CHINA UNICOM LTD (Form: 20-F, Received: 06/29/2007 06:46:51)

total amount of Capacity constructed on the Network

the actual number of the Lessee’s cumulative CDMA
( Subscribers as at the end of the month before the Costs are incurred )

total amount of Capacity constructed on the Network

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F


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


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006


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

For the transition period from to


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

CHINA UNICOM LIMITED

(Exact Name of Registrant as Specified in Its Charter)


N/A (Translation of Registrant’s Name Into English)		Hong Kong (Jurisdiction of Incorporation or Organization)

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

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


Title of Each Class Ordinary shares, par value HK$0.10 per share		Name of Each Exchange On Which Registered New York Stock Exchange, Inc.*

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, 2006, 12,680,989,270 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

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):

Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 þ

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

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		15

Item 4A. Unresolved Staff Comments		60

Item 5. Operating and Financial Review and Prospects		60

Item 6. Directors, Senior Management and Employees		86

Item 7. Major Shareholders and Related Party Transactions		95

Item 8. Financial Information		110

Item 9. The Offer and Listing		110

Item 10. Additional Information		111

Item 11. Quantitative and Qualitative Disclosures About Market Risks		122

Item 12. Description of Securities Other than Equity Securities		124

PART II		124

Item 13. Defaults, Dividend Arrearages and Delinquencies		124

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds		125

Item 15. Controls and Procedures		125

Item 16A. Audit Committee Financial Expert		126

Item 16B. Code of Ethics		126

Item 16C. Principal Accountant Fees and Services		127

Item 16D. Exemptions from the Listing Standards for Audit Committees		128


	Page
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers		128

PART III		128

Item 17. Financial Statements		128

Item 18. Financial Statements		128

Item 19. Exhibits		128
EX-4.7 PRE-GLOBAL OFFERING SHARE OPTION SCHEME
EX-4.9 SHARE OPTION SCHEME
EX-4.38 CDMA NETWORK CAPACITY LEASE AGREEMENT
EX-4.39 TRANSFER AGREEMENT OF THE CDMA NETWORK
EX-4.40 COMPREHENSIVE SERVICES AGREEMENT
EX-4.41 TRANSFER AGREEMENT
EX-12.1 CERTIFICATION OF CEO PURSUANT TO 13A-14A
EX-12.2 CERTIFICATION OF CFO PURSUANT OF 13A-14A
EX-13.1 CERTIFICATION OF CEO PURSUANT TO 13A-14B
EX-13.2 CERTIFICATION OF CFO PURSUANT TO 13A-14B

Note Regarding Forward-looking Statements

This annual report for the year ended December 31, 2006 contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. Such forward-looking statements include, without limitation:

	•		our strategy and future plan,

	•		our capital expenditure plan,

	•		our future business condition and financial results,

	•		our ability to retain existing subscribers and attract new subscribers,

	•		our ability to improve our existing services and offer and market new services,

	•		future growth of market demand for our services,

	•		our abilities to optimize, upgrade and expand our networks and increase network efficiency,

	•		our ability to leverage our position as an integrated telecommunications operator and expand into new businesses and new markets,

	•		our ability to upgrade and develop technology applications, and

	•		future regulatory and other developments in the Chinese telecommunications industry.

These forward-looking statements reflect our current views with respect to future events. Actual results may differ materially from information contained in the forward-looking statements as a result of many factors that may be beyond our control, including, without limitation:

	•		any changes in the regulatory policies of the Ministry of Information Industry, or MII, the State-owned Assets Supervision and Administration Commission, or SASAC, and other relevant government authorities in the People’s Republic of China, or the PRC,

	•		the PRC government’s decision in relation to the technology standards and licenses of third generation mobile telecommunications, or 3G,

	•		the effects of competition on the demand and price of our telecommunications services,

	•		any changes in telecommunications and related technology and applications based on such technology, and

	•		changes in political, economic, legal and social conditions in China including: the PRC government’s policies with respect to economic growth, consolidations of and other structural changes in the PRC telecommunications industry, foreign exchange controls, foreign investments in and entry by foreign companies into China’s telecommunications market.

iii

In addition, our future capital expenditure and development plans are dependent on various factors, including, among others:

	•		the availability of adequate financing on acceptable terms,

	•		the adequate and timely supply of equipment when required, and

	•		the adequacy of currently available spectrum and other government-controlled telecommunications resources or availability of additional spectrum and such other telecommunications resources.

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

Certain Definitions

As used in this annual report, references to “we”, “us”, “our”, the “Company” and “Unicom” are to 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 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. Please also see “A. History and Development of the Company” under Item 4 for our current shareholding structure. For purposes of this annual report, references to “PRC” and “China” do not include Hong Kong Special Administrative Region, Macau Special Administrative Region or Taiwan.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not Applicable.

Item 2. Offer Statistics and Expected Timetable

Not Applicable.

Item 3. Key Information

A. Selected Financial Data

The following table presents our selected consolidated income statement data for the years ended December 31, 2002, 2003, 2004, 2005 and 2006 and our selected consolidated balance sheet data as of December 31, 2002, 2003, 2004, 2005 and 2006. The selected consolidated balance sheet data as of December 31, 2005 and 2006 and income statement and cash flow data for the years ended December 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements included in this annual report. The selected consolidated balance sheet data as of December 31, 2002, 2003 and 2004 and income statement and cash flow data for the years ended December 31, 2002 and 2003 have been derived from our audited consolidated financial statements that are not included in this annual report.

Our financial statements are prepared in accordance with Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards, or HKFRS. Financial statements prepared in accordance with HKFRS vary in certain material respects from generally accepted accounting principles in the United States, or US GAAP. In accordance with HKFRS, we adopted the purchase method to account for our prior acquisitions from Unicom Group of certain cellular businesses and assets held by Unicom New Century Telecommunications Corporation Limited, or Unicom New Century, Unicom New World Telecommunications Corporation Limited, or Unicom New World, and China Unicom International Limited, or Unicom International. The acquisitions of Unicom New Century, Unicom New World and Unicom International became effective on December 31, 2002, December 31, 2003 and in September 2004, respectively, as described in “A. History and Development of the Company” under Item 4. Accordingly, our consolidated income statement and, except as otherwise noted, all other HKFRS financial information for the year 2004 presented in this annual report include the operating results of Unicom New Century and Unicom New World for the year ended December 31, 2004 and the operating results of Unicom International from the effective date of the acquisition to December 31, 2004, but our consolidated income statement and all other HKFRS financial information for the year 2003 presented in this annual report do not include the operating results of Unicom New World for the year ended December 31, 2003. Under the purchase method, our consolidated balance sheet as of December 31, 2003 includes the financial position of Unicom New Century and Unicom New World and our consolidated balance sheet as of December 31, 2004 also includes the financial position of Unicom International. In contrast, under US GAAP, these acquisitions would have been accounted for as transfers of entities under common control. The financial statements prepared under US GAAP would have been retroactively restated for all periods presented on a combined basis as if the acquisitions had been in effect since inception, whereby related assets and liabilities of the acquired businesses would have been accounted for at historical cost and the results of operations of the acquired businesses would have been included in the consolidated financial statements for the earliest period presented.

See Note 38 to the consolidated financial statements included in this annual report for a summary of the principal differences between HKFRS and US GAAP in relation to our financial statements.


	As of or for the year ended December 31
	2002 ⁽¹⁾			2003 ⁽¹⁾⁽²⁾			2004 ⁽¹⁾			2005			2006			2006
	RMB			RMB			RMB			RMB			RMB			US$ ⁽³⁾
							(in millions, except number of shares and per share data)
Statement of Income Data:
HKFRS:
Revenue (Turnover):
Cellular Service Business		31,112			57,819			71,887			79,712			86,584			11,095
-GSM Service Business		27,890			41,153			47,509			52,135			59,291			7,598
-CDMA Service Business		3,222			16,667			24,378			27,577			27,293			3,497
Paging Business		2,161			1,403			—			—			—			—
Long Distance Business		2,766			2,273			1,848			1,525			1,068			137
Data and Internet Business		2,793			3,437			3,662			3,050			2,375			304
Total service revenue		38,832			64,933			77,397			84,287			90,027			11,536
Sales of telecommunications products		1,411			2,221			1,690			2,762			4,267			547
Total revenue		40,243			67,154			79,087			87,049			94,294			12,083
Costs and expenses		(33,932	)		(60,956	)		(72,616	)		(79,947	)		(87,799	)		(11,251	)
Income before income tax		6,311			6,198			6,471			7,102			6,495			832
Net income		4,649			4,269			4,493			4,931			3,732			478
-Basic net income per share ⁽⁴⁾		0.37			0.34			0.36			0.39			0.30			0.04
-Number of shares outstanding for basic net income per share (in thousands) ⁽⁴⁾		12,552,996			12,553,010			12,561,242			12,570,398			12,599,018			12,599,018
-Diluted net income per share ⁽⁴⁾		0.37			0.34			0.36			0.39			0.30			0.04
-Number of shares outstanding for diluted net income per share (in thousands) ⁽⁴⁾		12,552,996			12,556,728			12,593,054			12,607,476			12,649,306			12,649,306
-Basic net income per ADS ⁽⁵⁾		3.69			3.41			3.58			3.92			2.96			0.38
-Number of ADS outstanding for basic net income per ADS (in thousands) ⁽⁴⁾		1,255,300			1,255,301			1,256,124			1,257,040			1,259,902			1,259,902
-Diluted net income per ADS ⁽⁵⁾		3.69			3.41			3.57			3.91			2.95			0.38
-Number of ADS outstanding for diluted net income per ADS (in thousands) ⁽⁴⁾		1,255,300			1,255,673			1,259,305			1,260,748			1,264,931			1,264,931

US GAAP ⁽⁶⁾ :
Revenue		50,421			71,980			79,388			87,255			94,500			12,109
Operating income from continuing operations		9,759			10,710			8,185			8,142			9,202			1,179
Net income before discontinued operation, and cumulative effect of change in accounting policy		5,500			6,078			4,713			5,013			6,156			789
Loss from discontinued operation, net of tax		422			1,342			—			—			—			—
Cumulative effect of change in accounting policy (transitional adjustment of goodwill impairment upon the adoption of SFAS 142)		42			—			—			—			—			—
Net income		5,036			4,736			4,713			5,013			6,156			789
-Basic net income per share before discontinued operation and cumulative effect of change in accounting policy ⁽⁴⁾		0.44			0.48			0.38			0.40			0.49			0.06
-Basic net income per ADS before discontinued operation and cumulative effect of change in accounting policy ⁽⁵⁾		4.38			4.84			3.75			3.99			4.89			0.63
-Basic net income per share after discontinued operation and cumulative effect of change in accounting policy ⁽⁴⁾		0.40			0.38			0.38			0.40			0.49			0.06
-Basic net income per ADS after discontinued operation and cumulative effect of change in accounting policy ⁽⁵⁾		4.01			3.77			3.75			3.99			4.89			0.63


	As of or for the year ended December 31
	2002 ⁽¹⁾			2003 ⁽¹⁾⁽²⁾			2004 ⁽¹⁾			2005			2006			2006
	RMB			RMB			RMB			RMB			RMB			US$ ⁽³⁾
							(in millions, except number of shares and per share data)
Balance sheet Data:

HKFRS:
Bank balances and cash		14,433			9,220			4,655			5,472			12,182			1,561
Property, plant and equipment		107,216			117,863			118,492			112,373	⁽⁷⁾		111,382			14,272
Total assets		152,095			152,870			149,038			142,630			146,438			18,764
Short-term debt and current portion of other long-term debt		15,330			18,173			20,015			22,035			11,072			1,419
Obligations under finance lease-current portion		17			25			938			421			100			13
Obligations under finance lease-non-current portion		101			100			489			145			10			1
Other long-term debt		37,686			36,213			26,137			11,982			4,139			530
Convertible bonds		—			—			—			—			10,325			1,323
Shareholders’ equity		66,572			69,052			72,442			76,287			79,412			10,176
Share capital		1,331			1,331			1,332			1,334			1,344			172
US GAAP ⁽⁶⁾ :
Property, plant and equipment		118,787			118,171			118,701			112,549			111,286			14,260
Total assets		164,636			150,477			146,615			139,958			143,718			18,416
Obligations under finance lease-current portion		17			25			938			421			100			13
Obligations under finance lease-non-current portion		101			100			489			145			10			1
Other long-term debt		45,520			36,213			26,137			11,982			4,139			530
Convertible bonds		—			—			—			—			7,863			1,008
Shareholders’ equity		64,215			65,946			69,442			73,265			78,733			10,089
Share capital		1,331			1,331			1,332			1,334			1,344			172

Other Financial Data:

HKFRS:
Net cash generated from operating activities		13,054			22,565			23,819			30,804			35,451			4,543
Net cash used in investing activities		(5,166	)		(19,051	)		(18,958	)		(16,748	)		(17,337	)		(2,222	)
Net cash used in financing activities		(11,868	)		(8,778	)		(9,401	)		(13,213	)		(11,403	)		(1,461	)
Dividend declared per share		0.10			0.10			0.10			0.11			0.18			0.02

US GAAP ⁽⁶⁾ :
Net cash generated from operating activities		18,235			25,993			24,510			31,486			35,874			4,597
Net cash used in investing activities		(10,261	)		(20,295	)		(19,668	)		(17,431	)		(17,760	)		(2,276	)
Net cash used in financing activities		(12,773	)		(11,397	)		(9,440	)		(13,213	)		(11,403	)		(1,461	)
Dividend declared per share		0.10			0.10			0.10			0.11			0.18			0.02


(1)		The adoption of HKFRS on January 1, 2005 resulted in changes in certain accounting policies which have been reflected in the financial statements either in accordance with the transitional provisions in the applicable accounting standards or, to the extent there are no transitional provisions, applied retrospectively. Accordingly, the comparative financial data prior to January 1, 2005 presented herein was restated, as applicable, in 2005 to conform to the changed accounting policies.

(2)		Under HKFRS, the sale of Guoxin Paging Corporation Ltd., or Guoxin Paging, on December 31, 2003 by us to Unicom Group has been accounted for as a sale of discontinued operation. The difference between the sale proceeds and the carrying amount of net assets of Guoxin Paging as of December 31, 2003 was recorded as a loss on sale of discontinued operation in our consolidated income statement for the year ended December 31, 2003. The operating results of Guoxin Paging from January 1, 2003 to the effective date of the sale of Guoxin Paging were included in our consolidated income statement for the year ended December 31, 2003. Under US GAAP, the sale of Guoxin Paging to Unicom Group is considered a transfer of business between entities under common control and accounted for at historical cost of the net assets transferred, after reduction, if appropriate, for an indicated impairment of value. In addition, under US GAAP, the results of operations of a component or segment of an entity that has been disposed of should be reported in discontinued operations as a separate component of income, separated from continuing operations, in the period in which the disposal occurred and in prior periods. Accordingly, all the operating results of Guoxin Paging have been grouped into and reported in the income statement as “Discontinued operation — Loss from discontinued operation” under US GAAP.

(3)

The translation of RMB into US dollars has been made at the rate of RMB7.8041 to US$1.00, the noon buying rate in New York City for cable transfer in RMB as certified for customs purposes by the Federal Reserve Bank of New York on December 29, 2006. The translations are solely for the convenience of the reader.

(4)

See Notes 30 and 38 to the financial statements included in this Form 20-F on how basic and diluted net income per share are calculated under HKFRS and US GAAP, respectively.

(5)

Net income per ADS is calculated by multiplying net income per share by 10, which is the number of shares represented by each ADS.

(6)

The US GAAP amounts as of and for each of the relevant years ended on December 31, 2006, 2005, 2004, 2003 and 2002 are presented as if the acquisitions of Unicom New Century, Unicom New World and Unicom International had been in existence since the beginning of the earliest period presented.

(7)

Certain assets have been reclassified for comparative purpose, see Notes 6 and 36 to our consolidated financial statements included in this Form 20-F for detailed discussions.

Historical Exchange Rates Information

We publish our financial statements in Renminbi, or RMB, the legal tender currency in the PRC. In this annual report, references to “US dollars” or “US$” are to United States dollars and references to “Hong Kong dollars”, “HK dollars” or “HK$” are to Hong Kong dollars. Solely for the convenience of the reader, this annual report contains translations of certain RMB and Hong Kong dollar amounts into US dollar amounts and vice versa at specified rates. These translations should not be construed as representations that the RMB or Hong Kong dollar amounts actually represent such US dollar amounts or could be converted into US dollar amounts at the rates indicated or at all. Unless otherwise stated, the translations of RMB and Hong Kong dollars into US dollars and vice versa have been made at the rate of RMB7.8041 to US$1.00 and HK$7.7771 to US$1.00, the noon buying rates in New York City for cable transfers payable in RMB or Hong Kong dollars as certified for customs purposes by the Federal Reserve Bank of New York on December 29, 2006.

The noon buying rates on June 27, 2007 were RMB7.6210 to US$1.00 and HK$7.8147 to US$1.00, respectively. The average noon buying rates for 2002, 2003, 2004, 2005 and 2006 were RMB8.2771, RMB8.2772, RMB8.2768, RMB8.1826 and RMB7.9723, respectively, to US$1.00, and HK$7.7996, HK$7.7864, HK$7.7899, HK$7.7755 and HK$7.7681, respectively, to US$1.00, calculated as the average of the noon buying rates on the last day of each month during each applicable year. The following table sets forth the high and low noon buying rates between RMB and the US dollar (in RMB per US dollar) and Hong Kong dollar and the US dollar (in Hong Kong dollar per US dollar) for each month during the previous six months:


Period	High		Low		High		Low
	(RMB per US$1.00)				(HK$ per US$1.00)
December 2006		7.8350		7.8041		7.7787		7.7665
January 2007		7.8127		7.7705		7.8112		7.7797
February 2007		7.7632		7.7410		7.8141		7.8041
March 2007		7.7454		7.7232		7.8177		7.8093
April 2007		7.7345		7.7090		7.8212		7.8095
May 2007		7.7065		7.6463		7.8236		7.8044
June 2007 (through June 27, 2007)		7.6680		7.6175		7.8188		7.8062

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

Our cellular businesses face competition from China Mobile Limited, or China Mobile, China Telecommunications Corporation, or China Telecom, and China Network Communications Group Corporation, or China Netcom. 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.

Our cellular businesses face intense competition from China Mobile. China Mobile is the largest cellular 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 cellular service areas, and such competition may continue and even intensify. In particular, continued price competition between China Mobile and us, such as increased offerings of package service plans with “calling-party-pays” features and/or decreased roaming charges, may accelerate the decline of the average revenue per user per month, or ARPU, of our cellular services, and adversely affect our profitability. Moreover, China Mobile has announced its intention to launch 3G cellular services in the future, which could further intensify the competition with our cellular businesses.

Our cellular services also compete with the local wireless telecommunications services offered by China Telecom and China Netcom in their respective service areas, known as “Little Smart” services, which are based on their fixed line networks and primarily utilize the personal handy-phone system, or PHS, technology. “Little Smart” services are offered as extensions of fixed line services and, with such features as calling-party-pays arrangements, carry significantly lower tariffs than cellular services. Currently these services have attracted over 90 million users in China and their subscriber base is continuing to grow. In addition, both China Telecom and China Netcom have announced their intention to develop 3G cellular services in the future, which would impose a more direct competition with our cellular business.

Increased competition from China Mobile, China Telecom and China Netcom could lead to slower subscriber growth, lower traffic volume of our cellular services, continued price pressure and higher customer acquisition costs, which may materially adversely affect our financial condition, results of operations and growth prospects.

Our CDMA services may remain in a relatively disadvantageous market position as compared to GSM services in China.

We are the only cellular operator offering CDMA services in China. The majority of cellular subscribers in China today are subscribers to services based on the global system for mobile communications, or GSM. As of December 31, 2006, we had approximately 36.5 million CDMA subscribers, while there were over 400 million cellular subscribers in China as of December 31, 2006. CDMA cellular services compete with GSM services for cellular subscribers, who may be reluctant to switch to CDMA cellular services because of the need to obtain a new CDMA handset and a new phone number. CDMA services are also perceived to have limitations in international roaming due to the lack of CDMA networks in many countries. In addition, CDMA handsets are generally more expensive than GSM handsets and are not compatible with GSM networks. As a result of the smaller subscriber base, the overall size of the supply chain for CDMA cellular services in China is significantly smaller than the supply chain for GSM cellular services.

Whether our CDMA services can gain a more favorable market position will continue to be subject to a number of uncertainties, including, among others:

	•		whether we can effectively retain our existing subscribers and attract sufficient new CDMA cellular subscribers;

	•		whether we can effectively maintain and/or improve the ARPU of our CDMA;

	•		whether we can effectively utilize our CDMA marketing expenses to accelerate the revenue growth of our CDMA business;

	•		whether we can generate more revenues from value-added services by capitalizing on the technological advantages of CDMA 1X wireless data services; and

	•		whether we can enhance the market image of our CDMA services among cellular users in China.

Any of these uncertainties may adversely affect the growth and profitability of our CDMA cellular services and consequently our financial condition and results of operation.

Our CDMA and GSM businesses compete with each other in certain areas, which may adversely affect the growth and profitability of these businesses.

To implement differentiated and dedicated management of our CDMA and GSM businesses, we recently segregated the sales and marketing functions of these two businesses, which may require (i) more delineated allocation of resources in personnel, management, finance and information technology, among others and (ii) more management coordination at both headquarter and branch levels. However, we may not be able to achieve favorable results from the implementation of our segregation of the sales and marketing functions of our CDMA and GSM businesses. In addition, the competition between the two businesses for our internal resources as well as external cellular subscribers may not lead to overall better results of our operations. If we cannot coordinate the development of our CDMA and GSM services effectively, or obtain adequate resources for both our GSM and CDMA cellular services, the growth and profitability of these businesses and our financial condition, results of operations and growth prospects may be adversely affected.

Failure to continually optimize, expand and upgrade our networks and infrastructure or changes in telecommunications technology and technological standards could adversely affect our competitive position and hinder our growth.

The growth of our businesses depends on whether we are able to continue to optimize and expand the coverage and capacity of our networks, to upgrade the technology and to improve the quality of our networks in a timely and effective manner. We also need to continue to improve the quality of our existing networks in order to enhance our telecommunications services.

In addition, the telecommunications industry in China and elsewhere in the world is subject to rapid and significant changes in technology and technological standards, including the technology migration to 3G. Such changes may render our networks and systems inadequate or obsolete. As a result of such changes, we may need to make significant changes and upgrades to our existing networks and infrastructure or construct new networks and infrastructure, which may require substantial capital expenditures and other resources.

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:

	•		obtain adequate financing;

	•		obtain relevant government licenses, permits and approvals;

	•		manage the technology migration in an effective manner;

	•		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 these uncertainties and other 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 adversely affected.

The CDMA handset promotional packages have increased our costs and expenses and may adversely affect our profitability.

In order to accelerate the development of our CDMA business and subscriber growth, we have offered CDMA handset promotional packages. Under those arrangements, CDMA handsets were provided to subscribers for their use at no additional cost to them during the specified contract periods as long as such subscribers agreed to incur a minimum amount of service fees during the contract period. The maximum contract period is two years. The cost of the handsets provided to subscribers under these contractual arrangements, treated as deferred customer acquisition costs, was deferred, to the extent recoverable, and amortized over the contractual period during which we expect to receive the minimum contract revenue. Therefore, these promotional packages tend to increase our costs and expenses.

While we have significantly reduced the use of such CDMA handset promotional packages in recent years, the carrying amount of the deferred customer acquisition costs has been gradually reduced but remained sizeable. For the year ended December 31, 2006, amortization of such deferred customer acquisition costs was approximately RMB4.21 billion and the carrying amount of such costs amounted to RMB2.10 billion as of December 31, 2006. As a result, while the use of these CDMA promotional packages has accelerated the growth of our CDMA business, it may adversely affect the profitability of our CDMA business and our financial condition and results of operations.

In addition, upon expiration of the contract period of these CDMA handset promotional packages, some subscribers did not renew their contracts and switched to cheaper service plan packages or subscribed to our competitors’ cellular services, which contributed to the decrease of ARPU and the increase of the churn rate of our CDMA business in 2006. Such effects, if they continue, may adversely affect the profitability of our CDMA business and our financial condition and results of operations.

In order to control the costs of our CDMA promotional packages, we adopted a policy to centralize the purchases of CDMA handsets since 2005. This centralized purchasing policy has resulted in our maintaining inventory of CDMA handsets that is subject to the risk of inventory obsolescence. As of December 31, 2006, we maintained an inventory of CDMA handsets of RMB1.35 billion.

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

We continue to have a significant level of capital expenditure and debt service requirements. We plan to spend approximately RMB26.00 billion for capital expenditure in 2007, an increase of 20.6% from 2006. As of December 31, 2006, the sum of our long-term and short-term interest bearing debt exceeded the amount of our cash, cash equivalents and short-term bank deposits by RMB13.27 billion. See “Liquidity and Capital Resources” under Item 5. We cannot assure you that we will be able to obtain future financing on a timely basis and on acceptable terms, and our failure to do so may adversely affect our financial condition, competitive position 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.

Our long distance, data and Internet businesses remain small compared to China Telecom or China Netcom, and competition from China Telecom, China Netcom and other telecommunications service providers may adversely affect our profitability and growth in these businesses.

The fixed line operators of China Telecom and China Netcom currently hold the strongest market position in the public switched long distance telephony, or PSTN, and data services markets in their respective service areas. They are also the leading providers of Internet protocol telephony, or IP telephony, and Internet access services in China. China Telecom and China Netcom have competitive advantages over us in areas such as customer base, financial resources, fixed network coverage and “last-mile” access. Our IP telephony services also compete with other service providers including China Satellite Communication, or China SatCom, and China Railway Communications Co. Ltd., or China Railcom. In 2006, intense competition continued to contribute to the decreases in average realized tariff rates for long distance services and in revenue from our long distance business. In addition, our lack of licenses to operate local telephony networks has continued to hinder the growth of our long distance, data and Internet businesses. Competition from China Telecom, China Netcom and other service providers may continue to adversely affect the profitability and growth of our long distance, data and Internet businesses and, to a lesser extent, our overall financial condition and results of operations.

Our churn rates and doubtful debt ratio may increase.

The monthly average churn rate of our GSM and CDMA cellular services increased from 2.41% in 2005 to 2.44% in 2006 and from 1.49% in 2005 to 1.57% in 2006, respectively.

The reasons for such increases include, among others, competition from other service providers, the increase in the proportion of cost-sensitive subscribers among new subscribers and discontinuance of some contractual subscribers upon expiration of their contract period under CDMA handset promotional

packages. Increased churn rates of our GSM and CDMA services may adversely affect our market share and increase our costs of additional customer acquisitions and bad debt, which would adversely affect our financial condition, results of operations and growth prospects.

China is still in the process of developing an effective credit reporting system, and with intense competition in the cellular telecommunications market, our doubtful debt ratio for cellular services, calculated as the amount of doubtful debt provided during the year divided by revenue from our cellular services, may increase in the future. Our doubtful debt ratio of our GSM and CDMA cellular businesses was at 1.7% as of December 31, 2006. If such ratio increases in the future, our financial condition and results of operations could be adversely affected.

Obstacles in interconnection with networks of other telecommunications operators could jeopardize our operations.

The effective provision of our cellular, long distance telephony and other services requires the interconnection between our networks and those of Unicom Group, and the networks of China Telecom, China Netcom, China Mobile and other telecommunications operators. Any obstacles in existing interconnection arrangements or any significant change of their terms, as a result of natural events, accidents, or for regulatory, technological, competitive or other reasons, could lead to temporary service disruptions and increased costs that can seriously jeopardize our operations and adversely affect our profitability and growth. Difficulties in the execution of new interconnection arrangements 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 adversely affect our financial condition, results of operation 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 our other shareholders.

Unicom Group indirectly controls an aggregate of 76.59% of our issued share capital as of May 31, 2007. As our controlling shareholder, it is able to influence our major business decisions through its control of our board of directors. All of our executive directors and executive officers also serve as directors or executive officers of Unicom Group. In addition, our operations depend on a number of services provided by Unicom Group. For example, Unicom Group leases to us, on an exclusive basis, capacity on the CDMA network located in our cellular service areas, provides us with access to international gateways, supplies us with subscriber identity module cards, or SIM cards, and calling cards and provides equipment procurement services and customer services to us. Unicom Group and we also provide a number of services to each other, including interconnection and roaming services, sales agency and collection services and provision of premises. See “A. History and Development of the Company ¾ Our Relationship with Unicom Group” under Item 4 of this annual report. The interests of Unicom Group and our interests in these transactions may differ and Unicom Group may cause us to make decisions that conflict with the interests of our other shareholders.

The internal reorganization of Unicom Group for the A Share offering has created a two-step voting mechanism that will require the approval of the minority shareholders of both our Company and the A Share Company for significant connected 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 newly established subsidiary, China United Telecommunications Corporation Limited, or 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 connected transactions. See “A. History and Development of the Company ¾ Further Restructuring of Unicom Group and Initial Public Offering of the A Share Company in 2002” under Item 4 below. As a result, significant connected transactions between us or our subsidiaries and Unicom Group or its subsidiaries will require the separate approval of the independent minority shareholders both of our company and of the A Share Company. Connected 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.

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 management’s assessment of the effectiveness of our internal control over financial reporting.

As of December 31, 2006, 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, 2006 was effective. Our management’s assessment has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, which expresses unqualified opinions on our management’s assessment and on the effectiveness of our internal control over financial reporting as of December 31, 2006. 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 and adversely affect the market prices of our shares and ADSs.

We may incur increased costs as a result of being a public company.

As a public company listed on the New York Stock Exchange and The Stock Exchange of Hong Kong Limited, we incur a higher level of accounting, legal and other expenses than many private companies. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and the New York Stock Exchange, have required changes in corporate governance and internal control practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. For example, as a result of increased compliance work in light of the implementation of Section 404 of the Sarbanes-Oxley Act of 2002, our audit fees increased 110% from US$7.35 million in 2005 to US$15.42 million in 2006.

The unrealized gain or loss on changes in fair value of the derivative component of our zero coupon convertible bonds and the dilution effect resulting from the conversion of such convertible bonds may adversely affect our share price.

On July 5, 2006, we issued zero coupon convertible bonds due July 5, 2009, with an aggregate principal amount of US$1 billion. The holder of the convertible bonds has an option to convert the bonds into our ordinary shares at a conversion price of HK$8.63 (approximately US$1.11) per share, subject to certain adjustments. According to HKFRS, the conversion option is separately carried as derivative liability at fair value on our balance sheet and any change in such fair value will be charged or credited to our statement of income for the period in which the change occurs. Due to the substantial change in our share price from HK$6.95 as of July 5, 2006, the issue date of the convertible bonds, to HK$11.40 as of December 31, 2006, the fair value of the conversion option in respect of the convertible bonds increased significantly and resulted in an unrealized loss of RMB2.40 billion (approximately US$307 million) on changes in fair value of derivative component of the convertible bonds. Although such unrealized losses do not have any effect on our cash flow or other aspects of our operations, they had a negative impact on our net income for the year 2006, causing a 24.3% decrease from 2005. Fluctuations in our share price, which are beyond our control, could cause unrealized loss or gain again in the future, which may significantly impact our net income. If such unrealized loss or gain reoccurs, we cannot assure you that it will not cause any negative impact on the market price of our shares or ADSs.

In addition, pursuant to the subscription agreement of the convertible bonds, the holder of the convertible bonds may choose to convert such bonds into our common shares, starting from July 5, 2007. Assuming full conversion of the bonds at the initial conversion price of HK$8.63 (US$1.11) per share, the bonds would be convertible into 899,745,075 ordinary shares, representing approximately 6.67% of our enlarged issued and outstanding share capital as of June 20, 2006. If the holder of the convertible bonds chooses to convert a portion or all of the convertible bonds, such conversion may dilute our net income per share, which in turn could have negative impact on the market price of our Shares or ADSs.

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.

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. These changes may include, among others, new regulatory decisions or measures relating to issuance of 3G licenses or selection of 3G technology standards, calling-party-pays arrangements, roaming charges or other tariff adjustments, fulfillment of telecommunications service providers’ universal service obligations and the associated expenses, usage of numbers or frequency resources and the associated fees, or standards and mechanisms of interconnection settlement, and could substantially affect our financial condition, results of operations and growth prospects. For example, if the PRC government decides to grant 3G licenses to one or more of our competitors but not to us, or deregulates or reduces state tariff rates applicable to some of our services, our results of operations and financial condition may be materially and adversely affected. In addition, MII has recently encouraged the gradual implementation of “calling-party-pays” billing arrangements and the reduction of roaming charges by wireless telecommunications operators in the PRC. We cannot predict whether such regulatory moves will result in changes in regulations and official policies, and we cannot assure you that any such regulatory moves, if implemented, will not adversely affect our financial condition, results of operations and growth prospects.

Moreover, the PRC government has in the past restructured the telecommunications industry through a number of initiatives that were rolled out in stages and may initiate further industry restructuring in the future. Any form of potential restructuring of the PRC telecommunications industry may significantly affect the overall business environment and the operations of telecommunications operators in China, including us. We cannot predict the timing for, and any implications and effect of, any future restructuring of the PRC telecommunications industry, or give any assurance that we will not be materially adversely affected by any such industry restructuring. Recently, there have been some media reports indicating that our CDMA and/or GSM businesses may be transferred to other PRC telecommunications operator(s) as a result of a contemplated industry restructuring. We are not aware of any agreements or arrangements in this regard, and we have been unable to confirm with the relevant PRC regulators whether this or any other particular form of industry restructuring is being contemplated. If any such restructuring is carried out at a time or in terms that are not in the interest of our Company or different from market expectations, the value of our Company and the market prices of our ADSs and shares could be materially and adversely affected.

Issuance of additional telecommunications service licenses, including 3G licenses, may further intensify competition in the PRC telecommunications industry and materially adversely affect our financial condition, results of operations and growth prospects.

Since the mid-1990s, the PRC government has taken various measures, including licensing more providers of telecommunications services, to encourage competition in the telecommunications industry. Currently, the Chinese telecommunications market has six basic telecommunications service providers — China Telecom, China Mobile, China Netcom, China Satcom, China Railcom, and our Company — and thousands of value-added service providers. In addition, the government may grant additional telecommunications service licenses in the future, including 3G licenses.

Although the MII recently announced three 3G technology standards in the PRC, which include the standard known as “CDMA2000” that has been utilized by our CDMA cellular business, to date, the PRC government has not publicly announced its official decisions on the definitive timing of the grant of the 3G licenses, the number of 3G licenses to be granted or the selection criteria for telecommunications operators to be granted with 3G licenses. The issuance of 3G licenses may significantly change the overall competition environment of the wireless telecommunications industry and further intensify the competition among telecommunications service providers in China. While we, together with certain other telecommunications service providers, have participated in the 3G trial test and study programs sponsored by the MII and have been preparing for developing 3G business by upgrading our networks and services, we cannot assure you that the PRC government will grant us the requisite approvals and 3G license(s) in a timely or favorable manner, or at all. We cannot predict the 3G technology standards that may be selected by the PRC government for the 3G license(s) that may be granted to us. Even if we are granted one or more 3G licenses, we cannot assure you that we will successfully manage the technology migration to 3G and 3G operations and effectively compete with other cellular services provider(s).

After its accession to the World Trade Organization, or WTO, in December 2001, China promulgated the Administrative Regulations on Telecommunications Companies with Foreign Investment, implementing its commitments to the WTO. Those commitments include the gradual reduction of foreign ownership restrictions in the telecommunications industry and the step-by-step opening of the telecommunications market in China to foreign operators. As of the end of 2006, there was no longer any geographic restriction for foreign telecommunications service provider to provide mobile voice and data telecommunications services in China. See “B. Business Overview — Regulatory and Related Matters — Entry into the Industry” under Item 4. When the PRC government grants licenses to additional telecommunications service providers in the future, licensees may include foreign-invested operators. Such foreign-invested operators entering into China’s telecommunications market may have competitive advantages over us in areas such as financial resources, network management and technical expertise.

Increased competition in China’s telecommunications services industry could impede the growth of our businesses, further increase competition for skilled and experienced employees, result in or exacerbate price competition and increase our customer acquisition costs and other costs and expenses, and thereby adversely affect our results of operations, financial condition 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 cellular communications sector. The total number of cellular subscribers in China increased from 43.3 million at the end of 1999 to 461.1 million by December 31, 2006. Cellular penetration increased from 3.5% to over 35% nationwide during the same period. The growth in cellular subscribers has been slowing down as cellular penetration continues to increase in our cellular service areas. In addition, ARPU for the cellular communications market in China continues to decline. For example, ARPU of our CDMA subscribers declined from RMB75.1 in 2005 to RMB65.9 in 2006. Any slowdown in the growth in China’s telecommunications industry 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 MII has the authority to delineate the scope of universal service obligations. The MII, 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.

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 to a universal service fund. In addition, as part of the transitional measures prior to the formalization of a universal service obligation framework, the MII 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. In participating in such project, Unicom Group, with our assistance, undertook the universal service obligation to extend telecommunications service coverage to a total of more than 5,700 administrative-level villages from 2004 to 2006 primarily through its CDMA and satellite transmission networks. 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 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 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, reduce cellular 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, cellular operators have been subject to lawsuits alleging various health consequences as a result of cellular 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 cellular service usage or result in litigation.

Risks Relating to Doing Business in China

Our operations may be 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 amount 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 adversely affected by government control over capital investments. In recent years, the PRC government has implemented certain measures to manage the pace of economic growth. These measures may cause a decrease in the level of economic activity in China, including a decline in individual spending activities, which in turn could adversely affect our financial condition and results of operations.

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

The ability of our wholly-owned operating subsidiary, China Unicom Corporation Limited, or 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. 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. However, there is no assurance that the relevant PRC government authorities will not in the future 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.

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 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 29, 2006, the Renminbi has appreciated approximately 5.71% 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 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.

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. Therefore, the PRC legal system may not afford the same legal protection available to investors in the United States or elsewhere.

Item 4. Information on the Company

A. History and Development of the Company

Historical Industry Restructuring

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 IP telephony, Internet and data services. It has also approved China Railcom to provide most telecommunications services other than cellular services.

In 1999, the State Council approved a plan to restructure the former China Telecom along four business lines: fixed line, cellular, 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 cellular 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 and western 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 is currently more than one service provider in most of the sectors within the telecommunications industry. See “B. Business Overview ¾ Competition” below.

History of Unicom Group

Since its establishment in July 1994, Unicom Group has developed a nationwide cellular network using GSM technology, a nationwide cellular network using CDMA technology and a nationwide long distance telephony network. In May 1997, the State Council granted approval to Unicom Group to provide data services. The MII licensed Unicom Group to begin to provide Internet services in July 1999 and IP telephony services on a trial basis in 12 cities in April 1999 and on a nationwide basis in March 2000.

Unicom Group offers local telephony services in Sichuan Province and the municipalities of Chongqing and Tianjin. It also offers satellite transmission services through its subsidiary, China United Telecommunications Satellite Communication Co. Ltd., or Unisat.

The Restructuring of Unicom Group and Our Initial Public Offering in 2000

We are a company limited by shares incorporated under the Companies Ordinance of Hong Kong on February 8, 2000. 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).

Under a reorganization agreement, dated April 21, 2000, between Unicom Group and CUCL, Unicom Group transferred to CUCL certain of its assets, rights and liabilities in preparation for our initial public offering, or IPO. Under an equity transfer agreement, dated April 21, 2000, among us, Unicom Group, China Unicom (Hong Kong) Group Limited and China Unicom (BVI) Limited, or Unicom BVI, Unicom Group transferred to us its 100% equity interest in CUCL, which became our wholly-owned operating subsidiary in China. In return, we issued 9,725 million shares to Unicom BVI, then an indirectly controlled subsidiary of Unicom Group.

In June 2000, we successfully completed our IPO, raising approximately US$5.65 billion. Upon completion of our IPO, our shares became listed and traded on The Stock Exchange of Hong Kong Limited and ADSs representing our shares became listed and traded on the New York Stock Exchange.

Further Restructuring of Unicom Group and Initial Public Offering of the A Share Company in 2002

After our IPO, Unicom BVI, which was a wholly-owned subsidiary of China Unicom (Hong Kong) Group Limited, or Unicom HK, a wholly-owned subsidiary of Unicom Group, directly held 77.47% of our outstanding shares. In October 2002, Unicom Group completed an internal restructuring of its shareholding in our company. Unicom HK transferred the total issued capital of Unicom BVI held by it to Unicom Group and Unicom BVI became a direct wholly-owned subsidiary of Unicom Group. Unicom Group then transferred 51% of its equity interest in Unicom BVI to the A Share Company, a newly established holding company and subsidiary of Unicom Group. The A Share Company’s business is limited to indirectly holding the equity interest of our company without any other direct business operations.

Following the restructuring, the A Share Company successfully completed its IPO in the PRC and the listing of its ordinary shares on the Shanghai Stock Exchange, or A Shares. After the IPO of the A Share

Company, the A Share Company transferred all of its net offering proceeds to Unicom Group in return for an additional 22.84% equity interest in Unicom BVI.

In accordance with the articles of association of the A Share Company and Unicom BVI, 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. This mechanism for voting is designed to allow public shareholders of the A Share Company to indirectly participate in our shareholders’ meeting.

The voting mechanism described above, however, will not apply to the approval process for any connected transactions 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 The Stock Exchange of Hong Kong Limited, or the HKSE Listing Rules. Instead, our significant connected transactions would require the separate approvals of the public shareholders both of our company and of the A Share Company. According to the two-step voting arrangements we and the A Share Company have established, each connected 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. This agreement would contain the following terms:

	•		the closing of the initial agreement would be subject to the (i) 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 connected 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 would provide for the transfer of all rights and obligations of the A Share Company or Unicom BVI on the one hand under the initial agreement to us or our subsidiaries on the other hand. The further agreement will constitute a connected 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 connected transaction allows, the two-step voting arrangements to apply as described above. However, there may be circumstances where the nature of the connected transaction requires the application of the two-step voting arrangements to be adjusted. This may arise where we or our subsidiaries are the providers, rather than recipients, of certain services. In this event, 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. Unicom Group or its subsidiaries (excluding the A Share Company and its subsidiaries), rather than us or our subsidiaries, will be party to the further agreement. The arrangements (including the conditions) will apply correspondingly. This two-step structure will be applied in all future connected transactions between us and Unicom Group and will effectively require the separate approvals of the public or

independent shareholders both of our company and of the A Share Company for such connected transactions.

Acquisitions of Unicom New Century and Unicom New World and the Sale of Guoxin Paging

On December 31, 2002, in accordance with the two-step approach outlined above, we successfully completed the acquisition from Unicom Group of Unicom New Century, which holds cellular telecommunications businesses (including GSM assets and businesses and CDMA businesses) in the following nine provinces, autonomous regions and municipalities in China: Jilin, Heilongjiang, Jiangxi, Henan, Shaanxi and Sichuan provinces, Guangxi Zhuang Autonomous Region, Xinjiang Uygur Autonomous Region and Chongqing municipality. The total purchase price was HK$4,523,181,304, payable in cash.

On December 31, 2003, we successfully completed the acquisition from Unicom Group of Unicom New World, which holds cellular telecommunications businesses (including GSM assets and businesses and CDMA businesses) in the following nine provinces and autonomous regions in China: Shanxi, Hunan, Hainan, Yunnan, Gansu and Qinghai provinces and Inner Mongolia, Ningxia Hui and Xizang Zang autonomous regions. The total purchase price was HK$3,014,886,000, payable in cash. On the same date, we also completed the sale of the entire equity interests of Guoxin Paging to Unicom Group for a total sale price of HK$2,590,917,656, and such proceeds were applied to our general working capital.

As a result of the acquisitions of Unicom New Century and Unicom New World, CUCL extended its cellular businesses to all provinces, autonomous regions and municipalities in China except Guizhou province.

Mergers of Unicom New Century and Unicom New World into CUCL

On July 30, 2004, Unicom New Century was merged into CUCL and legally dissolved upon the completion of such merger. On September 1, 2005, Unicom New World was merged into CUCL and legally dissolved upon the completion of such merger.

Acquisition of China Unicom International Limited

In September 2004, we acquired from Unicom Group of Unicom International, a limited liability company established in Hong Kong engaging in voice wholesale business, telephone cards business, line leasing services, managed bandwidth services and mobile virtual network services. Unicom International’s wholly-owned US subsidiary, China Unicom USA Corporation, or Unicom USA, carries a wholesale business of voice traffic between the United States and mainland China. The total purchase price was HK$37,465,996, payable in cash.

Establishment of Unicom Macau and the Launch of CDMA Services in Macau

On October 15, 2004, we established China Unicom (Macau) Company Limited, or Unicom Macau, in Macau. In March 2005, Unicom Macau was granted, through a bidding process, a CDMA license with a term up to June 5, 2013, which allows Unicom Macau to provide roaming services and, subject to the Macau government’s further approval, provide CDMA cellular services to local CDMA users in Macau after the first year of its operation. In October 2005, Unicom Macau completed the construction of a CDMA network in Macau and launched CDMA roaming services. On August 14, 2006, Unicom Macau obtained approval from the Macau government to provide CDMA cellular services to local users in Macau. Unicom Macau also received a 3G license on the basis of CDMA2000 technology standard on October 24, 2006 to operate a CDMA2000 network in Macau. Pursuant to the terms of the 3G license,

Unicom Macau is required to launch the 3G operations within a year from the date of the issuance of such license.

Incorporation of Unicom Huasheng

On July 1, 2005, CUCL and Unicom Xingye Science and Technology Trade Co., or Unicom Xingye, a subsidiary of Unicom Group, incorporated Unicom Huasheng. Unicom Huasheng, currently a 99.5%-owned subsidiary of CUCL, is principally engaged in sales of handsets and telecommunications equipment and provision of technical services for us.

Share Segregation Reform of the A Share Company

On May 11, 2006, the relevant shareholders of the A Share Company approved a proposal by all the holders of the non-tradable shares of the A Share Company, including Unicom Group, to convert their non-tradable shares into shares that are listed and tradable on the Shanghai Stock Exchange. This proposal was made pursuant to and in compliance with the PRC regulations in respect of share segregation reform of companies listed in the PRC. In connection with the conversion of all non-tradable shares into tradable shares, holders of the non-tradable shares of the A Share Company transferred to each holder of tradable shares 2.8 non-tradable shares for every ten tradable shares held by such holder as of May 17, 2006. The tradable shares converted from non-tradable shares are subject to certain lock-up restrictions as required by the relevant PRC regulations. As a result of the implementation of this proposal, Unicom Group’s ownership interest in the A Share Company decreased from 69.32% to 60.74%.

On May 31, 2007, Unicom Group increased its ownership interest in the A Share Company from 60.74% to 61.74% by subscribing for 212,081,265 additional shares of the A Share Company. Pursuant to the lock-up commitment made by Unicom Group, such newly subscribed shares as well as the 1,059,829,820 shares of the A Share Company held by Unicom Group will not be freely tradable until November 16, 2007. The A Share Company in turn held 82.10% of the total equity interest in Unicom BVI, with the remaining 17.90% held directly by Unicom Group. Unicom BVI held 76.59% of our outstanding shares and Unicom Group remains our ultimate controlling shareholder. See also the chart below for the current shareholding structure of our company.

Set forth below is our shareholding structure and subsidiaries as of May 31, 2007.

Our Relationship with Unicom Group

Unicom Group continues to own and manage the international gateways that provide international connections to our long distance network. Unicom Group also continues to operate the following telecommunications networks:

	•		its cellular networks in Guizhou province,

	•		its local telephony networks in Sichuan Province and Chongqing and Tianjin municipalities, and

	•		the satellite transmission networks operated through Unisat.

In March 2007, Unicom Group obtained approvals from the MII and discontinued the operations of its paging business through Unicom Paging and Guoxin Paging.

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. Under the respective reorganization agreements entered into by CUCL, Unicom New Century and Unicom New World with Unicom Group referred to above, Unicom Group undertook to hold and maintain all licenses received from the MII in connection with our businesses solely for our benefit during the term of the 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 except for 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 “Further Restructuring of Unicom Group and the Initial Public Offering of A Shares” above. These include arrangements for interconnection and roaming 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. In October 2006, we entered into several new agreements with Unicom Group to replace the existing arrangements. See “B. Related Party Transactions” under Item 7 for a detailed description of our agreements with Unicom Group.

Unicom Group has constructed nationwide cellular networks based on CDMA IX technology. We entered into lease agreements with Unicom Group to lease a portion of the network capacity and began to offer CDMA cellular services on an exclusive basis in our cellular service areas in early 2002. In October 2006, we entered into a new CDMA lease agreement, effective January 1, 2007, with Unicom Group in respect of the CDMA networks. Unicom Group only operates its CDMA networks in Guizhou province, which is outside of our cellular service areas. We also have an option to acquire the CDMA networks from Unicom Group. See “B. Related Party Transactions ¾ Leasing of CDMA Network Capacity” under Item 7.

Capital Expenditures and Divestitures

See “Liquidity and Capital Resources ¾ Capital Expenditures” under Item 5 for information concerning our principal capital expenditures for the previous three years and those planned for 2007. We have not undertaken any significant divestitures.

B. Business Overview

General

We are an integrated telecommunications operator in China, offering a comprehensive range of telecommunications services, including cellular, international and domestic long distance, data and Internet services based on our advanced, uniform nationwide network system. We offer nation-wide cellular communications services based on both GSM and CDMA technologies in China. We and China Mobile are currently the two cellular service providers in China.

We had a total of 105.87 million GSM cellular subscribers as of December 31, 2006, representing an 11.4% increase from 95.07 million subscribers as of December 31, 2005. Our GSM cellular business accounted for 62.9% of our total revenue in the year ended December 31, 2006. We had approximately 36.49 million CDMA cellular subscribers as of December 31, 2006, representing an 11.5% increase from 32.72 million subscribers as of December 31, 2005. Our CDMA Cellular business contributed 33.5% of our total revenue in the year ended December 31, 2006. At the end of 2006, our market share in terms of the number of subscribers in our cellular service areas was 31.3%, declining from 34.5% at the end of 2005.

We also provide long distance, data and Internet services in China. These businesses currently represent a relatively small portion of our overall business. Our long distance, data and Internet businesses collectively accounted for 3.7% of our total revenue in 2006, compared to 5.3% in 2005. Outgoing public switched and IP telephony long distance calls totaled 11.23 billion and 13.13 billion minutes, respectively, in 2006, compared to 10.48 billion and 14.73 billion minutes, respectively, in 2005. Incoming international long distance calls (including incoming calls from Hong Kong, Macau and Taiwan) totaled 2.61 billion minutes in 2006, a slight increase from 2.59 billion minutes in 2005. We had 1.254 million broadband Internet access subscribers at the end of 2006.

Recent Developments

As of March 31, 2007, the total number of our GSM subscribers has increased to 109.16 million, including 56.16 million post-paid subscribers and 53.00 million pre-paid subscribers. As of March 31, 2007, we also had a total of 37.72 million subscribers to our CDMA services. For the three months ended March 31, 2007, average minutes of usage, or MOU, per subscriber per month for GSM and CDMA services in our combined service areas were 237.2 minutes and 257.4 minutes, respectively. ARPU for GSM services in our combined service areas was RMB46.8 for the three months ended March 31, 2007. ARPU for CDMA services in our combined service areas was RMB58.6 for the three months ended March 31, 2007. For the three months ended March 31, 2007, outgoing public switched and IP telephony long distance calls totaled 2.64 billion minutes and 2.98 billion minutes, respectively.

Cellular Services

Our cellular business is our largest business, with our GSM and CDMA businesses together having contributed 96.3% of our total revenue in 2006.

We offer both GSM and CDMA cellular services. We also offer GSM international roaming services in conjunction with 260 operators in 170 countries and regions and CDMA international roaming services in conjunction with 22 operators in 16 countries and regions.

In 2004, we began to offer GSM and CDMA dual mode cellular handset service under the brand name “Worldwind.” In April 2005, we launched “Worldwind” dual-mode card service based on the dual mode handset service. In 2006, we introduced the “dual-standby” technology into our “Worldwind” services and now offer “dual-mode, dual-standby” services under the brand name “Worldwind.”

In October 2005, we successfully launched our CDMA network in Macau to provide roaming services for all CDMA users in Macau. In 2006, we obtained approval from the Macau government to provide CDMA services to local users in Macau and also received a 3G license to operate a CDMA 2000 network in Macau.

We also offer a broad range of value-added services, or VAS, to our cellular subscribers, including short message services, or SMS, personalized ring-back tone services, CDMA 1X wireless data services and GSM wireless data services, under the integrated business brand of “uni”, which represents various wireless VAS we offer for our cellular subscribers. The proportion of our total cellular service revenue generated from VAS increased significantly from 15.2% in 2005 to 19.5% in 2006.

