including China Mobile Limited and its affiliates, or China Mobile and China Telecom Corporation Limited and its affiliates , or China Telecom. Such competition may intensify and result in slower subscriber growth, lower tariffs and higher customer acquisition costs for us, which would materially adversely affect our financial condition, results of operations and growth prospects.” under Item 3.

Competition in Mobile Service Market

     Our main competitor in the mobile communications business is China Mobile. China Mobile continues to have competitive advantages over us in brand name, market share, financial resources and network management experience. Our mobile business also competes with the CDMA mobile business of China Telecom following our sale of the CDMA business to China Telecom in October 2008. After our sale of the CDMA business, we focused on developing our GSM business. In 2008, we further improved our mobile network quality by constructing new base stations and expanding our indoor network coverage in selected cities in China, diversified our mobile value-added service offering and actively prepared for the deployment of our 3G operations.

     In January 2009, China Mobile, China Telecom and Unicom Group were granted licenses by the MIIT to operate 3G businesses nationwide in China with TD-SCDMA, CDMA2000 and WCDMA technologies, respectively. Unicom Group, with the approval of the MIIT, has authorized CUCL to operate Unicom Group’s 3G business. Each of the 3G technologies has its own technical features. Because the TD-SCDMA technology is China’s homegrown technology, the Chinese government has announced a series of favorable policies for the development of this technology. Moreover, the CDMA2000 technology that China Telecom uses to operate its 3G business, due to its technical features, can be upgraded from its 2G counterpart more easily and quickly, which allowed China Telecom to launch its 3G business earlier than us. The WCDMA technology is a relatively mature technology and supported by a well-developed WCDMA industry chain. As of the date of this annual report, China Mobile and China Telecom have launched their 3G businesses. We have launched our 3G business on a trial basis. In addition, we expect that 3G services will compete with 2G services as an industry trend in the future. This may result in adverse impact on our GSM business.

Competition in Fixed-Line Service Market

     We currently compete with China Telecom and China Mobile in the fixed-line telephone business. In our fixed-line northern service region, we are the leading provider of fixed-line telephone services, including local telephone services, domestic and international long distance services and value-added services. However, in 21 provinces in southern China, we are a relatively new entrant in the fixed-line service market, where China Telecom has significant market presence. In addition, other than China Telecom and China Mobile, we also face increasing competition from other competitors in a number of areas of fixed-line business. Furthermore, the industry trend of convergence of telecommunications, Internet and cable television networks may also bring additional non-telecommunications operators to compete with us in our telecommunications businesses.

     Mobile substitution for fixed-line services has been the trend in global markets in recent years, which has caused losses of our fixed-line subscribers. We expect that this trend will continue. In addition, as the 3G industry continues to develop in China, we expect that wireless Internet access will become another main form of broadband access in the future, which may result in decreased use of fixed-line broadband access by our fixed-line broadband subscribers.

Strategic Alliances

      Strategic Alliance with Telefónica. Prior to its merger with us, China Netcom established a strategic alliance relationship with Telefónica International, S.A.U., pursuant to a strategic alliance agreement entered into by them in November 2005. Under the agreement, China Netcom and Telefónica identified a number of areas in the telecommunications business for potential cooperation. In January 2008, the beneficial owners of 148,015,436 China Netcom shares entered into a share purchase agreement with Telefónica to transfer their shares to Telefónica. Upon the completion of this transaction, Telefónica held approximately 7.2% of China Netcom’s outstanding shares.

Following our merger with China Netcom in October 2008, Telefónica became one of our shareholders and held a 5.38% interest in our company as of May 31, 2009. On January 30, 2009, we entered into a strategic alliance framework agreement with Telefónica. Pursuant to the framework agreement, Telefónica and we agreed to share business experience and strengthen cooperation in the areas of mobile communications, broadband applications, international business, marketing and sales and telecommunications services to corporate clients.

      Strategic Alliance with SKT . In June 2006, we entered into a strategic alliance framework agreement with SK Telecom Co., Ltd., or SKT, a mobile telecommunications service provider in Korea. Pursuant to this agreement, SKT and we agreed to explore cooperation initiatives on the further development of CDMA mobile communication services in China. Following the disposal of our CDMA business to China Telecom, SKT and we are currently exploring opportunities for cooperation in the WCDMA technologies-related areas in the future. In August 2007, SKT converted in full its US$1 billion zero coupon convertible bonds issued by us into 899,745,075 shares at HK$8.63 per share pursuant to the subscription agreement, dated June 20, 2006, between SKT and us. Following the conversion of these convertible bonds, SKT became the holder of a 6.61% ownership interest in our company. After our merger with China Netcom, SKT held 899,745,075 of our outstanding shares and SKT’s ownership interest in our company was 3.79% as of May 31, 2009.

Trademarks

     We conduct our businesses under the Unicom name and logo. Unicom Group is the registered proprietor in China of the “Unicom” trademark in English and the trademark bearing the Unicom logo. Unicom Group is also the registered proprietor of the trademark of the word “Unicom” in Chinese (“ ”). Unicom Group has granted us the right to use these trademarks on a royalty-free basis, and licensed us any trademark that it registers in China in the future which incorporates the word Unicom. In addition, prior to our merger with China Netcom, China Netcom marketed their services under the “CNC” brand name and logo, which are registered trademarks in China owned by Netcom Group, which merged with, and was absorbed by, our parent company, Unicom Group, in January 2009.

Regulatory and Related Matters

     The telecommunications industry in China is subject to a high degree of government regulation. The primary regulatory authority of the Chinese telecommunications industry is the MIIT, established in 2008 as a new ministry under the PRC State Council and the successor of the former Ministry of Information Industry. The State Council, the NDRC, the Ministry of Commerce and other governmental authorities also maintain regulatory responsibilities over certain aspects of the Chinese telecommunications industry.

     The MIIT, under the supervision of the State Council, is responsible for, among other things:

	•		formulating and enforcing industry policies and regulations, as well as technical standards;
	•		granting telecommunications service licenses;
	•		supervising the operations and quality of services of telecommunications service providers;
	•		allocating and administering telecommunications resources such as spectrum and number resources;
	•		together with other relevant regulatory authorities, formulating tariff standards for telecommunications services;
	•		formulating interconnection and settlement policies between telecommunications networks; and
	•		maintaining fair and orderly market competition among service providers.

     The MIIT has established a Communications Administration in each province, which is mainly responsible for overseeing the implementation of the MIIT’s policies and regulations and exercising regulatory authority delegated by the MIIT within that province.

     The NDRC, together with the MIIT, sets government fixed tariffs and government guidance tariffs for certain telecommunications services. See “— Tariff Setting and Price Controls” below. It also approves investment projects within the restricted sectors specified in an annually adjusted catalogue released by the State Council.

     The MIIT is in the process of drafting a telecommunications law that, once adopted by the National People’s Congress of the PRC, will become the basic telecommunications statute and provide the principal legal framework for telecommunications regulations in China. It is currently uncertain when the law will be adopted and become effective. See “D. Risk Factors — Risks Relating to the Telecommunications Industry in China — Regulatory or policy changes relating to the PRC telecommunications industry or any future industry restructuring may materially adversely affect our financial condition, results of operations and growth prospects.” under Item 3.