GSM Cellular Services

Our GSM cellular networks reach all cities, county centers, major towns, major highways and railways in our cellular service areas. We continue to selectively deploy GSM systems that operate in the 1800 MHz frequency band in high-density population and high call volume centers to supplement our GSM networks operating in the 900 MHz frequency band. In 2006, we continued to focus on optimizing the operational efficiency and stability of our GSM networks, and will continue to improve our GSM networks to support the development of our various cellular services. In particular, we started to upgrade our GSM networks to launch general packet radio service, or GPRS, services since 2005. We have upgraded our GSM networks in 65 major cities to be able to offer GPRS services as of the end of 2006. On May 17, 2007, we launched the commercial operation of GPRS services in 70 cities on a trial basis. We plan to continue and expand our GPRS upgrade to additional cities in 2007.

Post-paid Services and Pre-paid Services

We offer two main categories of GSM cellular services: post-paid and pre-paid services that target different consumer segments. Generally, we promote our pre-paid services to migrant population and temporary residents as well as mass market subscribers and target our post-paid services at consumers who have relatively high usage of telecommunications services.

Subscribers and Usage

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


	CUCL ⁽⁴⁾ and
	Unicom New									CUCL ⁽⁵⁾ as of or
	World, as of or									for the three
	for the year ended			CUCL ⁽⁵⁾ as of or for						months ended
	December 31,			the year ended December 31,						March 31,
	2004			2005			2006			2007
Number of subscribers (in thousands)		84,267			95,072			105,873			109,158
Post-paid		42,844			48,166			54,267			56,158
Pre-paid		41,423			46,906			51,606			53,000
Estimated market share in our service areas ⁽¹⁾		26.8	%		25.6	%		23.3	%		23.0	%
Average minutes of usage per subscriber per month ⁽²⁾		188.9			202.2			237.2			237.2
Average revenue per subscriber per month (in RMB) ⁽³⁾		49.4			48.5			49.2			46.8
SMS Volume (in billions)		32.39			39.51			58.89			17.28


(1)		Market share in a given area is determined by dividing the number of our GSM subscribers in the area by the total number of cellular subscribers in the area. Source : Ministry of Information Industry.

(2)		Average minutes of usage per subscriber per month is calculated by dividing the total minutes of usage during the period by the average number of our GSM subscribers during the period, and dividing the result by the number of months in the relevant period.

(3)		Average revenue per subscriber per month, or ARPU, is calculated by dividing the sum of GSM cellular services revenue during the relevant period by the average number of our GSM subscribers during the period, and dividing the result by the number of months in the period.

(4)		Includes Unicom New Century, which merged into CUCL on July 30, 2004.

(5)		Includes Unicom New Century and Unicom New World, which merged into CUCL on July 30, 2004 and September 1, 2005, respectively.

Subscriber Increase : As of December 31, 2006, our total number of GSM subscribers increased from 95.07 million as of December 31, 2005 to 105.87 million, including 54.27 million post-paid subscribers and 51.61 million pre-paid subscribers. We believe that this growth was attributable to a number of factors, including, among others, (i) continued growth of the Chinese cellular telecommunications market, driven by economic growth and reduction in the cost of cellular handsets and services, (ii) our sales and marketing efforts in retaining existing subscribers and expanding our subscriber base, (iii) relatively competitive pricing of our services and (iv) quality of our customer service. However, our share of the cellular market in terms of total cellular subscribers in our GSM cellular service areas was 23.3% as of December 31, 2006, as compared with 25.6% as of December 31, 2005.

MOU and ARPU : MOU and ARPU of our GSM services were 286.05 billion minutes and RMB49.2, respectively, in 2006. The average MOU per subscriber per month was 237.2 minutes in 2006, an increase of 35.0 minutes from 202.2 minutes in 2005. The increase in MOU was attributable to increased competition with our competitor, which resulted in the provision of more call minutes in the package service plans offered to subscribers. The decreasing effective tariffs as a result of such competition also encouraged higher usage among subscribers. ARPU of our GSM services increased slightly from RMB48.5 in 2005 to RMB49.2 in 2006, which was attributable to higher penetration rate of VAS services based on GSM networks.

Churn Rate : In 2006, the monthly average churn rate for our GSM services slightly increased from 2.41% in 2005 to 2.44% primarily as a result of intensified competition and the fact that a larger portion of our new GSM subscribers are low- to mid-end subscribers. 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. If competition continues to intensify, our churn rate from subscribers voluntarily discontinuing our services may further increase in the future.

Payment Delinquency : Payment delinquency increased in 2006. As of December 31, 2006, the doubtful debt ratio for our GSM cellular services, calculated as the amount of doubtful debt provided in 2006 divided by revenue from GSM cellular services, is 1.9%, higher than the 1.7% at the end of 2005 due to the fact that a larger portion of our new GSM subscribers are low- to mid- end subscribers. In some of our cellular service areas we require our post-paid subscribers to deposit service charges and maintain a certain level of account balances with us or with commercial banks that collect service fees for us. We classify the creditworthiness of our subscribers into various levels and have adopted other credit control measures. We also closely manage payment delinquencies through confirmation of customer address and other registration information, expansion of collection channels, advance notification of inadequate deposits, close monitoring of call patterns and account balances and prompt termination of services.

Tariffs

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

The cellular tariffs are set forth by the MII and tariff adjustments are subject to regulation by various government authorities, including the MII, the National Development and Reform Commission and the relevant provincial price regulatory authorities. The following table summarizes the present State-guidance tariff rates for post-paid and pre-paid cellular services:


	Post-paid Services		Pre-paid Services
	RMB		RMB
Basic monthly fee		50		0
Local usage charge (per minute)		0.4		0.6
Domestic roaming charge (per minute)		0.6		0.8


Source:		MII.

Intense competition in our cellular service areas has resulted in tariff discounts and service promotions offered by both us and our main competitor from time to time, which may lower 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. 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.

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 in the level of the fixed monthly fee, the number of specified call minutes and the tariff rates for call minutes in excess of the specified call minutes. The terms of these plans also vary depending on the local markets and generally offer some price discounts to similar plans of our main competitor. We have also introduced in selected cities promotional plans for certain qualified subscribers, which allow such subscribers to receive incoming calls without incurring per-minute usage charges in exchange for a fixed monthly fee.

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 cellular subscribers by allowing us to market our cellular services at discounted rates. As we and our main competitor introduced various package service plans and other

promotional programs, the tariff structure has become more complex. While we continue to maintain tariff levels that are generally lower than those of our main competitor, the more complex tariff structure has, to some extent, made our price advantages less obvious to subscribers compared to previous tariff schemes that were largely based on simple per-minute charges. Beginning in 2005, as we continued to offer package service plans in our service areas, we have significantly reduced the variety of such plans and stopped offering service plans that were not profitable. We also further centralized the package service planning to provincial-level branches and higher.

Beginning in 2006, the MII has stepped up its efforts to encourage wireless telecommunications operators to offer tariff packages featuring “calling-party-pays” billing arrangements. In light of such policy move, in early 2007, we have started to offer package service plans with “calling-party-pays” billing arrangements in selected service areas such as Beijing and Guangdong. Depending on the regulatory and business competitive environment, the service areas in which we offer package service plans with “calling-party-pays” features may further expand.

CDMA Cellular Services

Our controlling shareholder, Unicom Group, currently has the exclusive license to offer CDMA cellular services in China. It has constructed a CDMA network with comprehensive nationwide coverage through its wholly-owned subsidiary, Unicom New Horizon Mobile Telecommunications Company Limited, or Unicom New Horizon. We have leased CDMA network capacity from Unicom Group and offer CDMA cellular services and CDMA 1X wireless data services.

As of 2006, Unicom Group’s total CDMA network capacity amounted to approximately 84 million subscribers. This level of capacity provides sufficient room for the growth of our CDMA subscriber base and ensured our CDMA nationwide network coverage and telecommunications quality, including both outdoor and indoor coverage, as well as the data-processing capacity of our CDMA 1X services.

Our Lease of CDMA Networks from Unicom Group

After the acquisitions of Unicom New Century and Unicom New Horizon, we entered into a consolidated lease agreement, or the 2005 CDMA Lease, with Unicom Group and Unicom New Horizon on March 24, 2005 to replace the three then existing lease agreements, or the Old CDMA Leases, between Unicom Group and Unicom Horizon on the one hand, and CUCL, Unicom New Century and Unicom New World, respectively, on the other hand. On October 26, 2006, we entered into a further updated lease agreement, or the 2006 CDMA Lease, with Unicom Group and Unicom Horizon, to replace the 2005 Lease Agreement. See “B. Related Party Transactions ¾ Leasing of CDMA Network Capacity” under Item 7.

The 2006 CDMA Lease has an initial term of one year commencing from January 1, 2007. We may extend the 2006 CDMA Lease for another year until December 31, 2008 by giving no less than 180 days’ prior written notice to Unicom New Horizon on or before December 31, 2007. We currently intend to extend the 2006 CDMA Lease to December 31, 2008. The lease fee for each year of 2007 and 2008 will be (i) 31% of the audited service revenue generated in that year by our CDMA business or (ii) 30% of the audited service revenue generated in that year by our CDMA business, if the audited income before taxation of our CDMA business for the relevant year is less than the audited income before taxation of our CDMA business for 2006. The term of the 2006 CDMA Lease may be renewed for additional terms at our option, with the length of such renewed terms and lease fee to be agreed upon.

We lease all constructed CDMA network capacity from Unicom Group and operate these CDMA networks in our cellular service areas on an exclusive basis and receive all revenue generated from the

operation. We may terminate the lease arrangements upon giving at least 180 days’ prior written notice to Unicom Group.

In addition to leasing network capacity, we also have the option, exercisable at any time during the lease period and for an additional year thereafter, to purchase the CDMA network in our cellular service areas. The acquisition price will be negotiated between Unicom New Horizon and us. It will be based on the appraisal value of the CDMA network determined by an independent appraiser in accordance with applicable PRC laws and regulations and take into account the then prevailing market conditions and other factors. However, the purchase price will not exceed an amount which would, taking into account all lease fee payments made by us to Unicom New Horizon and lease fee discounts as a result of any delay of delivery, enable Unicom New Horizon to recover its total network construction costs, together with an internal rate of return of 8%. The exercise of the purchase option will be subject to the relevant laws, regulations and the HKSE Listing Rules, including approvals of our minority shareholders for connected transactions. See “B. Related Party Transactions — Leasing of CDMA Network Capacity” under Item 7 for a more detailed description of the New CDMA Lease.

Services

The CDMA services we offer include basic voice and value-added services such as call forwarding and voicemail, caller identity display, SMS services and CDMA 1X wireless data services. Like our GSM services, our CDMA services also offer both post-paid and pre-paid services.

In August 2004 and April 2005, we launched CDMA and GSM dual-mode cellular handset and card services, respectively, under the brand name “Worldwind.” In 2006, we further integrated “dual-standby” technology into our services to launch the “dual-mode, dual-standby” services. “Worldwind” “dual-mode, dual-standby” services, which are available to our subscribers who use either a “dual-mode, dual-standby” handset or a “dual-mode, dual-standby” user card, have the following features:

	•		users can switch between GSM and CDMA networks in China, thereby offering wireless coverage in areas of the country covered by only one of these networks;

	•		when roaming in areas outside of China, users can use the cellular services of local operators, whether they are GSM or CDMA, who signed roaming agreements with us; and

	•		our GSM users who sign up for “Worldwind” can continue to use the basic GSM services, while enjoying the additional benefits of the CDMA 1X services.

Subscriber Base

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


	CUCL ⁽⁴⁾									CUCL ⁽⁵⁾
	and Unicom									as of or
	New World,									for the three
	as of or for the year			CUCL ⁽⁵⁾ as of or for						months ended
	ended December 31,			the year ended December 31,						March 31,
	2004			2005			2006			2007
Number of subscribers (in thousands)		27,815			32,723			36,493			37,724
Post-paid		25,824			30,010			33,454			34,605
Pre-paid		1,991			2,713			3,039			3,119
Estimated market share in our service areas ⁽¹⁾		8.8	%		8.8	%		8.0	%		8.0	%
Average minutes of usage per subscriber per month ⁽²⁾		292.3			276.9			274.7			257.4
Average revenue per subscriber per month (in RMB) ⁽³⁾		85.3			75.1			65.9			58.6
SMS Volume (in billions)		11.83			15.02			16.78			4.52


(1)		Market share in a given area is determined by dividing the number of our CDMA subscribers in the area by the total number of cellular subscribers in the area. Source : Ministry of Information Industry.

(2)		Average minutes of usage per subscriber per month is calculated by dividing the total minutes of usage during the period by the average number of our CDMA subscribers during the period, and dividing the result by the number of months in the relevant period.

(3)		Average revenue per subscriber per month, or ARPU, is calculated by dividing the sum of CDMA cellular services revenue during the relevant period by the average number of our CDMA subscribers during the period, and dividing the result by the number of months in the period.

(4)		Includes Unicom New Century, which merged into CUCL on July 30, 2004.

(5)		Includes Unicom New Century and Unicom New World, which merged into CUCL on July 30, 2004 and September 1, 2005, respectively.

As of December 31, 2006, our total CDMA subscriber base reached 36.49 million, representing an increase of 11.5% from 32.72 million subscribers at December 31, 2005. Among the total CDMA subscribers, post-paid subscribers increased by 11.5% from 30.01 million as of December 31, 2005 to 33.45 million as of December 31, 2006, while pre-paid subscribers increased by 12.0% from 2.71 million as of December 31, 2005 to 3.04 million as of December 31, 2006. We believe the growth in our CDMA subscriber base was primarily attributable to:

	•		increased brand awareness and our distribution and marketing efforts, including our adoption of an effective subsidizing policy that (i) offers various forms of subsidies such as free minutes and free trials of VAS services and (ii) ties the subsidies to subscribers’ ARPU;

	•		decreased retail sale prices of and the availability of more varieties of CDMA handsets as a result of our centralized purchasing policy;

	•		the launching and promotion of our “Worldwind” “dual-mode, dual-standby” services, which ensures our subscribers wider coverage based on both of our networks and additional benefits of the CDMA 1X wireless data services;

	•		the competitiveness of our network coverage and quality; and

	•		the advantages of the CDMA technology, including the lower radio transmitting power of CDMA handsets as compared to GSM handsets, better voice quality and enhanced security.

MOU, ARPU and Churn Rate

In 2006, total MOU for our CDMA services was 113.85 billion minutes, an increase of 11.9% from 101.75 billion minutes in 2005, and ARPU for our CDMA services was RMB65.9, a decrease from RMB75.1 in 2005. Average MOU per subscriber per month for our CDMA services was 274.7 minutes, 15.8% higher than the average MOU of 237.2 minutes for GSM services, while our RMB65.9 CDMA ARPU was 33.9% higher than the RMB49.2 ARPU for our GSM subscribers. The reasons for the increase in MOU for our CDMA services in 2006 are similar to the reasons for similar trends in GSM services. See “B. Business Overview — Cellular Services — GSM Cellular Services — MOU and ARPU” under this Item 4. The decrease in ARPU for our CDMA services in 2006 was attributed to intensified market competition and regional promotional activities that led to a decline in effective tariffs, as well as non-renewal by some contractual subscribers upon the expiration of their previous handset subsidy packages.

The monthly average churn rate for our CDMA services is calculated in the same way as the churn rate for our GSM services and was 1.57% in 2006, slightly higher than 1.49% in 2005, but is significantly lower than the churn rate for our GSM services.

Payment Delinquency

As of December 31, 2006, the doubtful debt ratio for our CDMA cellular services, calculated as the amount of provision for doubtful debt divided by revenue from CDMA cellular services, stood at 1.7%. In 2006, we continued to take various measures to control payment delinquency for our CDMA services, which measures are similar to the ones taken to control payment delinquency for our GSM services. See “B. Business Overview — Cellular Services — GSM Cellular Services — Payment Delinquency” under this Item 4.

Tariffs and Promotion

The tariff rates for our CDMA services are generally the State-guidance rates for cellular services without the 10% discount we are permitted to adopt for GSM services. However, we have adopted other promotional programs. Generally we charge our CDMA subscribers the following categories of tariffs: basic monthly fees, local usage charges, roaming charges, long-distance call charges and VAS service charges.

To accelerate the growth in our CDMA subscriber base, we have been offering CDMA handset promotion packages since the second half of 2002, providing discounts towards our customers’ CDMA handset purchase prices on the basis of their committed minimum amount of monthly service fees. Due to the high cost of the handset promotional packages, and in light of the improved coverage of our CDMA network and the growing number of CDMA 1X functions, we have significantly reduced the use of such promotion packages since 2005, and concentrated instead on alternative promotional programs to develop our CDMA services. We offer differentiated services with various combinations of voice and VAS services to effectively target various market sectors. Moreover, we established a subsidiary, Unicom Huasheng, in 2005 to centralize the purchases and distribution of CDMA handsets to control the costs of our CDMA promotion packages.

See “D. Risk Factors ¾ Risks Relating to Our Business ¾ Our CDMA services may not succeed in gaining a broader market acceptance in China.” under Item 3.

Value-added Services

By leveraging our integrated telecommunications operations and advanced network system, we offer a broad range of value-added cellular services under a uniform business brand of “uni”, including SMS, personalized ring-back tone services, wireless internet services and other wireless information services. Our value-added services have achieved rapid growth in recent years.

The volume of our SMS continued to increase rapidly in 2006. A total of 75.68 billion short messages were transmitted by our GSM and CDMA subscribers in 2006, an increase of 38.8% over 2005. Our SMS services mainly include the following: SMS transmission and receipt through handsets, service provider-assisted SMS, business SMS platform, voice SMS and other information services. We continue to promote the use of SMS as a convenient and cost effective method of business and personal communication. The SMS platforms of our GSM and CDMA networks are interconnected with each other. Our SMS platforms are also interconnected with the SMS platforms of China Mobile’s GSM network, China Telecom’s “Little Smart” network, and China Netcom’s “Little Smart” network.

We market our personalized ring-back tone service under the brand name “Cool Ringtong.” This new value-added service has maintained a high growth rate since its introduction. As of December 31, 2006, we had a total number of 35.88 million subscribers to our Cool Ringtong service, representing 25.2% of our total cellular subscriber base from December 31, 2005.

We offer nationwide GSM wireless data services under the service brand of “Uni-Info”. The Uni-Info services are based on a nationwide wireless information services platform and offer a variety of services including games, downloads and other entertainment services, information and notification services, personal information management and transactions services. We have upgraded our GSM networks in 65 major cities to be able to offer GPRS services as of December 31, 2006. On May 17, 2007, we launched the commercial operation of GPRS services in 70 cities on a trial basis. We plan to continue and expand our GPRS upgrade to additional cities in 2007.

We also offer CDMA 1X wireless value-added services under the uniform business brand of “uni”, with individual services offered under various sub-brands, including “U-Info”, “U-Net”, “U-Mail”, “U-Magic”, “U-Map” and “Uni-Web.” In 2006, we continued to focus our efforts in promoting CDMA 1X wireless value-added services in three areas: (1) increasing market penetration, (2) easing the handset supply bottleneck by centralizing the purchase and distribution of CDMA handsets and (3) offering new services and service contents to activate more market demand. By the end of 2006, we had 20.04 million subscribers to CDMA 1X wireless value-added service, representing a substantial increase of 33.2% over 2005.

In 2006, in order to further develop our value-added services, we continued to implement a brand-centric development strategy and adopted the following measures:

	•		through the improvement of the value-added services, more staff training, advertising and promotions, trial programs and our various other efforts, we strengthened marketing efforts for our value-added services under the uniform business brand of “uni”;

	•		we improved the content of our value-added services, through strengthening service support of and cooperation with content providers and service providers, in order to increase the appeal of these services;

	•		we improved the quality of our value-added services by strengthening certain customer protection measures, such as requiring service providers to obtain re-confirmation from the subscribers before they activate the service and to provide subscribers trial periods before the service provider starts to charge for the service;

	•		we actively developed value-added services specifically catering to the youth and campus markets to increase the market share of our “U-Power” services;

	•		we targeted mid- to high-end subscribers by emphasizing the technological advantages of “dual-mode, dual-standby” services to facilitate the development of our “Worldwind” CDMA and GSM dual mode services and our CDMA 1X data services;

	•		through cooperation with partners in specific industries, we launched applications such as “SAIC Enforcement Horizon”, “Maritime Horizon”, “Agriculture Horizon” and “Police Horizon” to extend corporate and industry applications to institutional and industrial customers in markets such as maritime and agriculture. For example, we recently introduced the “SAIC Enforcement Horizon” application, which aims to offer tailored wireless services to law enforcement personnel of the State Administration of Industries

			and Commerce. We also expanded the application of our CDMA 1X data services in certain industries by providing information solutions to small- and medium-sized enterprises; and

	•		we introduced push mail mobile email services, which allows our subscribers to send and receive emails and view multimedia attachments via a mobile device, such as a handset.

We have designed and implemented a fee structure under which we earn transmission fees from the use of our GSM and CDMA value-added services and charge a certain percentage of information service fees for the billing and collection services we provide to content providers and service providers.

Strategic Cooperation

On June 20, 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, we and SKT agreed to cooperate on the further development of CDMA cellular communication services in China. We have identified SKT as our sole and exclusive partner in relation to our CDMA cellular communication business operations for a maximum period of 18 months in the PRC in the areas of CDMA handsets, value-added services and related business platforms, marketing, information technology infrastructure and network technologies. Detailed terms of our business cooperation with SKT are expected to be negotiated in the future and set forth in definitive legal agreements to be entered into by SKT and us. We and SKT have jointly established a designated team to further explore and implement the aforementioned business cooperation initiatives. In addition, pursuant to this agreement, if SKT and/or any of its affiliates, individually or collectively, hold more than 5% of our issued share capital, SKT will be entitled to nominate a representative to our board of directors. SKT has undertaken to cause such director to resign if it and/or its affiliates, individually or collectively, hold no more than 5% of our issued share capital for a period of three months.

Long Distance, Data and Internet Services

We offer international and domestic long distance services in China based on both the PSTN standard and the IP telephony standard. We leverage our ability to integrate our long distance services with a broad range of services to target different customer segments. For example, we have developed a nationwide video-conferencing network that reaches hundreds of cities. In addition to long distance services, we also offer data and Internet services throughout China. Our long distance, data and Internet services are supported by our advanced, unified nationwide network system.

The following table sets forth the total number of outgoing call minutes for our long distance services, leased bandwidth of our data services and number of dedicated access subscribers of Internet services for the periods indicated.


	As of or for the year ended December 31,
	2004		2005		2006
Public switched telephony (in billions of minutes):
Domestic		9.94		10.33		11.07
International		0.16		0.15		0.16
Total		10.10		10.48		11.23
IP telephony (in billion of minutes):
Domestic		13.81		14.60		13.02
International		0.14		0.13		0.11
Total		13.95		14.73		13.13


	As of or for the year ended December 31,
	2004		2005		2006
Data Services
Bandwidth leased to customers (2Mbps)		9,007		8,706		7,428
Internet Services
Dedicated access subscribers		61,569		38,000		31,350

Public Switched Telephony Services

We offer PSTN services to business and residential customers who register their telephone numbers with us. They can access our services by dialing a prefix of “193.” We also distribute pre-paid long distance calling cards that purchasers can use to access our services by dialing a prefix of “193300.” For some corporate and government customers, we also offer our public switched long distance services over dedicated lines, frequently as part of our integrated offerings of long distance and data services.

The following table sets forth selected information about our PSTN services for the periods indicated.


	As of or for the year ended on December 31,
	2004			2005			2006
Number of cities reached		332			333			333
Minutes of outgoing long distance calls (in billions)		10.10			10.48			11.23
Market share of outgoing long distance call minutes ⁽¹⁾		13.6	%		11.57	%		11.55	%
Minutes of incoming international calls (in billions)		2.47			2.34			2.39


(1)		Source : MII. In calculating market share, the total minutes of outgoing long distance calls include ours and those of the incumbent operators.

Starting from October 2005, the PRC government regulates the tariff rates for PSTN services by setting the maximum tariff rates. The following table sets forth our present tariff rates (including rates applicable to domestic and international long distance calls made by our cellular subscribers):


	Maximum Tariff Rates		Preferential Rates
	RMB per six seconds		RMB per six seconds
Public switched Domestic Long Distance:		0.06		0.03
Public switched International Long Distance:
To Hong Kong, Taiwan and Macau		0.18		0.15
To all other international destinations		0.72		0.38

Since 2001, we adjusted the discount rates set forth in the table above as follows:

	•		RMB0.04 per six seconds every day from 8pm to 10pm;

	•		RMB0.03 per six seconds every day from 10pm to 7am of the following day; and

	•		RMB0.04 per six seconds on public holidays and weekends from 7am to 8pm.

Settlement of outgoing and incoming international calls with international operators is conducted through negotiated contracts with such individual international operators, which contracts must be approved by the MII.

IP Telephony Services

We offer domestic and international long distance IP telephony services through interconnection of our IP network with the Internet and other telecommunications networks based on a manageable IP network configuration to enhance service quality. The following table sets forth selected information about our IP telephony services for the periods indicated.


	As of or for the year ended December 31,
	2004		2005		2006
Number of cities reached		341		341		343
Minutes of outgoing IP telephony calls (in billions)		13.95		14.73		13.13
Minutes of incoming international calls (in billions)		0.28		0.25		0.22

In February 2001, the PRC government ceased regulatory control of tariffs for IP telephony long distance calls and allowed operators to set their own rates. The following table sets forth our present tariff rates for our IP telephony services (including rates applicable to IP long distance calls made by our cellular subscribers):


		Our Tariff Rates (RMB)
IP Telephony Domestic Long Distance		0.30 per minute
IP Telephony International Long Distance
To Hong Kong, Taiwan and Macau		1.50 per minute
To U.S. and Canada		2.40 per minute
To other international destinations		3.60 per minute

Effective September 1, 2001, we adjusted our tariff rates for our IP telephony services for calls to 14 countries, including India, to RMB4.60 per minute.

Data Services

We presently provide data services in 328 cities in China. We target high volume users of integrated voice, data and video communications and offer them data services as part of our integrated offerings of long distance, data and Internet services. Our target customer groups are government offices, financial institutions, multinational or multi-regional corporations, large- and medium-sized enterprises in China, and Internet service providers and Internet content providers that provide telecommunications services. As of December 31, 2006, the total leased bandwidth of our ATM and FR data services was 7,428 x 2 Mbps.

Our data service offerings mainly consist of broadband, managed data services, including:

	•		Frame relay, or FR, services, which provide high speed and cost effective data communications services linking remote business sites using FR technology;

	•		Asynchronous transfer mode, or ATM, services, which employ ATM technology and are able to handle high bandwidth, integrated voice, video, data and Internet traffic; and

	•		Broadband video-conferencing and video-telephony services, which are provided under the brand name of “Uni-Video.” These services currently include video-conferencing, video-telephony, video conference room leasing and video public telephony services. These services are based on our existing unified data network platform. Two or more users can use our services by connecting to the Internet or our video network through video-conferencing terminals or computer terminals.

The following table sets forth selected information about our data services for the periods indicated.


	As of December 31,
	2004		2005		2006
Number of cities reached		328		328		328
Bandwidth leased to customers		9,007		8,706		7,428

We provide data services through an advanced, unified nationwide network system, the backbone of which is our advanced nationwide fiber optic transmission network. This network is the second largest fiber optic transmission network in China. We have also built metropolitan area networks in many cities throughout China. These networks provide local transmission capacity for our different services. See “— Networks — Transmission Network” below.

We believe that our ability to offer integrated access to customers’ premises is important to the success of our data services. We continue to build integrated access networks linking major office buildings to our networks in major cities. See “ ¾ Networks ¾ Long Distance, Data and Internet Networks” below.

Our charges for ATM and FR services include one-time, up-front charges for installation materials (currently RMB500 per circuit or port for ATM services and RMB300 per circuit or port for FR services) and testing (currently RMB500 per circuit or port for ATM services and RMB300 per circuit or port for FR services), a monthly port fee and a monthly circuit fee. Our tariff charges are generally offered at a 10% discount from the State-guidance tariffs.

The following table sets forth our tariff rates for monthly port fees for FR data services of selected bandwidths.


FR Services Port Fee (RMB per month)
Bandwidth (bps)		Port Fee
64k		260
128k		300
256k		400
384k		450
512k		500
768k		650
1M		750
2M		1,000

The following table sets forth our tariff rates for monthly permanent virtual circuit (PVC) fees for FR data services of selected bandwidths and selected distance categories.


	FR Services PVC Fee (RMB per month)
							Hong Kong,		International		International
	Local		Local		Domestic		Macau &		long distance		long distance
Bandwidth	(intra-district)		(inter-district)		long distance		Taiwan		(Asia)		(outside of Asia)
8kbps		290		440		990		1,550		8,800		9,400
16kbps		390		540		1,190		1,800		10,000		10,500
32kbps		450		650		1,300		2,000		11,500		11,500
48kbps		500		750		1,500		2,300		13,000		13,500
64kbps		550		800		1,700		2,600		14,500		14,600
128kbps		700		1,000		2,100		3,400		18,000		18,400
256kbps		800		1,150		2,200		3,500		19,000		19,600
384kbps		850		1,350		2,300		3,800		20,000		20,500
516kbps		1,000		1,450		2,500		4,100		22,300		23,100
768kbps		1,150		1,600		2,700		4,600		25,800		26,550
1Mbps		1,250		2,000		3,000		5,200		28,900		30,050
2Mbps		1,500		2,200		4,000		7,000		39,000		39,000

The following table sets forth our tariff rates for monthly port fees for ATM services of selected bandwidth.


ATM Services Port Fee (RMB per month)
Bandwidth	Port Fee
256K		400
512K		500
1M		750
2M		1,000
4M		2,000
6M		3,000
8M		4,000
10M		5,000
12M		6,000
34M		7,000
45M		8,000
100M		9,000
155M		10,000

The following table sets forth our tariff rates for monthly circuit fees for ATM data services of selected bandwidths and selected distance categories.


	ATM Services Circuit Fee (RMB per month)
							Hong Kong,		International		International
	Local		Local		Domestic		Macau &		long distance		long distance
Bandwidth	(intra-district)		(inter-district)		long distance		Taiwan		(Asia)		(outside of Asia)
256Kbps		800		1,150		2,200		3,500		19,000		19,600
512Kbps		1,000		1,450		2,500		4,100		22,300		23,100
1Mbps		1,250		2,000		3,000		5,200		28,900		30,050
2Mbps		1,500		2,200		4,000		8,000		39,000		39,000
4Mbps		2,000		3,000		6,000		12,900		72,200		72,200
6Mbps		2,500		5,500		9,000		19,800		105,400		105,400
8Mbps		3,500		8,500		12,000		26,700		138,700		138,700
10Mbps		5,000		11,500		15,500		30,600		157,800		157,800
15Mbps		7,000		15,000		22,000		40,000		205,000		205,000
20Mbps		7,500		17,500		29,000		49,000		252,300		252,300
25Mbps		8,000		21,000		36,000		59,000		300,000		300,000
30Mbps		9,000		24,000		42,000		69,000		348,500		348,500
40Mbps		10,000		29,000		52,000		88,500		416,000		416,000
50Mbps		10,500		32,000		60,000		108,200		486,600		486,600
60Mbps		11,000		33,000		68,000		122,600		567,900		567,900
70Mbps		11,500		35,000		76,000		137,000		649,100		649,100
80Mbps		12,000		36,000		84,000		151,300		730,400		730,400
90Mbps		12,500		37,000		92,000		165,700		811,600		811,600
100Mbps		13,000		37,500		100,000		180,100		892,900		892,900
110Mbps		13,500		38,000		107,500		187,300		933,500		933,500
130Mbps		13,800		38,500		122,500		201,600		1,014,800		1,014,800
155Mbps		14,500		39,000		130,000		216,000		1,096,000		1,096,000

Effective April 2003, we began charging our corporate customers fees for our “Uni-Video” services based on package service plans, including up-front charges for testing, a monthly fee and usage charges. Retail customers of our “Uni-Video” services purchase re-chargeable cards to pay for such services.

Internet Services

The Internet services we offer include:

	•		Dedicated Internet Access . We offer business customers high speed Internet access through dedicated lines. As of December 31, 2006, we had a total of 31,350 subscribers for dedicated Internet access. We package this service with voice and data services to provide integrated communications solutions to our business customers and cooperate with cable operators and real estate developers to offer broadband access to residential customers.

	•		IDC Services . We have built Internet data centers, or IDCs, in selected cities including Shanghai, Beijing, Guangzhou and certain provincial capitals, and provide server hosting, server rental, virtual servers and other IDC services to commercial customers and virtual IDC operators.

	•		“Ruyi Mailbox” Services . This service allows our cellular subscribers to use their cellular phone numbers as e-email addresses. As of December 31, 2006, the number of “Ruyi Mailbox” subscribers was approximately 12.22 million.

	•		Other Internet Services . Other Internet services we offer include international Internet Protocol-Virtual Private Network (or IP-VPN), Virtual Private Data Network (or VPDN), Virtual Internet Service Provider (or VISP), Uninet international roaming and corporate e-mail services.

The following table sets forth selected historical information about our dedicated Internet access service operations and our subscriber base for the periods indicated.


	As of December 31,
	2004		2005		2006
Number of cities reached by our dedicated Internet access services		327		334		334
Number of subscribers of dedicated Internet access services		61,569		38,000		31,350

Our tariff charges for dedicated Internet access include a network usage fee, an account set-up fee and a fixed telecommunications fee. Network usage fee is calculated based on monthly service plans. The account set-up fee is RMB100. The fixed telecommunications charge is based on the relevant tariff for the particular type and bandwidth of leased lines used to access the Internet. The following table summarizes the monthly network usage fees for selected bandwidths denoted as “R.”


Bandwidth	Standard network usage fees (RMB per month)
R £ 64Kbps		2,700-3,600
64Kbps<R £ 128Kbps		3,600-4,900
128Kbps<R £ 256Kbps		4,800-6,600
384Kbps <R £ 512Kbps		8,500-12,000
1024Kbps<R £ 2Mbps		18,000-27,000
8Mbps <R £ 10Mbps		59,400-70,000
20Mbps<R £ 34Mbps		165,900-195,200
34Mbps <R £ 45Mbps		210,000-250,000
45Mbps<R £ 100Mbps		428,400-504,000
100Mbps<R £ 155Mbps		664,100-781,200

Our provincial and local branches are permitted to make tariff decisions within the range set forth above. For customers who lease a high number of dedicated access lines, we provide discounts of up to 20% of the tariffs set forth in the table above.

We charge a monthly usage fee for our “Ruyi Mailbox” services, which is currently RMB6 per month. We do not charge for SMS notifications of e-mail receipt. Other e-mail functions performed through SMS are charged based on the SMS tariff rates for our “uni-Info” services.

Leased Line Services

We lease transmission lines to large business customers and other telecommunications operators. Our leased line services provide customers with dedicated digital links directly connecting customer sites. As of December 31, 2006, we had a total leased bandwidth of an equivalent of 50,391 x2 Mbps circuits.

Leased line tariffs are primarily based on the bandwidths of the lines leased and the distance of transmission. The following table sets forth State tariff rates for monthly fees of selected types and bandwidths of leased lines and selected distance categories:


	State Tariff Rates (RMB per month)
	Local (intra-district)		Local (inter-district)		Long distance
Digital Line (2 Mbps)		2,000		4,000		6,000
Digital Line (34 Mbps)		16,000		31,000		47,000
Digital Line (155 Mbps)		44,000		88,000		132,000


Source :		MII.

Similar to PSTN service operators, we can adopt tariffs that are different from the above State tariff rates as long as we do not offer services at tariff rates below cost. We generally offer our leased line services at a 10% discount to the State-guidance tariff rates and market these services to institutional customers through our own dedicated teams and our sales agents.

Sale and Lease of Other Network Elements

We have substantially completed the construction of our nationwide transmission network. See “ ¾ Networks ¾ Transmission Network” below. We have started to offer some network elements such as optic fibers or fiber channels for lease to other telecommunications operators or corporate customers.

Interconnection and Roaming Arrangements

Interconnection

Interconnection refers to various arrangements that permit the connection of our telecommunications networks to other networks. Our cellular and long distance networks interconnect with Unicom Group’s cellular 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.

Unicom Group’s cellular networks, our cellular networks and our long distance networks interconnect with the fixed telephone networks of China Telecom, China Netcom and China Railcom. Unicom Group’s cellular networks and our cellular networks also interconnect with China Mobile’s cellular networks. Our Internet network interconnects with the Internet networks of China Telecom and China Netcom. Although we continue to encounter some difficulties in the execution of our interconnection arrangement with other operators in limited service areas, the situation has been significantly improved since 2004 due to improved regulatory supervision by the PRC government in this area.

In October 2003, the MII issued regulations relating to settlement between telecommunications networks. These new regulations contain provisions regarding revenue sharing methods and settlement mechanisms for interconnection arrangements between other operators and us. These interconnection arrangements under the new regulations are described in “ ¾ Regulatory and Related Matters ¾ Interconnection Arrangements” below.

Unicom Group entered into interconnection arrangements with China Telecom, China Netcom and China Mobile with the following agreements, which equally apply to us:

	•		Framework interconnection and settlement agreement between Unicom Group and the former China Telecom, dated September 30, 2001, the rights and obligations of which were divided and continued after the former China Telecom was split into China Telecom and China Netcom pursuant to an agreement among Unicom Group, China Telecom and China Netcom, dated April 23, 2003. These interconnection and settlement agreements with China Telecom and China Netcom were superseded by the interconnection and settlement agreement between Unicom Group and China Telecom, dated March 29, 2004 and the interconnection and settlement agreement between Unicom Group and China Netcom, dated April 2, 2004. The 2004 agreements contained more detailed provisions relating to interconnection quality, pursuant to new MII directives in this area.

	•		Interconnection and settlement agreements between Unicom Group and China Mobile relating to the interconnection between Unicom Group’s GSM and CDMA cellular networks and China Mobile’s GSM cellular networks, both dated November 14, 2001, which were subsequently amended and supplemented by the respective parties on December 31, 2003.

	•		Interconnection and settlement agreement between Unicom Group and China Mobile regarding the interconnection of point-to-point short messaging services, dated April 1, 2002.

	•		Interconnection and settlement agreement between Unicom Group and China Mobile regarding the interconnection between China Mobile’s GSM cellular networks and Unicom’s telecommunications networks, including its local fixed line telephony networks, cellular networks, domestic long distance telephony networks, international telephony networks and IP telephony network, and the interconnection between China Mobile’s international gateways and IP telephony network and Unicom Group’s cellular networks and local fixed line telephony networks, dated December 31, 2003.

	•		Agreement between Unicom Group and China Mobile regarding the mutual provision of open service platforms, dated November 5, 2003.

	•		Agreement between Unicom Group and China Mobile regarding the mutual provision of open multimedia messaging service and interconnection and settlement business, dated April 6, 2007.

Unicom Group has also entered into the following interconnection arrangements, which equally apply to us:

•

Interconnection and settlement agreements between Unicom Group and China Railcom relating to the interconnection of Unicom Group’s cellular networks and local fixed line telephony networks and China Railcom’s local fixed line telephony networks, domestic

			long distance networks and IP telephony networks, dated January 25, 2002 and April 9, 2002.

	•		Supplemental agreements between Unicom Group and China Railcom, which allow each party to offer its domestic and international long distance telephony services and IP telephony services to the cellular or fixed line telephony service subscribers of the other party, dated April 23, 2003.

	•		Interconnection and settlement agreement between Unicom Group and China Satcom relating to the interconnection between Unicom Group’s networks and China Satcom’s “Global Star” satellite mobile communications network, dated September 27, 2003.

	•		Framework interconnection and settlement agreement between Unicom Group and China Satcom relating to the interconnection between Unicom Group’s cellular networks and China Satcom’s IP telephony networks, dated September 24, 2003.

	•		Interconnection agreement among major Internet operators, including Unicom Group, and three national Internet switching centers relating to the interconnection of Internet backbone networks, dated December 20, 2001.

	•		Interconnection and settlement agreement between Unicom Group and China Telecom relating to the provision of point-to-point SMS services between Unicom Group’s and China Telecom’s networks, dated October 10, 2004.

	•		Interconnection and settlement agreement between Unicom Group and China Netcom relating to the provision of point-to-point SMS services between Unicom Group’s and China Netcom’s networks, dated October 11, 2004.

For all interconnection services, we are required to pay the interconnection fees regardless of our ability or inability to collect the tariff from our subscribers. The fixed line operators are required to pay interconnection fees regardless of their ability or inability to collect the tariff from their subscribers, except for the interconnection by fixed line subscribers calling our subscribers in the same region where no interconnection fee will be charged. Interconnection charges are accrued on a monthly basis based on the actual call volume and applicable tariff rate. See “B. Related Party Transactions — Provision of Ongoing Telecommunications and Ancillary Services and Premises — Interconnection Arrangements” under Item 7 below for the interconnection and settlement arrangements between Unicom Group and us.

Roaming

As of December 31, 2006, our cellular subscribers can roam on cellular networks in Europe, North America and other Asian countries and regions through Unicom Group’s international roaming agreements with 260 GSM operators in 170 countries and regions and 22 CDMA operators in 16 countries and regions. Unicom Group has also agreed to arrange for us to participate in its future international roaming arrangements.

A cellular subscriber using roaming services is charged at our roaming usage rate for both incoming and outgoing calls, plus applicable long distance tariffs. Under our roaming agreement with Unicom Group, our subscribers who roam on Unicom Group’s networks are charged for each call made or received. We collect this tariff, retain RMB0.20 and pay the remaining amount to Unicom Group. On the other hand, when Unicom Group’s subscribers roam on our networks, Unicom Group collects the roaming tariff, retains only RMB0.04 and pays us the remaining amount.

In early 2007, MII officials publicly indicated that the MII may evaluate the existing policy that caps the roaming fees a wireless telecommunications operator may charge its subscribers with a view to further reducing roaming charges for wireless services. We do not know if or when such a regulatory move may be implemented. 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.

The following table is a summary of roaming settlement between Unicom Group and us:


			Paid to Unicom
For our subscribers roaming on Unicom Group’s networks	Roaming Tariff		Group		Retained by Us
GSM pre-paid users (RMB/minute)		0.60		0.40		0.20
GSM post-paid users (RMB/minute)		0.60		0.40		0.20
CDMA users (RMB/minute)		0.60		0.40		0.20


					Retained by
For Unicom Group’s subscribers roaming on our networks	Roaming Tariff		Paid to Us		Unicom Group
GSM pre-paid users (RMB/minute)		0.60		0.56		0.04
GSM post-paid users (RMB/minute)		0.60		0.56		0.04
CDMA users (RMB/minute)		0.60		0.56		0.04

With respect to international roaming, we settle roaming revenue with international operators through Unicom Group in accordance with roaming agreements between Unicom Group and each of the international operators.

See “B. Related Party Transactions — Provision of Ongoing Telecommunications and Ancillary Services and Premises — Roaming Arrangements” under Item 7 below for further information regarding the roaming arrangements between Unicom Group and us.

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 cellular, long distance, data and Internet networks. In addition, we continue to develop management and network support systems to enhance the quality and reliability of our networks and improve our customer service and operating efficiency. We generally utilize a centralized network planning and equipment selection process, which ensures uniform nationwide design and network compatibility.

Transmission Network

We own and operate an advanced nationwide fiber optic transmission network (except for the Xizang Autonomous Region, in which we lease capacity from other operators). As of December 31, 2006, our fiber optic transmission network reached 346 cities with a total cable length of approximately 863,000 kilometers, of which fiber optic backbone transmission network accounted for approximately 125,000 kilometers.

Our fiber optic transmission network is designed for broadband capacity with superior security and reliability, which supports our integrated telecommunications services and allows us to lease capacity to other telecommunications operators and corporate customers. The network deploys:

	•		synchronous digital hierarchy, or SDH, architecture with protective two- or four-fiber rings, a self-healing system that allows for instantaneous rerouting, automatically protects service circuits and minimizes down time in the event of a fiber cut or equipment malfunction;

	•		dense wave division multiplexing, or DWDM, technology, a means of increasing transmission capacity by transmitting signals over multiple wavelengths through a single fiber; and

	•		a digital cross connection, or DXC, system, a specialized high-speed data channel exchange and connection system that effectively manages the routing and channeling of our services.

Our SDH fiber rings have transmission bandwidths of 2.5 Gb/s in most routes and 10 Gb/s for the fiber ring that covers the eastern and southern coastal areas of China. We deploy mainly transmission equipment and technology supplied by Siemens, Nortel, Lucent, Alcatel, Huawei, ZTE and other vendors.

Concurrently with the construction and expansion of our domestic backbone transmission network, we also seek to expand our international bandwidth. Through our participation in the Asia Pacific Cable Network No. 2 Project (APCN 2), a trans-pacific submarine cable project that connects major countries and regions in eastern Asia and southeastern Asia and links them to North America through Japan, and our membership in the US-Japan Sub-marine Cable Organization, we are linked with 11 operators in Japan, U.S., South Korea, Singapore and Taiwan with 155x62 Mbps capacity. In December 2006, we also participated in the construction of the trans-pacific submarine cable (TPE), a high-speed submarine cable that will connect eastern Asia and North America. The construction of TPE is expected to be completed in 2008 and we will have an initial transmission capacity of 50 Gbps upon completion. We also lease 3669 Mbps of international broadband transmission capacity. We have also opened transmission lines on land with the main operators in Hong Kong and Macau, with 30Gbps and 2.5Gbps of transmission capacity, respectively. In addition, we have established several fiber-optic interconnections with China’s neighboring countries such as Vietnam, Mongolia and Russia, with transmission capacity ranging from 622Mbps to 10Gbps.

As of March 31, 2007, our metropolitan area networks cover 346 cities throughout China, with a total length of approximately 783,000 km. These networks provide a unified, high-speed local transmission platform for our cellular, data and Internet services.

Cellular Networks

A cellular 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’ cellular 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

	•		transmission lines, which link the mobile switching centers, base station controllers, base stations and the public switched telephone network.

We own most of the GSM cellular transmission network at the local and provincial level. We lease a portion of our inter-provincial transmission capacity for our GSM cellular networks as well as the CDMA cellular transmission network. We also use our own backbone fiber optic transmission network to provide transmission capacity for our cellular networks. We continue to focus on the management and operation of our cellular networks.

GSM Cellular Networks. The following table sets forth selected information regarding our GSM cellular networks in our service areas as of the dates indicated.


	As of December 31,
	2004		2005		2006
Network subscriber capacity (in thousands of subscribers)		84,552		89,461		105,464
Base stations		81,819		94,444		122,205
Base station controllers		1,653		1,781		2,020
Mobile switching centers		477		502		502

Currently our GSM cellular network mainly operates at 900 MHz. We have deployed GSM technology that operates at 1800 MHz in some major metropolitan areas to supplement the capacity of our existing cellular network. We have the right to use 6 x 2 MHz of spectrum in the 900 MHz frequency band and 10 x 2 MHz in the 1800 MHz frequency band for our GSM network.

Our cellular networks are supported by an advanced SS7 signaling system, which fosters efficient use of network capacity, reduces call set up 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.

As of December 31, 2006, we have upgraded our GSM networks in 65 major China cities to be able to offer GPRS services. On May 17, 2007, we launched the commercial operation of GPRS services in 70 cities on a trial basis. We plan to continue and expand our GPRS upgrade to additional cities in 2007.

CDMA Cellular Network. By the end of 2006, Unicom Group completed the construction of a comprehensive CDMA network, with an aggregate network capacity of approximately 84 million subscribers and nationwide coverage. We lease CDMA network capacity in our cellular service areas to operate Unicom Group’s network in those areas on an exclusive basis. We have the right to use 10x2 MHz of spectrum in the 800 MHz frequency band for our CDMA services.

Long Distance, Data and Internet Networks

By the end of 2006, our PSTN network reached 334 cities, while the coverage of our Internet networks, including our IP telephony networks, included over 341 cities throughout China.

Long Distance Network. Our long distance network is supported by a nationwide billing system and an intelligent network, which allows us to provide multiple services. Our cellular subscribers can access these services directly through our cellular networks, but our other customers typically access our long distance telephony, IP telephony and Internet services through the public switched telephone networks of China Telecom and China Netcom. As of December 31, 2006, the total network capacity for our IP telephony services reached 20,038 E1. E1 is the European format for digital transmission and carries signals at 2Mbps.

Data and Internet Networks. Our broadband data and Internet networks utilize a unified IP and ATM design, which is particularly suited for real-time, multimedia applications such as video and voice.

ATM switches perform high-speed switching of voice and data traffic and minimize time delay and congestion. They can also prioritize applications that least tolerate time delay, such as telephony and video, over less time-sensitive applications such as e-mails and file transfer. As of December 31, 2006, the international and domestic interconnection bandwidths have reached 3.8 Gbps and 17.8 Gbps, respectively.

Internet Network. Our Internet network, branded as “Uninet”, is also centrally designed and has a nationwide uniform architecture. It is supported by a nationwide, advanced billing system that facilitates roaming access and delivery of virtual ISP services and other value added services.

Broadband Video Network . Our broadband video network utilizes the H.323 technological standard and two-tier network structure. H.323 is a widely used multi-media conferencing protocol approved by the International Telecommunications Union. As of December 31, 2006, it can provide video conference and video telephone services and currently reaches over 300 cities nationwide as well as the United States and Hong Kong.

Integrated Access Networks. We believe that the key to the success of our data services is our ability to offer integrated access to customers’ premises. We are building integrated access networks in many cities throughout China. We focus the construction of our access networks on linking major office buildings to our metropolitan area transmission networks. We rely mainly on fiber optic cables to link office buildings to our networks and have offered narrow-band wireless access at the 3.5 GHz frequency band in approximately 3 municipalities, 18 provincial capitals and 14 provinces.

Integrated Management and Network Support Systems

We have developed various management and network support systems to support and manage our various networks. We have established, in each province, municipality or autonomous region, an integrated billing and settlement system that supports the billing and settlement services of our cellular, data and long distance businesses. We have also developed a management support system (MSS) that supports our business support system (BSS) and enterprise resource planning systems (ERP). We have integrated the billing and settlement system and business management system at our headquarters to manage our businesses.

Marketing, Sales and Distribution

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. In 2006, we further implemented our brand-centric marketing strategy and established a comprehensive branding structure, with an equal focus on existing subscriber retention and subscriber base expansion.

Sales and Marketing

We focus on developing a strong brand image of “Connecting you freely” that conveys our strengths in high quality services, comprehensive network coverage, integrated solution offerings, advanced technology and customer focus. We market all of our services under the China Unicom brand name. In 2006, we continued to implement the customer-oriented branding system focusing on four customer brands – “Worldwind”, “U-Power”, “Ruyi Tong” and “Unicom Horizon.” We consolidated our products, tariff structure and channel resources to offer distinctive customized service packages under these four customer brands that are targeted to different market segments. We emphasized the technological advantages of “dual-mode, dual-standby” of “Worldwind” CDMA and GSM dual mode services, our premier customer brand for offering high quality and differentiated services to mid- to high-end individual CDMA and GSM cellular customers. We actively developed the youth and campus markets to increase the

market share of our “U-Power.” We expended significant efforts in marketing the “Ruyi Tong” service, which is targeted to offer mainstream cellular services to individual customers in the mass market, including potential new subscribers in the rural areas. We actively developed institutional and industrial customers by providing integrated telecommunications solutions to government, small- and medium-sized enterprises and customers in industries such as agriculture, finance and capital markets. In addition to the four customer brands, we offer two business brands, “uni” and “Unicom Commerce”, which are used to market our value-added services to cellular subscribers and long-distance, data and Internet services to primarily institutional customers, respectively.

Our marketing strategy utilizes our image as an integrated telecommunications service provider and leverages our comprehensive services and nationwide sales and distribution network. By using direct sales forces and sales agents and active market analysis and through sales channels such as service centers, sales outlets and large-scale chain stores, our marketing strategy can be targeted at different customer segments and adjusted timely in accordance with the demands of different markets. In addition, we also seek to enter into strategic alliances in order to further expand the breadth and depth of our marketing and sales efforts. In September 2004, we entered into a wireless Internet joint marketing agreement with Intel, HP, IBM, Lenovo and Digital China to develop the industry value chain for our “U-Net” services based on the CDMA 1X network. In June 2005, the Unicom Group and the Lenovo Group entered into an agreement on the cooperation of Lenovo’s notebook computers and our “U-Net” business to expand our “U-Net” business. In December 2005, the Unicom Group entered into a full and exclusive strategic partnership with the Chinese Table Tennis Association to leverage the popularity of table tennis in China to enhance our brand recognition. In July 2006, we entered into a strategic cooperation agreement with SKT, pursuant to which we and SKT agreed to cooperate on the further development of CDMA cellular communication services in China in the areas of CDMA VAS and marketing, among others. In December 2006, we signed a memorandum of understanding with Toyota Motor (China) Investment Co., Ltd. to engage in joint research and development of vehicle global positioning systems based on our CDMA 1X technology. We expect these cooperative arrangements will enhance our marketing ability and promote our brand recognition and our marketing in China.

Moreover, we seek to formulate effective marketing strategies through customer relations management and analysis of customer segmentation, customer demand and consumption trends.

Customer Segmentation : We have two main categories of customers: (i) institutional customers, comprised of mainly corporate, industry and government customers, and (ii) individual customers. We have set up dedicated sales and service departments for institutional customers, both at our headquarters and at our provincial and local branches. We focus on promoting our integrated and customized solutions to these institutional customers. For individual customers, we conduct our sales through our own service centers and the retail outlets of independent sales agents.

Cellular services : In order to better coordinate our sales and marketing efforts in our cellular service provisions, in 2007 we separated our sales and marketing personnel and activities for our CDMA services from those for our GSM services. As a result, the sales and marketing department of our headquarters and our provincial-level branches have been separated into two independent departments for GSM and CDMA businesses respectively. By establishing a dedicated sales and marketing team for each cellular service segment, we aim to implement more competitive and focused sales and marketing strategies in a cost-effective way. In addition, a new department — a comprehensive sales and marketing department — was established at our headquarters to supervise and coordinate the sales and marketing activities of the GSM and CDMA business and formulate company-wide policies and strategies in respect of sales and marketing of our cellular services and products. See “D. Risk Factors — Risks Relating to Our Business — Our CDMA and GSM businesses compete with each other in certain areas, which may adversely affect the growth and profitability of these businesses.” under Item 3.

We promote our CDMA services by leveraging our abundant CDMA network resources and the technological advantage of CDMA 1X to provide differentiated services targeted at different market segments, including tailoring different service packages for different consumer groups. In 2006, we focused on optimizing the correlation between handset subsidies and the revenue generated by the related subscribers. We centralized our purchasing of CDMA handsets to lower the entry barrier of our CDMA services caused by high handset prices and to make our CDMA services more attractive and affordable to the mass market. We have also coordinated the sourcing of certain models of CDMA handsets with SKT to accelerate the commercial launch of new models of CDMA handsets. In addition, by offering a one-stop solution for customers, based on the integrated service capacity of CDMA 1X network technology, we actively pursued integrated services marketing to promote our CDMA 1X services.

We also continued to expand the subscriber base for our GSM voice and value-added services. Our marketing strategies for GSM services focused on the continued development of voice and SMS services and the rapid expansion of VAS. We also plan to leverage our newly upgraded GPRS networks in major Chinese cities to promote GPRS VAS services. Furthermore, we plan to capitalize on VAS and the release of new network number resources to develop high-end GSM service to enhance the profitability and image of our GSM business.

For our wireless VAS business, we focused on increasing the penetration rate of SMS, Cool Ringtone and wireless data services to achieve higher ARPU for our VAS business. In addition, we also plan to expand our market share in newer services such as mobile music, instant message and stock information download.

Recognizing the importance and the needs of our institutional customers and utilizing our advantages of being an integrated telecommunications operator, we formulated marketing strategies for our cellular services that were tailored to our institutional customers. In 2006, we continued to emphasize the development of advanced and customized industrial applications for our institutional customers. By offering industrial solutions, our business extended from the provision of basic telecommunications services to comprehensive value-added information services. For example, we expanded the CDMA IX-based applications for corporate and industrial customers in specific industries such as maritime. We introduced “Agriculture Horizon”, an integrated agriculture-related information service specifically targeting rural populations, based on our development of “Tianfu Agriculture Information Net”, an integrated agriculture information platform supported by our cellular, data and Internet network resources and information resources, which we launched in 2005. We recently introduced the “SAIC Enforcement Horizon” application which aims to offer tailored wireless services to law enforcement personnel of the State Administration of Industries and Commerce.

Long distance, data and Internet services : In 2006, we continued to focus on institutional customers, including financial institutions, large corporations, multi-national corporations, government entities and Internet service providers and Internet content providers, in order to provide them with customized “one-stop” solutions. We fully launched “Unicom Commerce” to offer integrated telecommunications services specifically designed to cater to institutional customers’ needs. Our marketing efforts with respect to retail customers were focused on promoting profitable services and products.

Service Bundling and Cross-Marketing : A key element of our sales and distribution strategy is to promote our strengths as a provider of a comprehensive range of integrated services. This strategy is implemented by our service centers, independent sales agents and direct sales forces, which distribute and support our various product offerings. For example, we cross-sell our long distance, data and Internet services to our cellular subscribers, as well as bundle wireless data service with voice services. In addition, based on the specific demands of our industry and institutional clients, we provide customized

communications solutions by bundling VPN, IP telephony, “Uni-Video” broadband video-telephony and “U-Net” services under the brand “Unicom Commerce.”

Distribution

We have a diversified distribution network comprising of self-owned sales outlets, agent/distributor sales outlets and direct sales forces. We distribute our services to our individual customers through our self-owned sales outlets as well as other retail outlets. We distribute our services to large customers through our direct sales forces and agents. We have developed a nationwide distribution network of service centers and sales outlets, of which only a small portion are owned by us and the rest are owned by independent agents or distributors. As a part of the segregation of the sales and marketing functions for our GSM and CDMA businesses, we are in the process of reorganizing our existing distribution system into two distinctive distribution systems for each of our GSM and CDMA businesses. As of December 31, 2006, we had a total of approximately 220,000 sales outlets, of which over 7,775 were self-owned. These service centers and retail outlets distribute our cellular, long distance, data and Internet services and provide post-sales services such as service inquiry, customer complaint and collections.

We generally aim to maintain a flat distribution structure, but utilize a multi-level distribution system in some service areas, in which our top-level distributors further distribute to lower level distributors and sales agents. In 2006, we further reduced the levels of such distribution system to control distribution costs. We are also in the process of setting up direct distribution centers to further flatten the distribution structure in some areas. We have also established direct sales and customer service teams to conduct one-on-one sales to high-usage institutional customers. These direct sales and customer service teams’ focus is to promote our cellular, domestic and international long distance, data and Internet services as integrated telecommunications services in order to provide differentiated and comprehensive solutions for our customers. In 2006, we actively pursued cooperation opportunities with third-party distribution channels to optimize our overall distribution system. In addition, we enhanced control and evaluation of third-party distribution channels by strengthening the assessment of potential customer contributions.

Customer Service

We provide specialized, differentiated and “one-stop” services to our customers, based on the customer service resources of Unicom Group. In 2006, we 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 service area can be accessed by our customers by dialing a nationwide hotline number “10010.” Our customer service system is a nationwide platform with regional centers, providing customer services for all of our businesses. This system is based on the customer service centers, and also relies on other systems, including operations, billing, account management and network management. This integrated 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, to different types of customers on a 24-hour basis. Our customers can access our customer services through various means, including telephone calls, faxes, e-mails and SMSs. To better serve our customers, we provide such value-added services as 10011 bill inquiry hotline, 101901 bill inquiry express line, 13010199999 international roaming service free hotline, bill payment through commercial banks, free copies of detailed statements, Internet account inquiry and a rechargeable card for all of our services. To better meet market demand, we continue to innovate in our customer services, in order to provide more pro-active, comprehensive and targeted customer services. We also continue to promote customer loyalty through our nationwide club member reward program.

To enhance customer satisfaction, we have launched a series of customer service campaigns such as “Reliable Network with Sincere Services.” Our headquarters and regional 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. Such a system has helped us to improve service quality and enhance our customer satisfaction.

In addition, we also analyze our customer segments in detail, and tailor our services to the requirements of different customer segments. While we are focused on retention of our individual 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 institutional customers. For mass-market customers, we offer standardized services that aim at enhancing customer experience.

We emphasize customer service and customer relations management and have taken various measures to improve customer satisfaction. Such measures include establishing and improving the customer service network, standardizing the content, manner and criteria of service and improving training of customer service representatives. We established our customer service workflow using a consistent set of standards in order to timely resolve problems for our customers. We have also strengthened our analysis and research of customer consumption behavior, consumption cycle and satisfaction levels in order to understand their consumption pattern and influence their consumption trend.

Billing and Collection

We are able to leverage our strengths as an integrated service provider to offer integrated billing and collection services to our institutional and individual customers. We also 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 cellular services, long distance telephony services and Internet dial-up services. Our billing system can 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. The following table sets forth our billing and collection methods for each of our business segments:


Business Segment	Billing	Collection
Post-paid GSM and CDMA services	Centralized at the provincial level and generally by monthly billing.	Subscribers may pre-deposit their service charges with us or commercial banks or China Post that collect payment for us, make payment in person at our service centers or branches of China Post, or through commercial banks.

Pre-paid GSM and CDMA services	Centralized on our nationwide intelligent network	Subscribers can purchase and/or re-charge pre-paid cards through various channels. They can also re-charge cards by telephone.

PSTN long distance telephony services	Settlement through centralized system at our headquarters with billing handled at the provincial branch level	Subscribers mainly go to our service centers, commercial banks and branches of China Post for payment.

IP telephony services	Settlement through centralized system at our headquarters with billing for 17910 business carried	Subscribers mainly go to our service centers, commercial banks and branches of China Post for payment.


Business Segment	Billing	Collection
“Uni-Video” services	out by our headquarters and 17911 by our provincial branches Centralized at our headquarters except that our Guangdong provincial branch is in charge of the billing of pre-paid subscribers to our video-telephony services in Guangdong Province.	Our corporate customers can pay either at the local service centers in the locations of the branches of such customer or at one local service center designated by the customer.

Internet services	Centralized at the provincial level. Billing methods include monthly billing, volume-based billing and billing according to contractual provisions.	Subscribers may go to our service centers, commercial banks, and branches of China Post or use the Internet for payment.

“Unicom’s Internet Plaza”	Customers of the Internet cafes either pay by membership or pay hourly rates.	N/A

Leased lines	Monthly billing in accordance with contractual provisions	Customers mainly pay at our service centers or at commercial banks.

Bad Debt Controls

Cellular Services. Post-paid subscribers must register with us before they can begin using our cellular 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 subscriber to collect payments or taking legal action. 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 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. We believe these measures will continue to improve our bad debt control.

Domestic and International Long Distance Services. We actively encourage customers to use our pre-paid services. For international long distance services, we generally only provide such services after receiving certain amounts of pre-paid deposits. In addition, we perform credit checks on potential customers. For high-volume users, we open telephone banking accounts at commercial banks, set credit limits on such accounts and settle with such customers on a monthly basis. We also monitor those high-volume users on a daily basis.

Internet services. We send e-mails to delinquent customers and use other methods to collect payment from delinquent customers. Accounts for individual customers which are delinquent for 20 days are suspended, and such accounts will be terminated if they are delinquent for more than 40 days. For corporate customers, our actions are based on the credit history of each delinquent customer.

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. In 2006, we established a China Unicom Patent Library and were granted 10 technology invention patents from the State Intellectual

Properties Bureau of the PRC. We also received six scientific and technological progress awards from the China Institute of Communications. Among them, our “CDMA/GSM dual-mode, dual-standby handset” technology ranked first among all First Prize recipients.

In 2006, we also received an official mandate from the CDMA Development Group, an international consortium working on the adoption and evolution of 3G CDMA wireless systems around the world, to develop international mobile communications standards for “dual-mode, dual-standby handsets.”

Competition

The Chinese telecommunications market has six basic telecommunications service providers — China Telecom, Unicom Group, China Mobile, China Netcom, China Satcom and China Railcom — and thousands of value-added service providers. As a relatively new entrant into this highly competitive landscape, we believe the following strengths have contributed to the development and growth of our business in recent years:

	•		Integrated service offerings and a uniform and advanced telecommunications network — We offer integrated cellular, domestic and international long distance, data and Internet services, and have a nationwide, uniform communications network that supports voice, data and Internet communications and allows us to provide integrated services to our customers and utilize our network resources in a cost-effective manner.

	•		Unique service offerings — Through our advanced integrated network platform and the implementation of our innovative marketing strategies, we introduced “Worldwind” CDMA and GSM dual-mode cellular services and a series of value-added services such as CDMA 1X wireless data services, “uni” value-added services and “Unicom Horizon” industry specific services, in order to satisfy the differentiated demand of our various customer segments.

	•		Advanced technologies — CDMA technology offers high bandwidth utilization, better voice quality, high data transmission capabilities, better security and lower handset radio transmitting power, and can be relatively cost-effectively and timely upgraded to 3G cellular telecommunications. We are the only provider for CDMA services in our service areas in China, and our CDMA network has been upgraded to CDMA 1X technology, which has higher data transmission capabilities. Our GSM services utilize 2G technology that is widely accepted internationally and we believe our GSM network coverage and voice quality meet international standards. Our uniform network platform (Unione) utilizes ATM+IP technology solutions to offer quality support to our voice, data, Internet, video conference, video telephony and mobile data services.

	•		Professional and quality customer service — Using the customer service resources of Unicom Group, we have built up a strong brand image in customer service that can be characterized as professional, differentiated and “one-stop” service under our uniform service brand of “Unicom 10010.”

However, the development of our business is also affected by certain competitive disadvantages, including:

•

Market position — As a relatively new entrant to the market, we are still behind the traditional operators in such areas as market share and branding. Due to our late entry, we still need to strengthen our market position through expenditures to capture mid- to

			high-end customers. In addition, we are reliant on the dominant operators in terms of interconnection and settlement.

	•		Financial resources — Compared to the dominant operators such as China Mobile, our capital scale is relatively small, our debt ratio is relatively high, and our share of the market revenue and profit is relatively low.

	•		Network coverage and upgrade — While we have made significant improvements in network construction in recent years, network coverage in certain in-door or remote areas still needs improvement. In addition, we are still in the process of upgrading our GSM networks to launch more GPRS services in selected cities.

Cellular Competition

Our main competitor in the cellular 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. To compete against China Mobile, we continue to improve our network coverage and voice quality, enhance network quality, develop value-added services (such as our CDMA 1X wireless data services), improve customer service and customize our package service plans to meet our various subscribers’ specific needs. We also seek to leverage our position as a fully integrated telecommunications operator to provide “one-stop” telecommunications solutions for our subscribers. In addition, we seek to compete against China Mobile’s GPRS wireless data services by the development of our CDMA 1X wireless data services, which offers such advantages as better voice quality, better security, higher data transmission rates and more comprehensive value-added wireless data services. Moreover, we have upgraded our GSM networks in selected cities and begun to offer GPRS wireless data services to our GSM subscribers in selected cities since 2007.

Our cellular services also compete with the wireless local communications services of China Telecom and China Netcom, known as “Little Smart”, which are based on their fixed line networks and primarily utilize PHS technology. These services were previously offered primarily in small- to medium-sized cities, but have been introduced in most cities nationwide. The “Little Smart” services reportedly have attracted a substantial subscriber base in China and compete with us mostly in the lower end of the cellular market. Although many cellular users use “Little Smart” services as a supplement, rather than an alternative, to their existing cellular services, the availability of “Little Smart” services has led to a decrease in effective cellular tariffs and reduced the overall usage volume of cellular services. The main competitive advantage of “Little Smart” services is their relatively low tariff rates. However, they generally have limited network coverage and roaming capability.

Since late 2006, the MII has stepped up its efforts to encourage wireless telecommunications operators to implement “calling-party-pays” billing arrangements by offering tariff packages with such billing arrangements in the future. In light of such a policy move, we have started to implement such billing arrangements in selected tariff packages offered in certain areas such as Beijing and Guangdong. In addition, the MII has also indicated that it may consider reducing the roaming fees cellular operators may charge their subscribers. Such regulatory actions may change the competitive environment of the PRC wireless telecommunications industry. For example, the implementation of “calling-party-pays” billing and the reduction of roaming charges may help us improve our competitive position against “Little Smart” service providers by reducing the price advantage of such services but it may also trigger more intensified competition among cellular service providers.

In addition, we expect that the PRC government’s decision in respect of the 3G licenses may significantly change the overall competitive environment of the PRC wireless telecommunications industry

and could further intensify the competition among cellular service providers. See “D. Risk Factors — Risks Relating to Our Business — Our cellular businesses face competition from China Mobile Communications Corporation, or China Mobile, China Telecom Corporation Limited, or China Telecom, and China Network Communications Group Corporation, or China Netcom. 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.” and “D. Risk Factors — Risks Relating to the Telecommunications Industry in China — Issuance of additional telecommunications service licenses including 3G licenses, may further intensify competition in the PRC telecommunications industry and materially adversely affect our financial condition, results of operations and growth prospects.” under Item 3.

To implement differentiated management of our CDMA and GSM businesses and foster an appropriate degree of internal competition, which we believe will be beneficial to the enhancement of our overall competitiveness, we recently segregated the sales and marketing functions of the two businesses. As a result, the internal competition between the two businesses for our internal resources as well as cellular subscribers may increase. See “D. Risk Factors — Risks Relating to Our Business — Our CDMA and GSM businesses compete with each other in certain areas, which may adversely affect the growth and profitability of these businesses.” under Item 3.

Long Distance Telephony Competition

China Telecom and China Netcom are the dominant providers and our primary competitors in the public switched long distance business in their respective service areas. They have advantages over us in their respective service areas in brand name, market share, financial resources, service area coverage, last-mile access, extensive access networks and experience in fixed line telecommunications business. However, the separation of China Telecom into two companies along geographic lines has weakened the competitiveness of the resulting entities on a nationwide basis.

Since our network has been constructed recently and is equipped with the latest technology and advanced features, it enables us to offer a variety of high-quality services. Our long distance telephony services are also supported by a centralized billing system. However, our services are hindered by our lack of fixed line telephone number resources and last-mile access.

In recent years, competition in the IP telephony market has been intensifying. Our IP telephony services currently face intense competition from China Telecom, China Netcom, China Mobile, China Railcom and China Satcom. Currently, China Telecom and China Netcom are the market leaders in their respective service areas.

Data and Internet Competition

China Telecom and China Netcom are our major competitors in the data services business in their respective service areas. Other competitors include China Railcom and China Satcom. While China Telecom, China Netcom, China Railcom, China Mobile, China Satcom and we are the only Internet backbone operators in China, there are many retail Internet service providers throughout China. China Telecom and China Netcom have leading positions in the Internet access market and are the largest wholesale Internet service providers in their respective service areas. Our data and Internet networks have nationwide access, which offers convenience and flexibility to our institutional customers, whereas the respective networks of China Telecom and China Netcom only extend to their respective service areas.

The advanced features and design of our backbone network allow us to provide nationwide high quality virtual private network services, which are specifically tailored to the high-usage corporate

customers and retail Internet service providers that we target. We have also built advanced metropolitan area networks and integrated access networks that allow us to connect to key commercial buildings throughout China. We also continue to cooperate with medium- to small-sized Internet service providers and other companies that have broadband access to concentrated residential areas to expand our broadband services.

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 to license to us any trademark that it registers in China in the future which incorporates the word Unicom.

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 MII. The State Council, the National Development and Reform Commission (the successor to the former State Development Planning Commission), or the NDRC, the Ministry of Commerce (formerly, the Ministry of Foreign Trade and Economic Cooperation) and other governmental authorities also maintain regulatory responsibilities over certain aspects of the Chinese telecommunications industry.

The MII, 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 service 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 arrangements between telecommunications networks, and

	•		maintaining fair and orderly market competition among service providers.

The MII has established a Telecommunications Administration Bureau in each province, which is mainly responsible for enforcement of telecommunications policies and regulations in that province.

The MII is in the process of drafting a telecommunications law that, once adopted by the National People’s Congress, 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.

Telecommunications Regulations

The State Council promulgated the Telecommunications Regulations, which became effective as of September 25, 2000. The Telecommunications Regulations are substantially consistent with, and are primarily intended to streamline and clarify, the existing rules and policies for the telecommunications industry. They provide the current primary regulatory framework for China’s telecommunications industry in the interim period prior to the adoption of the proposed telecommunications law.

The Telecommunications Regulations are intended to develop a transparent and fair regulatory environment to foster orderly competition and encourage development in the telecommunications industry. The Telecommunications Regulations address all key aspects of the telecommunications industry, including entry into the industry, scope of business, tariff setting, interconnection arrangements, quality of services, technology standards and allocation of telecommunications resources.

Entry into the Industry

The Telecommunications Regulations adopt the existing regulatory distinction between basic and value-added telecommunications services. An addendum to the Telecommunications Regulations sub-categorizes basic and value-added telecommunications services. In February 2003, the MII revised the addendum to the Telecommunications Regulations; and the revised addendum took effect in April 2003. Basic telecommunications services include, among others, fixed line local and domestic long distance telephony services, international telecommunications services, IP telephony services, mobile voice and data services, Internet and other public data transmission services, lease or sale of network elements, and paging services. Value added telecommunications services include, among others, e-mail, voice mail, electronic data interchange, Internet access, Internet content and video conferencing services.

The MII promulgated Measures on the Administration of Telecommunications Business Licenses, which took effect on January 1, 2002. Those rules apply to the application for, examination and approval of, telecommunications business licenses in China. Providers of any basic telecommunications services as well as providers of value-added services in two or more provinces, autonomous regions and municipalities in China must apply for licenses from the MII. Licenses for basic telecommunications services will be granted through a tendering process.

After its accession to the WTO in December 2001, China promulgated the Administrative Regulations on Telecommunications Companies with Foreign Investment, effective on January 1, 2002, implementing its commitments to the WTO. Those commitments include the gradual reduction of foreign ownership restrictions in the telecommunications industry and the step-by-step opening of the telecommunications market in China to foreign operators. However, the presence or absence of foreign investments in an applicant for telecommunications licenses will presumably bear no direct relation to the decision on whether to issue licenses, in as much as the issuance of new licenses is governed by a separate set of rules and regulations. In recent years, China gradually fulfilled the market-opening commitments it made to the WTO and lifted many restrictions for foreign investors and service providers in respect of telecommunications services. The remaining restrictions regarding mobile services, value-added telecommunications services and fixed line services are as follows.

•

For mobile voice and data services:

there is no longer any geographic restriction and the foreign ownership shall be no more than 49%.

•

For value-added telecommunications services:

there is no longer any geographic restriction and foreign ownership shall be no more than 50%.

•

For fixed line services:

the services areas have been expanded to include services in and between 17 cities of Shanghai, Guangzhou, Beijing, Chengdu, Chongqing, Dalian, Fuzhou,

Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Shenzhen, Xiamen, Xi’an, Taiyuan and Wuhan, or, the additional 14 cities; foreign ownership shall be no more than 35%; and after December 11, 2007, there will be no geographic restriction and ownership shall be no more than 49%.

Spectrum and Network Number Resources

The MII allocates all telecommunications-related frequencies, including those used in cellular, paging and microwave operations. The 800 MHZ, 900 MHZ and 1,800 MHZ frequency bands have been reserved for mobile cellular applications. The frequency assigned to a licensee may not be leased or transferred without obtaining the approval of the MII.

Since July 1, 2002, the MII has made some adjustments to the standard spectrum usage fees to be charged to teecommuincations network operators and the specific fee standards are as follows: (i) for the nation-wide GSM network frequency, an annual rate of RMB15 million per MHz of frequency, to be charged progressively over a period of three years, i.e., 50% for the first year; 75% for the second year and 100% for the third year and years thereafter; (ii) for the nation-wide CDMA network frequency, an annual rate of RMB15 million per MHz of frequency, to be charged progressively over a period of five years, i.e., 20% for the first year; 40% for the second year; 60% for the third year; 80% for the fourth year and 100% for the fifth year and thereafter and (iii) for any local telecommunications network frequency, an annual rate of RMB1.5 million per MHz of frequency for each province. In 2006, the aggregate fees we paid for frequency usage amounted to approximately RMB580 million.

The MII is also responsible for the administration of network number resources within China, including cellular network numbers and subscriber numbers. In January 2003, it issued the Administrative Rules for Telecommunications Network Numbers, which took effect on March 1, 2003. According to these rules, the telecommunications network number resources are properties of the PRC government, and the use of number resources by any telecommunications operator is subject to the approval of MII. Users of number resources, including us, are required to pay a usage fee to the PRC government. The rules also provide for procedures for application for the use, upgrade and adjustment of number resources by telecommunications operators.

In December 2004, the MII, the Ministry of Finance and the NDRC jointly issued the Provisional Administrative Measures with respect to the Collection of the Usage Fee of Telecommunications Network Number Resources, under which telecommunications companies are required to pay a usage fee to the PRC government by the 10th day of the first month of each quarter starting from 2005. Under these provisional measures, mobile telecommunications companies are required to pay an annual usage fee of RMB12 million for each network number. In addition, we are also required to pay usage fees for certain other network numbers. In 2006, the usage fees we paid for network numbers totaled RMB44.24 million.

Tariff Setting and Price Controls

The levels and categories of our current tariffs are subject to regulation by various government authorities, including the MII, 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. For example, there are State-guidance tariffs for cellular services, fixed line telephony services and leased lines services that are set jointly by the MII and the NDRC. Tariffs for telecommunications services where adequate competition has already developed may be set by the service providers as market-based tariffs. The government is required 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.

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

In December 2000, the MII, 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 MII jointly issued a circular to revoke certain fees including one-time installation fees charged to the fixed line telephone users and one-time activation fees charged to the cellular subscribers.

In June 2004, the MII 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 MII 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 MII 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.

Beginning in 2006, the MII has stepped up efforts to encourage wireless telecommunications operators to adopt “calling-party-pays” billing practices. MII has encouraged new service packages featured with “calling-party-pays” billing arrangements. In addition, MII officials have also indicated that they may evaluate the existing policy that caps the roaming charges at a certain level, to further reduce roaming fees wireless operators charge their subscribers. We do not know if or when such regulations will be promulgated or implemented.

Interconnection Arrangements

On October 28, 2003, the MII issued regulations on interconnection and settlement arrangements, which superseded the provisional regulations on interconnection and settlement arrangements issued by the MII in 1999 and 2001, respectively. The regulations contain specific provisions regarding, among other things, revenue sharing methods and settlement mechanisms and interconnection agreements among telecommunications service providers. The Telecommunications Regulations reaffirmed the obligations of dominant telecommunications operators in China to provide interconnection with other operators. We have entered into interconnection and settlement agreements with China Telecom, China Netcom, China Mobile and China Railcom that implement the regulatory requirements.

The following table sets forth our current interconnection revenue sharing and settlement arrangements with fixed line operators and China Mobile for local calls after the regulations issued in 2003.


Network from	Network at
which calls originated	which calls terminated	Settlement Arrangement

Unicom’s cellular network	Fixed line operators’ public fixed line network	(1) Unicom collects the local cellular usage charge from its subscribers (2) Unicom pays RMB0.06 per minute to fixed line operators

Fixed line operators’ public fixed line network	Unicom’s cellular network	No revenue sharing or settlement

Unicom’s cellular network	China Mobile’s cellular network	(1) Each of Unicom and China Mobile collects the cellular usage charge from its subscribers (2) Unicom pays RMB0.06 per minute to China Mobile

China Mobile’s cellular network	Unicom’s cellular network	(1) Each of Unicom and China Mobile collects the cellular usage charge from its subscribers (2) China Mobile pays RMB0.06 per minute to Unicom

The following table sets forth our interconnection revenue sharing and settlement arrangement with fixed line operators and China Mobile for domestic long distance calls after the regulations issued in 2003.


Network from	Network at
which calls originated	which calls terminated	Settlement Arrangement

Unicom’s cellular network at area A	Fixed line operators’ public fixed line network at area B, if through the long distance network of such fixed line operator	(1) Unicom collects the domestic long distance tariff and local call tariff from its subscribers (2) Unicom keeps RMB0.06 per minute and pays the rest of the domestic long distance tariff to fixed line operators

Unicom’s cellular network at area A	Fixed line operators’ public fixed line network at area B, if through the long distance network of Unicom	(1) Unicom collects the domestic long distance tariff and local call tariff from its subscribers (2) Unicom pays RMB0.06 per minute to fixed line operators, and keeps the rest of the domestic long distance tariff

Fixed line operators’ public fixed line network at area A	Unicom’s cellular network at area B, if through the long distance network of Unicom	(1) Fixed line operators collect the domestic long distance tariff from their subscribers (2) Fixed line operators keep RMB0.06 per minute and pay the rest to Unicom

Fixed line operators’ public fixed line network at area A	Unicom’s cellular network at area B, if through the long distance network of such fixed line operator	(1) Fixed line operators collect the domestic long distance tariff from their subscribers (2) Fixed line operators pay RMB0.06 per minute to Unicom and keep the rest

Fixed line operators’ public fixed line network at area A	Fixed line operators’ public fixed line network at area B, if through the long distance network of Unicom	(1) Fixed line operators on the originating end collect the domestic long distance tariff from their subscribers (2) Fixed line operators keep RMB0.06 per minute and pay the rest to Unicom (3) Unicom then pays RMB0.06 per minute to fixed line operators on the receiving end

Unicom’s cellular network at area A	China Mobile’s cellular network at area B, if through the long distance network of China Mobile	(1) Unicom collects the domestic long distance tariff and local call tariff from its subscribers (2) Unicom keeps RMB0.06 per minute and pays the rest of the domestic long distance tariff to


Network from	Network at
which calls originated	which calls terminated	Settlement Arrangement

		China Mobile

China Mobile’s cellular network at area A	Unicom’s cellular network at area B, if through the long distance network of Unicom	(1) China Mobile collects the domestic long distance tariff and local call tariff from its subscribers (2) China Mobile keeps RMB0.06 per minute and pays the rest of the domestic long distance tariff to Unicom

The following table sets forth our interconnection revenue sharing and settlement arrangement with fixed line operators for international long distance calls through their international gateways after the regulations issued in 2003.


Type of calls		Settlement Arrangements

Outgoing calls from Unicom’s cellular network, if through the international long distance network of fixed line operators		(1) Unicom collects the international long distance tariff and local call tariff from its subscribers (2) Unicom keeps RMB0.06 or RMB0.54 per minute (depending on whether through Unicom’s domestic long distance network) and pays the rest of the international long distance tariff to fixed line operators

Incoming calls to Unicom’s cellular network, if through the international long distance network of fixed line operators		(1) Unicom receives RMB0.06 or RMB0.54 per minute from fixed line operators (depending on whether through Unicom’s domestic long distance network)

The following table sets forth our interconnection revenue sharing and settlement arrangements with other operators for IP telephony long distance calls through our network after the regulations issued in 2003.


Network from which	Network at which calls
calls originated	terminated	Settlement Arrangement

Unicom’s cellular network at area A	Other operators’ public telecommunications network at area B (if through Unicom’s IP telephony network)	(1) Unicom collects the IP telephony long distance charges and local call tariff from its subscribers (2) Unicom pays RMB0.06 per minute to other operators on the receiving end

Other operators’ public telecommunications network at area A	Other operators’ public telecommunications network at area B (if through Unicom’s IP telephony network)	(1) Unicom collects the IP telephony long distance charges from its subscribers (2) Unicom pays RMB0.06 per minute to other operators on the receiving end (3) No settlement between Unicom and other operators on the originating end

Technical Standards

The MII sets industry technical standards for the Chinese telecommunications industry. Most of the standards set by the MII conform to the standards recommended by the International Telecommunications Union and other international telecommunications standards organizations. In January 2006, the MII issued the technical standards for TD-SCDMA, a 3G mobile telephony technology. In May 2007, the MII released the technical standards for two additional 3G technologies, WCDMA and CDMA2000. In cases where the MII has not set certain industry technical standards, we set our own enterprise technical standards. The MII also requires all network operators in China to purchase only telecommunications equipment certified by the MII, including cellular and paging equipment, radio equipment and interconnection terminal equipment.

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 MII has the authority to delineate the scope of its universal service obligations. The MII may also select universal service providers through a tendering process. The MII, 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 MII 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 MII has required major Chinese telecommunications service providers, including Unicom 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 undertook the universal service obligation to extend telecommunications service coverage to a total of more than 5,700 administrative-level villages from 2004 to 2006 primarily through its CDMA and satellite transmission networks. In 2007, the MII indicated that it may consider requiring Unicom Group and other telecommunications service providers to further extend telecommunications service coverage to tens of thousands of natural villages in remote areas. 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 the 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, State Administration of Industry and Commerce 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, as our controlling shareholder, Unicom Group, is under the direct supervision of SASAC, SASAC has an indirect influence over us. 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 are 76.59% indirectly owned by the Unicom Group and 23.41% owned by public shareholders as of May 31, 2007. See “A. History and Development of the Company” under Item 4. Set forth below are details of our significant subsidiaries:


Name of Subsidiary	Country of Incorporation	Ownership Interest
China Unicom Corporation Limited	China	100%
China Unicom International Limited	Hong Kong SAR	100%
China Unicom (Macau) Company Limited	Macau SAR	100%

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. A number of the properties that we lease and operate on do not have land use rights

certificates or building ownership certificates. 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.

Item 5. Operating and Financial Review and Prospects

You should read the following discussion and analysis together with the selected financial data set forth in Item 3 and the consolidated financial statements included in this annual report. The financial statements have been prepared in accordance with HKFRS, which differ in certain respects from US GAAP. Note 38 to the consolidated financial statements summarizes the nature and effects of significant differences between HKFRS and US GAAP as they relate to our financial statements and provides a reconciliation to US GAAP of our net income and shareholders’ equity. In addition, Note 38 to our consolidated financial statements includes our condensed consolidated financial information prepared and presented in accordance with US GAAP for the relevant periods. Our consolidated financial statements present, and the discussion and analysis under this Item 5 pertain to, our consolidated financial position and results of operations as of December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006.

On December 31, 2002 and 2003, we completed the acquisition of Unicom New Century from Unicom Group, and the acquisition of Unicom New World from Unicom Group and sale of Guoxin Paging to Unicom Group, respectively. Our consolidated financial statements as of and for the year ended December 31, 2004 reflect the results of operations of both Unicom New Century (which was merged into CUCL in July 2004) and Unicom New World (which was merged into CUCL in September 2005), but do not include the results of operations of Guoxin Paging. Our consolidated financial statements for the year ended December 31, 2003 reflect the results of operations of Unicom New Century and Guoxin Paging but do not include the results of operations of Unicom New World. In addition, in September 2004, we completed the acquisition of Unicom International from Unicom Group. Accordingly, the operating results of Unicom International for the period from the effective date of the acquisition to December 31, 2004 have been included in our consolidated statement of income for the year ended December 31, 2004. See “ ¾ Acquisitions of Unicom New Century, Unicom New World and Unicom International and the Sale of Guoxin Paging” below.

Overview

We are an integrated provider of telecommunications services in China and offer a comprehensive range of telecommunications services, including the following, which also constitute our major operating segments:

	•		GSM cellular service in 21 provinces, 5 autonomous regions and 4 municipalities;

	•		CDMA cellular service in 21 provinces, 5 autonomous regions and 4 municipalities of China and in Macau;

	•		domestic and international long distance service and other related services nationwide in China; and

	•		data and Internet and other related services nationwide in China.

The table below sets forth revenue from our major businesses and the respective percentage of our total revenue in 2004, 2005 and 2006.


	For the year ended December 31,
	2004 ⁽¹⁾					2005					2006
	RMB in		% of Total			RMB in		% of Total			RMB in		% of Total
	millions		Revenue			millions		Revenue			millions		Revenue
Total revenue		79,087		100.0	%		87,049		100.0	%		94,294		100.0	%
Total service revenue		77,397		97.9	%		84,287		96.8	%		90,027		95.5	%
GSM		47,509		60.1	%		52,135		59.9	%		59,291		62.9	%
CDMA		24,378		30.9	%		27,577		31.7	%		27,293		28.9	%
Long distance revenue		1,848		2.3	%		1,525		1.7	%		1,068		1.2	%
Data and Internet revenue		3,662		4.6	%		3,050		3.5	%		2,375		2.5	%
Sales of telecommunications products		1,690		2.1	%		2,762		3.2	%		4,267		4.5	%


⁽¹⁾		The adoption of HKFRS on January 1, 2005 resulted in changes in certain accounting policies which have been reflected in the financial statements either in accordance with the transitional provisions in the applicable accounting standards, or to the extent there are no transitional provisions, applied retrospectively. Accordingly, the comparative financial data prior to January 1, 2005 presented herein was restated, as applicable, in 2005 to conform to the changed accounting policies.

Our service revenue comes primarily from the following:

	•		Usage fees for our GSM, CDMA, long distance and data and Internet services, including, for our cellular subscribers, roaming-out fees for calls made by them outside their local service areas. We recognize usage fee revenue when the service is rendered.

	•		Monthly fees, of fixed amounts, charged to certain of our GSM, CDMA, data and Internet subscribers for access to the relevant service. We recognize monthly fee revenue in the month during which the services are rendered.

	•		Value-added service revenue from the provision of value-added services, such as short message services, personalized ring-back tone services, CDMA 1X wireless data services and certain receptionist services to subscribers.

	•		Interconnection revenue from other telecommunications operators, including Unicom Group, for calls made from their networks to our networks and roaming-in fees for calls made by cellular subscribers of other operators using our cellular networks. We recognize interconnection revenue when the relevant calls are made by subscribers.

	•		Rental income from leases of transmission lines on our networks and indefeasible rights of use (“IRU”) 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, except for the lease of specific and identified network assets that transfer substantially all the risks and rewards incidental to ownership to the lessee, which is recognized as capacity sales.

Along with the continued growth of China’s telecommunications industry, particularly in the cellular communications sector, our total revenue in 2006 increased by 8.3% from 2005. This increase was primarily the result of the continued growth in revenue of our GSM cellular business. Service revenue from our cellular businesses has increased from RMB79.71 billion in 2005 to RMB86.58 billion in 2006, representing a growth of 8.6%. We aim to further leverage our position as an integrated telecommunications operator in order to continue to drive the growth of our GSM and CDMA cellular businesses.

The following table sets forth our major costs and expenses items and income before income tax, both in terms of amount and as a percentage of total revenue in 2004, 2005 and 2006.


	For the year ended December 31,
	2004					2005					2006
	RMB in		% of Total			RMB in		% of Total			RMB in		% of Total
	millions		Revenue			millions		Revenue			millions		Revenue
Total Revenue		79,087		100.0	%		87,049		100.0	%		94,294		100.0	%
Costs and expenses		72,616		91.8	%		79,947		91.8	%		87,799		93.1	%
Leased line and network capacities		7,398		9.4	%		8,748		10.0	%		8,764		9.3	%
Interconnection charges		7,517		9.5	%		8,372		9.6	%		9,595		10.2	%
Depreciation and amortization		19,011		24.0	%		20,368		23.4	%		22,423		23.8	%
Employee benefit expenses		4,615		5.8	%		5,616		6.5	%		6,649		7.1	%
Selling and marketing		19,523		24.7	%		20,558		23.6	%		19,252		20.4	%
General, administrative and other expenses		10,500		13.3	%		11,742		13.5	%		13,415		14.2	%
Cost of telecommunications products sold		2,563		3.2	%		3,575		4.1	%		4,930		5.2	%
Finance costs		1,696		2.1	%		1,099		1.2	%		654		0.7	%
Unrealized loss on changes in fair value of derivative component of the convertible bonds		—		0.0	%		—		0.0	%		2,397		2.5	%
Interest income		-103		-0.1	%		-96		-0.1	%		-259		-0.3	%
Other gains, net		-104		-0.1	%		-35		-0.0	%		-21		-0.0	%
Income before income tax		6,471		8.2	%		7,102		8.2	%		6,495		6.9	%

Our major costs and expenses include the following:

	•		Depreciation and amortization expenses, mainly relating to our property, plant and equipment and other assets;

	•		Selling and marketing expenses, including commissions, promotion and advertising expenses, amortization of capitalized customer acquisition costs of certain CDMA contractual subscribers and customer retention costs;

	•		General, administrative and other expenses, primarily including operating lease expenses, repair and maintenance costs and provision for doubtful debts. Other components of general, administrative and other expenses include utilities, general office expenses and travel expenses;

	•		Leased line and network capacities charges, representing lease expenses for transmission capacity from other operators and CDMA network capacities from Unicom Group;

	•		Interconnection expenses, representing amounts paid to other operators, including Unicom Group, for calls from our networks to their networks and roaming-out fees paid to other operators, including Unicom Group, for calls made by our subscribers roaming in their networks;

	•		Employee benefit expenses, representing staff salaries and wages, bonuses and medical benefits, contributions to defined contribution pension schemes and housing benefits, share-based compensation costs amortized over the vesting period of share options;

	•		Costs of telecommunications products sold; and

	•		Unrealized loss on changes in fair value of derivative component of the convertible bonds.

As we continue to aim to strengthen management, integrate our businesses and control costs to achieve greater overall efficiency, total costs and expenses, as a percentage of total revenue in 2006, was 93.1%, representing an increase of 1.3% from that in 2005.

Acquisitions of Unicom New Century, Unicom New World and Unicom International and Sale of Guoxin Paging

In December 2002, we acquired from Unicom Group the GSM cellular assets and businesses and CDMA businesses of Unicom New Century in the following six provinces, two autonomous regions and one municipality in China: Sichuan, Heilongjiang, Jilin, Henan, Jiangxi, Shaanxi, Chongqing, Guangxi and Xinjiang. The total purchase price was HK$4,909,000,000, payable in cash. On July 30, 2004, Unicom New Century was merged into CUCL and legally dissolved upon the completion of such merger.

In December 2003, we acquired from Unicom Group the GSM cellular assets and businesses and CDMA businesses of Unicom New World in the following nine provinces and autonomous regions in China: Shanxi, Hunan, Hainan, Yunnan, Gansu and Qinghai provinces and Inner Mongolia, Ningxia Hui and Xizang autonomous regions. The total purchase price was HK$3,014,886,000, payable in cash. On the same date, we also completed the sale of the entire equity interests of Guoxin Paging to Unicom Group for a total sale price of HK$2,590,917,656, and such proceeds were applied to our general working capital. On September 1, 2005, Unicom New World was merged into CUCL and legally dissolved upon the completion of such merger.

In September 2004, we completed the acquisition from Unicom Group of Unicom International, a limited liability company established in Hong Kong engaging in voice wholesale business, telephone cards business, line leasing services, managed bandwidth services and mobile virtual network services in Hong Kong and the United States. The total purchase price was HK$37,465,996, payable in cash.

Under HKFRS, we have adopted the purchase method to account for our prior acquisitions from Unicom Group of Unicom New Century, which became effective on December 31, 2002, Unicom New World, which became effective on December 31, 2003, and Unicom International, which became effective in September 2004. Under the purchase method, our consolidated financial statements incorporate the results of operations of Unicom New Century, Unicom New World and Unicom International only from the effective dates of the respective acquisitions. The differences between the cost of the acquisitions and the fair value of the identifiable assets and liabilities acquired was recognized as goodwill or negative goodwill, which were amortized on a straight line basis over its beneficial life or the remaining weighted average useful life of the acquired identifiable non-monetary assets. We ceased the amortization of goodwill from January 1, 2005 upon the adoption of HKFRS and the accumulated amortization as of December 31, 2004 has been eliminated with a corresponding decrease in the cost of goodwill. We also derecognized the negative goodwill previously recognized on or prior to January 1, 2005, with a corresponding adjustment to the opening balance of retained earnings. Starting from January 1, 2005, we no longer amortize goodwill but test it for impairment on an annual basis or when there is indication of impairment.

Under US GAAP, the acquisitions of Unicom New Century, Unicom New World and Unicom International are accounted for as a transfer of businesses under common control. Under this method, the acquired assets and liabilities are accounted for at their historical cost under US GAAP and the consolidated financial statements prepared under US GAAP for all periods presented are retroactively restated as if

Unicom New Century, Unicom New World and Unicom International had always been part of our company since inception. This method is reflected in the significant differences between HKFRS and US GAAP provided in Note 38 to our consolidated financial statements.

The acquisitions of Unicom New Century and Unicom New World have had a material impact on our overall results of operations. In particular, our financial results in 2004 were significantly affected by the inclusion of the results of operations for Unicom New World we acquired effective December 31, 2003. These acquisitions have, among other things, significantly expanded the size of the telecommunications markets we serve and increased the number of our subscribers and usage of our services. As a result, our revenue and costs and expenses have also increased significantly.

Critical Accounting Policies

The preparation of our financial statements and this annual report requires us to make estimates and judgment that affect the reported and disclosed amounts of assets and liabilities, including contingent assets and liabilities, as at the relevant dates and revenue and expenses for the relevant periods. We have identified the accounting policies and estimates below 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.

Capitalization of CDMA Customer Acquisition Costs

We have been operating the CDMA business since the beginning of 2002. In order to accelerate the development of the CDMA business and subscriber growth, we have offered certain promotional packages. As part of the contractual arrangements with certain CDMA contractual subscribers under these special promotional packages, CDMA handsets were provided to the subscribers for their use at no additional charge during the specified contract periods ranging from six months to two years. In return, the subscribers are required to incur a minimum amount of service fees during the contract period. If the contractual subscribers can fulfill the minimum contract spending amounts by the end of the contract period, they will not be obliged to repay the remaining costs of the CDMA handsets given for their use. In addition, to secure contract performance, these subscribers are required under their contracts to (i) prepay certain amounts of service fees or deposits, (ii) maintain a bank deposit in one of the designated commercial banks to secure their minimum contract amounts, or (iii) provide a guarantor who will compensate us for any loss in the event of the subscriber’s non-performance of related contractual obligations.

We consider the costs of the CDMA handsets provided to contractual subscribers under these promotional packages as customer acquisition costs for the development of new CDMA contractual subscribers. Such customer acquisition costs are deferred to the extent expected to be recoverable, and amortized over the contractual periods (not exceeding two years), over which future economic benefits are expected to be received by us in the form of minimum contract revenue.

We determined the accounting policy for capitalization of customer acquisition costs of contractual CDMA subscribers after a careful evaluation of specific facts and circumstances, and believe that the capitalization of such costs is appropriate because future economic benefits are expected to be received by us in the form of future contractual revenues, taking into consideration (i) the historically high ARPUs and low churn rate, and low default or bad debt rates of these subscribers; (ii) our established procedures in and the relative low cost of enforcement of contracts in default; and (iii) the existence of specified contract periods with minimum contract spending amounts and built-in contractual safeguarding measures such as

non-refundable prepayments, bank deposits, and guarantees received, as well as penalty clauses imposed on subscribers.

Therefore, we believe that the customer acquisition costs are recoverable from future revenue to be derived from these promotional packages, and the capitalization and amortization of these customer acquisition costs is an appropriate accounting policy. Furthermore, we continuously assess and evaluate the recoverability of these customer acquisition costs, based on detailed review of historical subscriber churn rates and estimated default rate. Based on our current assessment and evaluation, we believe that there is no significant problem in recovering the carrying amounts of the customer acquisition costs as of December 31, 2004, 2005 and 2006.

We have made the above recoverability assessments based on the current legal and operating environment relating to the subscribers’ contract performance and other information currently available to us. Actual results may differ significantly from the current situation and our current estimates. If the situation changes significantly in the future, we may need to accelerate the amortization of customer acquisition costs based on conditions at that time.

Recognition of Upfront Non-refundable Revenue and Direct Incremental Costs

We capitalize and amortize upfront non-refundable revenue, including connection fees and activation fees of SIM cards or user identity module cards, or UIM cards, from our GSM and CDMA cellular subscribers over the expected customer service period. Accordingly, the related direct incremental costs of acquiring and activating GSM and CDMA businesses, including costs of SIM or UIM cards and commissions which are directly associated with upfront non-refundable revenue received upon activation of cellular services, are also capitalized and amortized over the same expected customer service period. We only capitalize 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 statement of income immediately as incurred.

The expected customer service period for our cellular business is estimated based on the expected stabilized churn rates of subscribers after taking into account 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 competitive environment, telecommunications technology development or regulatory environment, the amount and timing of recognition of these direct incremental costs and our deferred revenue would also change.

Lease of CDMA Network Capacity

We had entered into a CDMA network capacity lease agreement with Unicom Group and its wholly-owned subsidiary, Unicom New Horizon, in November 2001. Pursuant to this CDMA lease agreement, Unicom New Horizon agreed to lease the capacity of the CDMA network to us covering the nine provinces and the three municipalities. In addition, on December 31, 2002 and 2003, we acquired all the equity interests in Unicom New Century and Unicom New World, respectively, which together operate GSM and CDMA cellular businesses in another 12 provinces, one municipality and five autonomous regions in the PRC. Unicom New Century and Unicom New World had also respectively entered into a CDMA lease agreement with Unicom Group and Unicom New Horizon on similar terms and conditions. These lease agreements and the lease agreement entered in 2001 are collectively referred to as the “Old CDMA Leases.”

According to the terms of the Old CDMA Leases, the initial lease period is one year, renewable for an additional one-year term at our own option. We have the exclusive right to lease and operate the CDMA network capacity in the above regions. Also, we have the option to add or reduce the capacity leased by giving advance notice. The lease fee per unit of capacity is calculated on the basis that if full capacity is leased, it would permit Unicom New Horizon to recover its investment in constructing the CDMA network in seven years, with an internal return of 8%. In January 2004, we renewed the CDMA network capacity for an additional one-year term. We had the option to purchase the network assets based on the appraised value of the network determined by an independent appraiser.

Unicom New Horizon has the legal ownership of the CDMA network, is directly responsible for the planning, financing and construction of the CDMA network, and directly enters into all contracts with suppliers and constructors. We believe we only bear the risks associated with the operation of the CDMA business during the relevant leasing periods and are free from any ownership risks of the CDMA network and the risks and rewards of ownership of the leased assets rest substantially with the lessor.

At the inception of the Old CDMA Leases, there was a high degree of uncertainty related to the market condition and operating results of the CDMA business. It was highly uncertain whether we would continue to lease the network in the future or to estimate the future network capacity to be leased. We were also unable to determine whether or not we would exercise the purchase option in the future. Given these uncertainties and due to the fact that the risks associated with the ownership of the CDMA assets substantially remained with Unicom Group and Unicom New Horizon, we accounted for the leasing of the CDMA network as operating leases for the initial three-year lease period, so as to reflect the respective rights and obligations of the relevant parties to the Old CDMA Leases.

On March 24, 2005, we entered into the 2005 CDMA Lease with Unicom Group and Unicom New Horizon to replace the Old CDMA Leases. Key terms of the 2005 CDMA Lease, including exclusive operating rights and purchase option, are substantially similar to those contained in the Old CDMA Leases except that the 2005 CDMA Lease has an initial term of two years and the lease fee of the CDMA Network is to be determined on the basis of the audited CDMA service revenue. Given that the uncertainties continued, we considered the risks associated with the ownership of the CDMA assets still substantially remain with Unicom Group and Unicom New Horizon, and have concluded the leasing of the CDMA network continues to be an operating lease.

On October 26, 2006, we entered into the 2006 CDMA Lease with Unicom Group and Unicom New Horizon to replace the 2005 CDMA Lease. The 2006 CDMA Lease became effective from January 1, 2007. Pursuant to the 2006 CDMA Lease, the initial lease period is for one year, renewable for an additional one-year term at our option. The lease fee of the CDMA network for 2007 and 2008 is calculated as follows:

	•		31% of the audited CDMA service revenue of the lessee for each of the years 2007 and 2008; or

	•		30% of the audited CDMA service revenue of the lessee for the year 2007 or 2008, where the audited CDMA income before taxation of the lessee for the relevant year is less than the audited CDMA income before taxation of the lessee for the year 2006 as set out in the relevant annual audited financial statements of the lessee;

provided, that the annual lease fee of the CDMA network shall not be less than a certain minimum level (the “Minimum Lease Fee”) regardless of the amount of CDMA service revenue for that year. The Minimum Lease Fee for 2007 shall be 90% of the total amount of lease fee paid by us to Unicom New Horizon for 2006 pursuant to the 2005 CDMA Lease. The Minimum Lease Fee for 2008 shall be 90% of the total amount of lease fee paid by us to Unicom New Horizon for 2007 pursuant to the 2006 CDMA Lease. The

level of lease fee under the 2006 CDMA Lease has been set by reference to our view of the industry trends, including factors such as CDMA subscribers and average revenue per user per month levels.