Telecommunications Regulations

     On September 25, 2000, the PRC State Council promulgated the Telecommunications Regulations of the People’s Republic of China, which came into effect on the same date. The Telecommunications Regulations regulate all major aspects of the telecommunications industry, including licensing, interconnection, tariffs, resources, services, security, facility construction and access to networks.

Licensing

     The PRC Government licenses telecommunications businesses in accordance with their classification. Telecommunications businesses are currently classified into two broad categories of basic services and value-added services. An appendix to the Telecommunications Regulations divides each of the two categories into further sub-categories. On March 21, 2003, the former Ministry of Information Industry amended the categorization in this appendix and the amendments took effect on April 1, 2003. According to the amended appendix:

•

basic telecommunications services are classified into Category I basic telecommunications services and Category II basic telecommunications services. Category I basic telecommunications services include fixed-line telecommunications services (including fixed-line local, domestic long distance, international long distance and IP telephone services and services related to maintaining international telecommunications facilities), mobile telecommunications services (including 900/1800MHz GSM 2G, 800MHz CDMA 2G and 3G digital cellular mobile telecommunications services), Category I satellite telecommunications services (including satellite mobile telecommunications and international satellite private-line services) and Category I data communications services (including Internet data transmission, international data telecommunications, public telegraph and telex services). Category II basic telecommunications services include trunking telecommunications services (including analogue trunking telecommunications and digital trunking telecommunications services), wireless paging services, Category II satellite telecommunications services (including lease and sales of satellite transponders and very-small-aperture-terminal, or VSAT, telecommunications services), Category II data telecommunications services (including fixed-line domestic and wireless data transmission services), network access services (including wireless network access services and network services from customer premises), services related to maintaining domestic telecommunications facilities and network hosting services.

•

value-added telecommunications services are classified into Category I value-added telecommunications services and Category II value-added telecommunications services. Category I value-added telecommunications services include on-line data processing and interchange, domestic multi-party telecommunications, IP-VPN and Internet data center, or IDC, services. Category II value-added telecommunications services include store-and-forward, call center, Internet access and information services.

     On March 1, 2009, the MIIT promulgated the Measures on the Administration of Telecommunications Business Licenses, which took effect on April 10, 2009 and superseded the previous measures promulgated by the former Ministry of Information Industry on December 26, 2001.

     The measures govern the application for, approval of and regulation of telecommunications business licenses in China. The operation of any basic telecommunications business is subject to the MIIT’s approval and grant of License for Operation of Basic Telecommunications Businesses. The operation of any value-added business in two or more provinces, autonomous regions or municipalities is subject to the MIIT’s approval and grant of License for Inter-Provincial Operation of Value-Added Telecommunications Businesses. The operation of value-added businesses within a single province, autonomous region or municipality is subject to the approval of the telecommunications authority of the relevant province, autonomous region or municipality and the grant of the License for Operation of Value-Added Telecommunications Businesses. The measures, among other things, lowered the minimum amount of registered capital required for an applicant to enter the basic telecommunications business in the PRC.

     After the PRC’s accession to the WTO, on December 11, 2001, the PRC State Council promulgated the Administrative Regulations on Telecommunications Companies with Foreign Investments, which took effect on January 1, 2002, and were amended on September 10, 2008, to implement China’s commitments to the WTO. Those commitments include the gradual reduction of restrictions on foreign ownership in telecommunications enterprises in China and the step-by-step opening up of the Chinese telecommunications market to foreign enterprises. In recent years, China gradually lifted restrictions for foreign investors in telecommunications enterprises in China and fulfilled its commitment to open up the Chinese telecommunications market. However, the following restrictions on investments in mobile, value-added telecommunications and fixed-line businesses remain:

	•		for fixed-line services, there is no longer any geographic restriction and foreign ownership may be no more than 49%;
	•		for mobile voice and data services, there is no longer any geographic restriction and foreign ownership may be no more than 49%; and
	•		for value-added telecommunications services, there is no longer any geographic restriction and foreign ownership may be no more than 50%.

Spectrum and Network Number Resources

     The MIIT is responsible for the management of the wireless radio frequency spectrum and the allocation of frequencies within the spectrum. Currently, the frequencies allocated for mobile telecommunications are the 800 MHz, 900 MHz and 1,800 MHz bands, as well as the 1.9GHz and 2.1 GHz bands for 3G mobile telecommunications. The frequency assigned to a telecommunications operator may not be leased or transferred without the MIIT’s approval.

     Since January 1, 2008, the NDRC and the Ministry of Finance have made the following adjustments to the standard fees for the telecommunications operators’ usage of the frequencies assigned to cellular telecommunications: (i) for the nationwide GSM and CDMA network frequency, an annual rate of RMB17 million per MHz for the 900MHz band (including the 800MHz CDMA band) and an annual rate of RMB15 million per MHz for the 1800 MHz band; and (ii) for any local telecommunications network frequency, an annual rate of RMB1.7 million per MHz for each province for the 900MHz band (including the 800MHz CDMA band) and an annual rate of RMB1.5 million per MHz for each province for the 1800 MHz band. The fee standards for nationwide networks are to be applied if the

relevant networks cover 10 or more provinces, autonomous regions or municipalities. The aggregate fees we paid for frequency usage amounted to approximately RMB590 million, RMB612 million, and RMB654 million in 2006, 2007, and 2008, respectively.

     The MIIT is also responsible for the administration of China’s telecommunications network number resources. In January 2003, the former Ministry of Information Industry issued the Measures for the Administration of Telecommunications Network Numbers, which took effect on March 1, 2003. According to these measures, the telecommunications network number resources are owned by the State, which shall charge fees for the use of such resources. Application for the use of number resources by any telecommunications operator is subject to the approval of the MIIT or the relevant provincial telecommunications authority and the payment of certain usage fees. The measures also provide for the procedures for the application, usage and record keeping for the telecommunications operators’s use of number resources.

     In December 2004, the former Ministry of Information Industry, the Ministry of Finance and the NDRC jointly issued the Provisional Administrative Measures with Respect to the Collection of Usage Fees for Telecommunications Network Number Resources, under which telecommunications operators are required to pay usage fees by the tenth day of the first month of each quarter. Mobile telecommunications operators are required to pay an annual usage fee of RMB12 million for each mobile network number. The usage fees we paid for network numbers totaled RMB44.62 million, RMB42.88 million, and RMB71.06 million in 2006, 2007 and 2008, respectively.

     In addition, in January 2009, the MIIT issued the Notice on Matters Relating to Wireless Access Systems Operating on 1900-1920 MHz Frequency Bands, which, among others, required that the current wireless access systems operating on 1900-1920MHz frequency band be cleared and removed by the end of 2011.Those frequency bands will be reserved for the operation and development of the TD-SCDMA technology. See “D. Risk Factors — Risks Relating to Our Business — If we fail to achieve a smooth discontinuation of PHS services or retain our PHS subscribers, our financial condition and results of operations may be adversely affected. “ under Item 3.