Under the 2006 CDMA Lease, we believe the uncertainties of the CDMA business continue to exist, particularly due to the fact that (i) the service revenue of CDMA business was stagnant in 2006; (ii) the uncertainty of the future success of CDMA business arising from intense market competition; and (iii) the uncertainty of the future changes in technology, technological standards and government regulatory environment. Moreover, at the inception of the 2006 CDMA Lease, we were still unable to determine whether to renew the lease after the initial one-year lease term or whether to exercise the purchase option. As a result, we considered the risks associated with the ownership of the CDMA assets still substantially remain with Unicom Group and Unicom New Horizon, and have concluded the leasing of the CDMA network should still be accounted for as an operating lease in 2007. At the beginning of each future lease term, we will reassess the appropriate classification based on the relevant factors and circumstances at that time.

Based on the above accounting judgment made, the operating lease expense for the leasing of the CDMA network has been recorded in the statement of income, and the carrying value of the CDMA assets and the related liabilities have not been reflected in the balance sheets. For the years ended December 31, 2004, 2005 and 2006, we recorded lease expense of approximately RMB6.59 billion, RMB7.92 billion and RMB 8.08 billion, respectively, under the leased lines and network capacities in the statement of income.

Convertible Bonds

On July 5, 2006, we issued the zero coupon convertible bonds with an aggregate principal amount of USD1 billion. The three-year convertible bonds were issued with a conversion price of HKD8.63 and will mature on July 5, 2009. As the functional currency of us is RMB, the conversion option of the convertible bonds denominated in Hong Kong Dollars will not result in settlement by the exchange of a fixed amount of cash in RMB for a fixed number of our shares. In accordance with the requirements of HKAS 39, Financial Instruments — Recognition and Measurement, the convertible bonds contract must be separated into two component elements: a derivative component consisting of the conversion option and a liability component consisting of the straight debt element of the bond.

The embedded conversion option of the convertible bonds has been separated from the host debt contract and accounted for as a derivative liability carried at fair value on the balance sheet with any changes in fair value being charged or credited to the statement of income in the period when the change occurs. The remainder of the proceeds is allocated to debt element of the convertible bonds, net of transaction costs, and is recorded as the liability component. The liability component is subsequently carried at amortized cost until extinguished on conversion or redemption. Interest expense is calculated using the effective interest method by applying the effective interest rate to the liability component through the maturity date. If the convertible bonds are converted, the carrying amounts of the derivative and liability components are transferred to share capital and share premium as consideration for the shares issued. If the convertible bonds are redeemed, any difference between the amount paid and the carrying amounts of both components is recognized in the statement of income.

The fair value of the conversion option which is not traded in an active market is 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 each balance sheet date. The valuation model requires the input of subjective assumptions, including the volatility of share price, stock closing price, dividend yield, risk-free rate, and expected option life. Changes in subjective input assumptions can materially affect the fair value estimate. For the year ended December 31, 2006, we recognized unrealized

loss of approximately RMB2.40 billion resulting from changes in the fair value of the conversion option of the convertible bonds.

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 to residual values over the estimated useful lives. 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 use estimates of 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 expense may be adjusted. The cost or revalued amount and accumulated depreciation on property, plant and equipment as of December 31, 2006 amounted to RMB205.76 billion and RMB94.38 billion, respectively, as compared to RMB186.69 billion and RMB74.31 billion, respectively, as of December 31, 2005.

Impairment of Non-current Assets

At each balance sheet date, we perform a review of internal and external sources of information to identify indications that our non-current assets, including property, plant and equipment and goodwill, may be impaired. In addition, we review (i) our assets that have indefinite useful lives or are not yet available for use are not subject to amortization and (ii) our assets that are subject to depreciation or amortization for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We continually monitor our businesses, markets and business environment and make judgments and assessments as to whether any impairment event or change has occurred. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of (i) an asset’s fair value less costs to sell and (ii) value-in-use. We estimate value-in-use based on estimated discounted pre-tax future cash flows of a cash-generating asset unit, which is the smallest group of assets that generates cash flows independently.

In making judgments on the recoverability of non-current assets, we need to assess whether: (i) an event has occurred that may affect an asset’s value; (ii) the carrying value of an asset can be supported by the discounted pre-tax future cash flows from such asset and (iii) the cash flow is discounted at an appropriate rate. Changes in any of these assessments could result in significant changes to our estimates of the recoverability of our non-current assets.

Provision for Doubtful Debts

Accounts receivables are stated at cost, less provision for doubtful debts. 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 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 receivable balances. We make such estimates based on our past experience, historical collection patterns, subscribers’ creditworthiness and collection trends. For general subscribers of cellular, long distance, data and Internet services, we make a full provision for receivables aged over three months, which is consistent with our credit policy with respect to relevant subscribers.

Our estimates described above are based on our past experience, subscribers’ creditworthiness and collection trends. If circumstances change (e.g., 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.

Provision for Subscriber Point Reward Program

We have implemented a subscriber point reward program, which is a bonus point-based scheme that rewards subscribers according to their service consumption, loyalty and payment history. The cost of the subscriber point reward program is charged to the statement of income as “selling and marketing” expenses, instead of a reduction of revenue. The estimated liability is recognized based on (i) the value of each bonus point awarded to subscribers and (ii) the number of bonus points relating to subscribers who are qualified or expected to be qualified to exercise their redemption right at each balance sheet date. If subscribers redeem rewards or their entitlements expire, the provision will be adjusted accordingly. We have recognized a liability for this program amounting to RMB0.56 billion as of December 31, 2006, as compared to RMB0.34 billion as of December 31, 2005. As we have not had much historical incentive redemption experience in the past, we may need to re-assess our accruing method for the potential bonus point liability when we obtain more reliable historical redemption statistics 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 it is 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 the evaluation of temporary differences, we have assessed the likelihood that the deferred tax assets could be recovered. Major deferred tax assets relate to interest on loans from China-China-Foreign (“CCF”) joint ventures, loss arising from terminations of CCF arrangements, provisions for doubtful debts and write-down of inventory to net realizable value and additional depreciation deductible for tax purposes. Due to the effects of these temporary differences on income tax, we have recorded deferred tax assets amounting to RMB0.31 billion and RMB0.34 billion as of December 31, 2006 and 2005, respectively. Deferred tax assets are recognized based on our estimates and assumptions that they will be recovered from taxable income arising from the continuing operations in the foreseeable future.

We believe we have recorded adequate current tax provision and deferred taxes based on the prevailing tax rules and regulations and our current best estimates and assumptions. In the event that future tax rules and regulations or related circumstances change, adjustments to current and deferred taxation may be necessary.

Operating Results

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

In 2006, our revenue continued to increase, by 8.3% from RMB87.05 billion in 2005 to RMB94.29 billion in 2006. This growth was principally due to the steady growth of our GSM cellular business. For the reasons discussed below, our GSM and CDMA cellular businesses continued to increase in terms of revenues, while our long distance and data and Internet businesses continued to decrease in terms of revenues.

Due to factors discussed below, in 2006 our costs and expenses increased by 9.8% to RMB87.80 billion from 2005. As a result, our income before income tax decreased by 8.5% to RMB6.50 billion, and our income before income tax margin decreased by 1.3% from that of 2005. Our net income in 2006 decreased by 24.3% to RMB3.73 billion from 2005, for reasons discussed below.

We issued the convertible bonds (as defined in “ ¾ Costs and Expenses” below) to SKT in 2006. Due to the substantial increase in our share price during the period, we recorded an unrealized loss of approximately RMB2.40 billion on changes in the fair value of the derivative component of the convertible bonds. For detailed discussion, please refer to “ ¾ Liquidity and Capital Resource” below and Note 17 to our consolidated financial statements. Excluding the effect of the RMB2.40 billion unrealized loss on changes in fair value of derivative component of the convertible bonds, our total costs and expenses would be RMB85.40 billion, an increase of 6.8% from 2005, which would be slower than the 8.3% growth in the total revenue in 2006, and our net income would be RMB6.13 billion, an increase of 24.3% from 2005.

Revenue

Revenue from our GSM cellular business grew steadily in 2006 and continued to generate a majority of our total revenue, while revenue from our CDMA cellular business slightly increased in 2006. Due to the increase of the percentage of sales of telecommunications products in the total revenue, revenues from our GSM and CDMA cellular businesses as a percentage of our total revenue increased from 94.7% in 2005 to 96.3% in 2006. The share of revenue from the CDMA cellular business in our total revenue decreased from 34.8% in 2005 to 33.5% in 2006, while the share of revenue from the GSM cellular business in our total revenue increased from 59.9% in 2005 to 62.9% in 2006 as a result of the revenue growth of our GSM business. Aggregate revenues from our long distance business and our data and Internet businesses represented 3.7% of our total revenue in 2006, as compared with 5.3% in 2005.

Cellular Revenue

For the reasons discussed below, revenues from our GSM and CDMA cellular businesses (including revenues from sales of telecommunications products) together increased by 10.2%, from RMB82.46 billion in 2005 to RMB90.85 billion in 2006.

GSM Cellular Business. Revenue from our GSM cellular business increased by 13.7%, from RMB52.14 billion in 2005 to RMB59.30 billion in 2006, primarily due to the continued increases in the total number of our total GSM cellular subscribers and in our subscribers’ average MOU as well as ARPU. The total number of our GSM cellular subscribers increased by 11.4%, from 95.07 million as of December 31, 2005 to 105.87 million as of December 31, 2006. ARPU from the GSM cellular business also increased 1.4%, from RMB48.5 in 2005 to RMB49.2 in 2006, primarily due to the increase in GSM value-added services. The average MOU per subscriber per month increased 17.3%, from 202.2 minutes in 2005 to 237.2 minutes in 2006.

The table below sets forth the revenue composition of our GSM cellular business and each revenue item’s respective share of total GSM revenue in the years ended December 31, 2004, 2005 and 2006.


	2004					2005					2006
	RMB in		As percentage			RMB in		As percentage			RMB in		As percentage
	million		of total			million		of total			million		of total
Revenue		47,513		100.0	%		52,139		100.0	%		59,298		100.0	%
Service Revenue		47,509		100.0	%		52,136		100.0	%		59,290		100.0	%
Usage Fee		31,997		67.3	%		32,077		61.5	%		33,609		56.7	%
Monthly Fee		6,922		14.6	%		6,841		13.1	%		7,370		12.4	%
Interconnection Revenue		2,614		5.5	%		3,466		6.6	%		4,915		8.3	%
Value-added Service Revenue		4,819		10.1	%		7,967		15.3	%		11,543		19.5	%


	2004					2005					2006
	RMB in		As percentage			RMB in		As percentage			RMB in		As percentage
	million		of total			million		of total			million		of total
Others		1,157		2.5	%		1,785		3.5	%		1,853		3.1	%
Sales of Telecommunications Products		4		0.0	%		3		0.0	%		8		0.0	%

As a result of the increase in the average MOU, which is partially offset by the decrease in effective tariffs, usage fees for GSM cellular services increased by 4.8% from RMB32.08 billion in 2005 to RMB33.61 billion in 2006, representing 56.7% of total GSM service revenue, a decrease from 61.5% in 2005. Monthly fees increased by 7.7%, from RMB6.84 billion in 2005 to RMB7.37 billion in 2006, and represented 12.4% of total GSM service revenue as compared with 13.1% in 2005. This increase is primarily due to our GSM expanded subscriber base. Interconnection revenue increased by 41.8% from RMB3.47 billion in 2005 to RMB4.92 billion in 2006, and represented 8.3% of total service revenue as compared with 6.6% in 2005. This increase is primarily due to the increased total usage of our GSM cellular services.

While continuing to meet the diverse needs of our customers in the mass market, our GSM cellular business aims to actively develop and promote value-added services. As a result, revenue from value-added services significantly increased its contribution to our total GSM cellular revenue. Revenue from our GSM value-added cellular services increased 44.9%, from RMB7.97 billion in 2005 to RMB11.54 billion in 2006. Its share of total GSM service revenue increased significantly from 15.3% in 2005 to 19.5% in 2006. Of the total revenue from GSM value-added cellular services, revenue from short messaging services increased 31.0% from RMB3.74 billion in 2005 to RMB4.90 billion in 2006, and its share of total GSM service revenue grew from 7.2% in 2005 to 8.3% in 2006.

CDMA Cellular Business. Our CDMA subscriber base has continued to expand. In 2006, revenue from our CDMA cellular business reached RMB31.55 billion in 2006, a 4.1% increase over RMB30.32 billion in 2005. This increase was primarily due to a 55.2% increase in the sales of telecommunications products. However, CDMA service revenue in 2006 was RMB27.29 billion and decreased by 1.0% from 2005 due to a 12.3% decrease of the ARPU from RMB75.1 in 2005 to RMB65.9 in 2006 which offset the increases in the total number of our CDMA subscribers and in total MOU. Such ARPU decrease was because certain high-end contractual customers did not renew their contracts upon expiration of the contract period under the CDMA handset promotional packages while the average ARPU of new customers was relatively lower.

The table below sets forth the revenue composition of our CDMA cellular business and each revenue item’s respective share of total CDMA revenue for the years ended December 31, 2004, 2005 and 2006.


	2004					2005					2006
	RMB in		As percentage			RMB in		As percentage			RMB in		As percentage
	million		of total			million		of total			million		of total
Revenue		26,046		100.0	%		30,320		100.0	%		31,550		100.0	%
Service Revenue		24,378		93.6	%		27,577		91.0	%		27,293		86.5	%
Usage Fee		16,165		62.1	%		16,727		55.2	%		14,696		46.6	%
Monthly Fee		4,638		17.8	%		4,905		16.2	%		5,025		15.9	%
Interconnection Revenue		927		3.6	%		1,399		4.6	%		1,732		5.5	%
Value-added Service Revenue		2,371		9.1	%		4,116		13.6	%		5,314		16.8	%
Others		277		1.0	%		430		1.4	%		526		1.7	%
Sales of Telecommunications Products		1,668		6.4	%		2,743		9.0	%		4,257		13.5	%

CDMA usage fees decreased by 12.1% from RMB16.73 billion in 2005 to RMB14.70 billion in 2006, and represented 53.8% of total CDMA service revenue as compared with 60.7% in 2005. The decrease of usage fees in the percentage of total CDMA service revenue was primarily due to the decrease in the ARPU of our CDMA subscribers. With the expansion of our CDMA 1X wireless data services in

2006, we have been actively developing our CDMA wireless data business, by making efforts to leverage the competitive edge of the CDMA technology. Revenue from CDMA value-added cellular services reached RMB5.31 billion in 2006, an increase of 29.1% from RMB4.12 billion in 2005, and accounted for 19.5% of total service revenue from the CDMA cellular business in 2006. Of the total revenue from CDMA value-added cellular services, revenue from CDMA 1X wireless data services increased 49.2% from RMB1.33 billion in 2005 to RMB1.99 billion in 2006, and its share of total CDMA service revenue grew from 4.8% in 2005 to 7.3% in 2006. We expect revenue from value-added CDMA services will continue to grow significantly, as we will continue to focus on the development and marketing of such value-added services.

Monthly fees increased by 2.4% from RMB4.91 billion in 2005 to RMB5.03 billion in 2006, and represented 18.4% of total CDMA service revenue as compared with 17.8% in 2005. The increase of monthly fees in the percentage of total CDMA service revenue was primarily due to an increasing number of subscribers who subscribe to package plans that set minimum monthly fee. Interconnection revenue increased by 23.8% from RMB1.40 billion in 2005 to RMB1.73 billion in 2006, and represented 6.3% of total service revenue as compared with 5.1% in 2005. This increase is primarily due to the increased usage of our CDMA cellular services.

Long Distance and Data and Internet Revenue

Long Distance Business . Revenue from our domestic and international long distance business (including revenues from sales of telecommunications products) decreased by 30.3%, from RMB1.53 billion in 2005 to RMB1.07 billion in 2006. Such decrease is primarily due to the continued decrease in tariffs as a result of intensified competition as well as a decrease in the total minutes of outgoing long distance calls.

Data and Internet Business . Revenue from our data and Internet businesses (including revenues from sales of telecommunications products) decreased by 22.2% from RMB3.06 billion in 2005 to RMB2.38 billion in 2006 primarily due to the decrease in tariffs as a result of intensified competition and our termination of unprofitable services and products.

As a result of the foregoing, revenues from our long distance and data and Internet businesses were RMB3.45 billion, a decrease of 24.9% from 2005.

Costs and expenses

Costs and expenses in 2006 were RMB87.80 billion, representing an increase of 9.8% over 2005, exceeding the 8.3% growth in revenue for the same period. Excluding the effect of the RMB2.40 billion unrealized loss on changes in fair value of derivative component of the convertible bonds, costs and expenses would be RMB85.40 billion, increase by 6.8% from 2005, which would be slower than the 8.3% growth in the total revenue in 2006. Certain items of costs and expenses, however, had a higher rate of increase, such as the 14.6% increase in interconnection charges and the 18.4% increase in employee benefit expenses and 14.3% increase in the general, administrative and other expenses. As our various business segments continued to develop, interconnection charges also increased faster than our revenue in 2006 since the interconnection rates remain unchanged while our effective tariffs have been declining due to continued price competition in 2006. Our employee benefit expenses also grew faster than our revenue in 2006 due to factors including a general increase in employee insurance and social security expenses and an increase in share-based compensation costs. Due to increased rents for bases stations, sales outlets, maintenance fees, utilities charges and other expenses, general, administrative and other expenses increased by 14.3% from RMB11.74 billion in 2005 to RMB13.42 billion in 2006.

In 2006, we continued to implement the business strategy of “effective growth”, i.e., profit-driven growth, by strengthening cost control and optimization of our expense structure in order to ensure continued growth in earnings. Our costs and expenses as a percentage of total revenue stood at 93.1% in 2006, as compared with 91.8% in 2005. Excluding the effect of the RMB2.40 billion unrealized loss in connection with the convertible bonds, costs and expenses as a percentage of total revenue would be 90.6%.

The table below illustrates the major expense items from 2004, 2005 and 2006 and their respective shares of total revenue.


	For the year ended December 31,
	2004					2005					2006
			% of					% of					% of
	RMB in		Total			RMB in		Total			RMB in		Total
	million		Revenue			million		Revenue			million		Revenue
Costs and expenses		72,616		91.8	%		79,947		91.8	%		87,799		93.1	%
Leased lines and network capacities		7,398		9.4	%		8,748		10.0	%		8,764		9.3	%
Interconnection charges		7,517		9.5	%		8,372		9.6	%		9,595		10.2	%
Depreciation and amortization		19,011		24.0	%		20,368		23.4	%		22,423		23.8	%
Employee benefit expenses		4,615		5.8	%		5,616		6.5	%		6,649		7.1	%
Selling and marketing		19,523		24.7	%		20,558		23.6	%		19,252		20.4	%
General, administrative and other expenses		10,500		13.3	%		11,742		13.5	%		13,415		14.2	%
Cost of telecommunications products sold		2,563		3.2	%		3,575		4.1	%		4,930		5.2	%
Finance costs		1,696		2.1	%		1,099		1.2	%		654		0.7	%
Unrealized loss on changes in fair value of derivative component of the convertible bonds		—		0.0	%		—		0.0	%		2,397		2.5	%
Interest income		-103		-0.1	%		-96		-0.1	%		-259		-0.3	%
Other gains, net		-104		-0.1	%		-35		-0.0	%		-21		-0.0	%

Leased Lines and Network Capacities . With the increase in the lease fee from 29% of the audited service revenue of the CDMA business in 2005 to 30% of the audited service revenue of the CDMA business in 2006, the lease expense for CDMA network capacities slightly increased by 0.2%, from RMB7.92 billion in 2005 to RMB8.08 billion in 2006. Leased lines and network capacities expenses as a percentage of total revenue decreased slightly from 10.0% in 2005 to 9.3% in 2006.

Interconnection Charges . Interconnection charges reached RMB9.60 billion in 2006, representing an increase of 14.6% from 2005, primarily due to the increase in interconnection traffic volume as a result of the development of our GSM and CDMA cellular business and long distance, data and Internet businesses. Interconnection charges as a percentage of total revenue also slightly increased from 9.6% in 2005 to 10.2% in 2006.

Depreciation and Amortization . Depreciation and amortization expenses increased by 10.1% to RMB22.42 billion in 2006, being a higher growth rate than the growth rate in revenue. The increase in depreciation and amortization expenses resulted from expanded network capacity and the expansion of assets scale, including increased investments in GSM equipment and increased scale of construction-in-process. Depreciation and amortization expenses as a percentage of total revenue increased slightly from 23.4% in 2005 to 23.8% in 2006.

Employee Benefit Expenses . As of the end of 2006, we had 53,120 employees, a slight increase from 53,070 at the end of 2005. Our employee benefit expenses increased from RMB5.62 billion in 2005 to RMB6.65 billion in 2006 representing an increase of 18.4% from 2005. Its share as a percentage of total revenue increased from 6.5% in 2005 to 7.1% in 2006. The increase in employee benefit expenses in 2006

was mainly due to the following factors: (i) increase in headcount resulting from business expansion; (ii) a general increase in mandatory employee insurance and social security expenses; and (iii) increase of share-based compensation costs from grant of new share options under the share option scheme in 2006.

Selling and Marketing . Our major selling and marketing expenses included commissions, promotion and advertising expenses, amortization of customer acquisition costs of contractual CDMA subscribers and customer retention costs. Due to our effective cost control measures, selling and marketing expenses totaled RMB19.25 billion in 2006, a decrease of 6.4% from 2005. Amortization of contractual CDMA subscribers acquisition costs in 2006 were RMB4.21 billion, a decrease of 29.3% from 2005. The balance of unamortized deferred CDMA subscriber acquisition costs decreased from RMB2.94 billion as of the end of 2005 to RMB2.10 billion as of the end of 2006 primarily due to our efforts in reducing the use of CDMA handset promotional packages. Due to the continued growth in the subscriber base of our various business segments, the commissions to distributors and sales agents rose to RMB9.84 billion, an increase of 10.7%. Promotion and advertising expenses were RMB2.63 billion, an increase of 3.9%. As a result of our effective cost management, selling and marketing expenses as a percentage of revenue decreased from 23.6% in 2005 to 20.4% in 2006.

General, Administrative and Other Expenses . As a result of our increased network maintenance costs due to the expiration of many equipment warranties, increased rents for sales outlets, base stations, increased utilities charges, and increased other expenses such as audit and audit-related expenses, our general, administrative and other expenses were RMB13.42 billion in 2006, representing an increase of 14.3% from RMB11.74 billion in 2005. General, administrative and other expenses as a percentage of total revenue increased slightly from 13.5% in 2005 to 14.2% in 2006.

Cost of Telecommunications Products Sold . The cost of telecommunications products sold increased by 37.9% from RMB3.58 billion in 2005 to RMB4.93 billion in 2006. This increase was primarily due to the increase in the number of CDMA handsets we purchased through Unicom Huasheng and sold to our customers. The share of cost of telecommunications products sold as a percentage of revenue increased from 4.1% in 2005 to 5.2% in 2006.

Interest Income and Finance Costs . Our interest income was RMB0.26 billion in 2006, representing a significant increase of 169.3% from RMB0.10 billion in 2005. Our finance costs decreased from RMB1.10 billion in 2005 to RMB0.65 billion in 2006, primarily due to the reductions in our bank loans. In addition, we recorded a foreign exchange gain of RMB0.37 billion as compared to RMB0.27 billion in 2005, primarily due to the revaluation of Renminbi against U.S. dollars, which significantly contributed to the decrease of our finance costs. The above factors resulted in net finance costs of RMB0.40 billion in 2006, a decrease of 60.6% from the net finance costs of RMB1.00 billion in 2005.

Unrealized Loss on Changes in Fair Value of Derivative Component of Convertible Bonds. In accordance with the requirements of applicable accounting standards, the bond contract underlying the convertible bonds must be separated into two components: a derivative component consisting of the conversion option and a liability component consisting of the straight debt element of the bond. The conversion option is carried at fair value on the balance sheet with any changes in fair value being charged or credited to the income statement in the period when the change occurs. The fair value of the derivative component of the convertible bonds is calculated using the Binomial model, which considers various factors including exercise price, volatility, expected dividend yield, risk free rate, expected life of options and the closing price of our share at valuation date. Due to the substantial increase in our share price from HKD6.95 as of July 5, 2006 (the issuance date of the convertible bonds), to HKD11.40 as of December 31, 2006, the fair value of the derivative component in respect of the convertible bonds has increased and therefore resulted in an unrealized loss on changes in fair value of derivative component of the convertible bonds of the RMB2.40 billion recognized in the statement of income. The unrealized loss had no effect on

our cash flows or other aspects of our operations in 2006. For more detailed discussions of such unrealized loss in connection with the convertible bonds, please refer to Note 17 to our consolidated financial statements.

Segment income before income tax

In 2006, our income before income tax reached RMB6.50 billion, a decrease of 8.5% from 2005. Excluding the effect of the RMB2.40 billion unrealized loss on changes in fair value of derivative component of the convertible bonds, our income before income tax would be RMB8.89 billion, an increase of 25.2% from 2005, our income before taxation margin was 6.9% and 8.2% in 2006 and 2005, respectively.

GSM Cellular Business . In our GSM cellular business, segment income before income tax was RMB7.48 billion in 2006, an increase of 2.8% from 2005. The increase in the segment income before income tax of our GSM cellular business mainly reflects the 31.6% increase in total MOU and 1.4% increase in the ARPU for our GSM cellular business, partially offset by the decrease in the effective tariff. Our segment income before taxation margin in the GSM cellular business decreased from 14.0% in 2005 to 12.6% in 2006 primarily due to the increases in marketing expenses, interconnection charges and administrative expenses.

CDMA Cellular Business . Our segment income before income tax was RMB1.06 billion in 2006 for our CDMA business, as compared to the segment loss before income tax of RMB0.2 billion in 2005. The increase of segment income before income tax of our CDMA cellular business was primarily due to the continued expansion of CDMA cellular business subscriber base, the rapid growth of CDMA value-added services and the effective control of sales and marketing costs, partially offset by the decrease in CDMA cellular subscribers’ average MOU per month and the ARPU.

Long Distance Business . In our long distance business, segment income before income tax increased 104.3%, from RMB0.18 billion in 2005 to RMB0.38 billion in 2006, primarily due to effective control over operational expenses and termination of unprofitable services and products. As a result, the segment income before taxation margin in our long distance business increased from 6.8% in 2005 to 13.2% in 2006.

Data and Internet Business . In our data and Internet businesses, we had a segment income before income tax of RMB0.11 billion in 2006, compared with the segment loss before income tax of RMB0.04 billion in 2005.

Net Income

Income Tax . Our income tax increased to RMB2.76 billion in 2006, an increase of 27.3% from 2005. Our effective tax rates in 2005 and 2006 were 30.6% and 42.5%, respectively. Excluding the effects of the RMB2.40 billion unrealized loss on changes in fair value of derivative component of the convertible bonds, which, as discussed above, had no effect on our cash flows or other aspects of our operations in 2006, the effective tax rate would be 31.1%.

In addition, our future effective income tax rate depends on various factors, including applicable tax laws and regulations, the geographic composition of our pre-tax income and non-tax deductible expenses as incurred. Pursuant to the PRC Enterprise Income Tax Law that was enacted on March 16, 2007 and will become effective on January 1, 2008, a uniform enterprise income tax rate of 25% is adopted for all enterprises (including foreign-invested enterprises). The exact impact of this new law on our financial condition and results of operations will depend on detailed pronouncements that are to be issued.

Net Income . As a result of the foregoing, our net income was RMB3.73 billion in 2006, representing a decrease of 24.3% from 2005. Net income per share decreased by 24.5%, from RMB0.39 in 2005 to RMB0.30 in 2006. Excluding the effects of the RMB2.40 billion unrealized loss on changes in fair value of derivative component of the convertible bonds, which, as discussed above, had no effect on our cash flows or other aspects of our operations in 2006, our net income would be RMB6.13 billion, an increase of 24.3% from 2005, and net income per share that would be RMB0.49, increased by 24.0% from 2005.

Impact of Differences between HKFRS and US GAAP

In addition to the above management discussion and analysis of our results of the operation under HKFRS between the years ended December 31, 2006 and 2005, in connection with the preparation and reconciliation of our consolidated financial statements in accordance with US GAAP, except for the accounting treatment of the convertible bonds discussed in Note 38 to our consolidated financial statements included in this annual report, we believe there are no material differences between HKFRS and US GAAP that would have a significant impact on the discussion and analysis of our results of operations between the years ended December 31, 2006 and 2005. Our combined revenue under US GAAP increased from RMB87.25 billion in 2005 to RMB94.50 billion in 2006, representing an increase of 8.3%. Our net income under US GAAP increased from RMB5.01 billion in 2005 to RMB6.16 billion in 2006, representing an increase of 22.8%. See also Note 38 to the consolidated financial statements for a more detailed summary of all significant accounting differences between HKFRS and US GAAP that are relevant to us.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

In 2005, our revenue continued to increase, by 10.1% from RMB79.09 billion in 2004 to RMB87.05 billion in 2005. This growth was principally due to the relatively rapid growth of our CDMA cellular business and steady growth of our GSM cellular business. For the reasons discussed below, our cellular businesses continued to increase in terms of revenues and in their percentage contribution to our overall business, while our long distance, data and Internet businesses continued to decrease in terms of revenues and in their contribution to our business.

Due to factors discussed below, in 2005 our costs and expenses grew 10.1%, the same rate as that of our revenue. As a result, while our income before income tax increased by 9.8% to RMB7.10 billion, our income before income tax margin stood at 8.2%, the same as that of 2004. Segment income before income tax margin in our GSM cellular business decreased from 14.3% in 2004 to 14.0% in 2005. Our CDMA cellular business maintained relatively rapid growth in 2005 and its loss before income tax decreased by 64.5%. In our long distance and data and Internet businesses, segment income before income tax decreased 66.8% in 2005 and segment income before income tax margin decreased to 1.7% in 2005 from 4.8% in 2004.

Our net income in 2005 increased by 9.7% to RMB4.93 billion, for reasons discussed below.

Revenue

Revenue from our GSM cellular business grew steadily in 2005 and continued to generate a majority of our total revenue, while revenue from our CDMA cellular business maintained its growth in 2005 and further increased its share of our total revenue for the year. Revenues from our GSM and CDMA cellular businesses represented 94.7% of our total revenue in 2005, as compared with 93.0% in 2004. The share of revenue from the CDMA cellular business in our total revenue increased from 32.9% in 2004 to 34.8% in 2005, while the share of revenue from the GSM cellular business in our total revenue slightly decreased from 60.1% in 2004 to 59.9% in 2005. Revenues from our long distance and data and Internet

businesses decreased from RMB5.53 billion in 2004 to RMB4.59 billion in 2005. Aggregate revenues from our long distance business and our data and Internet businesses represented 5.3% of our total revenue in 2005, as compared with 7.0% in 2004. We believe the changes in our revenue composition reflect our focus on the development of our cellular businesses.

Cellular Revenue

For the reasons discussed below, revenues from our GSM and CDMA cellular businesses (including revenues from sales of telecommunications products) together increased by 12.1%, from RMB73.56 billion in 2004 to RMB82.46 billion in 2005.

GSM Cellular Business. Revenue from our GSM cellular business increased by 9.7%, from RMB47.51 billion in 2004 to RMB52.14 billion in 2005, primarily due to the continued increases in the total number of our total GSM cellular subscribers and in our subscribers’ average MOU. The total number of our GSM cellular subscribers increased by 12.8%, from 84.27 million as of December 31, 2004 to 95.07 million as of December 31, 2005. With the continually increasing cellular penetration in China, an increasing proportion of new subscribers are relatively low-end subscribers. As a result, ARPU from the GSM cellular business declined 1.8%, from RMB49.4 in 2004 to RMB48.5 in 2005. The average MOU per subscriber per month increased 7.0%, from 188.9 minutes in 2004 to 202.2 minutes in 2005.

The table below sets forth the revenue composition of our GSM cellular business and each revenue item’s respective share of total GSM revenue in the years ended December 31, 2003, 2004 and 2005.


	2003					2004					2005
	RMB in		As percentage			RMB in		As percentage			RMB in		As percentage
	million		of total			million		of total			million		of total
Revenue		41,201		100.0	%		47,513		100.0	%		52,139		100.0	%
Service Revenue		41,153		99.9	%		47,509		100.0	%		52,136		100.0	%
Usage Fee		29,072		70.6	%		31,997		67.3	%		32,077		61.5	%
Monthly Fee		7,042		17.1	%		6,922		14.6	%		6,841		13.1	%
Interconnection Revenue		1,927		4.7	%		2,614		5.5	%		3,466		6.6	%
Value-added Service Revenue		1,978		4.8	%		4,819		10.1	%		7,967		15.3	%
Others		1,134		2.7	%		1,157		2.5	%		1,785		3.5	%
Sales of Telecommunications Products		48		0.1	%		4		0.0	%		3		0.0	%

The growth in total usage of our GSM cellular services has been offset to some extent by the decrease in the ARPU. As a result, usage fees for GSM cellular services only increased by 0.3% from RMB32.00 billion in 2004 to RMB32.08 billion in 2005, representing 61.5% of total GSM service revenue, a decrease from 67.3% in 2004. Monthly fees decreased by 1.2%, from RMB6.92 billion in 2004 to RMB6.84 billion in 2005, and represented 13.1% of total GSM service revenue as compared with 14.6% in 2004. This decrease is primarily due to an increasing proportion of new subscribers who subscribe to package plans charging no monthly fee. Interconnection revenue increased by 32.6% from RMB2.61 billion in 2004 to RMB3.47 billion in 2005, and represented 6.6% of total service revenue as compared with 5.5% in 2004. This increase is primarily due to the increased total usage of our GSM cellular services.

While continuing to meet the diverse needs of our customers in the mass market, our GSM cellular business aims to actively promote value-added services. As a result, revenue from value-added services significantly increased its contribution to our total GSM cellular revenue. Revenue from our GSM value-added cellular services increased 65.3%, from RMB4.82 billion in 2004 to RMB7.97 billion in 2005. Its share of total GSM service revenue increased from 10.1% in 2004 to 15.3% in 2005. Of the total revenue from GSM value-added cellular services, revenue from short messaging services increased 34.1% from RMB2.79 billion in 2004 to RMB3.74 billion in 2005, and its share of total GSM service revenue grew from 5.9% in 2004 to 7.2% in 2005.

CDMA Cellular Business. Our CDMA subscriber base has continued to expand at a relatively fast pace. In 2005, the growth in our CDMA subscriber base resulted in increased revenue from the CDMA cellular business. Revenue from our CDMA cellular business reached RMB30.32 billion in 2005, a 16.4% increase over RMB26.05 billion in 2004. This increase was primarily due to a 17.6% increase in our CDMA subscribers.

The table below sets forth the revenue composition of our CDMA cellular business and each revenue item’s respective share of total CDMA revenue for the years ended December 31, 2003, 2004 and 2005.


	2003					2004					2005
	RMB in		As percentage			RMB in		As percentage			RMB in		As percentage
	million		of total			million		of total			million		of total
Revenue		18,063		100.0	%		26,046		100.0	%		30,320		100.0	%
Service Revenue		16,667		92.3	%		24,378		93.6	%		27,577		91.0	%
Usage Fee		11,672		64.6	%		16,165		62.1	%		16,727		55.2	%
Monthly Fee		3,488		19.3	%		4,638		17.8	%		4,905		16.2	%
Interconnection Revenue		608		3.4	%		927		3.6	%		1,399		4.6	%
Value-added Service Revenue		700		3.9	%		2,371		9.1	%		4,116		13.6	%
Others		199		1.1	%		277		1.0	%		430		1.4	%
Sales of Telecommunications Products		1,396		7.7	%		1,668		6.4	%		2,743		9.0	%

CDMA usage fees increased by 3.5% from RMB16.17 billion in 2004 to RMB16.73 billion in 2005, and represented 60.7% of total CDMA service revenue as compared with 66.3% in 2004. The decrease in the percentage of total CDMA service revenue was primarily due to the rapid increase in revenue from value-added CDMA services. With the expansion of our CDMA 1X wireless data services in 2005, we have been actively developing our CDMA IX wireless data business, by making efforts to leverage the competitive edge of the CDMA technology. Revenue from CDMA value-added cellular services reached RMB4.12 billion in 2005, an increase of 73.6% from RMB2.37 billion in 2004, and accounted for 14.9% of total service revenue from the CDMA cellular business in 2005. Of the total revenue from CDMA value-added cellular services, revenue from CDMA 1X wireless data services increased 95.6% from RMB0.68 billion in 2004 to RMB1.33 billion in 2005, and its share of total CDMA service revenue grew from 2.8% in 2004 to 4.8% in 2005. We expect revenue from value-added CDMA services will continue to grow significantly, as we will continue to focus on the development and marketing of such value-added services.

Monthly fees increased by 5.8%, from RMB4.64 billion in 2004 to RMB4.91 billion in 2005, and represented 17.8% of total CDMA service revenue as compared with 19.0% in 2004. Interconnection revenue increased by 50.9% from RMB0.93 billion in 2004 to RMB1.40 billion in 2005, and represented 5.1% of total service revenue as compared with 3.8% in 2004. This increase is primarily due to the increased usage of our CDMA cellular services.

Long Distance and Data and Internet Revenue

Long Distance Business . Revenue from our domestic and international long distance business (including revenues from sales of telecommunications products) decreased by 17.2%, from RMB1.85 billion in 2004 to RMB1.53 billion in 2005. Such decrease is primarily due to the decrease in tariffs as a result of intensified competition.

Data and Internet Business . Revenue from our data and Internet businesses (including revenues from sales of telecommunications products) decreased by 16.9% from RMB3.68 billion in 2004 to RMB3.06 billion in 2005 primarily due to the decrease in tariffs as a result of intensified competition.

As a result of the foregoing, revenues from our long distance and data and Internet businesses were RMB4.59 billion, a decrease of 17.0% from 2004.

Costs and expenses

Costs and expenses in 2005 were RMB79.95 billion, representing an increase of 10.1% over 2004, same as the 10.1% growth in revenue for the same period. Certain items of costs and expenses, however, had a higher rate of increase, such as the 18.2% increase in leased lines and network capacities expenses, the 11.4% increase in interconnection charges and the 21.7% increase in employee benefit expenses. Due to the expansion of our CDMA business, leased lines and network capacities expenses (which include the expenses from the CDMA network leases) increased faster than our revenue in 2005. As our various business segments continued to develop, interconnection charges also increased faster than our revenue in 2005 since the interconnection rates remain unchanged while our effective tariffs have been declining due to continued price competition in 2005. Our employee benefit expenses also grew faster than our revenue in 2005 due to factors including a general increase in employee insurance and social security expenses.

In 2005, we effectively implemented the business strategy of “effective growth”, i.e., profit driven growth, by focusing on cost control and optimization of our expense structure in order to ensure continued growth in earnings. Our costs and expenses as a percentage of total revenue stood at 91.8% in 2005, the same as that in 2004.

The table below illustrates the major expense items from 2003, 2004 and 2005 and their respective shares of total revenue.


	For the year ended December 31,
	2003					2004					2005
			% of					% of					% of
	RMB in		Total			RMB in		Total			RMB in		Total
	million		Revenue			million		Revenue			million		Revenue
Costs and expenses		60,956		90.8	%		72,616		91.8	%		79,947		91.8	%
Leased lines and network capacities		4,320		6.4	%		7,398		9.4	%		8,748		10.0	%
Interconnection charges		5,921		8.8	%		7,517		9.5	%		8,372		9.6	%
Depreciation and amortization		16,359		24.4	%		19,011		24.0	%		20,368		23.4	%
Employee benefit expenses		4,596		6.8	%		4,615		5.8	%		5,616		6.5	%
Selling and marketing		15,264		22.7	%		19,523		24.7	%		20,558		23.6	%
General, administrative and other expenses		9,139		13.7	%		10,500		13.3	%		11,742		13.5	%
Include: Impairment loss and assets write-off of the Paging Business		557		0.8	%		—		0.0	%		—		0.0	%
Cost of telecommunications products sold		2,939		4.4	%		2,563		3.2	%		3,575		4.1	%
Loss on sale of discontinued operation (Guoxin Paging)		663		1.0	%		—		0.0	%		—		0.0	%
Finance costs		1,946		2.9	%		1,696		2.1	%		1,099		1.2	%
Interest income		-173		-0.3	%		-103		-0.1	%		-96		-0.1	%
Other gains, net		-18		-0.0	%		-104		-0.1	%		-35		-0.0	%

Leased Lines and Network Capacities . With the increase in our CDMA subscribers, the lease expense for CDMA network capacities increased by 20.3%, from RMB6.59 billion in 2004 to RMB7.92 billion in 2005. Leased lines and network capacities expenses as a percentage of total revenue rose slightly from 9.4% in 2004 to 10.0% in 2005.

Interconnection Charges . Interconnection charges reached RMB8.37 billion in 2005, representing an increase of 11.3% from 2004, primarily due to the increase in interconnection traffic volume as a result of the development of our GSM and CDMA cellular business and long distance, data and Internet businesses. As our various business segments continued to develop, interconnection charges as a percentage of total revenue also slightly increased from 9.5% in 2004 to 9.6% in 2005.

Depreciation and Amortization . Depreciation and amortization expenses increased by 7.2% to RMB20.37 billion in 2005, being a lower growth rate than the growth rate in revenue. The increase in depreciation and amortization expenses resulted from expanded network capacity and the expansion of assets scale, which was partly offset by our cessation of the amortization of goodwill in 2005 in accordance with the changed accounting policies described above. Depreciation and amortization expenses as a percentage of total revenue decreased slightly from 24.0% in 2004 to 23.4% in 2005.

Employee Benefit Expenses . As of the end of 2005, we had 53,070 employees, an increase of 34.1% from 39,589 at the end of 2004. Our employee benefit expenses increased from RMB4.62 billion in 2004 to RMB5.62 billion in 2005. Its share as a percentage of total revenue increased from 5.8% in 2004 to 6.5% in 2005. The increase in employee benefit expenses in 2005 was mainly due to the following factors: (i) a general increase in mandatory employee insurance and social security expenses; (ii) the adoption of HKFRS which required the share-based payments arising from the share options to be amortized over the vesting period and recorded as employee benefit expenses and (iii) the conversion of a significant number of previously contracted workers to our formal employees.

Selling and Marketing . Our major selling and marketing expenses included commissions, promotion and advertising expenses, amortization of customer acquisition costs of contractual CDMA subscribers and customer retention costs. Due to our effective cost control measures, selling and marketing expenses totaled RMB20.56 billion in 2005, an increase of 5.3% from 2004, significantly lower than the growth rate of the total revenue in 2005. Amortization of contractual CDMA subscribers acquisition costs in 2005 were RMB5.95 billion, a decrease of 2.8% from 2004. The balance of unamortized deferred CDMA subscriber acquisition costs significantly decreased from RMB4.74 billion as of the end of 2004 to RMB2.94 billion as of the end of 2005 primarily due to our efforts in reducing the use of CDMA handset promotional packages. Due to the continued growth in the subscriber base of our various business segments, the commissions to distributors and sales agents rose to RMB8.89 billion, an increase of 7.5%. Promotion and advertising expenses were RMB2.53 billion, an increase of 6.3%. Selling and marketing expenses as a percentage of revenue decreased from 24.7% in 2004 to 23.6% in 2005.

General, Administrative and Other Expenses . As a result of our increased network maintenance costs due to the expiration of many equipment warranties, our general, administrative and other expenses were RMB11.74 billion in 2005, representing an increase of 11.8% from RMB10.50 billion in 2004. General, administrative and other expenses as a percentage of total revenue increased slightly from 13.3% in 2004 to 13.5% in 2005. In 2005, as a result of our credit control measures, the provision for doubtful debts fell to RMB1.50 billion, a significant decrease of 31.6% from 2004. Provision for doubtful debts as a percentage of service revenue decreased from 2.8% in 2004 to 1.7% in 2005.

Cost of Telecommunications Products Sold . The cost of telecommunications products sold increased by 39.5% from RMB2.56 billion in 2004 to RMB3.58 billion in 2005. This increase was primarily due to a significant increase in CDMA handset units purchased from manufacturers and sold to customers during 2005 as compared to 2004. The share of cost of telecommunications products sold as a percentage of revenue increased from 3.2% in 2004 to 4.1% in 2005.

Interest Income and Finance Costs . Our interest income was RMB0.10 billion in 2005, the same as in 2004. Our finance costs decreased from RMB1.70 billion in 2004 to RMB1.10 billion in 2005, primarily due to the increased portion of short-term borrowings with lower borrowing cost in our indebtedness. In addition, we recorded a foreign exchange gain of RMB0.20 billion due to the revaluation of Renminbi against U.S. dollars, which significantly contributed to the decrease of our finance costs. The above factors resulted in net finance costs of RMB1.00 billion in 2005, a decrease of 37.0% from the net finance costs of RMB1.59 billion in 2004.

Segment income (loss) before income tax

In 2005, our revenue and our costs and expenses both increased by 10.1%. While our income before income tax reached RMB7.10 billion, an increase of 9.8% from 2004, our income before taxation margin was 8.2% in both 2005 and 2004.

GSM Cellular Business . In our GSM cellular business, segment income before income tax was RMB7.28 billion in 2005, an increase of 6.5% from 2004. The increase in the segment income before income tax of our GSM cellular business mainly reflects the 7% increase in the average monthly MOU per subscriber which was partially offset by the 1.8% decline in the ARPU for our GSM cellular business. Our segment income before taxation margin in the GSM cellular business slightly decreased from 14.3% in 2004 to 14.0% in 2005.

CDMA Cellular Business . We incurred a segment loss before income tax of RMB0.2 billion in 2005 for our CDMA business, a 64.5% decrease from the segment loss before income tax of RMB0.56 billion in 2004. The decrease of segment loss before income tax of our CDMA cellular business was primarily due to the continued expansion of CDMA cellular business subscriber base, the rapid growth of CDMA value-added services and the effective control of sales and marketing costs, partially offset by the decrease in CDMA cellular subscribers’ average MOU per month and the ARPU.

Long Distance Business . In our long distance business, segment income before income tax decreased 62.8%, from RMB0.50 billion in 2004 to RMB0.18 billion in 2005, primarily due to reduced tariff level as a result of increased competition. As a result, the segment income before taxation margin in our long distance business decreased from 15.9% in 2004 to 6.8% in 2005.

Data and Internet Business . In our data and Internet businesses, we had a segment loss before income tax of RMB0.04 billion in 2005, compared with the segment loss before income tax of RMB0.07 billion in 2004.

Net Income

Income Tax . As a result of our increased income before income tax, our income tax increased to RMB2.17 billion in 2005, an increase of 9.8% from 2004. Our effective tax rates in 2004 and 2005 were both 30.6%.

Net Income . As a result of the foregoing, our net income was RMB4.93 billion in 2005, representing an increase of 9.7% from 2004. Net income per share increased 8.3%, from RMB0.36 in 2004 to RMB0.39 in 2005.

Impact of Differences between HKFRS and US GAAP

In addition to the above management discussion and analysis of our results of the operation under HKFRS between the years ended December 31, 2005 and 2004, in connection with the preparation and reconciliation of our consolidated financial statements in accordance with US GAAP, we believe there are no material differences between HKFRS and US GAAP that would have a significant impact on the discussion and analysis of our results of operations between the years ended December 31, 2005 and 2004. Our combined revenue under US GAAP increased from RMB79.39 billion in 2004, to RMB87.25 billion in 2005, representing an increase of 9.9%. Our net income under US GAAP increased from RMB4.71 billion in 2004 to RMB5.01 billion in 2005, representing an increase of 6.4%. See also Note 38 to the consolidated financial statements for a more detailed summary of all significant accounting differences between HKFRS and US GAAP that are relevant to us.

Liquidity and Capital Resources

Working Capital and Cash Flows

As of the end of 2006, we had RMB12.18 billion of cash and cash equivalents and RMB0.20 billion of short-term bank deposits, as compared with RMB5.47 billion of cash and cash equivalents and RMB0.28 billion of short-term deposits as of December 31, 2005. As of the end of 2006, we had working capital deficit (current assets minus current liabilities) of RMB29.88 billion, a 16.0% decrease from the working capital deficit of RMB35.59 billion at the end of 2005. The decrease in working capital deficit in 2006 was primarily resulted from increased operating cash flow. In view of our credit worthiness and the current availability of funds in China and Hong Kong, we believe that we will have access to debt and equity financing, in particular bank financing in the PRC and elsewhere, which together with net cash inflows from operations will be sufficient to fund our anticipated capital and liquidity needs.

The following table sets forth cash inflows and outflows in 2004, 2005 and 2006.


	For the year ended December 31,
	2004			2005			2006
	(RMB in millions)
Net cash generated from operating activities		23,819			30,804			35,451
Net cash used in investing activities		(18,958	)		(16,748	)		(17,337	)

Net cash inflows before financing activities		4,861			14,056			18,114
Net cash used in financing activities		(9,401	)		(13,213	)		(11,403	)

Net (decrease)/increase in cash and cash equivalents		(4,540	)		843			6,711

Net cash generated from operating activities increased 29.3% from RMB23.82 billion in 2004 to RMB30.80 billion in 2005, and increased further by 15.1% to RMB35.45 billion in 2006, mainly reflecting the growth in our business.

Net cash used in investing activities were RMB17.34 billion in 2006, compared to RMB16.75 billion in 2005. This increase in net cash outflows from investing activities in 2006 primarily resulted from increased purchase of other assets, including prepaid rents for premises and increased leased lines. Net cash used in investing activities were RMB18.96 billion in 2004. The decrease in net cash outflows from investing activities in 2005 primarily resulted from our effort to control capital investment and reduce investment cost.

Net cash used in financing activities were RMB11.40 billion in 2006, a decrease of 13.7% from the outflow of RMB13.21 billion in 2005, resulting primarily from issuance of the convertible bonds and decrease in repayments of short-term and long-term bank loans. Net cash used in financing activities were RMB9.40 billion in 2004. The increase in net cash used in financing activities in 2005 was primarily due to an increase in repayment of short-term bank loans, from RMB12.27 billion in 2004 to RMB20.10 billion in 2005 as we attempted to further optimize our debt structure.

Indebtedness and Capital Structure

The following table sets forth the amount of cash, assets, short-term and long-term debt, equity as well as debt-to-assets and debt-to-equity ratios as of the end of 2004, 2005 and 2006.


	As of December 31,
	2004			2005			2006
	(RMB in millions, except percentages)
Cash and cash equivalent and short-term bank deposits		5,317			5,754			12,378
Total assets		149,038			142,630			146,438
Short-term debt		20,953			22,456			11,171
Long-term debt		26,626			12,127			14,475
Shareholders’ equity		72,442			76,287			79,412
Debt-to-assets ratio ⁽¹⁾		39.6	%		31.2	%		24.4	%
Debt-to-equity ratio ⁽²⁾		65.7	%		45.3	%		32.3	%


(1)		Debt-to-assets ratio = (long-term interest bearing debt + short-term interest bearing debt)/(long-term interest bearing debt + short-term interest bearing debt + shareholders’ equity).

(2)		Debt-to-equity ratio = (long-term interest bearing debt + short-term interest bearing debt)/shareholders’ equity.

Our debt-to-assets ratio decreased from 31.2% at the end of 2005 to 24.4% at the end of 2006. Our debt-to-equity ratio decreased from 45.3% at the end of 2005 to 32.3% at the end of 2006. The sum of our long-term and short-term interest bearing debt exceeded the amount of our cash and cash equivalents and short-term bank deposits by RMB13.27 billion as of December 31, 2006. We continue to seek to optimize our capital structure, develop multiple financing sources and reduce overall financing costs.

Outstanding short-term and long-term bank loans, denominated in RMB, HK dollar or the U.S. dollar, decreased from RMB24.15 billion at the end of 2005 to RMB8.12 billion at the end of 2006 primarily due to repayments of RMB8.91 billion short-term bank loans and RMB10.35 billion long-term bank loans, which was partially offset by RMB2.14 billion short-term bank loans and RMB1.35 billion long-term bank loans raised in year 2006. Our long-term bank loans generally bear floating interest rates that range from US$ London Inter-Bank Offered Rate, or LIBOR, plus 0.35% to 0.44% per annum in 2006 with maturity through 2010. The loan agreements do not include financial performance or other covenants which materially restrict our operations or those of CUCL, our principal operating subsidiary in China. As of December 31, 2006, no short-term bank loans or long-term bank loans were guaranteed by Unicom Group.

We finance a significant portion of our business operations and capital expenditures with short-term and long-term debt. We have established and maintained high credit ratings among PRC financial institutions. In view of our creditworthiness and the current availability of funds in China, we believe that we are able to continue to obtain sufficient financing from PRC financial institutions.