Tariff Setting and Price Controls

     The levels and categories of our current tariffs are subject to regulation by various government authorities, including the MIIT, the NDRC, and, at the local level, the relevant provincial Telecommunications Administration Bureaus and price regulatory authorities. Under the Telecommunications Regulations, telecommunications tariffs are categorized into State-fixed tariffs, State-guidance tariffs and market-based tariffs.

     The monthly fee and usage fee for local telephone service are regulated as fixed tariffs, which are fixed jointly by the MIIT and the NDRC. The MIIT regulates the maximum tariffs for traditional domestic long distance services, traditional international long distance services to Hong Kong, Macau and Taiwan. Leased line and data services (other than ATM service) are charged at State-guidance tariffs, which are determined jointly by the MIIT and the NDRC.

     The Notice on Implementation of Market-Based Tariffs for Certain Telecommunications Services, promulgated jointly by the former Ministry of Information Industry and the NDRC in 2002, specifies the telecommunications businesses to which market-based tariffs are applicable, including VoIP, Internet access services, and certain value-added services provided over fixed-line telephone networks, such as telephone information, caller identification and voice mail. Market-based tariffs shall be applicable to those telecommunications services for which effective competition exists in the market. The tariffs of such telecommunications services are determined at the sole discretion of the operators, and will be implemented after filing with the MIIT or provincial Telecommunications Administration Bureaus, as applicable. There is uncertainty regarding how the MIIT determines the existence of effective competition, as the MIIT has not publicly disclosed the criteria it uses for determining whether a certain type of service should be subject to market-based tariffs. Under the Telecommunications Regulations, cost is the primary basis for tariff setting, but the tariff levels also take into account social and economic development, the development of the telecommunications industry and the purchasing power of the customers. The MIIT has not provided a timetable for tariff deregulation or indicated that operators will eventually be permitted to freely set all tariffs. We expect that increased flexibility in setting certain tariffs will allow us to better respond to changes in market demand and competitive conditions.

     In 1997, the PRC Government granted us preferential treatment by allowing us to vary our mobile tariffs by up to 10% from the State-guidance rates.

     In December 2000, the former Ministry of Information Industry, the former State Development Planning Commission and the Ministry of Finance jointly issued a tariff adjustment circular, which provides for tariff adjustments for a wide range of telecommunications services. Effective from February 21, 2001, we have adopted these government tariff adjustments.

     In June 2001, the Ministry of Finance and the former Ministry of Information Industry jointly issued a circular to revoke certain fees including one-time upfront connection fees charged to the fixed-line telephone users and one-time activation fees charged to the mobile subscribers.

     In June 2004, the former Ministry of Information Industry and the NDRC jointly issued a notice aimed at further strengthening the regulatory oversight of telecommunications tariffs. The notice requires telecommunications services providers to strengthen their internal control and management of tariff setting activities. Specifically, the notice requires services providers to strictly comply with the relevant government regulations relating to the procedures for the approval and registration of telecommunications tariffs.

     In August 2005, the former Ministry of Information Industry and NDRC jointly issued a notice stipulating that, with the exception of IP telephony services, maximum charges for many telecommunications services may not exceed the current level of charges.

     In September 2006, the former Ministry of Information Industry issued a notice stipulating that the telecommunications operators shall be responsible for the accuracy of the fees to be charged and collected for the wireless information services. In providing the wireless information services, the telecommunications operators shall respect users’ choice and information rights and treat users in a fair manner.

     Since 2007, the former Ministry of Information Industry and the MIIT have encouraged wireless telecommunications operators to adopt the “Calling-Party-Pays” tariff policy. In light of this regulatory initiative, we have implemented such billing arrangements in all new tariff packages offered throughout our service areas after July 1, 2007.

     On February 13, 2008, the former Ministry of Information Industry and the NDRC jointly promulgated the Tariff Notice. According to the Tariff Notice, we are required to adjust our then-effective mobile roaming charges where necessary to:

	•		equalize domestic roaming charges with charges for long distance calls made during domestic roaming;
	•		equalize the charges for pre-paid and post-paid mobile subscribers;
	•		set different tariff caps for callers and receivers in the context of domestic mobile roaming, with the tariff cap for callers being set at RMB0.6 per minute and the tariff cap for receivers being set at RMB0.4 per minute; and
	•		abolish the additional charge for use of the long distance network in the context of domestic roaming.

     The Tariff Notice requires telecommunication companies in China to upgrade their existing billing system in order to comply with the above new requirements by March 1, 2008.

     In addition, on February 14, 2008, the former Ministry of Information Industry promulgated the Guidelines for Regulating Telecommunications Services Tariff Schemes, or the Guidelines, to encourage the PRC telecommunication operators to provide multiple tariff schemes for customers. The Guidelines also specify that the number of such tariff schemes provided by a telecommunication operator should be limited to ten for a single service

area. In addition, the Guidelines encourage telecommunication operators to simplify their tariff structure.

     In 2008, the MIIT and the NDRC issued a Notice regarding the Cancellation of Differentiated Tariffs on SMS, requiring each telecommunications operator in China to unify tariffs on its inter-network and intra-network SMS services to promote fair competition.

     The PRC Government retains the ultimate authority to adopt changes to tariffs. However, the Telecommunications Regulations require the government to hold public hearings before setting or changing important State-tariff rates, which are attended by telecommunications operators, consumers and others. Operators are required to provide complete and adequate cost data and other materials for those hearings.

     The following tables set forth the tariff rates of certain services provided by us, where government fixed tariffs or government guidance tariffs are applicable:

      Mobile Services

     Generally the categories of tariffs we charge our mobile subscribers include, among others, basic monthly fees and local usage charges, roaming charges, long-distance call charges and charges for value-added services. Mobile tariffs are set forth by the MIIT and tariff adjustments are subject to regulation by various government authorities, including the MIIT, the NDRC and the relevant provincial price regulatory authorities. The following table summarizes the current tariffs for post-paid and pre-paid mobile services:

      Domestic Long Distance Services

     Our revenues from domestic long distance services consist of charges based on the duration, time of day and day of the week a call is placed. The following table sets forth the current tariffs for our domestic long distance telephone services using our traditional network:

		Tariff (in RMB)
Domestic long distance services on our traditional network (1)		0.07 per six seconds

      International Long Distance Services

     The MIIT regulates the maximum tariffs that we may charge for international long distance services. The following table sets forth our current international long distance tariffs:

		Tariff (in RMB)
International long distance services on our traditional network (1) :
To Hong Kong, Macau and Taiwan		0.20 per six seconds
To all international destinations		0.80 per six seconds

      Frame relay services . The following tables set forth the monthly fees for frame relay services, which include monthly fees for port access and permanent virtual circuits, or PVCs ⁽¹⁾ :

Interconnection Arrangements

     In October 2003, the former Ministry of Information Industry issued Measures on Settlement of Interconnection between Public Telecommunications Networks and Sharing of Relaying Fees, which superseded the Measures on the Settlement of Call Charges between Telecommunications Networks issued by the former Ministry of Information Industry in 2001. These regulations contain specific provisions regarding, among other things, revenue sharing methods and settlement mechanisms and interconnection agreements among telecommunications service providers.

     In November 2005, the Ministry of Information Industry issued the Notice on Adjustment to Settlement for Interconnection Fees of Fixed-Line Local Telephone Networks, which provides for new settlement arrangement standards for fixed-line local telephone operators.

     In October 2006, the Ministry of Information Industry issued a second notice, which provides for a further adjustment of the settlement standards for fixed-line local telephone operators.

     On November 14, 2007, the former Ministry of Information Industry amended and issued the new regulations on interconnection settlement arrangements for Internet exchange centers, which reduced the standard monthly settlement tariff for Internet exchange centers from approximately RMB2,000/Mbps per month to RMB1,000/Mbps per month.

     Unicom Group has entered into agreements on interconnection with other telecommunications operators, including China Telecom and China Mobile. The following table sets forth selected interconnection revenue sharing and settlement arrangements for local calls:

     The following table sets forth selected current major main interconnection revenue sharing and settlement arrangements for domestic long distance calls:

     The following table sets forth selected current main interconnection revenue sharing and settlement arrangements for public switched telephone network international long distance calls, including calls originated from and terminated in Hong Kong, Macau and Taiwan:

     The following table sets forth selected current main interconnection revenue sharing and settlement arrangements for VoIP long distance calls:

Technical Standards

     The MIIT is responsible for promulgating the technical standards for China’s telecommunications industry and establishing the technical requirements and testing parameters for telecommunications equipment (including network and end user equipment). The MIIT is also responsible for designating qualified institutes to test telecommunications equipment, which would grant network access licenses for the equipment that has successfully passed the relevant tests. Only telecommunications equipment for which a license has been granted may be sold and used in China.

     Most of the standards used in the Chinese telecommunications industry are generally based on the standards issued by the International Telecommunication Union, or ITU, 3rd Generation Partnership Project, 3rd Generation Partnership Project 2 and other international organizations for telecommunications standards, with more specific requirements made in light of China’s particular telecommunications industry. In January 2006, the former Ministry of Information Industry issued the technical standards for the TD-SCDMA technology, which China Mobile has been authorized to use for its 3G operations. Such technical standards have been adopted by the ITU as the international 3G standards for the TD-SCDMA technology. In May 2007, the former Ministry of Information Industry issued the technical standards for the other two 3G technologies, WCDMA and CMDA2000, which we and China Telecom have been authorized to use, respectively, for our 3G operations. On the basis of the technical standards used in China’s telecommunications industry, we may formulate our own technical standards based on our own needs and issue additional requirements for telecommunications equipment in order to meet our operational needs. All telecommunications equipment purchased by China’s telecommunication operators must have been granted a network access license issued by the MIIT and must meet the standards set forth by the relevant operators.

Quality of Service

     Under the Telecommunications Regulations, the MIIT and the relevant provincial Communications Administrations are responsible for supervising and monitoring the quality of services provided by telecommunications operators in China. Under the Telecommunications Regulations, customers of telecommunications operators have the right to submit their complaints to the MIIT and the relevant provincial telecommunications administrations or other relevant government authorities.

Universal Services

     Telecommunications service providers in China are required to fulfill universal service obligations in accordance with relevant regulations to be promulgated by the PRC Government, and the MIIT has the authority to delineate the scope of its universal service obligations. The MIIT may also select universal service providers through a

tendering process. The MIIT, together with the finance and pricing authorities, is also responsible for formulating administrative rules relating to the establishment of a universal service fund and compensation schemes for universal services. The MIIT and other relevant government authorities are still in the process of formulating the detailed regulations relating to the provision of such universal services. Such regulations, if promulgated, may require us to incur significant expenses to fulfill our universal service obligations and therefore could materially adversely affect our financial condition and results of operations.

     The MIIT has required major Chinese telecommunications service providers, including Unicom Group and former Netcom Group, to participate in a project to provide telecommunications services in a number of remote villages in certain designated provinces in China as transitional measures prior to the formalization of a universal service obligation framework. In participating in this project, Unicom Group has undertaken the universal service obligation to extend telecommunications service coverage to all administrative-level villages primarily through its transmission networks. In order to fulfill such obligations under those transitional measures, Unicom Group has agreed with us that it will assume the responsibility for investing in and constructing the necessary network facilities. If we operate and maintain such network facilities in our service regions, Unicom Group has agreed to compensate us for the related expenses based on fair market value. Currently, with our assistance, Unicom Group is further extending telecommunications service coverage to natural villages in remote areas in China as designated by the MIIT. We have been assisting Unicom Group in providing mobile telecommunications services to these remote villages and are responsible for the operation and maintenance of the relevant network facilities in our service areas.

     See “D. Risk Factors — Risks Relating to the Telecommunications Industry in China — The PRC Government may require us, along with other telecommunications service providers in China, to provide universal services with specified obligations, and we may not be compensated adequately for providing such services.” under Item 3.

Capital Investment

     On July 16, 2004, the State Council promulgated, effective immediately, the Decision on Reform of Investment System, or the Investment Reform Decision, which significantly modified the government approval process for major investment projects in China. The Investment Reform Decision eliminated the government approval requirements for investment projects that do not involve direct government funding unless the investment projects are in the restricted sectors specified in an annually adjusted catalogue released by the State Council. The 2004 catalogue, which was attached as an annex to the Investment Reform Decision, sets forth approval requirements for individual investment projects in restricted sectors. Within the telecommunications sector, the investment projects that require the approval of the NDRC include:

	•		domestic backbone transmission networks (including broadcasting and television networks);
	•		international telecommunications transmission circuits;
	•		international gateways;
	•		international telecommunications facilities for dedicated telecommunications networks; and
	•		other telecommunications infrastructure projects involving information security.

Others

     As a company with substantially all of our operations in China, we, along with our controlling shareholder, Unicom Group, are subject to various regulations of the PRC Government in addition to those regulating the telecommunications industry. PRC regulatory authorities, such as the State Bureau of Taxation, National Audit Office, SAIC and local price bureaus, exercise extensive control over various aspects of our businesses and conduct various regular inspections, examinations and/or audits on us and Unicom Group. As required by the relevant PRC laws and regulations, Unicom Group, as one of the key State-owned enterprises under the direct supervision of the SASAC, is also subject to routine audits by the National Audit Office, or the NAO, including the senior management departure

audit which involves a mandatory review by the NAO of the economic responsibilities of a departing senior management member of Unicom Group.

     In addition, SASAC has an indirect influence over us as our controlling shareholder, Unicom Group, is under the direct supervision of SASAC. In particular, SASAC may designate certain nominees and request Unicom Group to propose the appointment of such nominees as our directors and senior management. SASAC may also request Unicom Group to remove our directors and senior management in accordance with relevant procedures provided by applicable law and our articles of association.