Our long-term and short-term debts have declined in recent years. In order to further rationalize our debt structure and reduce our interest expense, we may continue to finance a portion of our business operations and capital expenditures through short-term borrowings. Our liquidity in the future will primarily depend on our ability to maintain adequate cash inflow from operations and obtain adequate external financing to meet our debt service obligations and planned capital expenditures. Our operating cash flows could be adversely affected by numerous factors beyond our control, including but not limited to changes in telecommunications tariffs, decreased demand for our telecommunications services and further intensified competition. Our ability to obtain external financing also depends on numerous factors, including but not limited to our financial condition and creditworthiness as well as our relationship with lenders. See “D. Risk Factors — Risks Relating to Our Business — If we are unable to fund our capital expenditure and debt service requirements, our financial condition and growth prospects will be adversely affected.” under Item 3.

In September 2003 we entered into a US$700 million term loan facility with 13 financial institutions, which consisted of three tranches: a three-year US$200 million tranche, with an interest rate of

0.28% over the US$ LIBOR per annum, a five-year US$300 million tranche, with an interest rate of 0.35% over the US$ LIBOR per annum, and a seven-year US$200 million tranche, with an interest rate of 0.44% over the US$ LIBOR per annum. The three-year US$200 million tranche was fully repaid in 2006.

In February 2004, our operating entity, CUCL, entered into a US$500 million term loan facility with 12 financial institutions, which is repayable in three years at an interest rate of 0.40% over the US$ LIBOR per annum. This term loan was fully repaid in February 2007.

In July 2005, CUCL completed an offering of two tranches of short-term bonds in the PRC interbank debenture market. The first tranche of the bonds was issued for an aggregate amount of RMB9.0 billion with a maturity period of 365 days. The second tranche of the bonds was issued for an aggregate amount of RMB1.00 billion with a maturity period of 180 days. These two tranches were fully repaid in 2006.

In March 2006, CUCL completed an offering of short-term bonds of RMB1.00 billion with a maturity period of 365 days, which were fully repaid in March 2007. In July 2006, CUCL completed another offering of short-term bonds in an aggregate amount of RMB6.00 billion, consisting of three tranches of RMB2.00 billion each, with a maturity period of 180 days, 270 days and 365 days, respectively. The first two tranches were fully repaid in the first half of 2007. The weighted average effective interest rate of these short-term bonds as at December 31, 2006 was 3.19%. As a result, our fixed rate debt obligation as of December 31, 2006 was RMB7.00 billion.

On June 20, 2006, we and SKT entered into a subscription agreement whereby SKT agreed to subscribe for US$1 billion zero coupon convertible bonds due 2009 to be issued by us on July 5, 2006, or such other date agreed by us and SKT which may not be later than July 12, 2006. On July 5, 2006, we and SKT completed the issuance and subscription, respectively, of the convertible bonds. Subject to certain adjustments pursuant to the terms of the convertible bonds, such bonds can be converted into our ordinary shares one year after the issuance at an initial conversion price of HK$8.63 (US$1.11) per share, representing a 28.8% premium over the closing price of our ordinary shares on the Hong Kong Stock Exchange on June 20, 2006. Assuming a full conversion of the convertible bonds at this initial conversion price, the bonds would be convertible into 899,745,075 ordinary shares, representing approximately 7.15% of our issued and outstanding share capital as of June 20, 2006 and approximately 6.67% of our enlarged issued and outstanding share capital as of June 20, 2006. Unless previously redeemed, converted or purchased and cancelled pursuant to the terms of the convertible bonds, we will redeem all the outstanding bonds at 104.26% of their principal amount on July 5, 2009. In addition, the holder of such bonds, with prior written notice to us, may require us to redeem, on July 5, 2008, all or a portion of their bonds at 102.82% of the principal amount of the convertible bonds to be redeemed. The proceeds from this issuance of the convertible bonds have been used for the repayments of our long-term loans and other general corporate purposes.

Contractual Obligations and Commercial Commitments

The following table sets forth the amount of our outstanding contractual cash obligations as of December 31, 2006.


	Payments Due by Period (RMB in millions)
			Due in		Due in		Due in		Due in		Due in		Due after
Contractual Obligations	Total		2007		2008		2009		2010		2011		2011
Long-term bank loans ⁽¹⁾		8,124		3,984		2,378		—		1,762		—		—
Convertible bonds		8,137		—		—		8,137		—		—		—
Finance lease obligations ⁽²⁾		115		105		8		—		1		1		—
Interest payment obligations on bank loans		628		270		198		94		66		—		—
Capital commitments ⁽³⁾		3,642		3,642		—		—		—		—		—


	Payments Due by Period (RMB in millions)
			Due in		Due in		Due in		Due in		Due in		Due after
Contractual Obligations	Total		2007		2008		2009		2010		2011		2011
Operating leases ⁽³⁾
CDMA network capacity leasing arrangement ⁽⁴⁾		7,271		7,271		—		—		—		—		—
Others		4,141		1,066		679		534		416		338		1,108
Other commitments ^{(3) (5)}		1,237		1,237		—		—		—		—		—
Total obligations		33,295		17,575		3,263		8,765		2,245		339		1,108


(1)		See Note 16 “Long-term Bank Loans” to our consolidated financial statements.

(2)		See Note 18 “Obligations Under Finance Leases” to our consolidated financial statements.

(3)		See Note 34 “Contingencies and Commitments” to our consolidated financial statements.

(4)		We entered into the CDMA network capacity leasing arrangement with Unicom Group and its subsidiary Unicom New Horizon by our wholly-owned subsidiaries, CUCL (including Unicom New Century, which was merged into CUCL on July 20, 2004, and Unicom New World, which was merged into CUCL on September 1, 2005) in our cellular service areas. See Note 34.2 “Contingencies and Commitments — Operating Lease Commitments” to our consolidated financial statements for details.

(5)		Other commitments represented our commitment to purchase CDMA handsets from vendors. See Note 34.3 “Contingencies and Commitments — Commitment to purchase CDMA Handsets” to our consolidated financial statements for details.

Off-balance Sheet Arrangements

As of December 31, 2006, except for the operating lease for CDMA network capacity set forth above in “— Contractual Obligations and Commercial Commitments”, we did not have any other off-balance sheet arrangements.

We operate our CDMA cellular business based on the CDMA network capacity we have leased from Unicom New Horizon, a wholly-owned subsidiary of Unicom Group. Such CDMA network capacity leasing arrangement is important to us in respect of our liquidity, capital resources, market risk support and credit risk support. The details of the CDMA network capacity leasing arrangement are described in “B. Business Overview — Cellular Services — CDMA Cellular Services — Our Lease of CDMA Networks from Unicom Group” under Item 4; “Critical Accounting Policies — Lease of CDMA Network Capacity” under Item 5; “B. Related Party Transactions — Leasing of CDMA Network Capacity” under Item 7 and Note 4.2(c) “Lease of CDMA network capacity” and Note 34.2 “Contingencies and Commitments — Operating Lease Commitments” to our consolidated financial statements. There is no known event, demand, commitment, trend or uncertainty that will or is reasonably likely to result in the termination or material reduction in availability to us, of the CDMA network capacity lease arrangement.

Capital Expenditures

The following table sets forth our historical and planned capital expenditure requirements for the periods indicated. Actual future capital expenditures may differ from the amounts indicated below.


	For the years ended December 31,
	2005		2006		2007
	(RMB in billions)
Cellular		7.33		10.58		13.60
Long distance, data and Internet		1.18		1.44		1.00
Transmission network ⁽¹⁾		2.95		3.70		3.90
Others ⁽²⁾		6.15		5.83		7.50
Total		17.61		21.55		26.00


(1)		Expenditures on transmission network refer to investment in the inter-province and intra-province backbone transmission network, the local network and the access network.


(2)		Other expenditures represent investment in billing, customer service and information systems, office buildings, construction of integrated access network and miscellaneous items.

Capital expenditures in 2006 totaled RMB21.55 billion. Capital expenditures attributable to the GSM cellular business, the long distance, data and Internet businesses, the transmission network and other projects were RMB10.58 billion, RMB1.44 billion, RMB3.70 billion, and RMB5.83 billion, respectively. Expenditures for other projects were mainly related to the set-up of the billing, customer service and information system, office building, construction of integrated access network and miscellaneous purchases.

Projected capital expenditures for 2007 is RMB26.00 billion, which will be used primarily for upgrading and expanding the GSM networks and for billing systems, customer services and information technology system.

We expect to fund our capital expenditure needs through a combination of cash generated from operating activities, short-term and long-term borrowings and other debt and equity financing. See “D. Risk Factors — Risks Relating to Our Business — If we are unable to fund our capital expenditure and debt service requirements, our financial condition and growth prospects will be adversely affected.” under Item 3.

US GAAP Reconciliation

Our consolidated financial statements are prepared in accordance with HKFRS, which differs in certain material respects from US GAAP. Differences relate primarily to the effect of the acquisitions of Unicom New Century, Unicom New World and Unicom International, the convertible bonds, employees’ housing benefits, revaluation of properties performed in connection with the reorganization, capacity transaction of leased lines and recognition of employee compensation costs under our share options scheme. Reconciliation between HKFRS and US GAAP which affect our net income and shareholders’ equity arising from the aforementioned differences are included in Note 38 to the consolidated financial statements included in this annual report. In addition, additional disclosures on the condensed financial information under US GAAP, including condensed statements of income, changes in shareholders’ equity and cash flows information, as well as condensed balance sheets information and other additional financial information which have been restated for relevant periods presented to reflect the impact of the effects of the acquisitions of Unicom New Century, Unicom New World and Unicom International under common control are included in Note 38 to the consolidated financial statements presented in this annual report.

Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

The following table sets forth certain information concerning our current directors and executive officers.


Name	Age		Position
Chang Xiaobing		50	Chairman of the Board of Directors; Executive Director; Chief Executive Officer

Shang Bing		51	Executive Director; President

Tong Jilu		49	Executive Director; Chief Financial Officer

Li Jianguo		53	Executive Director

Yang Xiaowei		43	Executive Director; Vice President


Name	Age		Position
Li Zhengmao		45	Executive Director; Vice President

Li Gang		49	Executive Director; Vice President

Zhang Junan		50	Executive Director; Vice President

Lu Jianguo		61	Non-Executive Director

Wu Jinglian		77	Independent Non-Executive Director

Shan Weijian		53	Independent Non-Executive Director

Linus Cheung Wing Lam		59	Independent Non-Executive Director

Wong Wai Ming		49	Independent Non-Executive Director

Chang Xiaobing was appointed in December 2004 as an Executive Director, Chairman of the Board of Directors and Chief Executive Officer of the Company. Mr. Chang, a professor level senior engineer, graduated in 1982 from the Nanjing Institute of Posts and Telecommunications with a B.S. degree in telecommunications engineering and received a master’s degree in business administration from Tsinghua University in 2001. He received a doctor’s degree in business administration from the Hong Kong Polytechnic University in 2005. Prior to joining the Unicom Group, Mr. Chang served as a Deputy Director of the Nanjing Municipal Posts and Telecommunications Bureau and a Deputy Director General of the Directorate General of Telecommunications of the Ministry of Posts and Telecommunications and a Deputy Director General and Director General of the Department of Telecommunications Administration of the MII, as well as Vice President of China Telecom Group. Mr. Chang was appointed the Chairman of Unicom Group in November 2004. He also serves as the Chairman of the A Share Company and CUCL, respectively. Mr. Chang has over 25 years of operational and managerial experience in the telecommunications industry in China.

Shang Bing was appointed in November 2004 as an Executive Director and President of the Company. Mr. Shang, a senior economist, graduated in 1982 from Shenyang Chemical Industry Institution with a bachelor’s degree in chemical industry and received a master’s degree in business administration from New York State University. He received a doctor’s degree in business administration from the Hong Kong Polytechnic University in 2005. From 1986 to 1998, Mr. Shang served as a Director of Industrial Technology Development Centre in Liaoning Province, a Deputy General Manager and General Manager of Economic and Technological Development Company in Liaoning Province. Mr. Shang joined Unicom Group in August 1998. From 1998 to 2001, Mr. Shang served as a Deputy General Manager and General Manager of Unicom Group Liaoning Branch. Mr. Shang was appointed a Vice President of Unicom Group in March 2001 and also became a Director of Unicom Group in September 2003. Mr. Shang was appointed the President of Unicom Group in November 2004. At present, Mr. Shang is also a Director and President of the A Share Company and CUCL. Mr. Shang has extensive management experience and knowledge in telecommunications operations.

Tong Jilu was appointed in February 2004 as an Executive Director and Chief Financial Officer of the Company. He assists the President in handling issues relating to finance. Mr. Tong graduated in 1987 from the Department of Economic Management at the Beijing University of Posts and Telecommunications. He received a master’s degree in business administration from National University of Australia in 2002 and is an Executive Director of the Association of Chief Accountants and Vice Chairman of Internal Audit Association of China. From August 1989 to October 1999, he served first as a Deputy Director, a Director and later as a Deputy Director General of the Finance Bureau of the Posts and Telecommunications Administration of Liaoning Province. From November 1999 to June 2000, Mr. Tong served as a Deputy Director General of the Posts Office of Liaoning Province. Mr. Tong joined Unicom Group in July 2000 and served as Chief Accountant of Unicom Group from July 2000 to February 2001. Since March 2001, Mr. Tong has served as a Vice President of Unicom Group. Mr. Tong has served as a

Director in the Unicom Group since September 2003 and the Chief Accountant of the Unicom Group since December 2004. Mr. Tong is also a Director in the A Share Company and a Director and Vice President in CUCL. Mr. Tong has extensive experience in management of telecommunications companies and finance management of listed companies.

Li Jianguo was appointed in April 2006 as an Executive Director of the Company. She graduated from the Xiangtan University with a bachelor’s degree in Chemical Engineering in 1982 and received a master’s degree in business administration from the Hong Kong Polytechnic University in 2006. Ms. Li is a senior economist and held leading positions in various enterprises, local governments and state ministries and committees for a significant period of time. Ms. Li joined the Unicom Group in June 2000 and has been the Chairperson of the labor union of the Unicom Group since December 2001 and a Director of the Unicom Group since September 2003. Ms. Li is also a Director of CUCL and the Chairperson of the board of supervisors of the A Share Company. Ms. Li has extensive experience in working for the government and enterprises and in management.

Yang Xiaowei was appointed in April 2006 as an Executive Director and Vice President of the Company. He received a bachelor’s degree from the Computer Application Department of Chongqing University in 1998 and a master’s degree in engineering from the Management Engineering Department of Chongqing University in 2001. Mr. Yang is a senior engineer. From December 1992 to January 2002, Mr. Yang held the positions of Assistant to Director and Deputy Director of Chongqing Telecommunications Bureau, a Deputy Director of the Chongqing Telecommunications Administration Bureau and a Director of Chongqing Municipal Communication Administration Bureau. Mr. Yang joined the Unicom Group in January 2002 and served as General Manager of the Chongqing branch and the Guangdong branch of the Unicom Group. Mr. Yang has been a Vice President of the Unicom Group since December 2003 and a Director of the Unicom Group since December 2004. Mr. Yang is also a Director and a Vice President of CUCL and the Chairman of Unicom Huasheng. Mr. Yang has extensive experience in management and the telecommunications industry.

Li Zhengmao was appointed in April 2006 as an Executive Director and Vice President of the Company. He received a doctor’s degree in communications and electronic engineering from the Southeast University in 1988. From 1992 to 1994, he was a Professor of the University of Electronic Science and Technology of China. Mr. Li joined the Unicom Group in August 1994 and held various positions in the Unicom Group, including Deputy Head of the Network Technology Department, Head of the Wireless Communication Department, Head of the Technology Department and Deputy Chief Engineer. From April 2000 to May 2002, he was an Executive Director and a Vice President of the Company. From May 2002 to December 2003, he was General Manager of the Yunnan branch of the Unicom Group. Mr. Li has been a Vice President of the Unicom Group since December 2003 and has been a Director of the Unicom Group since December 2004. Mr. Li serves as a Director and a Vice President of CUCL, as well as the Chairman of Unisk (Beijing) Information Technology Co. Ltd. and Unicom-BREW Telecommunications Technologies Ltd. Mr. Li has extensive experience in engineering technology and business operations.

Li Gang was appointed in April 2006 as an Executive Director and Vice President of the Company. He graduated from Beijing University of Posts and Telecommunications in 1985 and received a master’s degree in business administration from the Department of Advanced Business Administration of Jinan University in 2004. Mr. Li is a senior engineer and previously served as a Deputy Director of the Telecommunications Division, a Deputy Director of the Telecommunications Department, a Deputy Director of the Rural Telephone Bureau, a Deputy Director and a Director of the Telecommunications Operation and Maintenance Department of the Posts and Telecommunications Administration Bureau in Guangdong Province and as a Director of the Mobile Communication Bureau. From 1999 to 2005, he served as the Vice Chairman, General Manager and Chairman of Guangdong Mobile Communication Co., Ltd. and as the Chairman and General Manager of Beijing Mobile Communication Co., Ltd. From 2000 to

2005, he also served as an Executive Director of China Mobile (Hong Kong) Limited. Mr. Li joined the Unicom Group in December 2005 and is currently a Vice President of the Unicom Group. Mr. Li is also a Director and Vice President of CUCL and Unicom Xin Guo Xin Communications Ltd. Mr. Li has worked in the telecommunications industry for a long period of time and has extensive management experience.

Zhang Junan was appointed in April 2006 as an Executive Director and Vice President of the Company. He graduated from the Nanjing University of Posts and Telecommunications majoring in carrier communication in 1982. He received a master’s degree in business administration from the National Australian University in 2002. Mr. Zhang is a senior engineer. He previously served as a Director of the Bengbu Municipal Posts and Telecommunications Bureau in Anhui Province and a Deputy Director of the Anhui Provincial Posts and Telecommunications Bureau. From 2000 to 2005, he served as a Deputy General Manager and General Manager of the Anhui Provincial Telecommunications Company and the Chairman and General Manager of the Anhui Provincial Telecommunications Co., Ltd. Mr. Zhang joined the Unicom Group as a Vice President in December 2005. Mr. Zhang also serves as a Director and Vice President of CUCL. Mr. Zhang has worked in the telecommunications industry for a long period of time and has extensive management experience.

Lu Jianguo was appointed in April 2006 as a Non-Executive Director of the Company. He is an engineer. He graduated from the PLA Air Force Academy of Engineering in 1968 majoring in radio. From 1988 to 1994, he served as a Director of Beijing Long Distance Call Bureau, a Deputy Director-General of the Communication Department of the Posts and Telecommunications Ministry, a Deputy Director of Office of State Radio Regulatory Commission. Mr. Lu served as a Vice President of the Unicom Group from October 1994 to December 2005 and a Director of the Unicom Group from February 2000 to December 2005 and is currently also a Director of the A Share Company. Mr. Lu is experienced in telecommunications operations and has extensive management experience.

Wu Jinglian was appointed in April 2000 as an Independent Non-Executive Director of the Company. Mr. Wu is a senior researcher at the Development Research Center of the State Council, or DRC, and a professor at the Graduate School of the Chinese Academy of Social Sciences and China Europe International Business School. Mr. Wu graduated from Fudan University and received honorary doctoral degrees in Social Science from the Hong Kong Baptist University and the University of Hong Kong in 2000 and 2005, respectively. Mr. Wu was previously an Executive Director of the DRC and Deputy Director of the Programming Office for Economic Reform of the State Council. Mr. Wu has been a visiting scholar at Yale University, a visiting professor at the Asia-Pacific Research Center of Stanford University and a visiting researcher at the Massachusetts Institute of Technology.

Shan Weijian was appointed in May 2003 as an Independent Non-Executive Director. Mr. Shan is a Partner of TPG Capital Limited. Mr. Shan serves on the boards of BOC Hong Kong (Holdings) Limited, Lenovo Group Limited and TCC International Holdings Limited, among others. Before joining TPG, Mr. Shan was a Managing Director of J.P. Morgan. Prior to that, he taught at the Wharton School of Business at University of Pennsylvania. His earlier employers include the World Bank, Graham and James, a law firm based in San Francisco, and Beijing University of International Business and Economics. Mr. Shan received a Ph.D. degree from the University of California, Berkeley.

Linus Cheung Wing Lam was appointed in May 2004 as an Independent Non-Executive Director of the Company. Before this, Mr. Cheung was Deputy Chairman of PCCW Limited, prior to the merger of Pacific Century Cyberworks Limited and Cable & Wireless HKT Limited, or Hongkong Telecom. Mr. Cheung was the Chief Executive of Hongkong Telecom and an Executive Director of Cable & Wireless plc in the United Kingdom. Mr. Cheung also worked at Cathay Pacific Airways for 23 years before departing as Deputy Managing Director. He was appointed an Official Justice of the Peace in 1990 and a Non-official Justice of the Peace in 1992. Mr. Cheung is currently a member of the Chinese People’s Political

Consultative Conference for the Tianjin Municipal Government. Mr. Cheung received a bachelor’s degree in social science and a diploma in management studies from the University of Hong Kong. He is also an Honorary Fellow of the University of Hong Kong and of The Chartered Institute of Marketing in the United Kingdom.

Wong Wai Ming was appointed in January 2006 as an Independent Non-Executive Director of the Company. Mr. Wong is an Executive Director and Chief Executive Officer of Roly International Holdings Ltd. and an Executive Director of Linmark Group. Mr. Wong is also an Independent Non-Executive Director of Lenovo Group Limited and I.T Limited. Prior to his current executive position, he was an Executive Director and Chief Executive Officer of the Sing Tao News Corporation Limited. He was previously an investment banker with more than 15 years of experience in investment banking business in Greater China and was a member of the Listing Committee of The Stock Exchange of Hong Kong Limited. Mr. Wong is a chartered accountant and holds a bachelor of science degree (with Honors) in management science from the Victoria University of Manchester in the United Kingdom.

B. Compensation

The aggregate compensation and other benefits paid by us to our directors and executive officers as a group in 2006 was approximately RMB29.24 million, while retirement benefits paid by us were approximately RMB0.14 million. Each of our executive directors and executive officers participated in a bonus scheme with us that ties the amount of bonus he or she will receive at the end of a year to our operating results of the year and his or her job performance. Some of our directors also hold options to purchase shares in our company. See “E. Share Ownership” below for detailed descriptions of our share option schemes and options granted to our directors and executive officers as well as compensation for the year 2006.

C. Board Practices

General

Pursuant to our Articles of Association, at each annual general meeting, one-third of our directors retire from office by rotation. The retiring Directors are eligible for re-election. The Board may at any time appoint a new director to fill a vacancy or as an additional director. The Board may also appoint and remove our executive officers. No benefits are payable to our directors or executive officers upon termination of their service with us in accordance with the provisions of their service agreements, except certain statutory compensation. The following table sets forth certain information concerning our current directors and former directors who served as directors in 2006.


Name	Appointment Date	Re-appointment Date	Resignation Date
Current Directors
Chang Xiaobing	December 21, 2004	May 12, 2006	—
Shang Bing	November 5, 2004	May 12, 2005 and
		May 11, 2007	—
Tong Jilu	February 1, 2004	May 12, 2004 and
		May 12, 2006	—
Li Jianguo	April 1, 2006	May 12, 2006 and
		May 11, 2007	—
Yang Xiaowei	April 1, 2006	May 12, 2006 and
		May 11, 2007	—


Name	Appointment Date	Re-appointment Date	Resignation Date
Li Zhengmao	April 1, 2006	May 12, 2006	—
Li Gang	April 1, 2006	May 12, 2006	—
Zhang Junan	April 1, 2006	May 12, 2006	—
Lu Jianguo	April 1, 2006	May 12, 2006	—
Wu Jinglian	April 20, 2000	May 13, 2002,	—
		May 12, 2004,
		May 12, 2005 and
		May 11, 2007
Shan Weijian	May 12, 2003	May 12, 2005 and
		May 11, 2007	—
Linus Cheung Wing Lam	May 12, 2004	May 12, 2006	—
Wong Wai Ming	January 19, 2006	May 12, 2006	—
Former Directors
Li Qiuhong	July 19, 2005	—	April 1, 2006
William Lo Wing Yan	—	—	April 1, 2006
Ye Fengping	—	—	April 1, 2006
Liu Yunjie	—	—	April 1, 2006

Audit Committee

The audit committee reviews and supervises our financial reporting process and internal financial controls. The duties of the audit committee include, among others:

	•		considering and approving the appointment, resignation and removal of our external auditor and the auditor’s fees;

	•		reviewing our interim and annual financial statements and disclosures before submission to the board of directors;

	•		discussing with the auditor any problems and reservations arising from the audit of the interim and final results;

	•		reviewing any correspondence from the auditor to the management and the responses of the management;

	•		reviewing the relevant reports concerning our internal controls and procedures;

	•		pre-approving the audit and non-audit services to be provided by the external auditor, and determining whether any non-audit services would affect the independence of the auditor;

	•		discussing with the management the timing and procedures for the rotation of the partner of the auditing firm responsible for the audit of our company and the partner responsible for the review of audit related documents;

	•		supervising the internal audit department, which will directly report to the committee; and

•

having the right to approve the appointment or removal of the head of internal audit department.

As of May 31, 2007, the members of the audit committee are Wong Wai Ming, Chairman of the committee, Wu Jinglian, Shan Weijian and Linus Cheung Wing Lam.

Remuneration Committee

The remuneration committee meets regularly to consider human resources issues, issuance of share options and other matters relating to compensation. In particular, the remuneration committee makes recommendations to the Board on executive compensation. The primary duties of the remuneration committee are to make recommendations to the Board regarding the remuneration structure of the executive directors and to determine specific remuneration packages for the executive directors on behalf of the Board. The remuneration committee is also responsible for operating our employee share option scheme and any other incentive scheme as they apply to the executive directors, including determining the granting of options to executive directors. As of May 31, 2007, the members of the remuneration committee are Wu Jinglian, Chairman of the committee, Lu Jianguo and Linus Cheung Wing Lam.

D. Employees

As of December 31, 2004, 2005 and 2006, we had 39,589, 53,070, and 53,387 employees, respectively. The employees as of December 31, 2006 are classified by function as follows:


	Number of
By Function	Employees
Management and administration		8,410
Other general administration		7,866
Marketing and sales		18,996
Technical, engineering and network maintenance		13,847
Retail and customer service		3,882
General support		386

Total		53,387


	Number of
By Business Segment	Employees
Cellular		46,205
GSM		30,055
CDMA		16,150
Long distance		2,336
Data and Internet		4,846

Total		53,387

As of December 31, 2006, we also employed approximately 60,000 temporary employees.

E. Share Ownership

As of May 31, 2007, except for Mr. Li Zhengmao and Mr. Linus Cheung Wing Lam who hold 20,000 shares and 200,000 shares, respectively, of our company, our directors and executive officers as a group do not own any shares in our company.

As of May 31, 2007, our directors and executive officers as a group hold options for 11,361,600 shares, or less than 0.1% of our issued and outstanding share capital, including the following options granted under our pre-global offering share option scheme and share option scheme:

Options granted under the share option scheme

Compensation

Capacity and

Number of

Exercise

Consideration

for 2006

Name

Nature

Shares Covered

Expiration Date

Price

Paid

(RMB)

Chang Xiaobing

Beneficial Owner

526,000

December 20, 2010

HK$6.20

HK$1.00

4,571,000

(Personal)

800,000

February 14, 2012

HK$6.35

HK$1.00

Compensation

Capacity and

Number of

Exercise

Consideration

for 2006

Name

Nature

Shares Covered

Expiration Date

Price

Paid

(RMB)

Shang Bing

Beneficial Owner

292,000

July 19, 2010

HK$5.92

HK$1.00

4,771,000

(Personal)

128,000

December 20, 2010

HK$6.20

HK$1.00

700,000

February 14, 2012

HK$6.35

HK$1.00

Tong Jilu

Beneficial Owner

292,000

June 22, 2010

HK$15.42

HK$1.00

4,020,000

(Personal)

292,000

July 19, 2010

HK$5.92

HK$1.00

500,000

February 14, 2012

HK$6.35

HK$1.00

Beneficial Owner

32,000

July 19, 2010

HK$5.92

HK$1.00

(Spouse)

40,000

February 14, 2012

HK$6.35

HK$1.00

Li Jianguo ⁽¹⁾

Beneficial Owner

176,000

July 9, 2008

HK$6.18

HK$1.00

2,756,000

(Personal)

80,000

May 20, 2009

HK$4.30

HK$1.00

292,000

June 22, 2010

HK$15.42

HK$1.00

292,000

July 19, 2010

HK$5.92

HK$1.00

500,000

February 14, 2012

HK$6.35

HK$1.00

Yang Xiaowei ⁽²⁾

Beneficial Owner

122,000

July 9, 2008

HK$6.18

HK$1.00

2,686,000

(Personal)

292,000

July 19, 2010

HK$5.92

HK$1.00

500,000

February 14, 2012

HK$6.35

HK$1.00

Li Zhengmao ⁽³⁾

Beneficial Owner

176,000

July 9, 2008

HK$6.18

HK$1.00

2,257,000

(Personal)

292,000

July 19, 2010

HK$5.92

HK$1.00

500,000

February 14, 2012

HK$6.35

HK$1.00

Li Gang ⁽⁴⁾

Beneficial Owner
(Personal)

500,000

February 14, 2012

HK$6.35

HK$1.00

1,791,000

Zhang Junan ⁽⁵⁾

Beneficial Owner
(Personal)

500,000

February 14, 2012

HK$6.35

HK$1.00

1,791,000

Lu Jianguo ⁽⁶⁾

Beneficial Owner

292,000

July 9, 2008

HK$6.18

HK$1.00

1,525,000

(Personal)

292,000

July 19, 2010

HK$5.92

HK$1.00

500,000

February 14, 2012

HK$6.35

HK$1.00

Wu Jinglian

Beneficial Owner

292,000

July 9, 2008

HK$6.18

HK$1.00

420,000

(Personal)

292,000

May 20, 2009

HK$4.30

HK$1.00

292,000

July 19, 2010

HK$5.92

HK$1.00

Shan Weijian

Beneficial Owner

292,000

May 20, 2009

HK$4.30

HK$1.00

379,000

(Personal)

292,000

July 19, 2010

HK$5.92

HK$1.00

Cheung Wing Lam, Linus

Beneficial Owner
(Personal)

204,000

July 19, 2010

HK$5.92

HK$1.00

400,000

Wong Wai Ming ⁽⁷⁾

Beneficial Owner
(Personal)

390,000

Li Qiuhong ^(8)(12)

Beneficial Owner

204,000

July 9, 2008

HK$6.18

HK$1.00

584,000

(Personal)

204,000

May 20, 2009

HK$4.30

HK$1.00

204,000

July 19, 2010

HK$5.92

HK$1.00

280,000

February 14, 2012

HK$6.35

HK$1.00

Lo Wing Yan,

Beneficial Owner

88,000

May 20, 2009

HK$4.30

HK$1.00

611,000

William ^(9)(12)

(Personal)

262,000

July 19, 2010

HK$5.92

HK$1.00

280,000

February 14, 2012

HK$6.35

HK$1.00

Ye Fengping ^(10)(12)

Beneficial Owner

132,000

July 9, 2008

HK$6.18

HK$1.00

349,000

(Personal)

204,000

May 20, 2009

HK$4.30

HK$1.00

136,000

June 22, 2010

HK$15.42

HK$1.00

262,000

July 19, 2010

HK$5.92

HK$1.00

280,000

February 14, 2012

HK$6.35

HK$1.00

Liu Yunjie ^(11)(12)

Beneficial Owner

292,000

May 20, 2009

HK$4.30

HK$1.00

81,000

(Personal)

292,000

July 19, 2010

HK$5.92

HK$1.00


(1)		Ms. Li was appointed as Executive Director of our company on April 1, 2006.

(2)		Mr. Yang was appointed as Executive Director and Vice President of our company on April 1, 2006.

(3)		Mr. Li was appointed as Executive Director and Vice President of our company on April 1, 2006.

(4)		Mr. Li was appointed as Executive Director and Vice President of our company on April 1, 2006.

(5)		Mr. Zhang was appointed as Executive Director and Vice President of our company on April 1, 2006.

(6)		Mr. Lu was appointed as Non-Executive Director of our company on April 1, 2006.

(7)		Mr. Wong was appointed as Independent Non-Executive Director of our company on January 19, 2006.

(8)		Mr. Li was appointed as Executive Director and Vice President of our company on July 19, 2005 and resigned as Executive Director of our company on April 1, 2006.

(9)		Mr. Lo resigned as Executive Director and Vice President of our company on April 1, 2006.


(10)		Mr. Ye resigned as Executive Director and Vice President of our company on April 1, 2006.

(11)		Mr. Liu resigned as Non-Executive Director of our company on April 1, 2006.

(12)		For the directors who resigned during the year 2006, the numbers of options indicated represent the numbers of options held by those respective directors as of their dates of resignation.

Options granted under the pre-global offering share option scheme

Capacity and

Number of Shares

Consideration

Name

Nature

Covered

Expiration Date

Exercise Price

Paid

Shang Bing

Beneficial Owner
(Personal)

204,400

June 21, 2010

HK$15.42

HK$1.00

Li Zhengmao ⁽¹⁾

Beneficial Owner
(Personal)

292,600

June 21, 2010

HK$15.42

HK$1.00

Lu Jianguo ⁽²⁾

Beneficial Owner
(Personal)

292,600

June 21, 2010

HK$15.42

HK$1.00

Li Qiuhong ⁽³⁾

Beneficial Owner
(Personal)

204,400

June 21, 2010

HK$15.42

HK$1.00

Liu Yunjie ⁽⁴⁾

Beneficial Owner
(Personal)

292,600

June 21, 2010

HK$15.42

HK$1.00


(1)		Mr. Li was appointed as Executive Director and Vice President of our company on April 1, 2006.

(2)		Mr. Lu was appointed as Non-Executive Director of our company on April 1, 2006.

(3)		Mr. Li was appointed as Executive Director and Vice President of our company on July 19, 2005 and resigned as Executive Director on April 1, 2006.

(4)		Mr. Liu resigned as Non-Executive Director of our company on April 1, 2006.

Stock Incentive Schemes

We retained a compensation consulting firm to help us design stock incentive schemes that align the interests of our management and employees with those of our shareholders and link their compensation with our operating results and share performance.

Share Option Scheme. We adopted a share option scheme on June 1, 2000 and amended the scheme on May 13, 2002 and May 11, 2007, respectively. The amended scheme provides for the grant of options to our employees, including executive directors and non-executive directors. Any grant of share options to a “connected person” (as defined in the HKSE Listing Rules) of Unicom requires approval by our independent non-executive directors, excluding any independent non-executive director who is the grantee of the option. We plan to grant options that cover a total number of ordinary shares not exceeding 10% of the total number of our issued and outstanding shares as of May 13, 2002. The option period commences on any date after the date on which an option is offered, but may not exceed 10 years from the offer date. The subscription price of a share in respect of any particular option granted under this share option scheme will be determined by our board of directors in its discretion at the grant date, which shall be no less than the higher of: (i) the nominal value of the shares; (ii) the closing price of the shares on the Hong Kong Stock Exchange on the grant date in respect of such option; and (iii) the average closing price of the shares on the Hong Kong Stock Exchange for the five trading days immediately preceding the grant date. As of May 31, 2007, 272,182,800 options granted by us were outstanding and held by 12 directors and approximately 2,900 of our employees. As of May 31, 2007, 26,385,200 options with an exercise price of HK$6.18, 82,022,000 options with an exercise price of HK$4.3, 366,000 options with an exercise price of HK$4.65 and 35,418,000 options with an exercise price of HK$5.92 had been exercised.

Pre-Global Offering Share Option Scheme. We also adopted a pre-global offering share option scheme on June 1, 2000 and amended the scheme on May 13, 2002 and May 11, 2007, respectively. As of May 31, 2007, 24,178,000 options granted by us were outstanding and held by 3 directors and approximately 250 of our employees. We do not expect to grant further options under this scheme. The amended terms of the pre-global offering share option scheme are substantially the same as the share option scheme, except for the following:

	•		The subscription price of a share in respect of any particular option granted under the pre-global offering share option scheme is HK$15.42, the offer price in the Hong Kong public offering portion of our initial public offering, excluding brokerage fees and transaction levy.

	•		The period during which an option may be exercised commences two years from the date of grant and ends 10 years from June 22, 2000.

As of May 31, 2007, no options granted under this scheme had been exercised.

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

As of May 31, 2007, our controlling shareholder, Unicom Group, through its 17.90% direct interest in Unicom BVI, and its majority-owned subsidiary, China United Telecommunications Corporation Limited, which in turn holds 82.10% of Unicom BVI, beneficially owned approximately 6,670 million shares of Unicom, or 52.53% of our total outstanding shares. See “A. History and Development of the Company” under Item 4 above. Unicom Group’s shares are held by the SASAC and a group of thirteen companies, most of which are state-owned enterprises in China. Shares beneficially owned by Unicom Group do not carry voting rights different from our other issued shares.

As of May 31, 2007, most of our record shareholders were located outside of the United States. In addition, as of May 31, 2007, there were approximately 40 million ADSs outstanding, each representing 10 shares and together representing 3.2% of our total outstanding shares or 6.6% of our total outstanding shares not beneficially owned by our controlling shareholder.

B. Related Party Transactions

Principal transactions between us and our controlling shareholder, Unicom Group, include the following categories:

	•		leasing of CDMA network capacity by us from Unicom Group and related interconnection and roaming arrangements;

	•		provision of ongoing telecommunications and ancillary services and premises;

	•		agreements relating to the acquisition of Unicom International from Unicom Group;

	•		agreements relating to the acquisition of Unicom New World from Unicom Group and the sale of Guoxin Paging to Unicom Group;

	•		agreements relating to the restructuring in connection with the acquisition of Unicom New Century from Unicom Group; and

	•		agreements relating to the restructuring in connection with our initial public offering.

Leasing of CDMA Network Capacity

Old CDMA Leases

Under the Old CDMA Leases, Unicom New Horizon agreed to lease capacity on its CDMA network to each of CUCL, Unicom New Century and Unicom New World in their respective cellular service areas. In 2004, our total lease fee payment under the Old CDMA Leases was RMB6.59 billion.

Under the Old CDMA Leases, Unicom New Horizon agreed to plan, finance and construct the CDMA network, including the procurement of all equipment, and to ensure that the CDMA network was constructed in accordance with the detailed specifications and timetable agreed to between Unicom New Horizon and us. All payments, costs, expenses and amounts paid or incurred by Unicom New Horizon that were directly attributable to the construction of the CDMA network form the total network construction cost, which was used in calculating the lease fee payable by us, including:

	•		construction, installation and equipment procurement costs and expenses,

	•		survey and design costs,

	•		investment in technology, software and other intangible assets,

	•		insurance premiums and capitalized interest on loans,

	•		any taxes levied or paid in respect of the procurement of equipment and the construction of the CDMA network, including import taxes and custom duties, and

	•		all costs incurred in relation to any upgrade of technology.

The Old CDMA Leases required that the network construction cost be verified and appropriate documentation provided to us or our auditors for verification. The lease fee was calculated so as to enable Unicom New Horizon to recover its total network construction cost within seven years, together with an internal rate of return of 8%.

We were responsible for the operation, management and maintenance of the CDMA network in accordance with the relevant requirements of the Old CDMA Leases and had the exclusive right to provide CDMA services in our cellular service areas. All revenue, including airtime charges, monthly subscription fees, interconnection charges, income from sales of UIM cards and handsets and other income generated from or in connection with the operation of the CDMA network belonged to us. All costs of operating and managing the CDMA network and all maintenance costs of a non-capital nature should be borne by us except that constructed capacity-related costs (i.e. those costs of operating and managing the CDMA network which related directly to the constructed capacity on the CDMA network, including the rental fees for stations and base stations and related expenses including water and electricity charges, heating charges and fuel charges for the relevant equipment etc., as well as maintenance costs of a non-capital nature) should be borne by us only to the extent of such part of the costs that corresponded to the proportion of capacity actually leased under the Old CDMA Leases. Such part of the Constructed Capacity Related Costs that corresponded to the proportion of capacity not actually leased under the Old CDMA Leases should be borne by Unicom New Horizon.

In addition to the capacity that we agreed to lease in the first term, subject to giving not less than 180 days’ prior notice to Unicom New Horizon, we could request to lease additional capacity. Unicom New Horizon was required to ensure that all capacity which we had so requested was supplied by the due date of delivery of the capacity, provided that, unless otherwise agreed, Unicom New Horizon would not be obliged to expand the CDMA network beyond a certain limit. We could not reduce the amount of capacity leased during the initial one-year lease term. However, subject to providing not less than 180 days’ prior written notice to or with the prior written consent of Unicom New Horizon, we could reduce the amount of

capacity leased for any additional lease term, provided that we must lease all capacity which we had requested or otherwise committed to lease for at least one year following the date of delivery or renewal of the lease of such capacity.

Subject to certain exceptions, including delay caused by a force majeure event, a material breach of the Old CDMA Leases by us or compliance with applicable laws and regulations, if any capacity was not ready for operational service by the relevant delivery date, then Unicom New Horizon should be liable to provide a delay discount to us, equal to the daily lease fee in respect of the relevant capacity multiplied by the number of days of delay, which should be credited against future lease fee payments.

We had the option to purchase the CDMA network, which could be exercised at any time during the initial lease term or any additional lease term of the lease and within one year thereafter. The acquisition price would be negotiated between Unicom New Horizon and us, based on the appraised value of the CDMA network determined by an independent assets appraiser in accordance with applicable PRC laws and regulations and taking into account prevailing market conditions and other factors, provided that it would not exceed such price as would, taking into account all lease fee payments made by us to Unicom New Horizon and all delay discounts of lease fee, enable Unicom New Horizon to recover its total network construction cost, together with an internal rate of return on its investment of 8%. The exercise of the purchase option would be subject to the relevant laws, regulations and listing rules in Hong Kong and the PRC, particularly those governing connected transactions. Title to the CDMA network assets would remain vested in Unicom New Horizon until the CDMA network assets were transferred to us following exercise of the purchase option.

In consideration of our entering into the Old CDMA Leases, Unicom Group unconditionally and irrevocably guaranteed the due and punctual performance by Unicom New Horizon of its obligations under the Old CDMA Leases. Unicom Group also agreed to indemnify us for any loss suffered as a result of any defect in any of the equipment or any loss caused by any negligence, default, act or omission of Unicom New Horizon or Unicom Group under the Old CDMA Leases or in connection with the CDMA network. The aggregate liability of Unicom Group for any claim should not exceed the total amount of lease fee payments made to Unicom New Horizon and, where the purchase option had been exercised, the total purchase price paid for the CDMA network. The guarantee and indemnity provided by Unicom Group under the Old CDMA Leases would continue in force until the expiration of the relevant Old CDMA Lease.

We could terminate the Old CDMA Leases by not less than 180 days’ prior written notice, with effect from the end of any additional term. In addition, Unicom Group or we could terminate an Old CDMA Lease if the other committed any continuing or material breach of the relevant Old CDMA Leases. Neither Unicom Group nor Unicom New Horizon was otherwise permitted to terminate the lease.

2005 CDMA Lease

On March 24, 2005, we entered into a 2005 CDMA lease agreement, or 2005 CDMA Lease, with Unicom Group and its subsidiary Unicom New Horizon to replace the Old CDMA Lease. The 2005 CDMA Lease has an initial term of two years commencing January 1, 2005 and may be renewed at our option. The length of each renewed term shall be agreed by all parties to the 2005 CDMA Lease.

Under the 2005 CDMA Lease, Unicom New Horizon has agreed to lease all constructed capacity of its CDMA network to us and the lease fee for the CDMA network will be as follows:

	•		in 2005, 29% of the audited annual service revenue generated by our CDMA business; and

	•		in 2006, 30% of the audited annual service revenue generated by our CDMA business;

provided that the annual lease fee may not be less than a certain minimum level. The minimum lease fee for 2005 was 90% of the total amount of lease fee paid by us to Unicom New Horizon pursuant to the Old CDMA Leases for 2004. The minimum lease fee for 2006 was 90% of the total amount of lease fee paid by us to Unicom New Horizon pursuant to the 2005 CDMA Lease for 2005. The lease fee arrangements for any renewed term of the 2005 CDMA Lease would be subject to negotiations among the parties to the 2005 CDMA Lease.

Subject to certain exceptions, including delay caused by a force majeure event (including natural disasters, national emergencies, civil disturbances, riots, acts of terrorism, industrial disputes and other similar events beyond the control of the parties), a material breach of the 2005 CDMA Lease by us or compliance with applicable laws and regulations, if Unicom New Horizon fails to provide any capacity of its CDMA network which affects the provision of services by us, Unicom New Horizon shall be liable to provide a discount for delay to us, calculated pursuant to the following formula:

Discount for delay

Number of our CDMA

delay period

ARPU of CDMA

subscribers affected by

(number of days)

subscribers

the delay

the number of days in

the relevant month

In the above formula, “number of our CDMA subscribers affected by the delay” shall be confirmed by us on the basis of substantive evidence; “ARPU of CDMA subscribers” shall be the average monthly ARPU figure of the CDMA subscribers in the relevant areas for the three months immediately prior to the delay, as calculated and confirmed by us.

The proportion of the constructed capacity related costs to be borne by us shall be calculated by reference to the actual amount of capacity leased by us, which is calculated based on the actual number of our cumulative CDMA subscribers at the end of the month prior to the occurrence of the costs divided by 90%, as a percentage of the total amount of capacity (expressed in terms of the number of subscribers) constructed on the CDMA network.

The other key terms of the 2005 CDMA Lease, including exclusive operating rights, purchase option, guarantee and indemnity, are substantially similar to those of the Old CDMA Leases.

2006 CDMA Lease

On October 26, 2006, we entered into a new CDMA lease agreement, or 2006 CDMA Lease, with Unicom Group and its subsidiary Unicom New Horizon to replace the 2005 CDMA Lease, which was due to expire by the end of 2006. The 2006 CDMA Lease has an initial term of one year commencing on January 1, 2007 and may be extended until December 31, 2008 at our option by giving Unicom New Horizon not less than 180 days’ prior written notice. The 2006 CDMA Lease may be renewed at our option. The length, the lease fee and the minimum annual lease fee of each renewed term shall be agreed upon by all parties to the 2006 CDMA Lease. We currently intend to extend the term of the 2006 CDMA Lease until December 31, 2008.

Under the 2006 CDMA Lease, Unicom New Horizon has agreed to lease all constructed capacity of its CDMA network to us, and the lease fee for the CDMA network will be as follows:

•

31% of the audited service revenue generated by our CDMA business for each of the years 2007 and 2008; or

•

30% of the audited service revenue generated by our CDMA business for the year 2007 or 2008, where our audited CDMA income before taxation for the relevant year is less than our audited CDMA income before taxation for the year 2006;

provided that the annual lease fee may not be less than a certain minimum level. The minimum lease fee for 2007 shall be 90% of the total amount of lease fee paid by us to Unicom New Horizon pursuant to the 2005 CDMA Leases for 2006. The minimum lease fee for 2008 shall be 90% of the total amount of lease fee paid by us to Unicom New Horizon pursuant to the 2006 CDMA Lease for 2007. The lease fee arrangements for any renewed term of the 2006 CDMA Lease will be subject to negotiations among the parties to the 2006 CDMA Lease. In 2006, our total lease fee payment under the 2005 CDMA Lease was RMB8.08 billion.

Subject to certain exceptions, including delay caused by a force majeure event (including natural disasters, national emergencies, civil disturbances, riots, acts of terrorism, industrial disputes and other similar events beyond the control of the parties), a material breach of the 2006 CDMA Lease by us or compliance with applicable laws and regulations, if Unicom New Horizon fails to provide any capacity of its CDMA network which affects the provision of services by us, Unicom New Horizon shall be liable to provide a discount for delay to us, calculated pursuant to the following formula:

Discount for delay

Number of our CDMA

delay period

ARPU of CDMA

subscribers affected by

(number of days)

subscribers

the delay

the number of days in

the relevant month

In the above formula, the “number of our CDMA subscribers affected by the delay” shall be confirmed by us on the basis of substantive evidence; “ARPU of CDMA subscribers” shall be the average monthly ARPU figure of the CDMA subscribers in the relevant areas for the three months immediately prior to the delay, as calculated and confirmed by us.

The proportion of the constructed capacity-related costs to be borne by us shall be calculated by referencing to the actual amount of capacity leased by us, which is calculated based on the actual number of our cumulative CDMA subscribers at the end of the month prior to the occurrence of the costs divided by 90%, as a percentage of the total amount of capacity (expressed in terms of the number of subscribers) constructed on the CDMA network.

The other key terms of the 2006 CDMA Lease, including exclusive operating rights, purchase option, guarantee and indemnity, are substantially similar to those of the 2005 CDMA Leases.

Provision of Ongoing Telecommunications and Ancillary Services and Premises

We had entered into a number of service arrangements with Unicom Group and/or its subsidiaries with respect to provision of ongoing telecommunications and ancillary services between Unicom Group and us, including supply of international telecommunications network gateway services, supply of various telephone cards, supply of equipment procurement services, supply of value-added services to cellular subscribers, supply of customer services, supply of agency services, leasing of transmission line capacity and interconnection and roaming arrangements, as well as provision of premises.

On March 24, 2005, we and Unicom Group entered into a comprehensive services agreement, or the 2005 Comprehensive Services Agreement, a comprehensive operator services agreement, or the 2005 Comprehensive Operator Services Agreement, and a premise leasing agreement, or the 2005 Guoxin Premises Leasing Agreement, to replace the previous service arrangements between Unicom Group and us.

Each of the 2005 Comprehensive Services Agreement, the 2005 Comprehensive Operator Services Agreement and the 2005 Guoxin Premises Leasing Agreement has an initial term of two years commencing on January 1, 2005 and is renewable for further two-year terms at our option.

On October 26, 2006, we and Unicom Group entered into a new comprehensive services agreement, or the Current Comprehensive Services Agreement, to replace the 2005 Comprehensive Services Agreement, the 2005 Comprehensive Operator Services Agreement and the 2005 Guoxin Premises Leasing Agreement. The Current Comprehensive Services Agreement has an initial term of three years from January 1, 2007 and is renewable for three-year terms at our option. In 2006, our total payment under the 2005 Comprehensive Services Agreement was RMB1.10 billion.

Supply of International Telecommunications Network Gateway Services

Unicom Group provides us with access to international connections for our international long distance service through its international telecommunications network gateways. CUCL and Unicom Group previously entered into a services agreement, dated May 25, 2000, under which Unicom Group agreed to supply international telecommunications network gateway services to us. Unicom Group has undertaken not to supply international telecommunications network gateway services to third parties. The charges for these services were based on Unicom Group’s cost of operation and maintenance of the international telecommunications network gateway facilities, including depreciation, plus a margin of 10% over cost. We retained all revenues generated by our international long distance service.

The Current Comprehensive Services Agreement, which replaced the service agreement entered in 2000, contains similar terms with respect to the supply of international telecommunications network gateway services.

Supply of Telephone Cards

Each of CUCL, Unicom New Century and Unicom New World previously entered into a services agreement with Unicom Group, dated May 25, 2000, November 20, 2002 and November 20, 2003, respectively, to provide for a telephone cards supply arrangement under which Unicom Group agreed through its subsidiary, Unicom Xingye, to supply various kinds of telephone cards, including SIM cards, UIM cards, IP telephony cards and rechargeable calling cards, to us. Charges for the supply of these cards were based on the actual cost incurred by Unicom Xingye in supplying the cards plus a margin over cost to be agreed upon from time to time, but in any case not to exceed 20% of the cost, subject to specified volume discounts. Under these three services agreements, prices and volumes would be reviewed by the parties on an annual basis.

The Current Comprehensive Services Agreement, which replaced the previous telephone card supply arrangements, contains similar terms with respect to the supply of telephone cards.

Supply of Equipment Procurement Services

Prior to the restructuring in connection with our initial public offering, Unicom Import and Export Co. Ltd., a 95.0% direct subsidiary of Unicom Group, handled most procurement of foreign and domestic telecommunications equipment and other materials required for construction of Unicom Group’s networks. Each of CUCL, Unicom New Century and Unicom New World previously entered into a services agreement with Unicom Group, dated May 25, 2000, November 20, 2002 and November 20, 2003, respectively, to provide for this procurement service arrangement under which we were allowed to continue to use Unicom Group’s procuring service at the rate of:

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	•		0.7% of the contract value in the case of imported equipment, or

	•		0.5% of the contract value in the case of domestic equipment.

These three agreements were amended on November 22, 2004 so that with effect from July 1, 2004, the above rates were lowered as follows:

	•		0.55% of the contract value of those contracts under US$30 million (including US$30 million) and 0.35% of the contract value of those procurement contracts over US$30 million, in the case of imported equipment, or

	•		0.25% of the contract value of those contracts under RMB200 million (including RMB 200 million) and 0.15% of the contract value of those contracts over RMB 200 million, in the case of domestic equipment.