C. Organizational Structure

     We are incorporated in Hong Kong and as of May 31, 2009, we were 40.92% owned by Unicom BVI, which was 17.90% owned by Unicom Group and 82.10% owned by the A Share Company, which in turn was 61.05% owned by Unicom Group, 29.49% owned by Netcom BVI, which in turn was 100% owned by Unicom Group, 20.42% owned by public shareholders, 5.38% owned by Telefónica and 3.79% owned by SKT. See “A. History and Development of the Company” above. Set forth below are details of our significant subsidiaries:

D. Properties

     Our principal executive offices are located in Hong Kong. We also maintain executive offices in Beijing. We own and lease a large number of offices, retail outlets, equipment rooms and base stations throughout China. In some cases, we have not entered into formal lease agreements with the lessors or the lessors may not possess requisite title certificates. We believe that it is unlikely that we would be denied our right to use a large number of these properties at any given time.

Item 4A. Unresolved Staff Comments

     None.

merger is considered as a business combination of entities and businesses under common control, and has been accounted for using merger accounting in accordance with Accounting Guideline 5 “Merger Accounting for Common Control Combinations”, or AG 5, issued by the HKICPA in November 2005. In addition, we completed the acquisition of certain assets and business of Unicom Guizhou from Unicom Group in December 2007 and, prior to the merger with us, China Netcom completed an acquisition of the entire equity interest of Design Institute, a wholly-owned subsidiary of Netcom Group, in December 2007. Because we and Unicom Guizhou were under the common control of Unicom Group both prior to and after our acquisition of Unicom Guizhou, and China Netcom and Design Institute were under the common control of Netcom Group (which merged with and was absorbed by Unicom Group in January 2009) both prior to and after China Netcom’s acquisition of Design Institute, both acquisitions have been accounted for using merger accounting in accordance with AG5. Upon our adoption of IFRS, we adopted the accounting policy to account for business combination of entities and businesses under common control using the predecessor values method, which is consistent with HKFRS. The acquired assets and liabilities of China Netcom, Unicom Guizhou and Design Institute are stated at historical cost, and are included in the consolidated financial statements included in this annual report on Form 20-F as if those entities and their businesses acquired had always been part of our Company. Accordingly, the 2007 comparative figures in the consolidated financial information included in this Form 20-F have been restated to reflect the financial position, results of operations and cashflows of these acquired businesses.

     In addition, we completed the disposal of our CDMA business in October 2008. See “A. History and Development of the Company — Sale of CDMA Business, Merger with China Netcom and Related Transactions” under Item 4. In accordance with IFRS/HKFRS 5, “Non-Current Assets Held for Sale and Discontinued Operations,” we recognized the CDMA business segment as discontinued operations and the CDMA business is presented separately as discontinued operations in our audited consolidated statement of income and statement of cash flow for the year ended December 31, 2008. As a result, the 2007 comparative figures in our audited consolidated statement of income and statement of cash flow included in this annual report on Form 20-F have been restated accordingly. Prior to our merger with China Netcom, China Netcom completed a disposal of the fixed-line telecommunications and related services in its Guangdong and Shanghai branches in February 2007. See “A. History and Development of the Company — History and Corporate Development of China Netcom” under Item 4. In accordance with IFRS/HKFRS 5, we recognized the fixed-line businesses in Guangdong and Shanghai branches as discontinued operations, and the fixed-line business in Guangdong and Shanghai branches are presented separately as discontinued operations in our audited consolidated statement of income and statement of cash flow for the year ended December 31, 2007.

Overview

     As a result of our merger with China Netcom in October 2008, we have become an integrated telecommunications operator in China providing mobile voice and value-added, fixed-line voice and value-added, fixed-line broadband, data communications and other telecommunications services to our customers through our two business segments comprised of mobile services and fixed-line services. Following our acquisition of fixed-line business in 21 provinces in southern China from our parent companies in January 2009, we have extended the coverage of all of our services nationwide. We, China Mobile and China Telecom are the three major telecommunications operators in China. See “A. History and Development of the Company — Restructurings of Telecommunications Industry.”

     The table below sets forth revenues from our major businesses and their respective percentage of our total revenue from continuing operations in 2007 and 2008 (excluding fixed-line upfront connection fees of RMB1,517 million in 2007 and RMB886 million in 2008).

		For the Year Ended December 31,
		2007								2008
		RMB in millions				As % of Total				RMB in millions				As % of Total
Continuing Operations
Total revenue (excluding fixed-line upfront connection fees) *			149,170				100.0				148,020				100.0
Total service revenue (excluding fixed-line upfront connection fees)			148,230				99.4				146,366				98.9
Include: GSM mobile business			62,547				41.9				64,704				43.7
Fixed-line business			85,683				57.5				81,662				55.2
Out of which:

     Our service revenues from continuing operations primarily consist of the following:

	•		usage fees and monthly fees for our GSM mobile and fixed-line telephone services, which are recognized when we render the service to our customers;
	•		revenue from the provision of value-added services, which is recognized when we render the services to our customers;
	•		revenue from the provision of broadband and other Internet-related services, mainly consisting of Internet access services, and managed data services, which is recognized when we render the service to our customers;
	•		revenue from interconnection with other telecommunications operators, including Unicom Group, for calls made from their networks to our networks. We recognize interconnection revenue when the relevant calls are made by subscribers;
	•		revenue from ICT services, which is recognized when goods are delivered to the customers (which generally coincides with the time when the customers have accepted the goods and the related risks and rewards of ownership have been transferred to the customers) or when services are rendered to the customers using the percentage of completion method when the outcome of the services provide can be estimated reliably; If the outcome of the services provided cannot be estimated reliably, the treatment should be as follows: (i) if it is probable that the costs incurred for the services provided is recoverable, service revenue should be recognized only to the extent of recoverable costs incurred, and costs should be recognized as current expenses in the period in which they are incurred; (ii) if it is probable that costs incurred will not be recoverable, costs should be recognized as current expenses immediately and service revenue should not be recognized; and
	•		rental income from leases of customer-end equipment and transmission lines on our networks to Unicom Group, business customers and other telecommunications carriers in China. We recognize leased line rental revenue on a straight-line basis over the relevant lease term.

     Our revenue from continuing operations remained stable in 2008. Excluding RMB0.89 billion deferred fixed-line upfront connection fees, our revenue from continuing operations in 2008 was RMB148.02 billion, down by 0.8% from 2007, of which service revenue accounted for RMB146.37 billion, down by 1.3% from 2007, and revenue from sale of telecommunications products accounted for RMB1.65 billion, up by 76.0% from 2007.

     The following table sets forth our major costs and expenses items, both in terms of amount and as a percentage of total revenue from continuing operations in 2007 and 2008 (excluding fixed-line upfront connection fees of RMB1,517 million in 2007 and RMB886 million in 2008).

     Our major costs and expenses include the following:

	•		interconnection expenses, representing amounts paid to other operators, including Unicom Group and Netcom Group, for calls from our networks to their networks and for calls made by our subscribers roaming in their networks;
	•		depreciation and amortization expenses, mainly relating to our property, plant and equipment and other assets;
	•		networks, operations and support expenses, mainly relating to repair, maintenance and operations of our networks;
	•		employee benefit expenses, representing staff salaries and wages, bonuses and medical benefits, contributions to defined contribution pension schemes, housing benefits and share-based compensation costs amortized over the vesting period of share options;
	•		selling and marketing expenses, including commissions, promotion and advertising expenses, amortization of direct incremental costs for activating subscriber services and customer retention costs; and
	•		general, administrative and other expenses, primarily including provision for doubtful debts, utilities, general office expenses and travel expenses.

     We have aimed to strengthen management and control costs to achieve greater efficiency. However, due to a series of challenges in 2008, including an economic downturn, natural disasters and industry restructuring, our total costs and expenses from continuing operations in 2008, excluding the effects of the non-recurring items, consisting of impairment loss on PHS business-related assets of RMB11.84 billion in 2008, tax refund on reinvestment in subsidiaries of RMB4.00 billion in 2007 and realized loss on changes in fair value of derivative component of the convertible bonds of RMB0.57 billion in 2007, would be RMB128.93 billion, up by 1.6% from 2007. We believe that these non-recurring items are not indicators of our operating performance from the perspective of continuing

operations and thus excluding the effects of these non-recurring items may facilitate a better assessment of our performance and liquidity.

Critical Accounting Policies

     The preparation of our financial statements and this annual report on Form 20-F requires us to make estimates and judgments that affect the reported and disclosed amounts of assets and liabilities, including contingent assets and liabilities, as of the relevant dates and revenue and expenses for the relevant periods. We have identified below the areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the accounting policies and estimates, as critical to our business operations and an understanding of our results of operations and financial position. The impact and any associated risks related to these policies on our business operations are discussed throughout this Item 5 where such policies affect our reported and expected financial results. For a discussion of the application of these and other accounting policies, see Note 4 to our consolidated financial statements included in this annual report. There can be no assurance that actual results will not differ from those estimates and assumptions.

Significant Accounting Policies

Revenue Recognition

     Revenue comprises the fair value of the consideration received or receivable for the services and sales of goods or telecommunications products in the ordinary course of our business activities. Revenue is shown net of business tax, government surcharges, returns and discounts and after eliminating sales within our company.

     We recognize revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of our activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. We base our estimates on historical results, taking into consideration of the type of customer, the type of transaction and the specifics of each arrangement.

      Sales of services and goods

	•		Usage fees and monthly fees are recognized when the services are rendered;
	•		Revenues from the provision of broadband and other Internet-related services and managed data services are recognized when the services are provided to customers;
	•		Revenue from telephone cards, which represents service fees received from customers for telephone services, is recognized when the related service is rendered upon actual usage of the telephone cards by customers;
	•		Lease income from leasing of lines and customer-end equipment are treated as operating leases with rental income recognized on a straight-line basis over the lease term;
	•		Value-added services revenue, which mainly represents revenue from the provision of services such as short message, cool ringtone, personalized ring, wireless data services, caller number display and secretarial services to subscribers, is recognized when service is rendered;
	•		Standalone sales of telecommunications products, which mainly represent handsets and accessories, are recognized when title has been passed to the buyers;
	•		For CDMA promotional packages where CDMA handsets are provided to subscribers for their use during a specified contract period (see Note 4.2(a) to our consolidated financial statements included in this annual report), since the commercial substance of the transaction is to develop new contractual subscribers by offering handsets, the two elements of CDMA cellular services and handsets are considered as a linked transaction. Service revenues from such promotional packages are recognized based upon the actual usage of cellular services at the tariff set out in the contracts.
	•		Certain PHS bundled service contracts comprise the provision of PHS services and handsets to customers, under which customers either prepay a certain amount of service fee or commit to spend a minimum monthly service fee for a designated period in order to receive a free handset. When all of the following criteria are met, PHS handsets and related services are separately recognized as revenues according to their relative fair values. When any one of the following criteria is not met, total revenues from PHS bundled service contracts are recognized on a systematic basis to match the shorter of the pattern of usage of the PHS services by customers and the minimum non-cancellable contractual period.

	(i)		PHS handsets and related services have value on a stand-alone basis;
	(ii)		Reliable estimate for fair value of PHS handsets and related services exists; and
	(iii)		In arrangements that include a general right of refund for the delivered item, performance of the undelivered item is considered probable and substantially in our control.

•

Revenue from information communications technology services are recognized when goods are delivered to the customers (which generally coincides with the time when the customers have accepted the goods and the related risks and rewards of ownership have been transferred to the customers) or when services are rendered to the customers using the percentage of completion method when the outcome of the services provided can be estimated reliably. If the outcome of the services provided cannot be estimated reliably, the treatment should be as follows: (i) if it is probable that the costs incurred for the services provided is recoverable, services revenue should be recognized only to the extent of recoverable costs incurred, and costs should be recognized as current expenses in the period in which they are incurred; (ii) if it is probable that costs incurred will not be recoverable, costs should be recognized as current expenses immediately and services revenue should not be recognized.

Deferred Revenue, Advances from Customers and Subscriber Points Reward Program

      Deferred revenue

     Deferred revenue mainly represents upfront non-refundable revenue, including connection fees, installation fees and receipts from the activation of SIM/UIM cards relating to the GSM and CDMA businesses, which are deferred and recognized over the expected customer service period.

      Advances from customers

     Advances from customers are amounts paid by customers for prepaid cards, other calling cards and prepaid service fees, which cover future telecommunications services (over a period of one to twelve months). Advances from customers are stated at the amount of proceeds received less the amount already recognized as revenues upon the rendering of services.

      Subscriber points reward program

     The fair value of providing telecommunications services and the subscriber points reward are allocated based on their relative fair values. A portion of revenue equal to the fair value of the subscriber points reward is recorded as deferred revenue when the rewards are granted and recognized as revenue when the points are redeemed or expired. The deferred revenue is recognized based on (i) the value of each bonus point awarded to subscribers, (ii) the number of bonus points related to subscribers who are qualified or expected to be qualified to exercise their redemption right at each balance sheet date; and (iii) the expected bonus points redemption rate. The fair value of the outstanding subscriber points reward is subject to review by management on a periodic basis.

      Interest income

     Interest income from deposits in banks or other financial institutions is recognized on a time proportion basis, using the effective interest method.

      Dividend income

     Dividend income is recognized when the right to receive payment is established.

Critical Accounting Estimates and Judgments

Recognition of Upfront Non-Refundable Revenue and Direct Incremental Costs

      Mobile Telecommunications Services

     We defer and amortize upfront non-refundable revenue, including connection fees and activation fees of SIM cards or UIM cards from mobile subscribers over the expected customer service period. Accordingly, the related direct incremental costs of acquiring and activating GSM and CDMA subscribers, including costs of SIM or UIM cards and commissions which are directly associated with upfront non-refundable revenue received upon activation of mobile services, are also capitalized and amortized over the same expected customer service period. We only capitalized costs to the extent that they will generate future economic benefits. The excess of the direct incremental costs over the corresponding upfront non-refundable revenue, if any, are expensed to the statements of income immediately. The weighted average customer service period of mobile business based on current estimates after considering the prevailing market environment is approximately 3 years (2007: approximately 3 years).

     The expected customer service period for our GSM and CDMA mobile business is estimated based on the expected stabilized churn rates of subscribers after taking into consideration factors such as customer retention experience, the expected level of competition, the risk of technological or functional obsolescence of our services and the current regulatory environment. If the estimate of the expected stabilized churn rate changes for future periods as a result of unexpected changes in competition environment, telecommunications technology or regulatory environment, the amount and timing of recognition of these deferred direct incremental costs and deferred revenue would also be changed.