In addition, pursuant to this amendment on November 22, 2004, Unicom Group agreed to indemnify us for any loss caused by any negligence, default, act or omission of Unicom Group or Unicom Import and Export Co. Ltd. up to an amount equal to the total amount of agency services fees paid to Unicom Group under the three agreements.

Under the Current Comprehensive Services Agreement, Unicom Group agreed to provide us comprehensive procurement services at the same rates as those applied with effect from July 1, 2004 pursuant to the November 22, 2004 amendment mentioned above. Unicom Group has also agreed to continue to indemnify us for any loss caused by any negligence, default, act or omission of Unicom Group or Unicom Import and Export Co. Ltd. up to an amount equal to the total amount of agency services fees paid to Unicom Group under the Current Comprehensive Services Agreement.

Interconnection Arrangements

Our various telecommunications networks interconnect with various telecommunications networks of Unicom Group. CUCL previously entered into two services agreements with Unicom Group, dated May 25, 2000 and November 22, 2001, respectively, and each of Unicom New Century and Unicom New World previously entered into a services agreement with Unicom Group, dated November 20, 2002 and November 20, 2003, respectively. These four services agreements provided for our interconnection arrangements with Unicom Group, under which interconnection settlement between Unicom Group’s networks and our networks was based on relevant standards established from time to time by the MII. However, in the case of calls between cellular subscribers of different networks in different provinces, settlement was based on either the relevant standards established by the MII or a cost-based internal settlement arrangement applied by Unicom Group prior to the restructuring in connection with our initial public offering, whichever is more favorable to us.

Under the Current Comprehensive Services Agreement, interconnection settlements between Unicom Group’s networks and our networks are as follows:

With respect to cellular calls between different provinces, settlement between the cellular networks of Unicom Group and us will be made by one of the following two methods that is more favorable to us:

•

the cellular network from which the outgoing calls originate and the cellular network which receives the incoming calls will each retain 4% of the long distance call fee incurred and the remaining 92% of the long distance call fee will be credited to us; or

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•

pursuant to the settlement standard stipulated in the Notice Concerning the Issue of the Measures on Settlement of Interconnection between Public Telecommunications Networks and Sharing of Relaying Fees (Xin Bu Dian [ 2003 ] No. 454) promulgated by the MII on October 28, 2003, the cellular network from which the outgoing calls originate and the cellular network which receives the incoming calls will each retain RMB0.06 from the long distance call fee. The remaining long distance call fee will be credited to us.

For other interconnection settlements between the networks of Unicom Group and us, both parties agree to conduct settlement in accordance with the relevant provisions in the Notice Concerning the Issue of the Measures on Settlement of Interconnection between Public Telecommunications Networks and Sharing of Relaying Fees (Xin Bu Dian [2003] No. 454) promulgated by the MII on October 28, 2003 (as amended from time to time).

Roaming Arrangements

We and Unicom Group provide roaming services to each other. In addition, we make our long distance network available to Unicom Group in its implementation of its roaming arrangements with other operators. CUCL previously entered into two services agreements with Unicom Group, dated May 25, 2000 and November 22, 2001, respectively, and each of Unicom New Century and Unicom New World previously entered into a services agreement with Unicom Group, dated November 20, 2002 and November 20, 2003, respectively. These four services agreements provided for our roaming arrangements with Unicom Group, under which charges for these roaming services between us and Unicom Group were based on our respective internal costs of providing these services, and would be on no less favorable terms than those available to any third party. We received 50% of Unicom Group’s international roaming revenue from third party international operators for calls using our long distance network.

Under the Current Comprehensive Services Agreement, the roaming fee arrangements between Unicom Group and us are as follows:

•

The cellular subscribers using roaming services will pay roaming fees at the agreed rate of RMB0.60 per minute of roaming usage for both incoming and outgoing calls based on MII guidelines.

	§		If our cellular subscribers roam in the service areas of Unicom Group, we will be entitled to receive the roaming fees, which will be apportioned in the following way: (i) RMB0.40 per minute (the rate for local call charges under MII guidelines) will be paid to Unicom Group; and (ii) the remaining RMB0.20 per minute will be withheld by us; and

	§		If the cellular subscribers of Unicom Group roam in our service areas, Unicom Group will be entitled to receive the roaming fees, which will be apportioned in the following way: (i) RMB0.56 per minute will be paid to us; and (ii) RMB0.04 per minute will be withheld by Unicom Group; and

	§		If our cellular business expands to cover all regions throughout the PRC, the arrangements set out above will be terminated automatically; and

•

If the network of a third party cellular network operator is made available to the cellular subscribers of Unicom Group pursuant to the international roaming arrangements of Unicom Group, or if the network of Unicom Group is made available to the subscribers of

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any third party cellular network operator pursuant to such arrangements, we will receive 50% of all roaming revenue to be received under such international roaming arrangements.

Leasing of Transmission Line Capacity

Unicom Group leases fixed-line transmission capacity from CUCL. CUCL previously entered into a services agreement with Unicom Group, dated May 25, 2000, to provide for this transmission line capacity leasing arrangement under which lease charges were based on tariffs stipulated by the MII from time to time less a discount of up to 10%. The discount given by CUCL to Unicom Group must not be more than what CUCL offered to other third party lessees for a similar lease. When new tariffs were adopted by the MII, the discount rate would be reviewed.

The Current Comprehensive Services Agreement contains similar terms with respect to the leasing of transmission line capacity by us to Unicom Group.

Supply of Operator-based Value-added Services to Cellular Subscriber

Prior to the sale of Guoxin Paging to Unicom Group, it provided operator-based value-added services to our cellular subscribers through its paging network, equipment and operators. Such services include the “Unicom Assistant” services. Following the sale of Guoxin Paging to Unicom Group at the end of 2003, Unicom Group has agreed to provide (through the successor company to Guoxin Paging) to us cellular subscriber value-added services pursuant to a previous comprehensive operator services agreement dated November 20, 2003. The various local branches of Guoxin Paging and us would agree on the proportion for sharing the revenue derived and actually received by us from such value-added services, provided that the agreed-upon proportion for Guoxin Paging may not be higher than the average agreed-upon proportion for independent value-added telecommunications content providers who provided value-added communications content to us in the same region. The revenue sharing proportions would be adjusted annually.

Under the 2005 Comprehensive Operator Services Agreement, we will retain 40% of the revenue derived and actually received by us from value-added services provided to our subscribers by Unicom Group (through the successor company to Guoxin Paging) and allocate 60% of such revenue to Guoxin Paging, on the condition that such proportion for Guoxin Paging may not be higher than the average agreed-upon proportion for independent value-added telecommunications content providers who provide value-added communications content to us in the same region. The Current Comprehensive Services Agreement contains similar terms with respect to supply of cellular subscriber value-added services as the 2005 Comprehensive Services Agreement.

Supply of Value-added Services for Cellular Subscribers

Under the Current Comprehensive Services Agreement, Unicom Group or its subsidiaries will provide our cellular subscribers with various value-added services through its cellular communication network and data platform. Pursuant to the Current Comprehensive Services Agreement, we retain a portion of the revenue generated from the value-added services provided to our subscribers and allocate a portion of such revenue to Unicom Group for settlement, on the condition that such proportion allocated to Unicom Group shall not be higher than the average proportion for independent value-added telecommunications content providers who provide similar value-added telecommunications content to us in the same region. The percentage of revenue to be allocated to Unicom Group by us varies depending on the types of value-added services provided by Unicom Group.

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Supply of Customer Services

Pursuant to a previous comprehensive operator services agreement dated November 20, 2003, Unicom Group or its subsidiaries has agreed to provide to us customer services. These customer services included business inquiries, tariff inquiries, account maintenance, complaints handling, customer interviews and subscriber retention. Service fees payable by us to Unicom Group or its subsidiaries were calculated on the basis of the costs of the customer service plus a profit margin of no more than 10%. The costs of the customer service were the costs per operator seat multiplied by the number of effectively operating operator seats. The cost per operator seat in economically developed areas, such as Beijing and Shanghai, was the actual cost, i.e., actual wages, administration expenses, operation and maintenance expenses, depreciation of equipment and leasing fees for premises attributable to the customer service in such area for the previous year. The cost per operator seat in other area was agreed upon between the local branches of Guoxin Paging and us, subject to our final confirmation, provided that such cost could not exceed the nationwide (other than Beijing and Shanghai) weighted average of such costs plus 10%. Unicom Group would notify us the number of effectively operating operator seats of each month within 10 days after the end of that month, and then we would confirm that number within five business days based on criteria set forth in the relevant MII regulations.

Under the 2005 Comprehensive Operator Services Agreement, the cost per operator seat in economically developed areas such as Beijing and Shanghai remains the actual cost per operator seat, while the cost per operator seat in an area other than economically developed areas will be the lower of the actual cost per operator seat in that area and the nationwide (excluding Beijing and Shanghai) average of actual cost per operator plus 10%. Other than this, the 2005 Comprehensive Services Agreement contains similar terms with respect to the supply of customer services. The Current Comprehensive Services Agreement contains similar terms with respect to the supply of customer services as the 2005 Comprehensive Services Agreement, except Guangdong has been added as one of the economically developed areas in determining the cost per operator seat.

Supply of Agency Services

Pursuant to a previous comprehensive operator services agreement dated November 20, 2003, Unicom Group agreed to provide (through Guoxin Paging) to us subscriber development services, including by telephone or through other channels utilizing Guoxin Paging’s paging network, equipment and operators. Agency fees payable by us to Unicom Group or Guoxin Paging could not exceed the average of agency fees payable to any third party agent providing subscriber development services to us in the same region.

The 2005 Comprehensive Operator Services Agreement and the Current Comprehensive Services Agreement contains similar terms with respect to the supply of agency services by Unicom Group (or its subsidiaries).

Mutual Provision of Premises

Unicom Group and CUCL provide to each other premises from time to time pursuant to the services agreement between Unicom Group and CUCL, dated May 25, 2000. Unicom Group also provided premises to Unicom New Century and Unicom New World pursuant to services agreements with each of Unicom New Century and Unicom New World, dated November 20, 2002 and November 20, 2003, respectively. Other than premises leased from third parties, the rental rates in each case were based on the lower of depreciation costs and market prices for similar premises in that locality, but CUCL could charge Unicom Group market rates for premises leased to Unicom Group. In cases where the premises were leased from a third party, the rental was the amount payable in the head lease. In the case of shared premises, the

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price was split in proportion to the respective areas occupied by the parties. In connection with our provision of premises to Guoxin Paging, which was effective from January 1, 2004, the rental was based on the higher of depreciation costs and market prices for similar premises in each locality. The 2005 Guoxin Premises Leasing Agreement has been replaced by the Current Comprehensive Services Agreement.

The terms in the 2005 Comprehensive Services Agreement and the Current Comprehensive Services Agreement with respect to mutual provision of premises between Unicom Group or its subsidiaries and us are similar to those in the previous agreements.

Engineering design and technical services

China Information Technology Designing & Consulting Institute, or CITDCI, a wholly-owned subsidiary of Unicom Group, provides engineering design and technical services to us pursuant to the Current Comprehensive Services Agreement. We will select the providers of engineering design services and technical services by way of public tender. Unicom Group will ensure that CITDCI possesses qualifications and conditions which are not inferior to those of an independent third party, and participates in the tendering process equally with any independent third parties. The service standard for engineering design and technical services provided by CITDCI to us should not be less favorable than those similar services provided by an independent third party to us. The pricing standard for the engineering design and technical services will be implemented with reference to but should not be higher than those set out in the applicable regulations and other relevant national standards. In addition, such pricing standard shall not be higher than those adopted by an independent third party providing similar services in the same industry.

Procurement of CDMA Handsets

Pursuant to a framework agreement for procurement of CDMA handsets dated December 19, 2006, the Guizhou branch of Unicom Huasheng sells CDMA handsets to the Guizhou branch of Unicom Group. The selling prices are determined based on factors including the cost of the CDMA handsets acquired by Unicom Huasheng and the cost in distributing CDMA handsets to recipients. In 2006, the total sales from Unicom Huasheng to the Guizhou branch of Unicom Group under this framework agreement was RMB 98.5 million.

Agreements relating to the Acquisition of Unicom International from Unicom Group

In relation to the acquisition by us of Unicom International from Unicom Group, we and China Unicom (Hong Kong) Group Limited, which is a indirectly wholly-owned subsidiary of Unicom Group, entered into a conditional sale and purchase agreement, dated July 28, 2004. This agreement includes the following terms:

	•		China Unicom (Hong Kong) Group Limited’s agreement to transfer all of its equity interest in Unicom International to us;

	•		our agreement to pay China Unicom (Hong Kong) Group Limited a cash consideration in the amount of HK$37,159,995.77; and

	•		warranties given by China Unicom (Hong Kong) Group Limited to us in relation to Unicom International.

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Agreements relating to the Acquisition of Unicom New World from Unicom Group and the Sale of Guoxin Paging to Unicom Group

The Reorganization Agreement

In relation to the restructuring in connection with the acquisition by us of Unicom New World from Unicom Group, Unicom Group entered into a reorganization agreement with Unicom New World, dated November 4, 2003. This agreement includes the following terms:

	•		Unicom Group’s agreement to transfer to Unicom New World the assets and liabilities attributable to the businesses as described under “A. History and Development of the Company - Acquisitions of Unicom New Century and Unicom New World and the Sale of Guoxin Paging” under Item 4;

	•		mutual warranties and indemnities given by Unicom Group and Unicom New World in relation to the assets and liabilities transferred to Unicom New World and in relation to the restructuring; and

	•		undertakings by Unicom Group in favor of Unicom New World, including undertakings:

	§		to hold and maintain all licenses received from the MII in connection with any of the transferred businesses for the benefit of Unicom New World, and to allocate spectrum and to provide other resources to Unicom New World;

	§		subject to applicable Chinese laws and regulations in effect at the relevant time, to take all actions necessary to obtain, maintain, renew and otherwise extend to or for the benefit of Unicom New World such governmental or regulatory licenses, consents, permits or other approvals as Unicom New World may require to continue to operate its businesses; and

	§		not to engage in any business which competes with our businesses except for the existing competing businesses of Unicom Group.

Conditional Sale and Purchase Agreement with respect to Unicom New World

In relation to the acquisition by us of Unicom New World from Unicom Group, we and Unicom BVI entered into a conditional sale and purchase agreement, dated November 20, 2003. This agreement includes the following terms:

	•		Unicom BVI’s agreement to transfer all of its equity interest in Unicom New World (BVI) Limited, which holds 100% of the equity interest in Unicom New World, to us;

	•		our agreement to pay Unicom BVI a cash consideration in the amount of HK$3,014,886,000 (approximately RMB3.2 billion); and

	•		warranties given by Unicom BVI to us in relation to Unicom New World.

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Conditional Sale and Purchase Agreement with respect to Guoxin Paging

In relation to the sale by us of Guoxin Paging to Unicom Group, CUCL and the A Share Company entered into a conditional sale and purchase agreement, dated November 20, 2003. This agreement includes the following terms:

	•		CUCL’s agreement to sell to the A Share Company, and the A Share Company’s agreement to acquire from CUCL, all of CUCL’s equity interest in Guoxin Paging;

	•		the A Share Company’s agreement to pay CUCL a cash consideration in the amount of HK$2,590,917,656 (approximately RMB2.75 billion); and

	•		warranties given by CUCL to the A Share Company in relation to Guoxin Paging.

Agreements relating to the Restructuring in connection with Acquisition of Unicom New Century from Unicom Group

The Reorganization Agreement

In relation to the restructuring in connection with the acquisition by us of Unicom New Century from Unicom Group, Unicom Group entered into a reorganization agreement with Unicom New Century, dated November 18, 2002. This agreement includes the following terms:

	•		Unicom Group’s agreement to transfer to Unicom New Century the assets and liabilities attributable to the businesses as described in “A. History and Development of the Company - Acquisitions of Unicom New Century and Unicom New World and the Sale of Guoxin Paging” under Item 4;

	•		mutual warranties and indemnities given by Unicom Group and Unicom New Century in relation to the assets and liabilities transferred to Unicom New Century and in relation to the restructuring; and

	•		undertakings by Unicom Group in favor of Unicom New Century, including undertakings:

	§		to hold and maintain all licenses received from the MII in connection with any of the transferred businesses for the benefit of Unicom New Century, and to allocate spectrum and to provide other resources to Unicom New Century;

	§		subject to applicable Chinese laws and regulations in effect at the relevant time, to take all actions necessary to obtain, maintain, renew and otherwise extend to or for the benefit of Unicom New Century such governmental or regulatory licenses, consents, permits or other approvals as Unicom New Century may require to continue to operate its businesses; and

	§		not to engage in any business which competes with our businesses except for the existing competing businesses of Unicom Group.

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Conditional Sale and Purchase Agreement

In relation to the acquisition by us of Unicom New Century from Unicom Group, we and Unicom BVI entered into a conditional sale and purchase agreement, dated November 20, 2002. This agreement includes the following terms:

	•		Unicom BVI’s agreement to transfer all of its equity interest in Unicom New Century (BVI) Limited, which holds 100% of the equity interest in Unicom New Century, to us;

	•		our agreement to pay Unicom BVI a cash consideration in the amount of HK$4,523,181,304 (approximately RMB4.8 billion); and

	•		warranties given by Unicom BVI to us in relation to Unicom New Century.

Agreements Relating to the Restructuring in Connection with Our Initial Public Offering

The Reorganization Agreement

In relation to the restructuring in connection with our initial public offering, our wholly-owned subsidiary, CUCL, entered into a reorganization agreement with Unicom Group dated April 21, 2000. This agreement includes the following terms:

	•		Unicom Group’s agreement to transfer to CUCL the assets and liabilities attributable to the businesses as described in “A. History and Development of the Company - The Restructuring of Unicom Group and Our Initial Public Offering in 2000” under Item 4,

	•		mutual warranties and indemnities given by Unicom Group and CUCL in relation to the assets and liabilities transferred to CUCL and in relation to the restructuring,

	•		undertakings by Unicom Group in favor of CUCL, including, among others:

	§		to hold and maintain all licenses received from the MII in connection with any of our businesses for our benefit, and to allocate spectrum and to provide other resources to us;

	§		subject to applicable Chinese laws and regulations in effect at the relevant time, to take all actions necessary to obtain, maintain, renew and otherwise extend to or for our benefit such governmental or regulatory licenses, consents, permits or other approvals as we shall require to continue to operate our businesses;

	§		to arrange for us to participate in its international roaming arrangements;

	§		not to engage in any business which competes with our businesses except for the existing competing businesses of Unicom Group;

	§		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;

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	§		to ensure that we can continue to use premises for which title documentation cannot be obtained at this time for a period of three years following the restructuring;

	§		not to dispose of any of our shares it beneficially owns or to take or permit any other actions, including primary issuances of securities by us or CUCL, which would result in us or CUCL no longer constituting majority owned subsidiaries of Unicom Group; and

	§		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;

	•		an option granted by Unicom Group to us to acquire Unicom Group’s interest in any telecommunications interest such as Unicom Paging, Unicom Xingye and Unicom Group’s CDMA telephony license and business; and

	•		a commitment by Unicom Group that it will provide continuous financial support to us when necessary.

The Current Comprehensive Services Agreement provides that the determination of whether we or CUCL would constitute majority owned subsidiaries of the Unicom Group shall be made in accordance with the PRC Enterprise Accounting Standards as amended by the Ministry of Finance from time to time.

Equity Transfer Agreement

In relation to the restructuring in connection with our initial public offering, we, Unicom Group, China Unicom (Hong Kong) Group Limited and China Unicom (BVI) Limited entered into an equity transfer agreement, dated April 21, 2000. This agreement includes the following terms:

	•		Unicom Group’s agreement to transfer all of its equity interest in CUCL to us;

	•		our agreement to issue shares to China Unicom (BVI) Limited, China Unicom (BVI) Limited’s agreement to issue shares to China Unicom (Hong Kong) Group Limited and China Unicom (Hong Kong) Group Limited’s agreement to issue shares to Unicom Group;

	•		Unicom Group’s and our agreement that:

	§		we shall be entitled to apply in Hong Kong, Macau, Taiwan and in all places outside of China for all trademarks incorporating the word Unicom in English and Chinese and for the Unicom logo; and

	§		once these trademarks have been registered, we will sublicense these trademarks to Unicom Group, CUCL, Guoxin Paging and Guoxin Paging’s subsidiaries on a royalty-free basis; and

•

warranties and indemnities given by Unicom Group to us in relation to CUCL.

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Trademark Agreement

Unicom Group is the registered owner of the Unicom trademark in English and the trademark bearing the Unicom logo, which are registered at the People’s Republic of China State Trademark Bureau. Under a PRC trademark license agreement entered into on May 25, 2000 between Unicom Group and CUCL, CUCL and our affiliates were granted the right to use these trademarks on a royalty-free basis for an initial period of five years, renewable at the option of CUCL. Under the terms of this agreement, we and our affiliates are the exclusive licensees of these trademarks provided that Unicom Group may also license these trademarks to any of its existing or future subsidiaries. Unicom Group also agreed to license to CUCL any trademark that it registers in China in the future which incorporates the word Unicom.

CUCL entered into a service agreement with Unicom Paging on August 1, 2001. Under the terms of the agreement, both parties agreed to license their respective trademarks and logos to each other on equitable terms and free of charge.

C. Interests of Experts and Counsel

Not applicable.

Item 8. Financial Information

See Item 18, “Financial Statements.” Other than as disclosed elsewhere in this annual report, no significant change has occurred since the date of the annual financial statements.

Legal Proceedings

We are not involved in any material litigation, arbitration or administrative proceedings. So far as we are aware, we do not have any pending or threatened litigation, arbitration or administrative proceedings expected to have a material effect on our financial condition and results of operations.

Policy on Dividend Distribution

The objective of our dividend policy is to achieve a long-term, sustainable and steadily increasing dividend, with a view to maximize our shareholders’ value. The declaration and payment of future dividends will depend upon, among other things, financial condition, business prospects, future earnings, cash flow, liquidity level and cost of capital. We believe such policy will provide our shareholders with a stable return in the long term along with the growth of our company. We may only pay dividends out of our distributable profits.

Having taken into account such factors as our financial condition, cash flow position and requirements to ensure the sustainable future growth of our business, our board of directors recommended payment of a final dividend of RMB0.18 per share for the financial year ended December 31, 2006. This represents an increase of 63.6% over the annual dividend of RMB0.11 per share for the financial year ended December 31, 2005 and a dividend payout ratio of 60.8%.

Item 9. The Offer and Listing

Market Price Information

Our American depositary shares, each representing ten ordinary shares, are listed and traded on the New York Stock Exchange. Our ordinary shares are listed and traded on the Hong Kong Stock Exchange.

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The New York Stock Exchange and the Hong Kong Stock Exchange are the principal trading markets for our ADSs and ordinary shares, which are not listed on any other exchanges in or outside the United States.

The high and low closing prices of our ordinary shares on the Hong Kong Stock Exchange and of our ADSs on the New York Stock Exchange since listing are as follows:


	Price per Ordinary Share (HK$)				Price per ADS (US$)
	High		Low		High		Low
Annual:
2002		8.90		4.15		11.54		5.35
2003		8.00		3.92		10.55		5.02
2004		10.20		5.20		13.18		6.78
2005		7.20		5.65		9.19		7.30
2006		12.44		6.25		15.46		8.03

Quarterly:
First Quarter, 2005		7.20		5.65		9.19		7.30
Second Quarter, 2005		6.65		5.90		8.42		7.61
Third Quarter, 2005		6.95		6.15		9.08		7.83
Fourth Quarter, 2005		6.65		5.90		8.55		7.54
First Quarter, 2006		7.00		6.25		9.12		8.03
Second Quarter, 2006		7.80		6.40		10.33		8.10
Third Quarter, 2006		7.80		6.60		9.91		8.53
Fourth Quarter, 2006		12.44		7.76		15.46		9.84

Monthly:
January 2007		11.78		9.51		15.09		12.80
February 2007		10.78		9.90		13.82		12.22
March 2007		11.32		9.10		14.34		11.75
April 2007		11.86		11.18		15.24		14.42
May 2007		12.00		11.12		15.50		14.41
June 2007 (through June 27)		13.48		11.06		17.33		14.39

Item 10. Additional Information

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

General

Under our Memorandum of Association, we have the capacity, rights, powers, liabilities and privileges of a natural person. The following is a summary of selected provisions of our Articles of Association:

Directors

Material Interests and Voting

A director shall not vote (or be counted in the quorum) on any resolution of our board of directors in respect of any contract or arrangement or proposal in which he or any of his associates (as defined in the Hong Kong Stock Exchange Listing Rules) is, to his knowledge, materially interested, and if he shall do so,

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his vote shall not be counted (nor shall he be counted in the quorum for that resolution), but this prohibition does not apply to any contract, arrangement or other proposal for or concerning:

	•		the giving of any security or indemnity either (i) to the director or any of his associates (as defined in the Hong Kong Stock Exchange Listing Rules) in respect of money lent or obligations incurred by him or any of them at the request of or for the benefit of Unicom or any of its subsidiaries or (ii) to a third party in respect of a debt or obligation of Unicom or any of its subsidiaries for which the director or any of his associates has himself assumed responsibility or guaranteed or secured in whole or in part;

	•		an offer of shares or debentures or other securities of or by Unicom (or any other company which Unicom may promote or be interested in) where the director or any of his associates is a participant in the underwriting or sub-underwriting of the offer;

	•		any other company in which the director or any of his associates is interested only, whether directly or indirectly, as an officer or shareholder or in which the director is beneficially interested in shares of that company, provided that he, together with any of his associates, is not beneficially interested in 5% or more of (i) the issued shares of any class of such company (or of any third company through which such interest is derived) or (ii) the voting rights attached to such issued shares or securities (excluding for the purpose of calculating such 5% interest, any indirect interest of such director or any of his associates by virtue of an interest of Unicom in such company);

	•		the benefit of employees of Unicom or any of its subsidiaries including (i) the adoption, modification or operation of any employees share scheme under which the director or any of his associates may benefit or (ii) the adoption, modification or operation of a pension fund or retirement, death or disability benefits scheme which relates both to directors, their associates and employees of Unicom or any of its subsidiaries and does not provide in respect of the director or any of his associates, any privilege or advantage not generally accorded to the class of persons to which such scheme or fund relates; or

	•		any contract or arrangement in which the director or any of his associates is interested in the same manner as other holders of shares or debentures or other securities of Unicom by virtue only of his interest in shares or debentures or other securities of Unicom.

Remuneration and Pensions

The directors of Unicom are entitled to receive by way of remuneration for their services such sum as is from time to time determined by Unicom in general meeting. The directors are also entitled to be repaid all traveling, hotel and other expenses reasonably incurred by them in or about the performance of their duties as directors. The board of directors may grant special remuneration to any director who performs services which in the opinion of the board are outside the scope of the ordinary duties of a director.

The board may establish and maintain any contributory or non-contributory pension or superannuation funds for the benefit of, or give donations, gratuities, pensions, allowances or emoluments to, any persons (i) who are or were at any time in the employment or service of Unicom, or of any company which is a subsidiary of Unicom, or is allied or associated with Unicom or with any such subsidiary company, or (ii) who are or were at any time directors or officers of Unicom or of any such other company above, and holding or who have held any salaried employment or office in Unicom or such other company, and the wives, widows, families and dependants of any such persons, and may make payments for or towards the insurance of any such persons. Any director holding any such employment or office is entitled

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to participate in, and retain for his own benefit, any such donation, gratuity, pension, allowance or emolument.

Borrowing Powers

The directors may exercise all the powers of Unicom to borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of Unicom and to issue debentures, debenture stocks, bonds and other securities, whether outright or as collateral security for any debt, liability or obligation of Unicom or of any third party.

Qualification of Directors

A director of Unicom is not required to hold any qualification shares. No person is required to vacate office or be ineligible for re-election or reappointment as a director.

Rotation of Directors

At every annual general meeting, one-third of the directors for the time being, or, if the number is not three or a multiple of three, then the number nearest one-third, shall retire from office by rotation. The directors to retire in every year shall be those who have been longest in office since their last election. In addition, a director appointed by the board to fill in a casual vacancy or as an addition to the board shall retire at the next following general meeting and shall not be taken into account in determining the number of directors who are to retire by rotation at each annual general meeting. The retiring directors shall be eligible for re-election.

Rights Attached to Ordinary Shares

Voting Rights

Under the Companies Ordinance, any action to be taken by the shareholders in a general meeting requires the affirmative vote of either an ordinary or a special resolution passed at the meeting. An ordinary resolution is one passed by the majority of such shareholders as are entitled to, and do, vote in person or by proxy at a general meeting. A special resolution is one passed by not less than three-quarters of such shareholders as are entitled to, and do, vote in person or by proxy at a general meeting. Most shareholders decisions are passed by ordinary resolutions. However, the Companies Ordinance and our articles of association stipulate that certain matters may only be passed by special resolutions.

Subject to any special rights, privileges or restrictions as to voting that may from time to time be attached to any class or classes of shares, at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless a poll is required by the Listing Rules of the Hong Kong Stock Exchange or is demanded by:

	•		the chairman of the meeting,

	•		at least three shareholders present in person or by proxy and entitled to vote at the meeting,

	•		any shareholder or shareholders present in person or by proxy and representing in the aggregate not less than one-tenth of the total voting rights of all shareholders having the right to attend and vote at the meeting, or

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•

any shareholder or shareholders present in person or by proxy and holding shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

On a show of hands, every individual shareholder who is present in person and every corporate shareholder who is present by a representative duly authorized under section 115 of the Companies Ordinance has one vote.

On a poll, every shareholder present in person or, if the shareholder is a corporation, by duly authorized representative, or by proxy has one vote for every share of which he or she is the shareholder which is fully paid up or credited as fully paid up. However, no amount paid up or credited as paid up on a share in advance of calls or installments is treated for the foregoing purposes as paid up on the share.

Any action to be taken by the shareholders requires the affirmative vote of a majority of the shares at a meeting of shareholders. There are no cumulative voting rights. Accordingly, the holders of a majority of the shares voting for the election of directors can elect all the directors if they choose to do so.

Issue of Shares

Under the Companies Ordinance, our board of directors may, without prior approval of our shareholders, offer to issue new shares to existing shareholders proportionately according to their shareholdings. Our board of directors may not offer to issue new shares in any other manner without the prior approval of our shareholders in a general meeting. Any such approval given in a general meeting will continue in force until the conclusion of the following annual general meeting or the expiration of the period within which the next annual general meeting is required by law to be held or when revoked or varied by an ordinary resolution of our shareholders in a general meeting, whichever comes first. If such approval is given, the un-issued shares shall be at the disposal of our board of directors, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as our board of directors may determine.

In accordance with the Listing Rules of the Hong Kong Stock Exchange, any such approval given by the shareholders must be limited to shares with an aggregate nominal value not exceeding 20 per cent of the aggregate nominal value of our share capital in issue plus the aggregate nominal amount of share capital repurchased by us since the granting of such approval.

Dividends

Subject to the Companies Ordinance and as set out in our articles of association, our shareholders in a general meeting may from time to time by ordinary resolution declare dividends to be paid to our shareholders according to their rights and interests in the profits available for distribution, but no dividend shall be declared in excess of the amount recommended by our board of directors.

In addition to any dividends declared in a general meeting upon the recommendation of the board of directors, our board of directors may from time to time declare and pay to our shareholders such interim dividends as appear to our board of directors to be justified by our financial position. Our board of directors may also pay any fixed dividend which is payable on any of our shares on any other dates, whenever our financial position, in the opinion of our board of directors, justifies such payments.

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All dividends or bonuses unclaimed for one year after having become payable may be invested or otherwise made use of by the board for the benefit of Unicom until claimed. All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the board and will revert to Unicom.

Winding Up

If we are wound up, the surplus assets remaining after payment to all creditors shall be divided among the shareholders in proportion to the capital paid up on the shares held by them, subject to the rights of the holders of any shares which may be issued on special terms or conditions.

If we are wound up, the liquidator may, with the sanction of a special resolution, divide among our shareholders in specie or in kind the whole or any part of our assets or vest any part of our assets in trustees upon such trusts for the benefit of our shareholders or any of them as the resolution shall provide.

Miscellaneous

Shareholders are not entitled to any redemption rights, conversion rights or preemptive rights on the transfer of ordinary shares.

The transfer agent and registrar for the shares is Hong Kong Registrars Limited, 46th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

Modification of Rights

Subject to the Companies Ordinance, any of the rights from time to time attaching to any class of shares may, subject to the provisions of the Companies Ordinance, be varied or abrogated with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of shares of that class. The provisions of our Articles of Association relating to general meetings apply to such separate general meetings, except that the necessary quorum is not less than two persons holding or representing by proxy one-third in nominal value of the issued shares of that class, and that any holder of the shares of the class present in person or by proxy may demand a poll.

Annual General and Extraordinary General Meetings

We must hold in each year a general meeting as our annual general meeting in addition to any other meetings in that year. The annual general meeting is held at such time (within a period of not more than fifteen months, or such longer period as the Registrar of Companies of Hong Kong may authorize in writing, after the holding of the last preceding annual general meeting) and place as may be determined by the Directors. All other general meetings are called extraordinary general meetings. The Directors may call an extraordinary general meeting at any time or upon request in accordance with the Hong Kong Companies Ordinance.

Subject to the Companies Ordinance, an annual general meeting and a meeting called for the passing of a special resolution can be called by not less than twenty-one days’ notice in writing, and any other general meeting can be called by not less than fourteen days’ notice in writing. The notice must specify the place, date and time of meeting, and, in the case of special business, the general nature of that business.

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Limitations on Rights to Own Securities

There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities, imposed by Hong Kong law or by our Memorandum of Association or our Articles of Association.

Changes in Capital

We may exercise any powers conferred or permitted by the Companies Ordinance to purchase or otherwise acquire our own shares and warrants at any price or to give, directly or indirectly, by means of a loan, guarantee, the provision of security or otherwise, financial assistance for the purpose of or in connection with a purchase made by any person of any shares or warrants in Unicom. Repurchases of our own shares may be made either by way of a general offer to all shareholders in proportion to their shareholdings, by purchasing our shares on a stock exchange or by an off-market contract with individual shareholders. Any such purchase or other acquisition or financial assistance must be made or given in accordance with any relevant rules or regulations issued by the Hong Kong Stock Exchange or the Securities and Futures Commission of Hong Kong.

We in general meeting may, from time to time, by ordinary resolution increase our authorized share capital by the creation of new shares, and prescribe the amount of new capital and number of new shares. We may from time to time by ordinary resolution:

	•		consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;

	•		divide our shares into several classes and attach to them any preferential, deferred, qualified or special rights, privileges or conditions;

	•		cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person, and diminish the amount of our share capital by the amount of the shares so canceled;

	•		sub-divide our shares or any of them into shares of a smaller amount than is fixed by our Memorandum of Association, subject nevertheless to the provisions of the Companies Ordinance; and

	•		make provision for the issue and allotment of shares which do not carry any voting rights.

C. Material Contracts

In addition to contracts we have entered into with our controlling shareholder, Unicom Group, or its subsidiaries, as described in “B. Related Party Transactions” under Item 7, Unicom Group, we or our subsidiaries have entered into the following contracts that are not in the ordinary course of business within the two years preceding the date of this annual report that are or may be material:

•

Subscription Agreement between our Company and SK Telecom Co., Ltd., dated June 20, 2006, relating to US$1 billion zero coupon convertible bonds due 2009. See “B. Liquidity and Capital Resources — Indebtedness and Capital Structure” under Item 5.

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D. Exchange Controls

The ability of our operating subsidiary, CUCL, to satisfy their respective foreign exchange obligations and to pay dividends to us depends on existing and future exchange control regulations in China. The Renminbi is currently convertible under the current account, which includes trade and service-related foreign exchange transactions. Renminbi currently cannot be converted under the capital account, which includes foreign direct investment. CUCL, our wholly-owned subsidiary that holds substantially all of our assets, is a foreign investment enterprise. The foreign investment enterprise status will allow 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. These current account transactions include payment of dividends. However, the relevant PRC government authorities may in the future limit or eliminate the authorizations for a foreign investment enterprise to retain its foreign exchange to satisfy its foreign exchange obligations or to pay dividends in the future. Furthermore, certain foreign exchange transactions of this subsidiary under the capital account still require approvals from the State Administration for Foreign Exchange. This requirement affects our subsidiary’s ability to obtain foreign exchange through equity financing, including by means of capital contributions from us.

Under existing Hong Kong law, (i) there are no foreign exchange controls or other laws which restrict the import or export of capital and which would affect the availability of cash and cash equivalents for our use, (ii) there are no foreign exchange controls or other laws, decrees or regulations that affect the remittance of interest, dividends or other payments on our outstanding debt and equity securities to U.S. residents and (iii) there are no limitations on the rights of non-resident or foreign owners to hold our debt or equity securities.

E. Taxation

The taxation of income and capital gains of holders of ordinary shares or ADSs is subject to the laws and practices of Hong Kong and of jurisdictions in which holders of ordinary shares or ADSs are resident or otherwise subject to tax. The following summary of certain relevant taxation provisions is based on current law and practice, is subject to change and does not constitute legal or tax advice. The discussion does not deal with all possible tax consequences relating to an investment in the ordinary shares or ADSs. In particular, the discussion does not address the tax consequences under state, local and other laws, such as non-Hong Kong and non-U.S. federal laws. The discussion is based upon laws and relevant interpretations in effect as of the date of this annual report.

Hong Kong

Tax on Dividends

Under the current practices of the Hong Kong Inland Revenue Department, no tax is payable in Hong Kong in connection with dividends paid by us, either by withholding or otherwise, unless such dividends are attributable to a trade, profession or business carried on in Hong Kong.

Profits

No tax is imposed in Hong Kong in respect of capital gains from the sale of shares and ADSs. Trading gains from the sale of shares or ADSs by persons carrying on a trade, profession or business in Hong Kong where such gains are derived from or arise in Hong Kong from such trade, profession or business will be chargeable to Hong Kong income tax rates of 17.5% on corporations and 16.0% on individuals. Gains from sales of shares effected on the Hong Kong Stock Exchange will be considered to be derived from or arise in Hong Kong. Liability for Hong Kong income tax would thus arise in respect of

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trading gains from sales of shares or ADSs realized by persons carrying on a business of trading or dealing in securities in Hong Kong.

Stamp Duty

Hong Kong stamp duty, currently charged at the rate of 0.1% of the higher of the consideration for or the value of the shares, will be payable by the purchaser on every purchase and by the seller on every sale of shares. In addition, a fixed duty of HK$5 is currently payable on any instrument of transfer of shares. If one of the parties to the sale is a non-resident of Hong Kong and does not pay the required stamp duty, the duty not paid will be assessed on the instrument of transfer (if any) and the transferee will be liable for payment of such duty.

The withdrawal of shares upon the surrender of ADRs, and the issuance of ADRs upon the deposit of shares, will also attract stamp duty at the rate described above unless such withdrawal or deposit does not result in a change in the beneficial ownership of the shares under Hong Kong law. The issuance of the ADRs upon the deposit of shares issued directly to The Bank of New York, as depositary of the ADSs, or for the account of The Bank of New York does not attract stamp duty. No Hong Kong stamp duty is payable upon the transfer of ADSs outside Hong Kong.

Estate Duty

The Revenue (Abolition of Estate Duty) Ordinance 2005 became effective on February 11, 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of holder of the shares, whose deaths occur on or after February 11, 2006.

United States

United States Federal Income Taxation

This section describes the material United States federal income tax consequences to a U.S. holder (as defined below) of owning shares or ADSs. It applies to you only if you hold your shares or ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:

	•		a dealer in securities,

	•		a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings,

	•		a tax-exempt organization,

	•		an insurance company,

	•		a person liable for alternative minimum tax,

	•		a person that actually or constructively owns 10% or more of our voting stock,

	•		a person that holds shares or ADSs that are a hedge or that are hedged against currency risks or as part of a straddle or a conversion transaction, or

	•		a person whose functional currency is not the U.S. dollar.

This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the

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representations of the Depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.

You are a U.S. holder if you are a beneficial owner of shares or ADSs and you are:

	•		a citizen or resident of the United States,

	•		a corporation organized under the laws of the United States or any States,

	•		an estate whose income is subject to United States federal income tax regardless of its source, or

	•		a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.

You should consult your own tax advisor regarding the United States federal, state and local tax consequences of owning and disposing of shares and ADSs in your particular circumstances.

This discussion addresses only United States federal income taxation.

In general, taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented by those ADSs. Exchanges of shares for ADSs, and ADSs for shares, generally will not be subject to United States federal income tax.

Taxation of Dividends

Under the United States federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below, if you are a U.S. holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal taxation. If you are a non-corporate U.S. holder, dividends paid to you in taxable years beginning after December 31, 2002 and before January 1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the shares or ADSs will be qualified dividend income provided that, in the year that you receive the dividend, the shares or ADSs are readily tradable on an established securities market in the United States.

The dividend is taxable to you when you, in the case of shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Hong Kong Dollar payments made, determined at the spot Hong Kong/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the shares or ADSs and thereafter as capital gain.

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Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. Dividends will be income from sources outside the United States, but dividends paid in taxable years beginning before January 1, 2007 generally will be “passive income” or “financial services income” and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive income” or “general income” which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.

Taxation of Capital Gains

Subject to the passive foreign investment company rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your shares or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares or ADSs. Capital gain of a non-corporate U.S. holder that is recognized on or after May 6, 2003 and before January 1, 2011 is generally taxed at a maximum rate of 15% where the property is held more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Your ability to deduct capital losses is subject to limitations. Any Hong Kong stamp duty that you pay will not be a creditable tax for United States federal income tax purposes, but you may be able to deduct such stamp duty subject to limitations under the Code.

Passive Foreign Investment Company Rules . We believe that we should not be treated as a passive foreign investment company for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change.

In general, if you are a U.S. holder, we will be a passive foreign investment company with respect to you if for any taxable year in which you held our ADSs or shares:

	•		at least 75% of our gross income for the taxable year is passive income; or

	•		at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.

Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns directly or indirectly at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the passive foreign investment company tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

If we are treated as a passive foreign investment company, and you are a U.S. holder that does not make a mark-to-market election, as described below, you will be subject to special rules with respect to:

	•		any gain you realize on the sale or other disposition of your shares or ADSs; and

	•		any excess distribution that we make to you. Generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the shares or ADSs.

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Under these rules:

	•		the gain or excess distribution will be allocated ratably over your holding period for the shares or ADSs;

	•		the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income;

	•		the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and

	•		the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.

Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a passive foreign investment company.

If you own shares or ADSs in a passive foreign investment company that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject to the passive foreign investment company rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your shares or ADSs at the end of the taxable year over your adjusted basis in your shares or ADSs. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the shares or ADSs will be adjusted to reflect any such income or loss amounts. Your gain, if any, recognized upon the sale of your shares or ADSs will be taxed as ordinary income.

In addition, notwithstanding any election you make with regard to the shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. Dividends that you receive that do not constitute qualified dividend income, are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for United States federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income.

If you own shares or ADSs during any year that we are a passive foreign investment company, you must file Internal Revenue Service Form 8621.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

You can read and copy documents referred to in this annual report that have been filed with the U.S. Securities and Exchange Commission, or the SEC, at the SEC’s public reference room located at 100 F

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Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC.

The SEC allows us to “incorporate by reference” the information we file with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report on Form 20-F.

I. Subsidiary Information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures About Market Risks

Our exposure to financial market risks relates primarily to changes in interest rates and currency exchange rates.

Interest Rate Risk

We are subject to market risks due to fluctuations in interest rates, principally as a result of our long-term loans, all of which bear variable interest rates. The original maturities of our long-term loans range from one to seven years.

The People’s Bank of China has the sole authority in China to establish official interest rates for Renminbi-denominated loans. Financial institutions in China set their effective interest rates within the range established by the People’s Bank of China. The fair value of our borrowings is approximately the same as the carrying value since the interest rates on all our bank loans are variable. These bank loans, denominated in Renminbi, are borrowed from domestic banks at interest rates that vary in accordance with the standard guidance interest rates announced by relevant PRC government authorities.

Interest rates and payment methods on loans denominated in foreign currencies are set by financial institutions based on interest rate changes in the international financial market, cost of funds, risk levels and other factors. In September 2003, we entered into a US$700 million term loan facility with 13 financial institutions, which is consisted of three tranches: a three-year US$200 million tranche, with an interest rate of 0.28% over the US$ LIBOR, a five-year US$300 million tranche, with an interest rate of 0.35% over the US$ LIBOR, and a seven-year US$200 million tranche, with an interest rate of 0.44% per annum over the US$ LIBOR. The three-year tranche of US$200 million was fully repaid in 2006.

In February 2004, we entered into a US$500 million long-term syndicated loan agreement with 12 financial institutions to finance working capital and network construction expenditure. This facility is repayable in three years and carries an interest rate of 0.40% over US$ LIBOR per annum. The term loan was fully repaid in February 2007.

In July 2005, CUCL completed an offering of two tranches of short-term bonds in the PRC inter-bank debenture market. The first tranche of the bonds was issued for an aggregate amount of RMB9.0 billion with a maturity period of 365 days and was repaid in July 2006. The second tranche of the bonds was issued for an aggregate amount of RMB1.0 billion with a maturity period of 180 days and was fully repaid in January 2006.

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In March 2006, CUCL completed an offering of short-term bonds of RMB1.0 billion with a maturity period of 365 days, which were fully repaid in March 2007. In July 2006, CUCL completed another offering of short-term bonds in an aggregate amount of RMB6.0 billion, consisting of three tranches of RMB2.0 billion each, with a maturity period of 180 days, 270 days and 365 days, respectively. The first two tranches were fully repaid in the first half of 2007. The weighted average effective interest rate of these short-term bonds as at December 31, 2006 was 3.19%. As a result, our fixed rate debt obligation as of December 31, 2006 was RMB7.0 billion.

On July 5, 2006, we issued US$1 billion zero coupon convertible bonds due 2009 to SKT. Subject to certain adjustments pursuant to the terms of the convertible bonds, such bonds can be converted into our ordinary shares one year after the issuance at an initial conversion price of HK$8.63 (US$1.11) per share. Unless previously redeemed, converted or purchased and cancelled pursuant to the terms of the convertible bonds, we will redeem all the outstanding bonds at 104.26% of their principal amount on July 5, 2009. In addition, the holder of such bonds, with prior written notice to us, may require us to redeem, on July 5, 2008, all or a portion of their bonds at 102.82% of the principal amount of the convertible bonds to be redeemed.

As a result, we are exposed to interest rate risk resulting from fluctuations in interest rates on our debts. Increases in interest rates will increase the cost of new borrowing and the interest expense with respect to our outstanding floating rate debt, and therefore could have a material adverse effect on our financial position. From time to time, we may enter into interest rate swap agreements designed to mitigate our exposure to interest rate risks in connection with our borrowings denominated in foreign currencies, although we did not consider it necessary to do so in 2006. We are also considering hedging our borrowings denominated in Renminbi once interest rate swaps become available for Renminbi-denominated borrowings in China.

The following table provides information, by maturity date, regarding our interest rate-sensitive financial instruments, which consist of variable rate debt obligation, as of December 31, 2006.


																			As of December
	Expected Maturity Date																		31, 2006
															There-
	2007			2008			2009			2010			2011		after		Total		Fair Value
	(RMB equivalent in million, except interest rate)
Variable rate bank and other loans (RMB)		80			35			—			200			—		—		315		315
Average interest rate ⁽¹⁾		4.14	%		3.62	%		3.50	%		3.67	%		—		—		—		—
Variable rate bank and other loans (U.S. dollars)		—			3,904			2,343			1,562			—		—		7,809		7,809
Average interest rate ⁽²⁾		5.74	%		5.77	%		5.57	%		5.39	%		—		—		—		—


(1)		The interest rates for variable rate bank and other loans are calculated based on the weighted average interest rates at the end of 2006.

(2)		The interest rates are the implied future LIBOR rates calculated based on U.S. swap as a proxy.

For the year ended December 31, 2006, if the average interest rates for our variable rate bank and other loans had increased by 10%, we estimate that we would have incurred additional interest expenses of RMB105 million in 2006.

Exchange Rate Risk

The majority of our indebtedness and capital expenditures are in Renminbi. Currency exchange rate risk exists with respect to our repayment of indebtedness to our foreign lenders, payables to equipment suppliers and contractors and our dividend payments to holders of ordinary shares and ADSs in foreign

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currencies. As of December 31, 2006, we had approximately RMB200 million of capital commitments in currencies other than Renminbi. We also had foreign currency-denominated debt outstanding, representing our five-year US$300 million term loan and seven-year US$200 million term loan entered into with 13 financial institutions in September 2003 and US$1 billion convertible bonds as described above. In addition, we had approximately US$501 million in bank balances and cash, and short-term bank deposits as of December 31, 2006. Fluctuations in exchange rates may lead to significant fluctuations in the exposure of our foreign currency-denominated liabilities and assets. We may, from time to time, enter into currency swap agreements and foreign exchange forward contracts designed to mitigate our exposure to foreign currency risks, although we did not consider this to be necessary in 2006. Although the Renminbi-to-U.S. dollar exchange rate has been relatively stable since 1994, we cannot predict or give any assurance of its future stability. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. As a result of the revaluation of the Renminbi, we recorded a foreign exchange gain of RMB0.37 billion in 2006. 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%.

The following table provides information regarding our foreign currency-sensitive financial instruments and transactions, which consist of short-term bank deposits, bank balances and cash, long-term debt obligations and capital commitments as of December 31, 2006.


	Expected Maturity Date																As of December 31, 2006
															There-
	2007			2008			2009			2010			2011		after		Total		Fair Value
				(RMB equivalent in millions, except interest rate)
On-balance sheet financial instruments:
Short-term deposits with banks:
in U.S. dollars		174			—			—			—			—		—		174		174
in Hong Kong dollars		13			—			—			—			—		—		13		13
Bank balances and cash:
in U.S. dollars		3,736			—			—			—			—		—		3,736		3,736
in Hong Kong dollars		655			—			—			—			—		—		655		655
in EUR		17			—			—			—			—		—		17		17
Debts:
Variable rate bank and other loans (U.S. dollars)		—			3,904			2,343			1,562			—		—		7,809		7,809
Average interest rate ⁽¹⁾		5.74	%		5.77	%		5.57	%		5.39	%		—		—		—		—
Convertible bonds (U.S. dollars)		—			—			8,137			—			—		—		8,137		10,325
Average interest rate		5.53	%		5.53	%		5.53	%		—			—		—		—		—
Off-balance sheet commitments:
Capital commitments authorized and contracted for in U.S. dollars		203			—			—			—			—		—		203		203


(1)		The interest rates are the implied future LIBOR rates calculated based on U.S. swap as a proxy.

Item 12. Description of Securities Other than Equity Securities

Not Applicable.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

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Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act of 1934, as amended) as of December 31, 2006, the end of the period covered by this annual report, have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that material information relating to our Company was made known to them by others within our Company.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act of 1934, as amended) for the Company. Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with applicable generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As of December 31, 2006, our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on this assessment, our management has concluded that our Company’s internal control over financial reporting as of December 31, 2006 was effective.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, as stated in their report appearing on pages F2 and F3.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are fully aware of the importance of maintaining and improving our controls and procedures in relation to internal control over financial reporting. As disclosed in our annual report on Form 20-F for the year ended December 31, 2005, our assessment of the progress made for the period relevant for the preparation of our consolidated financial statements as of and for the year ended December 31, 2005 revealed that there were significant control deficiencies relating to: (i) the sufficiency of monitoring controls over period-end financial closing procedures of certain individual branches and (ii) the sufficiency of advanced knowledge, experiences and skills of our accounting personnel when applying international accounting standards. In 2006, we implemented a series of measures that have addressed these control deficiencies, strengthened control processes and procedures, and improved our internal control over financial reporting. These measures included, among others:

	•		standardizing control procedures for monitoring the financial reporting and period-end financial closing procedures at branch level and upgrading our business performance review processes and controls;

	•		expanding accounting manuals to clearly document key controls and processes for preparing consolidated financial statements in accordance with applicable accounting standards;

	•		hiring additional accounting professionals with experience in financial reporting and familiarity with international accounting practices and increasing technical training for our finance and accounting personnel in respect of relevant accounting standards;

	•		enhancing monitoring controls over branches by assessing the effectiveness of internal controls at branch-level based on our enterprise risk assessment results; and

	•		continuing to improve the policies and standards for the control environment within The Committee of Sponsoring Organizations of the Treadway Commission risk control framework.

Our management, with the oversight of our audit committee and board of directors, is committed to having proper internal control over financial reporting. We believe that the measures already being implemented will continue to improve our internal control over financial reporting since many of these measures relate to people and processes that require time before they are fully effective.

Item 16A. Audit Committee Financial Expert

Our board of directors has determined that Mr. Wong Wai Ming, an Independent Non-executive Director and a member of our audit committee, is an audit committee financial expert.

Item 16B. Code of Ethics

In 2003, we adopted a code of ethics that applies to our chief executive officer, chief financial officer, president, vice-presidents, controller and other senior officers. A copy of our Code of Ethics for Senior Officers was filed as Exhibit 11.1 to our annual report on Form 20-F for the fiscal year ended December 31, 2003. In February 2006, we adopted another code of ethics that applies to our employees generally. A copy of our Code of Ethics for Employees is filed as Exhibit 11.2 to this annual report on Form

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20-F for the fiscal year ended December 31, 2005. Copies of our Code of Ethics for Senior Officers and Code of Ethics for Employees may also be downloaded from our website at http://www.chinaunicom.com.hk. Information on that website is not a part of this annual report on Form 20-F.

Item 16C. Principal Accountant Fees and Services

The following table sets forth the aggregate audit fees, audit-related fees, tax fees and other fees our principal accountant billed for products and services they provided for audit services, audit-related services, tax services and other services for each of the fiscal years 2005 and 2006:


	For the years ended
	December 31,
	2005		2006
	(in U.S. dollars)
Audit fees		7,350,000		15,418,000
Audit-related fees		3,704,800		1,445,000
Tax fees		4,300		11,000
All other fees		—		5,000

Total		11,059,100		16,879,000

Audit services include the standard audit work that needs to be performed each year in order to issue an opinion on the consolidated financial statements of the Company and its subsidiaries. Audit services in 2006 also include audit work in connection with the evaluation of the Company management’s assessment of the effectiveness of internal control over financial reporting and the audit of the Company’s internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. It also includes performing agreed upon procedures on quarterly financial statements and pre-issuance reviews of interim financial statements.

Audit-related services include other assurance and related services that can be reasonably provided by the external auditor, including acquisition audit, special audit for the issuance of short-term bonds, agreed-upon procedures on certain transactions, and advisory services in respect of the Company’s internal control.

Tax services include the assistance with compliance and reporting of enterprise taxes.

Other services include providing the Company with access to an online database of global financial reporting literature regarding new pronouncements and guidance.

Audit Committee’s Pre-approval Policies and Procedures

The Audit Committee of our Board of Directors is responsible, among other things, for the oversight of the external auditor subject to the requirements of the Hong Kong Company Ordinance and our Articles of Association. The Audit Committee has adopted a policy regarding pre-approval of audit and permissible non-audit services to be provided by our independent accountants. Under the policy, proposed services either (i) may be pre-approved by the Audit Committee without consideration of specific case-by-case services; or (ii) require the specific pre-approval of the Audit Committee. General approval applies to services of a recurring and predictable nature. These types of services, once approved by the Audit Committee, will not require further approval in the future, except when actual fees and expenses exceed pre-approved budget levels. In such a case, the Audit Committee may authorize one of its members to approve budget increases subject to the requirement that such member provide a report on his decision to

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approve or deny an application for budget increases to the Audit Committee at an Audit Committee meeting held immediately after such member grants or denies the approval.

Specific pre-approval applies to all other services. These services must be approved by the Audit Committee on a case-by-case basis after an application including proposed budget and scope of services to be provided by our independent auditors is submitted to the Audit Committee.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.

PART III

Item 17. Financial Statements

We have elected to provide financial statements and related information specified in Item 18 in lieu of Item 17.

Item 18. Financial Statements

See “Index to Consolidated Financial Statements” for a list of all financial statements filed as part of this annual report.

Item 19. Exhibits


Exhibit
Number		Description of Exhibit

1.1		Memorandum of Association of Unicom, dated January 27, 2000 ⁽¹⁾ .

1.2		Amended Articles of Association of Unicom (as amended) ⁽¹⁾ .

1.3		Amended Articles of Association of Unicom (as amended on May 12, 2004) ⁽⁶⁾ .

2.1		Deposit Agreement, among Unicom, The Bank of New York, as Depositary, and Owners and Beneficial Owners of American Depositary Receipts issued thereunder, including the form of American Depositary Receipt ⁽²⁾ .

2.2		Form of specimen certificate for the shares ⁽¹⁾ .

4.1		CDMA Network Capacity Lease Agreement among CUCL, Unicom Group and Unicom New Horizon, dated November 22, 2001 ⁽⁴⁾ .

4.2		Reorganization Agreement between Unicom Group and CUCL (together with English translation) ⁽¹⁾ .

4.3		Services Agreement between Unicom Group and CUCL (together with English translation) ⁽¹⁾ .

4.4		Lease Agreement between CUCL and Unicom Xingye Science and Technology Trade Co. Ltd. (together with English translation) ⁽¹⁾ .

4.5		Transmission Line Lease and Services Agreement between Unicom Group, CUCL and Guoxin Paging (together with English translation) ⁽¹⁾ .

4.6		Pre-Global Offering Share Option Scheme, adopted by ordinary resolution of the Company on June 1, 2000 and amended by ordinary resolution of the Company on May 13, 2002 ⁽⁴⁾ .

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Exhibit
Number		Description of Exhibit
4.7		Pre-Global Offering Share Option Scheme, adopted by ordinary resolution of the Company on June 1, 2000 and amended by ordinary resolutions of the Company on May 13, 2002 and May 11, 2007*.

4.8		Share Option Scheme, adopted by ordinary resolution of the Company on June 1, 2000 and amended by ordinary resolutions of the Company on May 13, 2002 ⁽⁴⁾ .

4.9		Share Option Scheme, adopted by ordinary resolution of the Company on June 1, 2000 and amended by ordinary resolutions of the Company on May 13, 2002 and May 11, 2007*.

4.10		Service Agreements between executive directors of Unicom and Unicom ⁽³⁾ .

4.11		Reorganization Agreement between Unicom Group and Unicom New Century, dated November 18, 2002. (English translation) ⁽⁵⁾ .

4.12		Form of Conditional Sale and Purchase Agreement between Unicom BVI and our company, dated November 20, 2002 ⁽⁵⁾ .

4.13		Comprehensive Services Agreement between Unicom Group and A Share Company, dated November 20, 2002. (English translation) ⁽⁵⁾ .

4.14		Transfer Agreement with respect to the Comprehensive Services Agreement between A Share Company and Unicom New Century, dated November 20, 2002. (English translation) ⁽⁵⁾ .

4.15		Form of CDMA Network Capacity Lease Agreement among Unicom New Horizon, A Share Company and Unicom Group, dated November 20, 2002 ⁽⁵⁾ .

4.16		Transfer Agreement with respect to the CDMA Network Capacity Lease Agreement between A Share Company and Unicom New Century, dated November 20, 2002. (English translation) ⁽⁵⁾ .

4.17		Reorganization Agreement between Unicom Group and Unicom New World, dated November 4, 2003. (English translation) ⁽⁶⁾ .

4.18		Conditional Sale and Purchase Agreement between Unicom BVI and our Company, dated November 20, 2003 ⁽⁶⁾ .

4.19		Conditional Sale and Purchase Agreement between CUCL and A Share Company, dated November 20, 2003. (English translation) ⁽⁶⁾ .

4.20		Comprehensive Services Agreement between Unicom Group and A Share Company, dated November 20, 2003. (English translation) ⁽⁶⁾ .

4.21		Transfer Agreement with respect to the Comprehensive Services Agreement between A Share Company and Unicom New World, dated November 20, 2003. (English translation) ⁽⁶⁾ .

4.22		CDMA Network Capacity Lease Agreement among Unicom New Horizon, A Share Company and Unicom Group, dated November 20, 2003 ⁽⁶⁾ .

4.23		Transfer Agreement with respect to the CDMA Network Capacity Lease Agreement between A Share Company and Unicom New World, dated November 20, 2003. (English translation) ⁽⁶⁾ .

4.24		Comprehensive Operator Services Agreement between Unicom Group and A Share Company, dated November 20, 2003. (English translation) ⁽⁶⁾ .

4.25		Transfer Agreement with respect to the Comprehensive Operator Services Agreement between A Share Company, CUCL, Unicom New Century and Unicom New World, dated November 20, 2003. (English translation) ⁽⁶⁾ .

4.26		Service Agreement between Mr. William Lo Wing Yan, executive director of Unicom, and Unicom. (English translation) ⁽⁶⁾ .

4.27		Letter Agreement between Mr. Wang Jianzhou, executive director of Unicom, and Unicom with respect to the Extension of the Service Agreement between Mr. Wang and Unicom. (English translation) ⁽⁶⁾ .

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Exhibit
Number		Description of Exhibit
4.28		Conditional Sales and Purchase Agreement between China Unicom (Hong Kong) Group Limited and our Company with respect to the acquisition of Unicom International, dated July 28, 2004 ⁽⁷⁾ .

4.29		CDMA Network Capacity Lease Agreement between Unicom New Horizon, A Share Company and Unicom Group, dated March 24, 2005 ⁽⁷⁾ .

4.30		Transfer Agreement of The CDMA Network Capacity Lease Agreement between A Share Company, CUCL and Unicom New World, dated March 24, 2005. (English translation) ⁽⁷⁾ .

4.31		Comprehensive Services Agreement between A Share Company and Unicom Group, dated March 24, 2005. (English translation) ⁽⁷⁾ .

4.32		Transfer Agreement of the Comprehensive Services Agreement between A Share Company, CUCL and Unicom New World, dated March 24, 2005. (English translation) ⁽⁷⁾ .

4.33		Operator-based Comprehensive Services Agreement between Unicom New Guoxin and A Share Company, dated March 24, 2005. (English translation) ⁽⁷⁾ .

4.34		Transfer Agreement of the Operator-based Comprehensive Services Agreement between A Share Company and CUCL and Unicom New World, dated March 24, 2005. (English translation) ⁽⁷⁾ .

4.35		Premise Leasing Agreement between CUCL, Unicom New World and A Share Company, dated March 24, 2005. (English translation) ⁽⁷⁾ .

4.36		Transfer Agreement of the Premise Leasing Agreement between A Share Company and Unicom New Guoxin, dated March 24, 2005. (English translation) ⁽⁷⁾ .

4.37		Subscription Agreement between Unicom and SK Telecom Co., Ltd., dated June 20, 2006 ⁽⁸⁾ .

4.38		CDMA Network Capacity Lease Agreement among Unicom New Horizon, A Share Company and Unicom Group, dated October 26, 2006*.

4.39		Transfer Agreement of The CDMA Network Capacity Lease Agreement between A Share Company and CUCL, dated October 26, 2006. (English translation)*.

4.40		Comprehensive Services Agreement between A Share Company and Unicom Group, dated October 26, 2006. (English translation)*.

4.41		Transfer Agreement of the Comprehensive Services Agreement between A Share Company and CUCL, dated October 26, 2006. (English translation)*.

8.1		List of our significant subsidiaries ⁽⁷⁾ .

11.1		Code of Ethics for Senior Officers ⁽⁶⁾ .

11.2		Employee Code of Ethics (English translation) ⁽⁸⁾ .

12.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)*.

12.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)*.

13.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b)*.

13.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b)*.


(1)		Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-11938) filed with the SEC in connection with our initial public offering in June 2000.

(2)		Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-11952) filed with the SEC with respect to American Depositary Shares representing our shares.

(3)		Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2000.

(4)		Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2001.

(5)		Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2002.

130


(6)		Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2003.

(7)		Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2004.

(8)		Incorporated by reference to our Annual Report on Form 20-F (File No. 1-15028) for the year ended December 31, 2005.

*		Filed herewith.

131

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

Date: June 29, 2007


CHINA UNICOM LIMITED
By:	/s/ Chang Xiaobing
	Name:	Chang Xiaobing
	Title:	Chairman and Chief Executive Officer

132

INDEX OF CONSOLIDATED FINANCIAL STATEMENTS

CHINA UNICOM LIMITED AND ITS SUBSIDIARIES

Report of Independent Registered Public Accounting Firm

Consolidated balance sheets as of December 31, 2005 and 2006

Consolidated statements of income for the years ended December 31, 2004, 2005 and 2006

Consolidated statements of changes in equity for the years ended December 31, 2004, 2005 and 2006

Consolidated statements of cash flows for the years ended December 31, 2004, 2005 and 2006

Notes to the consolidated financial statements

Report of Independent Registered Public Accounting Firm

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CHINA UNICOM LIMITED (Incorporated in the Hong Kong Special Administrative Region of the People’s Republic of China (“Hong Kong”) with limited liability)

We have completed an integrated audit of the 2006 consolidated financial statements and the internal control over financial reporting as of December 31, 2006 of China Unicom Limited and its subsidiaries (the “Company”) and audits of its 2005 and 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in equity and cash flows present fairly, in all material respects, the financial position of the Company at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with the accounting principles generally accepted in Hong Kong. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2.1 to the consolidated financial statements, the Company adopted the Revised Hong Kong Financial Reporting Standards (“HKFRS”) issued by the Hong Kong Institute of Certified Public Accountants during the year ended December 31, 2005. The effect of adoption of certain HKFRS, which results in changes to some accounting policies of the Company, is set out in Note 2.1 to the consolidated financial statements.

Accounting principles generally accepted in Hong Kong vary in certain significant respects from accounting principles generally accepted in the United States of America (“US GAAP”). Information relating to the nature and effect of such differences is presented in Note 38 to the consolidated financial statements.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the Management’s Report on Internal Control Over Financial Reporting included in Item 15 of this Annual Report on Form 20-F, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

F - 2

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers

Certified Public Accountants

Hong Kong
June 21, 2007

F - 3

CHINA UNICOM LIMITED AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2006

(Expressed in thousands)


	Note	2005		2006		2006
		RMB		RMB		US$
ASSETS
Non-current assets
Property, plant and equipment	6, 36		112,373,285		111,381,505		14,272,178
Goodwill	7		3,143,983		3,143,983		402,863
Other assets	8, 36		11,501,730		11,176,569		1,432,141
Deferred income tax assets	9		335,234		309,668		39,680

			127,354,232		126,011,725		16,146,862


Current assets
Inventories	10		2,107,812		2,333,902		299,061
Accounts receivable, net	11		4,548,429		3,419,343		438,147
Prepayments and other current assets	12		2,342,467		1,988,019		254,740
Amounts due from related parties	33.1		384,531		168,548		21,597
Amounts due from Domestic Carriers	33.2		138,485		138,521		17,750
Short-term bank deposits	13		282,457		195,820		25,092
Cash and cash equivalents	14		5,471,576		12,182,108		1,560,988

			15,275,757		20,426,261		2,617,375


Total assets			142,629,989		146,437,986		18,764,237


EQUITY
Capital and reserves attributable to the Company’s equity holders
Share capital	15		1,333,621		1,344,440		172,273
Share premium	15		52,601,014		53,222,976		6,819,874
Reserves			2,827,331		3,554,930		455,521
Retained profits
- Proposed final dividend	31		1,383,169		2,282,578		292,484
- Others			18,139,210		19,003,893		2,435,117

			76,284,345		79,408,817		10,175,269

Minority interest	22(a)		2,734		2,841		364


Total equity			76,287,079		79,411,658		10,175,633

The accompany notes are an integral part of the consolidated financial statements.

F - 4


	Note	2005			2006			2006
		RMB			RMB			US$
LIABILITIES
Non-current liabilities
Long-term bank loans	16		11,981,518			4,139,349			530,407
Convertible bonds	17		—			10,324,949			1,323,016
Obligations under finance leases	18		145,367			10,230			1,311
Deferred income tax liabilities	9		5,613			5,879			753
Deferred revenue			3,348,232			2,243,384			287,462

			15,480,730			16,723,791			2,142,949


Current liabilities
Payables and accrued liabilities	19		18,526,628			26,290,074			3,368,751
Taxes payable			1,016,128			1,632,195			209,146
Amounts due to Unicom Group	33.1		38,094			45,081			5,777
Amounts due to related parties	33.1		116,621			325,308			41,684
Amounts due to Domestic Carriers	33.2		822,006			850,975			109,042
Short-term bonds	20		9,865,900			7,087,217			908,140
Short-term bank loans	21		7,024,358			—			—
Current portion of long-term bank loans	16		5,145,190			3,984,350			510,546
Current portion of obligations under finance leases	18		420,631			99,566			12,758
Advances from customers			7,886,624			9,987,771			1,279,811

			50,862,180			50,302,537			6,445,655


Total liabilities			66,342,910			67,026,328			8,588,604


Total equity and liabilities			142,629,989			146,437,986			18,764,237


Net current liabilities			(35,586,423	)		(29,876,276	)		(3,828,280	)


Total assets less current liabilities			91,767,809			96,135,449			12,318,582

The accompany notes are an integral part of the consolidated financial statements.

F - 5

CHINA UNICOM LIMITED AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(Expressed in thousands, except per share data)


	Note	2004			2005			2006			2006
		RMB			RMB			RMB			US$
Revenue (Turnover)
GSM Business	5, 23, 33		47,508,952			52,135,528			59,290,421			7,597,343
CDMA Business	5, 23, 33		24,377,674			27,576,936			27,293,142			3,497,282
Data and Internet Business	5, 23, 33		3,662,734			3,049,967			2,375,316			304,368
Long Distance Business	5, 23, 33		1,848,009			1,524,573			1,068,422			136,905

Total service revenue			77,397,369			84,287,004			90,027,301			11,535,898

Sales of telecommunications products	5, 23, 33		1,689,755			2,761,827			4,267,192			546,788

	5, 23

Total revenue			79,087,124			87,048,831			94,294,493			12,082,686


Leased lines and network capacities	24, 33		(7,398,128	)		(8,747,317	)		(8,763,865	)		(1,122,982	)
Interconnection charges	33		(7,516,586	)		(8,372,370	)		(9,595,622	)		(1,229,562	)
Depreciation and amortization	24		(19,011,074	)		(20,368,181	)		(22,422,812	)		(2,873,209	)
Employee benefit expenses	25, 26, 27		(4,615,057	)		(5,616,312	)		(6,648,699	)		(851,949	)
Selling and marketing	24, 33		(19,523,280	)		(20,557,878	)		(19,251,704	)		(2,466,871	)
General, administrative and other expenses	24, 33		(10,500,241	)		(11,741,560	)		(13,415,568	)		(1,719,041	)
Cost of telecommunications products sold	24, 33		(2,562,645	)		(3,575,316	)		(4,929,988	)		(631,718	)
Unrealized loss on changes in fair value of derivative component of convertible bonds	17		—			—			(2,396,592	)		(307,094	)
Finance costs	24		(1,696,075	)		(1,099,321	)		(654,220	)		(83,830	)
Interest income			102,907			96,196			259,040			33,193
Other gains — net			103,647			34,925			21,353			2,736


Income before income tax			6,470,592			7,101,697			6,495,816			832,359
Income tax expenses	9		(1,977,141	)		(2,170,411	)		(2,763,885	)		(354,158	)


Net income			4,493,451			4,931,286			3,731,931			478,201


Attributable to:
Equity holders of the Company			4,493,451			4,931,052			3,731,824			478,187
Minority interest			—			234			107			14

			4,493,451			4,931,286			3,731,931			478,201


Proposed final dividend	31		1,256,349			1,383,169			2,282,578			292,484


Dividend paid during the year	31		1,256,160			1,256,924			1,384,146			177,361

The accompany notes are an integral part of the consolidated financial statements.

F - 6


	Note	2004		2005		2006		2006
		RMB		RMB		RMB		US$
Earnings per share for income attributable to the equity holders of the Company during the year

Basic earnings per share	30		0.36		0.39		0.30		0.04


Diluted earnings per share	30		0.36		0.39		0.30		0.04


Number of shares outstanding for basic earnings (in thousands)	30		12,561,242		12,570,398		12,599,018		12,599,018


Number of shares outstanding for diluted earnings (in thousands)	30		12,593,054		12,607,476		12,649,306		12,649,306


Basic earnings per ADS	30		3.58		3.92		2.96		0.38


Diluted earnings per ADS	30		3.57		3.91		2.95		0.38


Number of ADS outstanding for basic earnings (in thousands)	30		1,256,124		1,257,040		1,259,902		1,259,902


Number of ADS outstanding for diluted earnings (in thousands)	30		1,259,305		1,260,748		1,264,931		1,264,931

The accompany notes are an integral part of the consolidated financial statements.

F - 7

CHINA UNICOM LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(Expressed in thousands of RMB)


					Employee
					share-based
	Share		Share		compensation			Revaluation			Statutory		Retained						Minority		Total
	capital		premium		reserve			reserve			reserve		profits			Total			interest		equity
Balance at December 31, 2003		1,331,390		52,483,266		21,707			176,853			1,542,478		13,496,174			69,051,868			—		69,051,868
Net income		—		—		—			—			—		4,493,451			4,493,451			—		4,493,451
Employees share option scheme:
- Value of employee services		—		—		88,957			—			—		—			88,957			—		88,957
- Recognition of shares issued on exercise of options (Note 29)		1,097		63,028		—			—			—		—			64,125			—		64,125
Appropriation to statutory reserve (Note 28)		—		—		—			—			429,300		(429,300	)		—			—		—
Dividends relating to 2003		—		—		—			—			—		(1,256,160	)		(1,256,160	)		—		(1,256,160	)
Derecognition of negative goodwill		—		—		—			—			—		7,425			7,425			—		7,425

Balance at December 31, 2004		1,332,487		52,546,294		110,664			176,853			1,971,778		16,311,590			72,449,666			—		72,449,666

Net income		—		—		—			—			—		4,931,052			4,931,052			234		4,931,286
Subscription of shares of a subsidiary by minority shareholder (Note 22(a))		—		—		—			—			—		—			—			2,500		2,500
Employee share option scheme:
-Value of employee services		—		—		108,417			—			—		—			108,417			—		108,417
-Recognition of shares issued on exercise of options (Note 29)		1,134		54,720		(3,720	)		—			—		—			52,134			—		52,134
Appropriation to statutory reserve (Note 28)		—		—		—			—			463,339		(463,339	)		—			—		—
Dividends relating to 2004 (Note 31)		—		—		—			—			—		(1,256,924	)		(1,256,924	)		—		(1,256,924	)

Balance at December 31, 2005		1,333,621		52,601,014		215,361			176,853			2,435,117		19,522,379			76,284,345			2,734		76,287,079

Net income		—		—		—			—			—		3,731,824			3,731,824			107		3,731,931
Revaluation of buildings — gross (Note 6)		—		—		—			200,330			—		—			200,330					200,330
Revaluation of buildings — tax (Note 6)		—		—		—			(105,129	)		—		—			(105,129	)		—		(105,129	)
Employee share option scheme:
-Value of employee services		—		—		146,294			—			—		—			146,294			—		146,294
-Recognition of shares issued on exercise of options (Note 29)		10,819		621,962		(97,482	)		—			—		—			535,299			—		535,299
Appropriation to statutory reserve (Note 28)		—		—		—			—			583,586		(583,586	)		—			—		—
Dividends relating to 2005 (Note 31)		—		—		—			—			—		(1,384,146	)		(1,384,146	)		—		(1,384,146	)

Balance at December 31, 2006		1,344,440		53,222,976		264,173			272,054			3,018,703		21,286,471			79,408,817			2,841		79,411,658

The accompany notes are an integral part of the consolidated financial statements.

F - 8

CHINA UNICOM LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(Expressed in thousands)


	Note	2004			2005			2006			2006
		RMB			RMB			RMB			US$
Cash flows from operating activities
Cash generated from operations	(a)		27,703,311			33,974,778			38,522,310			4,936,163
Interest received			106,365			95,731			248,924			31,897
Interest paid			(2,310,270	)		(1,792,398	)		(1,206,933	)		(154,654	)
Tax paid			(1,680,111	)		(1,474,423	)		(2,113,144	)		(270,774	)


Net cash generated from operating activities			23,819,295			30,803,688			35,451,157			4,542,632


Cash flows from investing activities
Purchase of property, plant and equipment			(18,939,138	)		(16,643,005	)		(16,744,789	)		(2,145,640	)
Proceeds from sale of property, plant and equipment			53,970			91,851			59,341			7,604
Decrease in short-term bank deposits			250,769			379,568			86,637			11,101
Payment of direct acquisition cost of Unicom New Century			(4,566	)		—			—			—
Payment of direct acquisition cost of Unicom New World			(14,039	)		—			—			—
Purchase of Unicom International, net of cash acquired			44,267			—			—			—
Proceeds from of sale of Guoxin Paging, net of cash disposed			450,000			—			—			—
Purchase of other assets			(799,866	)		(576,755	)		(738,500	)		(94,630	)


Net cash used in investing activities			(18,958,603	)		(16,748,341	)		(17,337,311	)		(2,221,565	)


Cash flows from financing activities
Proceeds from exercise of share options			64,125			52,134			535,299			68,592
Proceeds from minority interest of a subsidiary in respect of share capital contribution			—			2,500			—			—
Proceeds from short-term bonds			—			9,690,800			6,949,700			890,519
Proceeds from short-term bank loans			10,224,971			12,532,071			2,143,000			274,599
Proceeds from long-term bank loans			11,083,383			5,798,657			1,345,050			172,352
Proceeds from issuance of convertible bonds			—			—			7,993,500			1,024,269
Repayment of short-term bonds			—			—			(9,731,800	)		(1,247,011	)
Repayment of short-term bank loans			(12,271,753	)		(20,104,146	)		(8,905,858	)		(1,141,177	)
Repayment of long-term bank loans			(17,245,641	)		(19,928,416	)		(10,348,059	)		(1,325,977	)
Dividends paid	31		(1,256,160	)		(1,256,924	)		(1,384,146	)		(177,361	)


Net cash used in financing activities			(9,401,075	)		(13,213,324	)		(11,403,314	)		(1,461,195	)


Net (decrease)/increase in cash and cash equivalents			(4,540,383	)		842,023			6,710,532			859,872
Cash and cash equivalents, beginning of year			9,169,936			4,629,553			5,471,576			701,116

Cash and cash equivalents, end of year	14		4,629,553			5,471,576			12,182,108			1,560,988


Analysis of the balances of cash and cash equivalents:

Cash balances			4,756			9,319			4,458			571
Bank balances			4,650,708			5,462,257			12,177,650			1,560,417
Less: Restricted bank deposits	(i)		(25,911	)		—			—			—

			4,629,553			5,471,576			12,182,108			1,560,988


		Note (i): As of December 31, 2006, no bank balances (2004: RMB26 million; 2005: Nil) were restricted by the bank as collateral for long-term bank loans.

F - 9

(a)

The reconciliation of income before income tax to cash generated from operations was as follows:


	2004			2005			2006			2006
	RMB			RMB			RMB			US$
Income before income tax		6,470,592			7,101,697			6,495,816			832,359
Adjustments for:
Depreciation and amortization		19,011,074			20,368,181			22,422,812			2,873,209
Amortization of customer acquisition costs of contractual CDMA subscribers		6,120,737			5,947,631			4,205,253			538,852
Interest income		(102,907	)		(96,196	)		(259,040	)		(33,193	)
Interest expense		1,668,467			1,060,271			454,742			58,270
Loss on disposal of property, plant and equipment		10,537			25,134			144,644			18,534
Share-based compensation costs		88,957			108,417			146,294			18,746
Provision for doubtful debts		2,191,820			1,498,510			1,741,765			223,186
Unrealized loss on changes in fair value of derivative component of convertible bonds		—			—			2,396,592			307,094

Changes in working capital:
Increase in accounts receivable		(1,915,496	)		(816,959	)		(612,679	)		(78,507	)
(Increase)/decrease in inventories		(939,899	)		1,006,820			(226,090	)		(28,970	)
Increase in other assets		(5,536,980	)		(2,738,580	)		(1,748,235	)		(224,015	)
Increase in prepayments and other current assets		(792,416	)		(477,665	)		(451,215	)		(57,818	)
(Increase)/decrease in amounts due from Domestic Carriers		(85,306	)		131,434			(36	)		(5	)
Decrease in amounts due from Unicom Group		—			61,401			—			—
Decrease/(increase) in amounts due from related parties		70,516			(191,483	)		215,983			27,676
Increase in payables and accrued liabilities		1,835,813			604,410			2,354,762			301,734
Increase in advances from customers		367,431			851,629			2,101,147			269,236
Increase/(decrease) in deferred revenue		244,486			(492,261	)		(1,104,848	)		(141,573	)
Increase/(decrease) in amounts due to Domestic Carriers		169,733			(126,568	)		28,969			3,712
(Decrease)/increase in amounts due to Unicom Group		(943,448	)		38,094			6,987			895
(Decrease)/increase in amounts due to related parties		(230,400	)		110,861			208,687			26,741


Cash generated from operations		27,703,311			33,974,778			38,522,310			4,936,163

(b)		Supplemental information:

		Payables to equipment suppliers for construction-in-progress during 2006 increased by approximately RMB5.0 billion (2004: decreased by approximately RMB775 million; 2005: increased by approximately RMB633 million).

The accompany notes are an integral part of the consolidated financial statements.

F - 10

CHINA UNICOM LIMITED AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in RMB thousands unless otherwise stated)

1.		ORGANISATION AND PRINCIPAL ACTIVITIES

		China Unicom Limited (the “Company”) was incorporated as a limited liability company in the Hong Kong Special Administrative Region (“Hong Kong”), the People’s Republic of China (the “PRC”) on February 8, 2000. The principal activities of the Company are investment holding and the Company’s subsidiaries are principally engaged in the provision of GSM and CDMA cellular, long distance, data and Internet services in the PRC. The GSM and CDMA businesses are hereinafter collectively referred to as the “Cellular Business”. The Company and its subsidiaries are hereinafter referred to as the “Group”. The address of its registered office is 75th Floor, The Center, 99 Queen’s Road Central, Hong Kong.

		The shares of the Company were listed on the Stock Exchange of Hong Kong Limited (“SEHK”) on June 22, 2000 and the American Depositary Shares of the Company were listed on the New York Stock Exchange on June 21, 2000.

		The immediate holding company of the Company is China Unicom (BVI) Limited (“Unicom BVI”). The majority of the equity interests in Unicom BVI is owned by China United Telecommunications Corporation Limited (“A Share Company”, a joint stock company incorporated in the PRC on December 31, 2001, with its A shares listed on the Shanghai Stock Exchange on October 9, 2002). The majority of the equity interests in A Share Company are owned by China United Telecommunications Corporation (a state-owned enterprise established in the PRC, hereinafter referred to as “Unicom Group”). The directors of the Company consider Unicom Group to be the ultimate holding company.

2.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

		The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

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2.1		Basis of Preparation

		The consolidated financial statements have been prepared under the historical cost convention, modified by the revaluation of buildings, financial assets and financial liabilities (including derivative financial instruments) at fair value through profit or loss. They have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRS”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). These accounting standards differ from that used in the preparation of statutory financial statements for PRC statutory reporting purposes, which are based on the accounting principles and financial regulations applicable to enterprises established in the PRC (“PRC GAAP”).

		The principal adjustments made to conform to HKFRS include the following:

	•		reversal of revaluation surplus and related depreciation and amortization charges arising from the revaluation of assets performed by independent valuers for the purpose of reporting to relevant PRC government authorities;

	•		additional capitalization of borrowing costs;

	•		capitalization of the direct costs associated with the acquisition of subsidiaries;

	•		recognition of employee share-based compensation costs;

	•		reversal of goodwill amortization and recognition of negative goodwill in opening retained earnings;

	•		separation of the conversion option of convertible bond from the host debt contract and accounting for it as a derivative component at fair value through profit or loss;

	•		capitalization and amortization of upfront non-refundable revenue and the related direct incremental costs for activating cellular subscribers; and

	•		provision for deferred taxation on HKFRS adjustments.

As of December 31, 2006, the current liabilities of the Group had exceeded the current assets by approximately RMB29.9 billion (2005: RMB35.6 billion). Taking into account of available sources of financing and continuous net cash inflows from operating activities, the Group has sufficient funds to meet its working capital requirements and debt obligations. As a result, the consolidated financial statements of the Group for the years ended December 31, 2004, 2005 and 2006 have been prepared under the going concern basis.

The preparation of the consolidated financial statements in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

F - 12

(a)

New accounting pronouncements in 2006:

(i)

The following are the series of amendments, new standards and interpretations issued by the HKICPA to existing standards that are not yet effective and have not been early adopted by the Group:

	•		HKFRS 7, Financial instruments: Disclosures (effective for annual periods beginning on or after January 1, 2007). HKFRS 7 introduces new disclosures relating to financial instruments. This standard is not expected to have any impact on the classification and valuation of the Group’s financial instruments;

	•		HKFRS 8, Operating segments (effective for annual periods beginning on or after January 1, 2009). HKFRS 8 sets out requirements for disclosure of information about an entity’s operating segments and also about the entity’s products and services, the geographical areas in which it operates and its major customers. This standard is not expected to have any impact on the classification and presentation of the Group’s consolidated financial statements;

	•		Amendment to HKAS 1, Presentation of financial statements — Capital Disclosure (effective for annual periods beginning on or after January 1, 2007). The amendment introduces new disclosures for managing capital. This amendment is not expected to have any impact on the classification and presentation of the Group’s consolidated financial statements;

	•		HK(IFRIC)-Int 8, Scope of HKFRS 2 (effective for annual periods beginning on or after May 1, 2006). HK(IFRIC)-Int 8 requires consideration of transactions involving the issuance of equity instruments — where the identifiable consideration received is less than the fair value of the equity instruments issued — to establish whether or not they fall within the scope of HKFRS 2. HK(IFRIC)-Int 8 is not expected to have any impact on the Group’s consolidated financial statements;

	•		HK(IFRIC)-Int 9, Reassessment of embedded derivatives (effective for annual periods beginning on or after June 1, 2006). HK(IFRIC)-Int 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. As the Group’s entities have not changed the terms of their contracts, HK(IFRIC)-Int 9 is not expected to have any impact on the Group’s consolidated financial statements;

	•		HK(IFRIC)-Int 10, Interim financial reporting and impairment (effective for annual periods beginning on or after November 1, 2006). HK(IFRIC)-Int 10 prohibits the impairment losses recognized in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply HK(IFRIC)-Int 10 from January 1, 2007, but it is not expected to have any significant impact on the Group’s consolidated financial statements; and

F - 13

•

HK(IFRIC)-Int 11, Group and treasury share transaction (effective for annual periods beginning on or after March 1, 2007). HK(IFRIC)-Int 11 requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity-instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments needed are obtained. HK(IFRIC)-Int 11 also provides guidance on whether share-based payment arrangements, in which suppliers of goods or services of an entity are provided with equity instruments of the entity’s parent, should be accounted for as cash-settled or equity-settled in the entity’s financial statements. HK(IFRIC)-Int 11 is not expected to have a material impact on the Group’s consolidated financial statements.

(ii)

Interpretations to existing standards issued by the HKICPA that are not yet effective and not relevant for the Group’s operations:

	•		HK(IFRIC)-Int 7, Applying the restatement approach under HKAS 29, Financial reporting in hyperinflationary economies (effective from March 1, 2006). HK(IFRIC)-Int 7 provides guidance on how to apply requirements of HKAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, when the economy was not hyperinflationary in the prior period. As none of the group entities have a currency of a hyperinflationary economy as its functional currency, HK(IFRIC)-Int 7 is not relevant to the Group’s operations; and

	•		HK(IFRIC)-Int 12, Service concession arrangements (effective for annual periods beginning on or after January 1, 2008). HK(IFRIC)-Int 12 provides guidance on the accounting by operators for public-to-private service concession arrangements. As the Group does not have any public-to-private service concession arrangement, HK(IFRIC)-Int 12 is not relevant to the Group’s operations.

(b)		Adoption of HKFRS in 2005:

		In 2005, the Group adopted the new/revised standards and interpretations of HKFRS as listed below, which are relevant to the operations of the Group. The 2004 comparatives have been amended as required, in accordance with the relevant requirements.

HKAS 1 Presentation of Financial Statements

HKAS 2 Inventories

HKAS 7 Cash Flow Statements

HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

HKAS 10 Events after the Balance Sheet Date

HKAS 16 Property, Plant and Equipment

HKAS 17 Leases

HKAS 21 The Effects of Changes in Foreign Exchange Rates

HKAS 23 Borrowing Costs

HKAS 24 Related Party Disclosures

HKAS 27 Consolidated and Separate Financial Statements

HKAS 28 Investments in Associates

HKAS 31 Investments in Joint Ventures

HKAS 32 Financial Instruments: Disclosures and Presentation

HKAS 33 Earnings per Share

HKAS 36 Impairment of Assets

HKAS 38 Intangible Assets

HKAS 39 Financial Instruments: Recognition and Measurement

HKAS Int 15 Operating Leases — Incentives

HKFRS 2 Share-based Payments

HKFRS 3 Business Combinations

F - 14

(i)		The adoption of new/revised HKAS 1, 2, 7, 8, 10, 16, 21, 23, 27, 28, 31, 32, 33, 39 and HKAS Int 15 did not result in substantial changes to the Group’s accounting policies.

(ii)		The adoption of revised HKAS 17 has resulted in a change in the accounting policy relating to the reclassification of leasehold land and land use rights from property, plant and equipment to other assets — long-term prepayment for lease of land. The upfront prepayments made for the leasehold land and land use rights are expensed in the statements of income on a straight-line basis over the period of the lease. In prior years, the leasehold land was accounted for at cost less accumulated depreciation.

		The effects of adoption of revised HKAS 17 on the consolidated statements of income were:


	2004			2005
	RMB in millions			RMB in millions
Decrease in depreciation and amortization		(26	)		(28	)
Increase in general, administrative and other expenses		26			28

(iii)

HKAS 24 extended the identification of related parties and disclosure of related parties to include state-owned enterprises. Related parties include Unicom Group and its related parties, other state-owned enterprises and their subsidiaries directly or indirectly controlled by the PRC government (other than those shown on the face of balance sheets as related parties), other entities and corporations in which the Company is able to control, jointly control or exercise significant influence and key management personnel of the Company and Unicom Group as well as their close family members. Details of transactions with other major state-owned enterprises for the years ended December 31, 2004, 2005 and 2006 are set forth in Note 33.3.

(iv)		The adoption of HKFRS 2 resulted in a change in the accounting policy for share-based payments. Until December 31, 2004, the provision of share options to employees did not result in an expense in the statements of income. Effective on January 1, 2005, the Group expenses the cost of share options in the statements of income over the vesting period of the options. As a transitional provision, the cost of share options granted after November 7, 2002 and not yet vested on January 1, 2005 was expensed retrospectively in the statements of income of the respective periods. The adoption of HKFRS 2 resulted in a decrease in the retained earnings as of January 1, 2005 by approximately RMB111 million.

		The effects of adoption of HKFRS 2 on the consolidated statements of income were:


	2004		2005
	RMB in millions		RMB in millions
Increase in employee benefit expenses		89		108
Decrease in basic earnings per share (RMB)		0.007		0.009
Decrease in diluted earnings per share (RMB)		0.007		0.009

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(v)		The adoption of HKFRS 3, HKAS 36 and HKAS 38 resulted in a change in the accounting policy for goodwill/ negative goodwill. Until December 31, 2004, goodwill was amortized on a straight-line basis over 20 years, and assessed for any indication of impairment at each balance sheet date. In accordance with the provisions of HKFRS 3, the Group ceased amortization of goodwill from January 1, 2005, and the accumulated amortization as of December 31, 2004 was eliminated with a corresponding decrease in the cost of goodwill. Starting from January 1, 2005 onwards, goodwill is no longer amortized but is tested for impairment on an annual basis, as well as when there is indication of impairment.

		Had the previous accounting policy for goodwill been applied in 2005, the effects of adoption of HKFRS 3 and HKAS 38 on the consolidated statements of income would have been:


	2004		2005
	RMB in millions		RMB in millions
Impact on depreciation and amortization (decrease)		—		171
Increase in basic earnings per share (RMB)		—		0.014
Increase in diluted earnings per share (RMB)		—		0.014

		In addition, in accordance with HKFRS 3, from January 1, 2005, if the fair value of the net identifiable assets and liabilities acquired exceed the purchase consideration (i.e. an amount arising which would have been recorded as negative goodwill under the previous accounting policy), the excess is recognized immediately in the consolidated statement of income as it arises. Negative goodwill previously recognized has been derecognized at January 1, 2005, with a corresponding adjustment to the balance of retained earnings as of January 1, 2005 of the Group amounting to approximately RMB7 million.

(vi)		Upon the adoption of HKFRS on January 1, 2005, the Group changed its accounting policy for recognition of upfront non-refundable revenue (i.e. connection fee and receipts from SIM/UIM cards), which had previously been recognized upon the completion of activation services. Effective from January 1, 2005, upfront non-refundable revenue and the related direct incremental costs for activating cellular subscribers (including costs of SIM/UIM cards and commissions) are capitalized and amortized over the expected customer service periods. Direct incremental costs are capitalized only to the extent expected to be recoverable. The expected customer service period for the Cellular Business is estimated based on the expected stabilized churn rates of subscribers. Management judges that this change of accounting policy provides reliable and more relevant information because it better reflects the economic effects of the transactions. These changes in accounting policy for recognition of upfront and non-refundable revenue and direct incremental costs resulted in a decrease in the retained earnings as of December 31, 2005 by approximately RMB368 million.

		The following table summarizes the effects of adoption of this accounting policy on the consolidated statements of income:


	2004			2005
	RMB in millions			RMB in millions
(Decrease)/increase in revenue		(244	)		492
Increase in selling and marketing expenses		579			1,140
Decrease in costs of telecommunications products sold		917			786
Decrease in income tax expenses		102			40
Increase in basic earnings per share (RMB)		0.016			0.014
Increase in diluted earnings per share (RMB)		0.016			0.014

F - 16

			All changes in the accounting policies have been made in accordance with the transitional provisions in the respective standards, wherever applicable. All of the new/revised standards adopted by the Group require retrospective application other than:

	•		HKFRS 2 – only retrospective application for all equity instruments granted after November 7, 2002 and not vested at January 1, 2005; and

	•		HKFRS 3 – prospectively from January 1, 2005.

2.2		Consolidation

		The consolidated financial statements include the financial statements of the Company and its subsidiaries made up to December 31.

		Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

		Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

		The Group has acquired the equity interests of certain subsidiaries prior to 2005 (refer to Note 7 for details). The purchase method of accounting was used to account for the acquisition of those subsidiaries (including common control transactions) by the Group. Under the purchase method of accounting, the cost of an acquisition is measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of income.

		Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries would be changed when necessary to ensure consistency with the policies adopted by the Group.

		Minority interest at the balance sheet date, being the portion of the net assets of subsidiaries attributable to interests that are not owned by the Company whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheets and statements of changes in equity within equity, separately from equity attributable to the equity holders of the Company. Minority interests in the results of the Group are presented on the face of the consolidated statements of income as an allocation of the total income or loss for the year between minority interests and the equity holders of the Company.

		Where losses applicable to the minority exceed the minority’s interest in the equity of a subsidiary, the excess, and any further losses applicable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make additional investment to cover the losses. If the subsidiary subsequently reports income, the Group’s interest is allocated all such income until the minority’s share of losses previously absorbed by the Group has been recovered.

F - 17

2.3		Segment Reporting

		A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. The Group has not presented geographical segments as the Group operates primarily in one geographical segment. This is also consistent with the Group’s internal financial reporting.

		Unallocated costs primarily represent corporate expenses, income tax expense and unrealized loss on changes in fair value of derivative component of convertible bonds, whilst unallocated income represents interest income that cannot be identified to different operating segments. Segment assets consist primarily of property, plant and equipment, other assets, prepayments, inventories, receivables and operating cash. Segment liabilities primarily comprise operating liabilities. Capital expenditure mainly comprises additions to property, plant and equipment.

2.4		Foreign Currency Translation

	(a)		Functional and presentation currency

			Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entities operate (“the functional currency”). The consolidated financial statements are presented in Renminbi (“RMB”), which is the Company’s functional and presentation currency.

	(b)		Transactions and balances

			Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of income.

For the convenience of the reader, translation of amounts for RMB into United States dollars (“US$”) has been made at the noon buying rate in New York city for cable transfer payables in foreign currencies as certified for customers purposes by the Federal Reserve Bank of New York on December 29, 2006 of US$1.00=RMB7.8041. No representation is made that RMB amounts could have been, or could be, converted into US$ at that rate on December 31, 2006, or at other rate.

F - 18

2.5		Property, Plant and Equipment

		Buildings are stated at valuation. Independent valuations are performed periodically with the last valuation being performed on values as of August 31, 2006. In the intervening years, the directors review the carrying value of buildings and adjustment is made where in the directors’ opinion there has been a material change in value. Any increase in the values of the buildings is credited to the revaluation reserve; any decrease is first offset against the increase on earlier valuations recorded in the revaluation reserve, in respect of the same asset and is thereafter charged to the statement of income. Upon the disposal of revalued buildings, the realized portion of the revaluation reserve is transferred from the revaluation reserve to retained earnings.

		Other property, plant and equipment, comprising leasehold improvements, plant, telecommunications equipment, office furniture, fixtures and others, are stated at historical cost less accumulated depreciation and accumulated impairment losses. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

		Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable at the time the costs are incurred that future economic benefits associated with the item will flow to the Group, and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance costs are charged to the statement of income during the financial period in which they are incurred.

		Depreciation on property, plant and equipment is calculated using the straight-line method to allocate their costs or revalued amounts less their residual values over their estimated useful lives, as follows:


	Depreciable life	Residual rate
Buildings	10–40 years		3	%
Telecommunications equipment	3–15 years		3	%
Office furniture, fixtures and others	5–15 years		3	%

		Leasehold improvements are depreciated over the shorter of their estimated useful lives and the lease periods.

		The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

		Construction-in-progress (“CIP”) represents buildings, plant and equipment under construction and pending installation, and is stated at cost less accumulated impairment losses. Costs include construction and acquisition costs, and interest charges arising from borrowings used to finance the assets during the construction period. No provision for depreciation is made on construction-in-progress until such time as the assets are completed and ready for use.

		An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.8).

		The gain or loss on disposal of a property, plant or equipment is the differences between the net sales proceeds and the carrying amount of the relevant asset, and is recognized in the statement of income. Any revaluation reserve balance remaining attributable to the relevant asset is transferred to retained earnings and is shown as a movement in reserves.

F - 19

2.6		Goodwill/Negative Goodwill

		Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Prior to the adoption of HKFRS 3 on January 1, 2005, goodwill was carried at cost less accumulated amortization and accumulated impairment losses. In year 2004, goodwill was amortized using the straight-line method over the estimated economic lives of the acquired business. Goodwill arising on major strategic acquisitions of the Group to expand its geographical market coverage was amortized over 20 years.

		Negative goodwill represents the excess of the fair value of the Group’s share of the net identifiable assets and liabilities of the acquired subsidiary over the cost of acquisition at the date of acquisition. Prior to the adoption of HKFRS on January 1, 2005, negative goodwill was recognized using the straight-line method over the remaining weighted average useful life of acquired identifiable non-monetary assets.

		The adoption of HKFRS 3, HKAS 36 and HKAS 38 resulted in a change in the accounting policy for goodwill/negative goodwill. Effective from January 1, 2005, the Group ceased amortization of goodwill, and the accumulated amortization as of December 31, 2004 was eliminated with a corresponding decrease in the cost of goodwill. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gain or loss on the disposal of an entity includes the carrying amount of goodwill relating to the entity sold.

		In addition, in accordance with HKFRS 3, from January 1, 2005 onwards, if the fair value of the net identifiable assets and liabilities acquired exceed the cost of an acquisition (i.e. an amount arising which would have been known as negative goodwill under the previous accounting policy), the excess is recognized immediately in the consolidated statement of income as it arises. Negative goodwill recognized prior to January 1, 2005 was derecognized at January 1, 2005, with a corresponding adjustment to the balance of retained earnings as of January 1, 2005 of the Group.

		Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The Group has allocated goodwill to the GSM Business and the CDMA Business which it operates (Note 2.8).

F - 20

2.7		Other Assets

		Other assets mainly represent (i) capitalized direct incremental costs for activating GSM and CDMA subscribers; (ii) customer acquisition costs under contractual CDMA subscriber packages; (iii) computer software; (iv) prepaid rentals for premises and leased lines; and (v) prepayment for lease of land.

		Capitalized direct incremental costs for activating GSM and CDMA subscribers, including costs of SIM/UIM cards and commissions which are directly associated with upfront non-refundable revenue received upon activation of cellular services, are amortized over the expected customer service periods. The expected customer service periods are estimated based on the expected stabilized churn rates of subscribers.

		Customer acquisition costs under contractual CDMA subscriber packages represent the cost of CDMA handsets given to contractual subscribers under special promotional packages. Such customer acquisition costs, to the extent recoverable, are amortized over the contractual period (not exceeding 2 years) during which the minimum contract revenue is expected to flow to the Group. Customer acquisition costs of contractual CDMA subscribers are included in “prepayment and other current assets” when the customer contract is within 1 year of expiry, whereas they are recorded as “other assets” when the unexpired contract period is over 1 year.

		Acquired computer software licences are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives.

		Long-term prepaid rental for premises and leased lines are amortized using a straight-line method over the lease period.

		Long-term prepayments for lease of land are amortized over the period of the lease on a straight-line basis.

2.8		Impairment of Assets

		Assets that have an indefinite useful life or are not yet available for use are not subject to amortization and are tested for impairment at each balance sheet date. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Assets other than goodwill that suffered from impairment are reviewed for possible reversal of the impairment at each reporting date.

F - 21

2.9		Inventories

		Inventories, which principally comprise handsets, SIM cards, UIM cards and accessories, are stated at the lower of cost and net realizable value. Cost is based on the weighted average method and comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Net realizable value for all the inventories including those CDMA handsets for promotional package purpose is determined on the basis of anticipated sales proceeds less estimated selling expenses.

2.10		Accounts Receivable and Other Receivables

		Accounts receivable and other receivables are recognized at fair value, less provision for impairment. A provision for impairment of accounts receivable and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the assets’ carrying amount and the present value of estimated future cash flows. The carrying amount of the assets is reduced through the use of a provision account, and the amount of the loss is recognized in the statement of income. When a receivable is uncollectible, it is written off against the provision account for receivables. Subsequent recoveries of amounts previously written off are credited to the statement of income.

2.11		Short-term Bank Deposits

		Short-term bank deposits are cash invested in fixed-term deposits with original maturities ranging from more than 3 months to 1 year.

2.12		Cash and Cash Equivalents

		Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.

F - 22

2.13		Convertible Bonds

		As the functional currency of the Group is RMB, the conversion of the convertible bonds denominated in Hong Kong Dollars will not result in settlement by the exchange of a fixed amount of cash in RMB, the functional currency of the Group, for a fixed number of the Company’s shares. In accordance with the requirements of HKAS 39, Financial Instruments — Recognition and Measurement, the convertible bond contract must be separated into two component elements: a derivative component consisting of the conversion option and a liability component consisting of the straight debt element of the bonds.

		On the issue of the convertible bonds, the fair value of the embedded conversion option was calculated using the Binomial model. The derivative component, the embedded conversion option, is carried at fair value on the balance sheet with any changes in fair value being charged or credited to the statement of income in the period when the change occurs. The remainder of the proceeds is allocated to the debt element of the bonds, net of transaction costs, and is recorded as the liability component. The liability component is subsequently carried at amortized cost until extinguished on conversion or redemption. Interest expense is calculated using the effective interest method by applying the effective interest rate to the liability component through the maturity date.

		If the convertible bonds are converted, the carrying amounts of the derivative and liability components are transferred to share capital and share premium as consideration for the shares issued. If the convertible bonds are redeemed, any difference between the amount paid and the carrying amounts of both components is recognized in the statement of income.

2.14		Deferred Revenue and Advances from Customers

	(a)		Deferred revenue

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

	(b)		Advances from customers

			Advances from customers are amounts paid by customers for GSM and CDMA prepaid cards, Internet protocol (“IP”) telephone cards and other calling cards, GSM and CDMA 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.

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2.15

Employee Benefits

	(a)		Retirement benefits

			For defined contribution plan, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as employee benefit expenses when they are due. Prepaid contributions are recognized as an asset to the extent that a reduction in the future payments is available.

	(b)		Housing benefits

			The Group’s contributions to the housing fund, special monetary housing benefits and other housing benefits are expensed as incurred.