      Fixed-Line Telecommunications Services

     We defer the recognition of upfront customer connection and installation fees and amortize them over the expected customer relationship period of 10 years. The related direct incremental installation costs are deferred and amortized over the same expected customer relationship period of 10 years, except when the direct incremental costs exceed the corresponding installation fees, the excess amounts are immediately written off as an expense to the statements of income.

     We estimate the expected customer relationship period based on the historical customer retention experience and after factoring in the expected level of future competition, the risk of technological or functional obsolescence to our services, technological innovation, and the expected changes in the regulatory and social environment. If our estimate of the expected customer relationship period changes as a result of increased competition, changes in telecommunications technology or other factors, the amount and timing of recognition of the deferred revenues may change for the future periods.

Depreciation on Property, Plant and Equipment

     Depreciation on our property, plant and equipment is calculated using the straight-line method to allocate cost or revalued amounts up to residual values over the estimated useful lives of the assets. We review the useful lives and residual values periodically to ensure that the method and rates of depreciation are consistent with the expected pattern of realization of economic benefits from property, plant and equipment. We estimate the useful lives of property, plant and equipment based on historical experience, taking into account anticipated technological changes. If there are significant changes from previously estimated useful lives, the amount of depreciation expenses may change.

Revaluation of Property, Plant and Equipment

     Property, plant and equipment other than buildings and telecommunications equipment related to our GSM services is carried at revalued amounts, being the fair value at the date of revaluation, less subsequent accumulated depreciation and impairment. See Note 2.6 (iii) to our consolidated financial statements included in this annual report. Such equipment was revalued on a replacement cost or open market value approach, as appropriate, by an independent valuer. If the revalued amounts differ significantly from the carrying amounts of the equipment in the future, the carrying amounts will be adjusted to the revalued amounts. The key assumptions made to determine the revalued amounts include the estimated replacement costs and the estimated useful lives of the equipment. This will have an impact on our future results, since any subsequent decreases in valuation are first set off against increases on earlier valuations in respect of the same item and thereafter are charged as an expense to the statements of income and any subsequent increases are credited as income to the statements of income up to the amount previously charged to the statements of income and thereafter are credited to equity. In addition, the depreciation expenses in future periods will change as the carrying amounts of such equipment change as a result of the revaluation.

Impairment of Non-Current Assets

     We test whether non-current assets have suffered from any impairment, in accordance with the accounting policy stated in Note 2.10 to our consolidated financial statements included in this annual report. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. We estimate value in use based on estimated discounted pre-tax future cash flows of the cash generating unit at the lowest level to which the asset belongs. If there is any significant change in management’s assumptions, including discount rates or growth rates in the future cash flow projection, the estimated recoverable amounts of the non-current assets and our results would be significantly affected. Such impairment losses are recognized in the statements of income, except where the asset is carried at valuation and the impairment loss does not exceed the revaluation surplus for that same asset, in which case the impairment loss is treated as a revaluation decrease and charged to the revaluation reserve. Accordingly, there will be an impact to the future results if there is a significant change in the recoverable amounts of the non-current assets.

     During 2008, we conducted the impairment test for the PHS service related assets, after considering the expected significant decline in revenue and profitability in 2009 and onwards. The impaired PHS business related assets were written down to their recoverable amount, which was determined based on their estimated value in use as there is no active market transaction for PHS business related assets. Estimated value in use was determined based on the present value of estimated future net cash flows expected to arise from the continuing use of the PHS business related assets. In estimating the future net cash flows, we made key assumptions and estimates on the appropriate discount rate of 15%, the period covered by the cash flow forecast of 3 years, the future loss of customers at an annual rate of declining ranging from 60% to 80%, and the decrease in average revenue per subscriber at an annual rate of decline at 15%.

     These assumptions and estimates were made after considering the historical trends, the prevailing market trends and the physical conditions of the PHS business related assets. Changes in these assumptions and estimates could have a significant impact on the estimated recoverable amount. Based on above, we recognized RMB11,837 million (2007: Nil) of impairment loss on PHS services related assets for the year ended December 31, 2008.

Provision for Doubtful Debts

     Accounts receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. We evaluate specific accounts receivable where there are indications that the receivable may be doubtful or is not collectible. We record a provision based on our best estimates to reduce the receivable balance to the amount that is expected to be collected. For the remaining receivable balances as at each reporting date, we make a provision based on observable data indicating that there is a measurable decrease in the estimated future cash flows from the remaining balances. We make such estimates based on our past experience, historical collection patterns, subscribers’ creditworthiness and collection trends. For general subscribers, we make a full provision for receivables aged over 3 months, which is consistent with our credit policy with respect to the relevant subscribers.

     Our estimates described above are based on past experience, subscribers’ creditworthiness and collection

trends. If circumstances change, including changes due to factors including developments in our business and the external market environment, we may need to re-evaluate our policies on doubtful debts, and make additional provisions in the future.

Income Tax and Deferred Taxation

     We estimate our income tax provision and deferred taxation in accordance with the prevailing tax rules and regulations, taking into account any special approvals obtained from relevant tax authorities and any preferential tax treatment to which we are entitled in each location or jurisdiction in which we operate. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. We recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

     For temporary differences which give rise to deferred tax assets, we have assessed the likelihood that the deferred tax assets could be recovered. Major deferred tax assets relate to impairment loss and revaluation deficit on property, plant and equipment, provision for doubtful debts, deferred revenue and accruals of expenses not yet deductible for tax purpose. Due to the effects of these temporary differences on income tax, we have recorded deferred tax assets amounting to approximately RMB5,326 million as at December 31, 2008 (2007: approximately RMB2,514 million). Deferred tax assets are recognized based on our estimates and assumptions that they will be recovered from taxable income arising from continuing operations in the foreseeable future.

     We believe we have recorded adequate tax provisions and deferred taxes based on the prevailing tax rules, regulations and interpretations and our current best estimates and assumptions. See “E. Taxation — People’s Republic of China” under Item 10. In the event that future tax rules, regulations and interpretations or related circumstances change, adjustments to current and deferred taxation may be necessary.

Equity-Settled Share Options

     On October 15, 2008, we granted share options under a special purpose share option scheme. See “E. Share Ownership — Stock Incentive Schemes — Special Purpose Share Option Scheme” under Item 6. The fair value of these options which are not traded in an active market are determined by using valuation techniques. We use our judgment to select an appropriate valuation method and make assumptions that are mainly based on market conditions existing at the grant date. The valuation model requires the input of subjective assumptions, including the volatility of share price, dividend yield and expected option life. Changes in subjective input assumptions can materially affect the fair value estimate. For details, please refer to Note 32 to our consolidated financial statements included in this annual report.

Recently Issued International Financial Reporting Standards

     The IASB has issued a number of new and revised IFRSs and interpretations that are first effective for the current accounting period commencing January 1, 2008 or are available for early adoption. The equivalent new and revised HKFRSs and interpretations consequently issued by the HKICPA have the same effective date as those issued by the IASB and are in all material respects identical to the pronouncements issued by the IASB. There have been no other material changes to HKFRSs.

     Up to the date of issue of our 2008 financial statements, the following new standards and amendments or revisions to existing standards have been issued but not yet effective for the annual accounting period ended December 31, 2008 and have not been adopted by us:

     Apart from the above, there are also a number of minor amendments to IFRS/HKFRS 7, including “Financial Instruments: Disclosures,” IAS/HKAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors,” IAS/HKAS 10, “Events After the Balance Sheet Date,” IAS/HKAS 18, “Revenue” and IAS/HKAS 34, “Interim Financial Reporting.”

     We are currently in the process of making an assessment of the expected impact of these new standards, and amendments/revisions to existing standards in the period of initial application.

     In addition, we have elected early adoption of IFRIC/HK(IFRIC) 13, “Customer Loyalty Programmes” for the year ended December 31, 2008. In terms of the impact of early adoption of IFRIC/HK(IFRIC) 13, please see Note 2.2 point (b) “Subscriber point reward program” under the section headed “Changes of Accounting Policies and Estimates” to our financial statements included in this annual report.

Operating Results

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenue

     In 2008, we experienced various challenges, including changes in the economic environment, a further intensified trend of mobile substitution in our fixed-line business and downward adjustments in mobile roaming tariffs, as well as the telecommunications industry restructuring. By improving customer value, promoting bundling of fixed-line and mobile services and the application of value-added services, we maintained stable revenue from continuing operations. Revenues from continuing operations for 2008 amounted to RMB148.91 billion, a decrease from RMB150.69 billion for 2007, of which fixed-line upfront connection fees amounted to RMB0.89 billion. Excluding the effects of fixed-line upfront connection fees, our revenues from continuing operations for 2008 would amount to RMB148.02 billion, representing a decrease of 0.8% from RMB149.17 billion in 2007, of which our service revenue was RMB146.37 billion, representing a decrease of 1.3% from RMB148.23 billion in 2007, and revenue from sale of telecommunications products was RMB1.65 billion, representing an increase of 76.0% from RMB0.94 billion in 2007.

Mobile Business Revenue

     Revenue from our GSM mobile business grew in 2008. Revenue from our GSM mobile business increased by 4.3% from RMB62.56 billion in 2007 to RMB65.25 billion in 2008. Revenue from our GSM mobile business, as a percentage of our total revenue from continuing operations (excluding fixed-line upfront connection fees), increased

from 41.9% in 2007 to 44.1% in 2008. The growth in revenue from our GSM mobile business is primarily due to the continued increase in the total number of our total GSM mobile subscribers, partially offset by the decrease in our subscribers’ ARPU.

     Our total number of GSM mobile subscribers was 133.37 million as of December 31, 2008, an increase of 10.6% from 120.56 million as of December 31, 2007. Total usage of our GSM mobile services was 376.67 billion minutes, an increase of 10.3% from 2007. ARPU from our GSM mobile business was RMB42.3 in 2008, a decrease of 7.4% from RMB45.7 in 2007. This decrease was primarily due to (i) our decreasing effective tariffs, which mainly resulted from pricing competition with other telecommunication operators in China and downward adjustments on tariffs by the PRC Government (which may continue in the future); and (ii) the fact that a significant portion of our incremental market consists of users from rural areas in China, many of whom tend to have less usage of telecommunications services (mobile services, in particular) and are more cost-sensitive than users from urban areas. The average MOU decreased by 1.3%, from 249.7 minutes in 2007 to 246.4 minutes in 2008, primarily due to the fact that a significant portion of our incremental market consists of users from rural areas in China, many of whom tend to have less usage of telecommunications services than urban users. See “D. Risk Factors — We may further lose fixed-line and mobile subscribers and our doubtful debt ratios may increase, which may materially adversely affect our financial condition, results of operations and growth prospects” and “D. Risk Factors — We may experience further declines in ARPU for our telecommunications services” under Item 3.

     The table below sets forth the revenue composition of our GSM mobile business and each revenue item’s respective share of total GSM revenue for the years ended December 31, 2007 and 2008.

      Usage Fees and Monthly Fees . As a result of our tariff adjustments in response to intense market competition and the MIIT’s roaming charges adjustment in 2008, usage fees and monthly fees for our GSM mobile services were RMB40.46 billion in 2008, a decrease of 3.8% from RMB42.08 billion in 2007, and as a percentage of our total GSM service revenue, decreased from 67.3% in 2007 to 62.5% in 2008.

      Value-Added Service Revenue . As a result of our promotion of the value-added business, revenues from our GSM value-added services amounted to RMB16.26 billion in 2008, an increase of 20.2% from RMB13.53 billion in 2007 and as a percentage of GSM service revenue increased from 21.6% in 2007 to 25.1% in 2008. Of the total revenue from GSM value-added mobile services, revenue from our SMS services increased by 8.8% from RMB5.99 billion in 2007 to RMB6.52 billion in 2008; revenue from “Cool Ringtone” services increased by 34.6% from RMB1.85 billion in 2007 to RMB 2.49 billion in 2008; and revenue from caller identification services increased by 15.0% from RMB3.26 billion in 2007 to RMB3.75 billion in 2008. In addition, as we further expanded the coverage of our GPRS services and improved the quality of our GPRS network in 2008, our GPRS services became a new contributing factor to the growth of our GSM mobile value-added services. Revenue from our GPRS services significantly increased by 705.8% from RMB155 million in 2007 to RMB1,249 million in 2008 and its share of total GSM service revenue grew from 0.2% in 2007 to 1.9% in 2008.

      Interconnection Revenue . Our interconnection revenue increased by 17.2% from RMB5.85 billion in 2007 to RMB6.86 billion in 2008, and represented 10.6% of total service revenue in 2008 as compared with 9.4% in 2007. This increase is primarily due to the increased total usage of our GSM mobile services.

      Sales of Telecommunications Products . Revenues from our sale of GSM mobile telecommunications products increased 4,483.3% from RMB12 million in 2007 to RMB550 million in 2008, mainly due to the establishment of Unicom Vsens Telecommunications Company Limited in August 2008, which was principally

engaged in sales of GSM handsets and telecommunications equipment and provision of technical services.

Fixed-Line Business Revenue

     In 2008, as mobile substitution further intensified and the declining trend of the fixed-line voice business continued, we further adjusted our business structure and continued to focus on the development of fixed-line broadband services. Excluding fixed-line upfront connection fees, our revenue from fixed-line business would have decreased by 4.4% from RMB86.61 billion in 2007 to RMB82.77 billion in 2008, of which service revenue would have decreased by 4.7% from RMB85.68 billion in 2007 to RMB81.66 billion in 2008. See “D. Risk Factors — We may further lose fixed-line and mobile subscribers and our doubtful debt ratios may increase, which may materially adversely affect our financial condition, results of operations and growth prospects” and “D. Risk Factors — We may experience further declines in ARPU for our telecommunications services” under Item 3.

     The table below sets forth the revenue composition of our fixed-line business and each revenue item’s respective share of total revenue from our fixed-line business for the years ended December 31, 2007 and 2008.