	(c)		Share-based compensation costs

			The Group operates an equity-settled share-based compensation plan. The fair value of the employee services received in exchange for the grant of the share options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the share options granted excluding the impact of any non-market vesting conditions (for example, revenue and profit targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the Group revises its estimates of the number of share options that are expected to become exercisable. The Group recognizes the impact of the revision of original estimates, if any, in the statement of income, and a corresponding adjustment to equity.

			The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the share options are exercised.

2.16		Provisions

		Provisions are recognized when the Group has present legal or constructive obligations as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

		Provisions are measured at the present value of the pre-tax amount of expenditures expected to be required to settle the obligation that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

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2.17

Revenue Recognition

	(a)		Revenue comprises the fair value of the consideration received or receivable for the services and sales of telecommunications products in the ordinary course of the Group’s activities. Revenue is shown net of business tax, government surcharges, returns and discounts and after eliminating revenue within the Group.

			Revenue is recognized when it is probable that the economic benefits associated with a transaction will flow to the Group and when the revenue and cost can be measured reliably, on the following basis:

	•		usage fees are recognized when the service is rendered;

	•		monthly fees are recognized as revenue in the month during which the services are rendered;

	•		revenue from telephone cards, which represent 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;

	•		leased lines and indefeasible rights of use (“IRU”) are treated as operating leases with rental income recognized on a straight-line basis over the lease term, except for the lease of specific and identified network assets that transfer substantially all the risks and rewards incidental to the ownership to the lessee, which is recognized as capacity sales;

	•		value-added services revenue, which mainly represents revenue from the provision of services such as short message, cool ringtone, CDMA1X wireless data services and secretarial services to subscribers, is recognized when service is rendered; and

	•		sales of telecommunications products, which mainly represent handsets and accessories, are recognized when title has been passed to the buyers.

	(b)		Interest income

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

	(c)		Dividend income

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

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2.18

Leases (as the lessee)

	(a)		Operating lease

			Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are expensed in the statement of income on a straight-line basis over the period of the lease.

	(b)		Finance lease

			Leases of assets where the Group have substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate of interest on the liability balance outstanding. The corresponding liabilities, net of finance charges, are recorded as obligations under finance leases. The interest element implicits in the lease payment is recognized in the statement of income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

2.19		Costs under Subscriber Point Reward Program

		The estimated costs of providing telecommunications services or providing non-cash gifts under the subscriber point reward program are calculated based on the value of bonus points awarded to subscribers, and are recognized as selling and marketing expenses when subscribers accumulate bonus points. The value of a bonus point and the criteria for awarding bonus points are established by the Group at the inception of the program.

2.20		Borrowing Costs

		Borrowing costs are expensed as incurred, except for interest directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use, in which case they are capitalized as part of the cost of that asset. Capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and the activities to prepare the asset for its intended use are in progress. Borrowing costs are capitalized up to the date when the project is completed and ready for its intended use.

		To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization is determined at the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings.

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		To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization is determined by applying a capitalization rate to the expenditures on that asset. The capitalization rate is the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period should not exceed the amount of borrowing costs incurred during that period. Other borrowing costs are recognized as expenses when incurred.

		The capitalized borrowing rate represents the cost of capital for raising the related borrowings externally and varies from 3.60% to 5.83% for the year ended December 31, 2006 (2004: 4.78% to 5.73%; 2005: 3.60% to 5.58%).

2.21		Taxation

	(a)		Income tax

			Income tax is provided on the basis of income for statutory financial reporting purposes, adjusted for income and expense items, which are not assessable or deductible for tax purposes.

	(b)		Deferred income tax

			Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable income or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

			Deferred income tax assets are recognized to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized.

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2.22		Dividend Distribution

		Dividend distribution to the Company’s shareholders is recognized as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders.

2.23		Related Parties

		Entities are considered to be related if one has the ability to control the other, directly or indirectly, or has the ability to exercise significant influence over the financial and operating decisions of the other. Entities are also considered to be related if they are subject to common control or common significant influence.

2.24		Contingent Liabilities and Contingent Assets

		A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognized because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

		A contingent liability is not recognized but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that outflow is probable, the liability will then be recognized as a provision.

		A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group.

		Contingent assets are not recognized but are disclosed in the notes to the financial statements when an inflow of economic benefits is probable. When an inflow is virtually certain, an asset is recognized.

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2.25		Earnings per Share and per American Depositary Share (“ADS”)

		Basic earnings per share is computed by dividing the income attributable to equity holders by the weighted average number of ordinary shares outstanding during the year.

		Diluted earnings per share is computed by dividing the income attributable to equity holders by the weighted average number of ordinary shares, after adjusting for the effects of the dilutive potential ordinary shares.

		Basic and diluted earnings per ADS are computed by multiplying the net income per share by 10, which is the number of shares represented by each ADS.

3. FINANCIAL RISK MANAGEMENT

	3.1		Financial risk factors

			The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk and fair value interest rate risks), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.

			Financial risk management is carried out by the Group’s finance department in headquarter, following the overall directions determined by the Board of Directors. The Group’s finance department identifies and evaluates financial risks in close co-operation with the Group’s operating units.

(a)

Market risk

	(i)		Foreign exchange risk

			The Group’s businesses are mainly conducted in RMB, except for certain subsidiaries located in Hong Kong, Macau and United States of America (“USA”). Dividends to equity holders are declared in RMB and paid in HK dollars. The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to US dollars and HK dollars. As of December 31, 2006, the Group had approximately USD1.0 billion bank loans and a USD1.3 billion convertible bonds recorded in the financial statements. The Group also had cash and cash equivalents and short-term bank deposits of USD501 million and HKD664 million in total. The Group has not used any forward contracts or foreign currency swap arrangements to hedge its exposure to currency risk. However, the Group’s finance department in headquarter continuously monitors the foreign exchange risk regarding loans and deposits denominated in foreign currency.

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	(ii)		Cash flow and fair value interest rate risk

			The Group’s interest-bearing assets are mainly represented by bank deposits. Apart from this, the Group’s income and operating cash flows are substantially independent of changes in market interest rates.

			The Group’s interest rate risk arises from long-term bank loans and liability component of convertible bonds. Bank loans issued at floating rates expose the Group to cash flow interest-rate risk. Bank loans, short-term bonds and liability component of convertible bonds issued at fixed rates expose the Group to fair value interest rate risk. As of December 31, 2006, RMB315 million (2005: RMB7,442 million) of long-term bank loans and RMB7,087 million (2005: RMB9,866 million) of short-term bonds and RMB7,117 million (2005: Nil) of liability component of convertible bonds were at fixed rates, while RMB7,809 million (2005: RMB9,684 million) of long-term bank loans were at floating rates.

			The Group does not expect any significant changes in interest rates which might materially affect the Group’s results of operations.

	(b)		Credit risk

			The Group has no significant concentrations of credit risk. The extent of the Group’s credit exposure is mainly represented by the aggregate balance of accounts receivable for services and amounts due from related parties and other operators.

			The Group has policies that limit the amount of credit exposure to accounts receivable for services and amounts due from related parties and other operators. The normal credit period granted by the Group is on an average 30 days from the date of invoice. The utilization of credit limits is regularly monitored by the Group.

	(c)		Liquidity risk

			Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of available financing, including short-term bank loans and issuance of bonds. Due to the dynamic nature of the underlying businesses, the Group’s finance department in headquarter maintains adequate amount of cash and cash equivalents and flexibility in funding through having available sources of financing.

3.2		Fair value estimation

		The estimate of the fair value of the conversion option of the convertible bonds, that is separated from the host debt contract and accounted for as a derivative liability, is determined by using valuation techniques. The Group selects an appropriate valuation method and makes assumptions with reference to market conditions existing at each balance sheet date. Please refer to Note 17 for details.

		The carrying value of trade receivables (net of impairment provision) and payable are a reasonable approximation of their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

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4.		CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

		Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

	4.1		Critical accounting estimates and assumptions

			The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, may not equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

	(a)		Depreciation on property, plant and equipment

			Depreciation on the Group’s property, plant and equipment is calculated using the straight-line method to allocate cost or revalued amounts to residual values over the estimated useful lives. The Group reviews 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. The Group estimates the useful lives of property, plant and equipment based on historical experience, taking into account of anticipated technological changes. If there are significant changes from previously estimated useful lives, the amount of depreciation expenses may change. The cost or revalued amount and accumulated depreciation of property, plant and equipment as of December 31, 2006 amounted to RMB205.8 billion (2005: RMB186.7 billion) and RMB94.4 billion (2005: RMB74.3 billion), respectively.

	(b)		Impairment of non-current assets

			The Group tests whether non-current assets have suffered from any impairment, in accordance with the accounting policy stated in Note 2.8. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Management estimates 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 a significant change in management’s assumptions and the estimated recoverable amounts of the non-current assets, the Group’s future results would be significantly affected.

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	(c)		Provision for doubtful debts

			Accounts receivables are stated at costs, less provision for doubtful debts. The Group evaluates specific accounts receivable where there are indications that the receivable may be doubtful or is not collectible. The Group records a provision based on its best estimates to reduce the receivable balance to the amount that is expected to be collected. For the remaining receivable balances as of each reporting date, the Group makes a provision based on observable data indicating that there is a measurable decrease in the estimated future cash flows from the remaining balances. The Group makes such estimates based on its past experience, historical collection patterns, subscribers’ credibility and collection trends. For general subscribers of Cellular, Long Distance, Data and Internet businesses, the Group makes a full provision for receivables aged over 3 months, which is consistent with its credit policy with respect to relevant subscribers.

			The Group’s estimates described above are based on past experience, subscribers’ credibility and collection trends. If circumstances change (e.g. due to factors including developments in the Group’s business and the external market environment), the Group may need to re-evaluate its policies on doubtful debts, and make additional provisions in the future.

	(d)		Provision for subscriber point reward program

			The Group has implemented a subscriber point reward program, which is a bonus point based scheme that rewards subscribers according to their service consumption, loyalty and payment history. The cost of the subscriber point reward program is charged to the statement of income as “selling and marketing” expenses, instead of a reduction of revenue. The estimated liability is recognized based on (i) the value of each bonus point awarded to subscribers, and (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. If subscribers redeem rewards or their entitlements expire, the provision is adjusted accordingly. The Group has recognized a liability for this program amounting to RMB556 million as of December 31, 2006 (2005: RMB337 million). As the Group has not had much historical incentive redemption experience in the past, the Group may need to re-assess the method for accruing for the potential bonus point liability when there is a more stabilized and reliable historical redemption statistics in future.

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	(e)		Income tax and deferred taxation

			The Group estimates its 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 it is entitled in each location or jurisdiction in which the Group operates. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes 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 the evaluation of temporary differences, the Group has assessed the likelihood that the deferred tax assets could be recovered. Major deferred tax assets relate to interest on loans from China-China-Foreign (“CCF”) joint ventures, loss arising from terminations of CCF arrangements (Note 9(g)), provisions for doubtful debts and write-down of inventory to net realizable value and additional depreciation deductible for tax purposes. Due to the effects of these temporary differences on income tax, the Group has recorded deferred tax assets amounting to RMB0.31 billion as of December 31, 2006 (2005: RMB0.34 billion). Deferred tax assets are recognized based on the Group’s estimates and assumptions that they will be recovered from taxable income arising from the continuing operations in the foreseeable future.

			The Group believes it has recorded adequate current tax provision and deferred taxes based on the prevailing tax rules and regulations and its current best estimates and assumptions. In the event that future tax rules and regulations or related circumstances change, adjustments to current and deferred taxation may be necessary.

	(f)		Fair value of conversion option

			On July 5, 2006, the Company issued a zero coupon convertible bonds with an aggregate principal amount of USD1 billion. The three-year convertible bonds was issued with a conversion price of HKD8.63 and will mature on July 5, 2009. The embedded conversion option has been separated from the host debt contract and accounted for as a derivative liability carried at fair value through profit or loss (Note 17). The fair value of this conversion option which is not traded in an active market is determined by using valuation techniques. The Group uses its judgement to select an appropriate valuation method and makes assumptions that are mainly based on market conditions existing at each balance sheet date. The valuation model requires the input of subjective assumptions, including the volatility of share price, stock closing price, dividend yield, risk-free rate, and expected option life. Changes in subjective input assumptions can materially affect the fair value estimate. For the year ended December 31, 2006, the unrealized loss resulting from changes in fair value of the conversion option of the convertible bonds was approximately RMB2.4 billion.

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4.2

Critical judgements in applying the entity’s accounting policies

	(a)		Capitalization of CDMA customer acquisition costs

			The Group has been operating the CDMA business since the beginning of 2002. In order to accelerate the development of the CDMA business and subscriber growth, the Group offers certain promotional packages. As part of the contractual arrangements with certain CDMA contractual subscribers under these special promotional packages, CDMA handsets were provided to the subscribers for their use at no additional charge during the specified contract period ranging from six months to two years. In return, the subscribers are required to incur a minimum amount of service fees during the contract period. If the contractual subscribers can fulfill the minimum contract spending amounts by the end of the contract period, they will not be obliged to repay the remaining costs of the CDMA handsets given for their use. In addition, to secure contract performance, these subscribers are required under their contracts to (1) prepay certain amounts of service fees or deposits, (2) maintain a bank deposit in one of the designated commercial banks to secure their minimum contract amounts, or (3) provide a guarantor who will compensate the Group for any loss in the event of the subscriber’s non-performance of related contractual obligations.

			The Group considers the costs of the CDMA handsets provided to contractual subscribers under these promotional packages as customer acquisition costs for the development of these new CDMA contractual subscribers. Such customer acquisition costs are deferred to the extent expected to be recoverable, and amortized over the contractual periods (not exceeding two years), over which future economic benefits are expected to flow to the Group in the form of minimum contract revenue.

			The Group determined its accounting policy for capitalization of customer acquisition costs of contractual CDMA subscribers after a careful evaluation of specific facts and circumstances, and believes that the capitalization of such costs is appropriate because future economic benefits are expected to flow to the Group in the form of future contractual revenues, taking into consideration (1) the historically high ARPUs and low churn rate, and low default or bad debt rates of these subscribers; (2) the Group’s established procedures in and the relative low cost of enforcement of contracts in default; and (3) the existence of specified contract periods with minimum contract spending amounts and built-in contractual safeguarding measures such as non-refundable prepayments, bank deposits, and guarantees received, as well as penalty clauses imposed on subscribers.

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			Therefore, the Group believes that the customer acquisition costs are recoverable from future revenue to be derived from these promotional packages, and the capitalization and amortization of these customer acquisition costs is an appropriate accounting policy. Furthermore, the Group continuously assesses and evaluates the recoverability of these customer acquisition costs, based on detailed review of historical subscriber churn rates and estimated default rate. Based on the Group’s current assessment and evaluation, the Group believes that there is no significant problem in recovering the carrying amounts of the customer acquisition costs as of the balance sheet date.

			The Group has made the above recoverability assessments based on the current legal and operating environment relating to the subscribers’ contract performance and other information currently available. Actual results may differ significantly from the current situation and the Group’s current estimates. If the situation changes significantly in the future, the Group may need to accelerate the amortization of customer acquisition costs based on conditions at that time.

	(b)		Recognition of upfront non-refundable revenue and direct incremental costs

			The Group defers and amortizes upfront non-refundable revenue, including connection fees and activation fees of SIM cards or UIM cards from cellular 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 cellular services, are also capitalized and amortized over the same expected customer service period. The Group only capitalizes 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 statement of income immediately.

			The expected customer service period for the cellular 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, telecommunication technology or regulatory environment, the amount and timing of recognition of these direct incremental costs and our deferred revenue would also change.

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	(c)		Lease of CDMA network capacity

			Pursuant to a CDMA lease agreement signed by the Group and Unicom Group’s wholly-owned subsidiary, Unicom New Horizon Mobile Telecommunications Company Limited (“Unicom New Horizon”) in 2002 ( “Original CDMA Lease Agreement”), Unicom New Horizon agreed to lease the capacity of the CDMA network to the Group.

			According to the terms of the Original CDMA Lease Agreements, the initial lease period is for one year, renewable for additional one-year term at the Group’s option. The Group has the exclusive right to lease and operate the CDMA network capacity in the relevant regions. Also, the Group has the option to add or reduce the capacity leased by giving specified period of advance notice. The lease fee per unit of capacity is calculated on a basis that if full capacity is leased, it would permit Unicom New Horizon to recover its investment in constructing the CDMA network in 7 years, together with an internal return rate of 8%. The Group has the option to purchase the network assets based on the appraised value of the network determined by an independent appraiser.

			Unicom New Horizon has the legal ownership of the CDMA network, is directly responsible for the planning, financing and construction of the CDMA network, and directly enters into all construction contracts with suppliers and constructors. The Group believes it only bears the risks associated with the operation of the CDMA business during the relevant leasing periods and is free from any ownership risks of the CDMA network and the risks and rewards of ownership of the leased assets rest substantially with the lessor.

			At the inception of the Original CDMA Lease Agreement, there was a high degree of uncertainty related to the market condition and operating results of the CDMA business. It was highly uncertain whether the Group would continue to lease the network in the future or to estimate the future network capacity to be leased. The Group was also unable to determine whether or not they would exercise the purchase option in future. Given these uncertainties and due to the fact that the risks associated with the ownership of the CDMA assets substantially remained with Unicom Group and Unicom New Horizon, the Group accounted for the leasing of the CDMA network as operating leases for the initial three-year lease period, so as to reflect the respective rights and obligations of the relevant parties to the Original CDMA Lease Agreement.

			On March 24, 2005, the Group entered into another CDMA Lease Agreement ( “2005 CDMA Lease Agreement”) with Unicom Group and Unicom New Horizon to replace the Original CDMA Lease Agreement. Key terms of the 2005 CDMA Lease Agreement, including exclusive operating rights and purchase option, are substantially similar to those contained in the Original CDMA Lease Agreement except that the CDMA lease has an initial term of two years and the lease fee of the CDMA Network is to be determined on the basis of the audited CDMA service revenue. Given that the uncertainties continued, the Group considered the risks associated with the ownership of the CDMA assets still substantially remain with Unicom Group and Unicom New Horizon, and has concluded the leasing of the CDMA network continues to be an operating lease.

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On October 26, 2006, the Group entered into a new CDMA Lease Agreement (the “2006 CDMA Lease Agreement”) with Unicom Group and Unicom New Horizon to renew the 2005 CDMA Lease Agreement effective from January 1, 2007. Pursuant to the 2006 CDMA Lease Agreement, the initial lease period is for one year, renewable for an additional one-year term at the Group’s option. The lease fee of the CDMA network for 2007 and 2008 is as follows:

	•		31% of the audited CDMA service revenue of the lessee for each of the years 2007 and 2008; or

	•		30% of the audited CDMA service revenue of the lessee for the year 2007 or 2008, where the audited CDMA income before taxation of the lessee for the relevant year is less than the audited CDMA income before taxation of the lessee for the year 2006 as set out in the relevant annual audited financial statements of the lessee.

			Under the 2006 CDMA Lease Agreement, the annual lease fee of the CDMA network shall not be less than a certain minimum level (the “Minimum Lease Fee”) regardless of the amount of CDMA service revenue for that year. The Minimum Lease Fee for 2007 shall be 90% of the total amount of lease fee paid by the Group to Unicom New Horizon for 2006 pursuant to the 2005 CDMA Lease Agreement. The Minimum Lease Fee for 2008 shall be 90% of the total amount of lease fee paid by the Group to Unicom New Horizon for 2007 pursuant to the 2006 CDMA Lease Agreement. The level of lease fee under the 2006 CDMA Lease Agreement has been set by reference to the Group’s view of the industry trends, including factors such as CDMA subscribers and average revenue per user per month levels.

			At the inception of the 2006 CDMA Lease Agreement, the Group believes the uncertainties of the CDMA business continue to exist, particularly due to the fact that (i) the service revenue of CDMA business was stagnant in 2006; (ii) the uncertainty of the future success of CDMA business arising from keen market competition; and (iii) the uncertainty of the future changes in technology, technological standards and government regulatory environment. Moreover, at the inception of the 2006 CDMA Lease Agreement, the Group was still unable to determine whether it would renew the lease after the initial one-year lease term or whether it would exercise the purchase option. As a result, the Group considered the risks associated with the ownership of the CDMA assets still substantially remain with Unicom Group and Unicom New Horizon, and has concluded the leasing of the CDMA network will still be accounted for as an operating lease in 2007. At the beginning of each future lease term, the Group will reassess the appropriate classification based on the relevant factors and circumstances at that time.

			Based on the above accounting judgement made, the operating lease expense for the leasing of CDMA network has been recorded in the statement of income, and the carrying value of the CDMA assets and the related liabilities have not been reflected in the balance sheets. For the year ended December 31, 2006, the lease expense of approximately RMB8.08 billion (2004: 6.59 billion; 2005: RMB7.92 billion) was recorded under leased lines and network capacities in the statement of income.

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5.		SEGMENT INFORMATION

		The Group comprises four business segments based on the various types of telecommunications services mainly provided to customers in Mainland China. The major business segments operated by the Group are classified as below:

	•		GSM Business — the provision of GSM telephone and related services;

	•		CDMA Business — the provision of CDMA telephone and related services, through a leasing arrangement for CDMA network from Unicom New Horizon;

	•		Data and Internet Business — the provision of domestic and international data, Internet and other related services; and

	•		Long Distance Business — the provision of domestic and international long distance and other related services.

The Group’s primary measure of segment results is based on segment income or loss before income tax. Unallocated costs primarily represent corporate expenses, income tax expense and unrealized loss on change in fair value of derivative component of convertible bonds, whilst unallocated income represents interest income that cannot be identified to different operating segments.

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5.1 Business Segments


	2006																					2005
							Data and			Long																		Data and			Long
	GSM			CDMA			Internet			Distance			Unallocated									GSM			CDMA			Internet			Distance			Unallocated
	Business			Business			Business			Business			amounts			Elimination			Total			Business			Business			Business			Business			amounts			Elimination			Total
Revenue (Turnover):
Usage fee		33,609,094			14,695,758			1,770,321			64,337			—						50,139,510			32,077,305			16,726,678			2,540,574			599,251			—						51,943,808
Monthly fee		7,370,440			5,025,422			—			—			—						12,395,862			6,840,720			4,905,538			—			—			—						11,746,258
Interconnection revenue		4,914,964			1,732,360			92,140			424,792			—						7,164,256			3,466,067			1,398,577			102,989			434,577			—						5,402,210
Leased lines rental		—			—			473,708			574,728			—						1,048,436			—			—			393,659			489,969			—						883,628
Value-added service revenue		11,543,343			5,314,118			—			—			—						16,857,461			7,966,629			4,115,542			—			—			—						12,082,171
Other revenue		1,852,580			525,484			39,147			4,565			—						2,421,776			1,784,807			430,601			12,745			776			—						2,228,929

Total services revenue		59,290,421			27,293,142			2,375,316			1,068,422			—						90,027,301			52,135,528			27,576,936			3,049,967			1,524,573			—						84,287,004
Sales of telecommunications products		8,174			4,257,118			1,900			—			—						4,267,192			3,174			2,743,337			7,226			8,090			—						2,761,827

Total revenue from external customers		59,298,595			31,550,260			2,377,216			1,068,422			—						94,294,493			52,138,702			30,320,273			3,057,193			1,532,663			—						87,048,831
Intersegment revenue		—			—			2,978,468			1,783,015			—			(4,761,483	)		—			—			—			2,553,242			1,189,531			—			(3,742,773	)		—

Total revenue		59,298,595			31,550,260			5,355,684			2,851,437			—						94,294,493			52,138,702			30,320,273			5,610,435			2,722,194			—						87,048,831
Leased lines and network capacities		(235,033	)		(8,160,189	)		(303,858	)		(64,785	)		—						(8,763,865	)		(253,790	)		(8,035,534	)		(369,644	)		(88,349	)		—						(8,747,317	)
Interconnection charges		(9,498,433	)		(3,449,676	)		(481,528	)		(927,468	)		—			4,761,483			(9,595,622	)		(7,207,123	)		(3,345,180	)		(600,462	)		(962,378	)		—			3,742,773			(8,372,370	)
Depreciation and amortization		(18,614,663	)		(717,828	)		(2,419,598	)		(670,191	)		(532	)					(22,422,812	)		(17,315,209	)		(614,297	)		(1,886,178	)		(551,045	)		(1,452	)					(20,368,181	)
Employee benefit expenses		(4,136,669	)		(1,529,543	)		(527,358	)		(272,653	)		(182,476	)					(6,648,699	)		(3,550,780	)		(1,176,502	)		(492,376	)		(297,160	)		(99,494	)					(5,616,312	)
Selling and marketing		(9,336,325	)		(9,007,838	)		(683,402	)		(224,078	)		(61	)					(19,251,704	)		(7,546,848	)		(11,308,449	)		(1,386,790	)		(315,791	)		—						(20,557,878	)
General, administrative and other expenses		(9,481,491	)		(2,849,754	)		(797,130	)		(259,900	)		(27,293	)					(13,415,568	)		(8,054,364	)		(2,537,950	)		(867,670	)		(259,705	)		(21,871	)					(11,741,560	)
Cost of telecommunications products sold		(188,239	)		(4,735,533	)		(6,197	)		(19	)		—						(4,929,988	)		(80,674	)		(3,477,893	)		(16,315	)		(434	)		—						(3,575,316	)
Unrealized loss on changes in fair value of derivative component of convertible bonds		—			—			—			—			—						(2,396,592	)		—			—			—			—			—						—
Finance costs		(475,456	)		(46,359	)		(35,512	)		(54,229	)		(467,026	)		424,362			(654,220	)		(943,214	)		(42,368	)		(37,043	)		(66,787	)		(223,682	)		213,773			(1,099,321	)
Interest income		122,601			6,846			12,483			2,323			539,149			(424,362	)		259,040			64,626			8,958			2,915			3,807			229,663			(213,773	)		96,196
Other gains (loss) — net		23,474			1,027			246			(3,409	)		15						21,353			25,591			9,043			65			229			(3	)					34,925

Segment income (loss) before income tax		7,478,361			1,061,413			113,830			377,028			(138,224	)					6,495,816			7,276,917			(199,899	)		(43,063	)		184,581			(116,839	)					7,101,697


Income tax expenses																				(2,763,885	)																				(2,170,411	)

Net income																				3,731,931																					4,931,286


Attributable to:
Equity holders of the Company																				3,731,824																					4,931,052
Minority interest																				107																					234

																				3,731,931																					4,931,286


Other information:
Provision for doubtful debts		1,124,113			457,942			106,883			52,827			—						1,741,765			867,154			458,161			139,327			33,868			—						1,498,510

Capital expenditures for segment assets (a)		10,577,010			—			2,500,814			2,640,789			5,827,151						21,545,764			7,333,030			—			1,962,796			2,162,637			6,154,335						17,612,798


	December 31, 2006															December 31, 2005
					Data and															Data and
	GSM		CDMA		Internet		Long Distance		Unallocated							GSM		CDMA		Internet		Long Distance		Unallocated
	Business		Business		Business		Business		amounts		Elimination			Total		Business		Business		Business		Business		amounts		Elimination			Total
Total segment assets		107,288,975		7,722,626		8,300,155		16,810,768		56,477,257		(50,161,795	)		146,437,986		107,723,037		4,087,906		7,518,912		17,794,349		55,667,580		(50,161,795	)		142,629,989

Total segment liabilities		38,594,177		7,666,939		2,801,914		3,673,741		14,289,557					67,026,328		45,706,440		5,620,722		2,519,018		4,973,134		7,523,596					66,342,910

F - 39


	2004
	GSM			CDMA			Data and Internet			Long Distance			Unallocated
	Business			Business			Business			Business			amounts			Elimination			Total
Revenue (Turnover):
Usage fee		31,997,020			16,164,333			2,685,083			879,281			—						51,725,717
Monthly fee		6,922,400			4,638,024			—			—			—						11,560,424
Interconnection revenue		2,614,268			927,288			131,371			454,383			—						4,127,310
Leased lines rental		—			—			344,014			512,134			—						856,148
Value-added service revenue		4,818,822			2,370,872			461,492			—			—						7,651,186
Other revenue		1,156,442			277,157			40,774			2,211			—						1,476,584

Total services revenue		47,508,952			24,377,674			3,662,734			1,848,009			—						77,397,369
Sales of telecommunications products		4,128			1,668,444			14,782			2,401			—						1,689,755

Total revenue from external customers		47,513,080			26,046,118			3,677,516			1,850,410			—						79,087,124
Intersegment revenue		135,521			107,477			2,059,881			1,264,140			—			(3,567,019	)		—

Total revenue		47,648,601			26,153,595			5,737,397			3,114,550			—						79,087,124
Leased lines and network capacities		(284,092	)		(6,685,059	)		(361,412	)		(67,565	)		—						(7,398,128	)
Interconnection charges		(6,452,988	)		(2,794,843	)		(917,294	)		(918,480	)		—			3,567,019			(7,516,586	)
Depreciation and amortization		(16,118,746	)		(438,957	)		(1,795,499	)		(530,695	)		(127,177	)					(19,011,074	)
Employee benefits expenses		(2,917,299	)		(861,614	)		(443,466	)		(279,664	)		(113,014	)					(4,615,057	)
Selling and marketing		(6,324,638	)		(11,347,712	)		(1,387,453	)		(463,477	)		—						(19,523,280	)
General, administrative and other expenses		(7,068,838	)		(2,206,458	)		(865,889	)		(320,115	)		(38,941	)					(10,500,241	)
Cost of telecommunications products sold		(135,172	)		(2,399,360	)		(22,371	)		(5,742	)		—						(2,562,645	)
Finance costs		(1,606,741	)		(36,755	)		(17,569	)		(36,962	)		(112,429	)		114,381			(1,696,075	)
Interest income		67,526			11,093			5,504			3,653			129,512			(114,381	)		102,907
Other gains (loss), net		22,382			42,695			(1,195	)		140			39,625						103,647

Segment income (loss) before income tax		6,829,995			(563,375	)		(69,247	)		495,643			(222,424	)					6,470,592


Income tax expenses																				(1,977,141	)

Net income																				4,493,451


Attributable to:
Equity holders of the Company																				4,493,451
Minority interest																				—

																				4,493,451


Other information:
Provision for doubtful debts		1,317,374			645,470			164,514			64,462			—						2,191,820

Capital expenditures for segment assets (a)		6,396,406			—			2,444,623			1,949,202			7,373,877						18,164,108


	December 31, 2004
	GSM		CDMA		Data and Internet		Long Distance		Unallocated
	Business		Business		Business		Business		amounts		Elimination			Total
Total segment assets		102,693,857		7,119,115		9,470,980		18,042,840		62,101,761		(50,390,158	)		149,038,395

Total segment liabilities		51,493,461		8,624,230		4,437,311		5,408,689		6,632,463					76,596,154

(a) Capital expenditures classified under “Unallocated amounts” represent capital expenditures on common facilities, which benefit all business segments.

F - 40

	5.2		Geographical Segments

			The customers of the Group’s services are mainly in mainland China. There is no other geographical segment with segment revenue from external customers equal to or greater than 10% of total revenue.

			In addition, although the Group has its corporate headquarter in Hong Kong, a substantial portion of the Group’s non-current assets (including property, plant and equipment and other assets) are situated in mainland China, as the Group’s principal activities are conducted in mainland China. For 2004, 2005 and 2006, substantially all capital expenditures were incurred to acquire assets located in mainland China and less than 10% of the Group’s assets and operations are located outside mainland China. Accordingly, no geographical segment information is presented.

6. PROPERTY, PLANT AND EQUIPMENT


	2006																		2005
							Office
				Tele-			furniture,
				communications			fixtures and			Leasehold			Construction-
	Buildings			equipment			others			improvements			in-progress			Total			Total
Cost or valuation:
Beginning of year		13,614,937			144,752,704			8,370,669			1,120,171			18,826,688			186,685,169			173,835,655
Revaluation surplus		200,330			—			—			—			—			200,330			—
Additions		566,212			348,077			139,036			—			20,492,439			21,545,764			17,612,798
Transfer from CIP		737,505			23,240,505			1,532,868			477,166			(25,988,044	)		—			—
Reclassification to other assets (Note 36)		(528,428	)		—			—			—			—			(528,428	)		(4,194,413	)
Disposals		(22,296	)		(1,478,238	)		(425,924	)		(214,304	)		—			(2,140,762	)		(568,871	)


End of year		14,568,260			166,863,048			9,616,649			1,383,033			13,331,083			205,762,073			186,685,169

Representing:
At cost		2,036,229			166,863,048			9,616,649			1,383,033			13,331,083			193,230,042			184,314,396
At valuation		12,532,031			—			—			—			—			12,532,031			2,370,773

		14,568,260			166,863,048			9,616,649			1,383,033			13,331,083			205,762,073			186,685,169


Accumulated depreciation:
Beginning of year		3,110,261			66,942,910			3,502,469			741,937			14,307			74,311,884			55,343,535
Charge for the year		454,958			19,524,750			1,753,763			271,990			—			22,005,461			19,931,501
Reclassification to other assets (Note 36)		—			—			—			—			—			—			(511,266	)
Disposals		(16,473	)		(1,418,541	)		(287,459	)		(214,304	)		—			(1,936,777	)		(451,886	)


End of year		3,548,746			85,049,119			4,968,773			799,623			14,307			94,380,568			74,311,884


Net book value:
End of year		11,019,514			81,813,929			4,647,876			583,410			13,316,776			111,381,505			112,373,285


Beginning of year		10,504,676			77,809,794			4,868,200			378,234			18,812,381			112,373,285			118,492,120

For the year ended December 31, 2006, interest expense of approximately RMB423 million (2004: RMB648 million; 2005: RMB683 million) was capitalized to construction-in-progress.

F - 41

During 2006, the Group engaged an independent property valuation firm to undertake a valuation of the buildings of the Group as of August 31, 2006 (“2006 Revaluation”), using the replacement cost or open market value approach, as appropriate. Based on the 2006 Revaluation, an additional revaluation surplus of approximately RMB200 million was recognized. The valuation surplus net of the related deferred income tax of approximately RMB105 million (Note 9) was credited to revaluation reserve in shareholders’ equity. The accumulated revaluation surplus on the buildings resulting from all previous and current valuations of the buildings as of December 31, 2006 was RMB272 million. As of December 31, 2006, the carrying value of buildings would have been approximately RMB10,701 million (2005: RMB10,379 million) had they been stated at historical cost less accumulated depreciation. The directors considered the fair values of these buildings were not materially different from their carrying values as of December 31, 2006. The additional depreciation attributable to the revaluation surplus amounted to approximately RMB8.80 million for 2006 (2004: RMB8.80 million; 2005: RMB8.80 million).

Telecommunications equipment held under finance leases represents wireless public phone equipment. As of December 31, 2006, net book value of wireless public phone equipment under finance leases amounted to approximately RMB231 million (2005: RMB354 million) (Note 18).

For the year ended December 31, 2006, the Group recognized loss on disposal of property, plant and equipment of approximately RMB145 million (2004: RMB11 million; 2005: RMB25 million).

For comparative purpose, the carrying value of land use rights underlying the buildings acquired from third parties amounting to approximately RMB3.7 billion was reclassified from “Property, plant and equipment” to “Other assets” in the 2005 comparative consolidated balance sheet.

F - 42

GOODWILL


	2005		2006
Cost:
Goodwill arising from acquisitions		3,143,983		3,143,983

Goodwill arising from the acquisitions of Unicom New Century Telecommunications Co., Ltd. and Unicom New World Telecommunications Co., Ltd. in 2002 and 2003 respectively represented the excess of the purchase considerations over the Group’s shares of the fair values of the separately identifiable net assets acquired.

Goodwill is allocated to the Group’s cash-generating units (“CGU”) identified according to business segments. The recoverable amount of goodwill is determined based on value in use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by management, including expected profit margins, growth rates and the applicable discount rates. Management determined expected profit margins based on past performance and its expectations in relation to market developments. The expected growth rates used are consistent with the forecasts of the business segments. The discount rates used are pre-tax and reflect specific risks relating to the business. Based on management’s assessment results, there was no impairment of goodwill as of December 31, 2005 and 2006.

OTHER ASSETS


	Note		2005		2006
Direct incremental costs for activating cellular subscribers		(a)		3,191,853		2,243,384
Customer acquisition costs of contractual CDMA subscribers		4.2(a),(b)		2,416,224		1,643,623
Long-term prepayment for lease of land		(c), 6, 36		4,189,326		4,867,840
Purchased software		(d)		276,803		677,187
Prepaid rental for premises and leased lines				858,661		1,005,514
Others		(d)		568,863		739,021


				11,501,730		11,176,569

F - 43

(a)

For the year ended December 31, 2006, amortization of direct incremental costs for activating GSM and CDMA subscribers amounted to RMB1,817 million (2004: RMB936 million; 2005: RMB1,582 million) (Note 24), which has been included in “selling and marketing” expenses.

(b)

For the year ended December 31, 2006, amortization of the customer acquisition costs of contractual CDMA subscribers amounted to approximately RMB4,205 million (2004: RMB6,121 million; 2005: RMB5,948 million) (Note 24) which was recorded in “selling and marketing” expenses. As of December 31, 2006, the carrying amount of unamortized customer acquisition costs of contractual CDMA subscribers totaled approximately RMB2,102 million (2005: RMB2,944 million), with approximately RMB1,644 million (2005: RMB2,416 million) recorded in “other assets” (for contracts expiring over 1 year) and approximately RMB458 million (2005: RMB528 million) recorded in “prepayments and other current assets” (for contracts expiring within 1 year) (Note 12).

(c)

The Group’s long-term prepayment for lease of land represents prepaid operating lease payments for land use rights in Mainland China and their net book value is analyzed as follows:


	2005		2006
Held on:
Leases of between 10 to 50 years		4,174,864		4,833,011
Leases of less than 10 years		14,462		34,829


		4,189,326		4,867,840

For comparative purposes, the carrying value of land use rights underlying the buildings acquired from third parties was reclassified from “Property, plant and equipment” to “Other assets” in the 2005 comparative consolidated balance sheet. Please refer to Note 6 for details.

For the year ended December 31, 2006, the long-term prepayment for lease of land expensed in statement of income amounted to RMB171.0 million (2004: RMB26.0 million; 2005: RMB28.4 million), which was recorded in “general, administrative and other expenses”.

(d)

For the year ended December 31, 2006, the amortization of purchased software and others of other assets amounted to approximately RMB417 million (2004: RMB664 million; 2005: RMB437 million) (Note 24).

F - 44

9.		TAXATION

		Provision for taxation represents:


	2004		2005		2006
Provision for income tax on the estimated taxable income for the year
- Hong Kong		—		1,063		4,817
- Outside Hong Kong		1,422,635		2,033,457		2,838,365

		1,422,635		2,034,520		2,843,182
Deferred taxation		554,506		135,891		(79,297	)


		1,977,141		2,170,411		2,763,885

	(a)		The Company did not have any assessable income sourced from Hong Kong for the years ended December 31, 2004, 2005 and 2006.

	(b)		China Unicom International Limited (“Unicom International”, a subsidiary of the Company) assessed its income tax liability in Hong Kong using the tax rate of 17.5% (2004: 17.5%; 2005: 17.5%). The income tax liability of Unicom International amounted to approximately RMB4.82 million for the year ended December 31, 2006 (2004: nil, 2005: RMB1.06 million).

	(c)		China Unicom (Macau) Company Limited (“Unicom Macau”, a subsidiary of the Company) assessed its income tax liability in Macau, using progressive tax rates from 3% to 12%. There is no Macau income tax liability of Unicom Macau for the years ended December 31, 2004, 2005 and 2006 as there were no assessable income in these years.

	(d)		Unicom Huasheng Telecommunications Technology Company Limited (“Unicom Huasheng”, a subsidiary of the Company) and its branches are subject to income tax at the statutory enterprise income tax rate of 33% in Mainland China. The income tax liabilities of Unicom Huasheng and its branches were assessed separately by relevant local tax authorities.

	(e)		Various provincial/municipal branches of China Unicom Corporation Limited (“CUCL”, a subsidiary of the Company) were granted preferential tax treatment by relevant tax authorities to assess their enterprise income tax at the rates of 13% or 18% in mainland China for the years ended December 31, 2004, 2005 and 2006. The remaining provincial branches were assessed at the standard tax rate of 33%.

F - 45

Reconciliation between applicable statutory tax rate and the effective tax rate:


	Note			2004			2005			2006
Mainland China statutory tax rate of 33%					33.0	%		33.0	%		33.0	%
Non-deductible expenses					3.2	%		1.9	%		1.7	%
Unrealized loss on changes in fair value of derivative component of convertible bonds					—			—			12.2	%
Non-taxable income
- Connection fee					(2.1	%)		(1.2	%)		(1.3	%)
- Interest income					(0.7	%)		(0.1	%)		(0.6	%)
- Line leasing income					(0.1	%)		(0.1	%)		—
Impact of PRC preferential tax rates					(2.1	%)		(2.2	%)		(2.3	%)
Increase in opening deferred tax assets resulting from an increase in tax rate					(0.4	%)		—			—
Investment tax credits for domestic equipment		(f	)		(0.2	%)		(0.7	%)		(0.2	%)

Effective tax rate					30.6	%		30.6	%		42.5	%

Tax effect of preferential tax rate is as follows:


	2004		2005		2006
Aggregate amount (RMB in millions)		135		155		150
Per share effect (RMB)		0.011		0.012		0.012

(f)

For the years ended December 31, 2004, 2005 and 2006, tax credits represented investment tax credits relating to the additions of certain domestic equipment that were deductible against current income tax.

F - 46

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset tax assets against tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows:


	2005			2006
Deferred tax assets:
- Deferred tax asset to be recovered after 12 months		1,004,323			787,991
- Deferred tax asset to be recovered within 12 months		737,740			887,636


		1,742,063			1,675,627


Deferred tax liabilities:
- Deferred tax liabilities to be settled after 12 months		(1,278,531	)		(1,051,774	)
- Deferred tax liabilities to be settled within 12 months		(128,298	)		(314,185	)


		(1,406,829	)		(1,365,959	)


Net deferred tax assets after offsetting		335,234			309,668


Deferred tax liabilities that cannot be offset		(5,613	)		(5,879	)

There were no material unrecognized deferred tax assets as of December 31, 2005 and 2006.

The movement of the net deferred tax assets/liabilities is as follows:


	2004			2005			2006
Net deferred tax assets after offsetting :
- Beginning of year		1,022,108			468,774			335,234
- Deferred tax (charged) /credited to the statement of income		(553,334	)		(133,540	)		79,563
- Deferred tax charged to equity (Note 6)		—			—			(105,129	)


- End of year		468,774			335,234			309,668


The deferred tax liabilities that can not be offset:
- Beginning of year		—			(3,262	)		(5,613	)
- Acquisition of a subsidiary		(2,090	)		—			—
- Deferred tax charged to the statement of income		(1,172	)		(2,351	)		(266	)


- End of year		(3,262	)		(5,613	)		(5,879	)

F - 47

Deferred taxation as of year-end represents the taxation effect of the following temporary differences:


	Note			2005			2006
Mainland China Enterprises
Deferred tax assets:
Interest on loans from CCF joint ventures		(g	)		96,012			45,463
Loss arising from terminations of CCF Arrangements		(g	)		111,003			20,636
Provision for doubtful debts					399,590			492,920
Write-down of inventories to net realizable value					43,780			32,858
Accruals of retirement benefits					4,670			18,137
Additional depreciation deductible for tax in future years					12,361			6,315
Monetary housing benefits					11,784			12,607
Differences on tax basis for the residual value of property, plant and equipment					10,045			—
Net amount of deferral and amortization of upfront non-refundable revenue					891,467			740,429
Accruals of expenses not yet deductible for tax purpose					137,279			232,863
Others					24,072			73,399


					1,742,063			1,675,627

Deferred tax liabilities:
Net amount of capitalization and amortization of direct incremental costs					(925,462	)		(740,429	)
Capitalized interest already deducted for tax purpose					(481,367	)		(520,401	)
Revaluation of buildings (Note 6)					—			(105,129	)


					(1,406,829	)		(1,365,959	)


					335,234			309,668


Hong Kong Enterprises
Deferred tax liabilities:
Accelerated depreciation for tax purpose					(5,613	)		(5,879	)

F - 48

(g)

Prior to 2000, in the process of developing its cellular networks, the GSM Business has entered into cooperation agreements with certain contractual joint ventures (the “CJVs”) established in Mainland China. Each CJV was established by one or more Chinese enterprises and one or more foreign parties. The aforementioned cooperation arrangements are referred to as the China-China-Foreign Arrangement (the “CCF Arrangements”). Pursuant to the CCF Arrangements, the CJVs extended funding to the GSM Business for the construction of telecommunications systems and network equipment in Mainland China. Based on the terms of the cooperation agreements, the CCF Arrangements had been accounted for as secured financing arrangements to the GSM Business, and interest had been accrued by the GSM Business based on the funds provided by the CJVs at the then prevailing market borrowing rates. All CCF Arrangements had been terminated in 1999 and 2000, the related loss on the termination of CCF Arrangements was charged to the statement of income as incurred. Pursuant to the approval of relevant tax authorities, all the interest costs and the loss on termination of these CCF Arrangements are to be deducted against current taxable income over 7 years. The resulting deferred tax assets were recognized accordingly.

10.

INVENTORIES


	2005		2006
Handsets		1,121,288		1,462,210
Telephone cards		592,490		522,161
Others		394,034		349,531


		2,107,812		2,333,902

The cost of inventories recognized as expense and included in cost of telecommunications products sold amounted to approximately RMB4,930 million (2004: RMB2,524 million; 2005: RMB3,575 million).

For the year ended December 31, 2006, the write-down of inventories to net realizable value amounted to RMB43 million (2004: RMB69 million; 2005: RMB20 million), which was mainly due to the decline of market values of certain handsets.

F - 49

11.

ACCOUNTS RECEIVABLE, NET


	2005			2006
Accounts receivable for GSM services		4,021,887			3,416,679
Accounts receivable for CDMA services		2,648,504			2,264,188
Accounts receivable for Data and Internet services		522,579			323,369
Accounts receivable for Long Distance services		444,010			458,402

Sub-total		7,636,980			6,462,638

Less: Provision for doubtful debts for GSM services		(1,821,057	)		(1,841,212	)
Provision for doubtful debts for CDMA services		(954,185	)		(905,094	)
Provision for doubtful debts for Data and Internet services		(83,711	)		(77,006	)
Provision for doubtful debts for Long Distance services		(229,598	)		(219,983	)


		4,548,429			3,419,343

The aging analysis of accounts receivable is as follows:


	2005		2006
Within one month		2,884,068		2,349,963
More than one month to three months		1,062,895		906,221
More than three months to one year		1,636,529		1,709,954
More than one year		2,053,488		1,496,500


		7,636,980		6,462,638

The normal credit period granted by the Group is on average 30 days from the date of invoice.

There is no significant concentration of credit risk with respect to individual customers’ receivables, as the Group has a large number of customers.

Provision for doubtful debts is analyzed as follows:


	2005			2006
Balance, beginning of year		3,933,507			3,088,551
Provision for the year		1,498,510			1,741,765
Written-off during the year		(2,343,466	)		(1,787,021	)


Balance, end of year		3,088,551			3,043,295

F - 50

12.

PREPAYMENTS AND OTHER CURRENT ASSETS


	Note		2005		2006
Prepaid rental				322,243		364,622
Deposits and prepayments				973,698		732,774
Advances to employees				163,838		154,866
Customer acquisition costs of contractual CDMA subscribers		8(b)		527,577		458,095
Others				355,111		277,662


				2,342,467		1,988,019

The aging analysis of prepayments and other current assets is as follows:


	2005		2006
Within one year		2,249,097		1,892,558
More than one year		93,370		95,461


		2,342,467		1,988,019

13.

SHORT-TERM BANK DEPOSITS


	2005		2006
Bank deposits with maturity exceeding three months		282,457		187,449
Restricted bank deposits		—		8,371


		282,457		195,820

As of December 31, 2006, restricted bank deposits represented deposits that were subject to externally imposed restriction relating to construction payable as requested by a contractor.

14.

CASH AND CASH EQUIVALENTS


	2005		2006
Cash at bank and in hand		5,110,716		11,180,476
Bank deposits with original maturities of three months or less		360,860		1,001,632


		5,471,576		12,182,108

The effective interest rates on bank deposits at December 31, 2006 ranged from 3.20% to 5.49 % (December 31, 2005: 3.98% to 4.50%). The bank deposits have a weighted average maturity of 76 days.

F - 51

15.

SHARE CAPITAL


	2005		2006
	HKD’000		HKD’000
Authorized:
30,000,000,000 ordinary shares of HKD0.10 each		3,000,000		3,000,000


			Ordinary shares,
	Number of		par value of		Share		Share
	shares		HKD0.1 each		capital		premium		Total
	’000		HKD’000
At January 1, 2005		12,563,492		1,256,349		1,332,487		52,546,294		53,878,781
Employee share option scheme
– Recognition of shares issued on exercise of options (Note 29)		10,773		1,077		1,134		54,720		55,854


At December 31, 2005		12,574,265		1,257,426		1,333,621		52,601,014		53,934,635
Employee share option scheme
– Recognition of shares issued on exercise of options (Note 29)		106,724		10,672		10,819		621,962		632,781


At December 31, 2006		12,680,989		1,268,098		1,344,440		53,222,976		54,567,416

The total authorized number of ordinary shares is 30 billion shares (2005: 30 billion shares) with a par value of HKD0.10 per share (2005: HKD0.10 per share). All issued shares are fully paid.

Increase of 106,724,000 ordinary shares in 2006 (2005: 10,773,200) represented the ordinary shares issued on exercise of share options under the Company’s share option scheme (Note 29(h)).

F - 52

16.

LONG-TERM BANK LOANS


	Interest rates and final maturity	2005			2006
RMB denominated bank loans	Fixed interest rates ranging from 3.60% to 5.58% (2005: 3.60% to 5.58%) per annum with maturity through 2010 (2005: maturity through 2010) (a)
- secured			755,000			—
- unsecured			6,687,468			315,000


			7,442,468			315,000


USD denominated bank loans	Floating interest rates of USD LIBOR plus interest margin of 0.35% to 0.44% (2005: 0.28% to 0.44%) per annum with maturity through 2010 (2005: maturity through 2010) (b)		9,684,240			7,808,699


Sub-total			17,126,708			8,123,699
Less: Current portion			(5,145,190	)		(3,984,350	)


			11,981,518			4,139,349

The repayment schedule of the long-term bank loans was as follows:


	2005			2006
Balances due:
2006		5,145,190			—
2007		6,137,608			3,984,350
2008		3,501,800			2,377,609
2009		353,070			—
2010		1,989,040			1,761,740


		17,126,708			8,123,699
Less: Portion classified as current liability		(5,145,190	)		(3,984,350	)


Total		11,981,518			4,139,349

F - 53

	(a)		As of December 31, 2006, no long-term bank loans (2005: RMB755 million) were secured by the future service fee revenue to be generated by the cellular operations of the relevant branches who borrowed the long-term bank loans.

	(b)		On September 26, 2003, the Company signed an agreement with 13 financial institutions for a long-term syndicated loan of USD0.7 billion. This facility was split into 3 tranches (i) USD0.2 billion 3-year loan; (ii) USD0.3 billion 5-year loan; and (iii) USD0.2 billion 7-year loan and carried an interest rate of 0.28%, 0.35% and 0.44% over US dollar LIBOR per annum for each tranche, respectively. In October 2003, the Company and CUCL entered into an agreement to re-lend such funds to CUCL with similar terms to finance the network construction of CUCL. During 2006, the Company has fully repaid the USD0.2 billion 3-year loan.

			In addition, on February 25, 2004, CUCL signed an agreement with various financial institutions for a long-term syndicated loan of USD0.5 billion to finance its working capital and network construction expenditure. This facility is repayable in 3 years and carries an interest rate of 0.40% over US dollar LIBOR per annum. In February 2007, CUCL has fully repaid the USD0.5 billion loan.

	(c)		The effective interest rate of long-term bank loans denominated in RMB at December 31, 2006 was 4.22% (December 31, 2005: 5.25%), and the effective interest rates of long-term bank loans denominated in USD at December 31, 2006 ranged from 5.72% to 5.81% (December 31, 2005: from 4.94% to 5.14%).

	(d)		The carrying amount of long-term bank loans approximated their fair value.

17.

CONVERTIBLE BONDS

The carrying values of the derivative component and liability component of the convertible bonds as of December 31, 2006 are as follows:


Liability component			7,117,035
Derivative component			3,207,914


Carrying value of convertible bonds			10,324,949


Number of conversion shares at the issuance date (shares)			899,745,075

No conversion of the convertible bond has occurred up to December 31, 2006.

F - 54

On July 5, 2006, the Company issued a zero coupon convertible bonds with an aggregate principal amount of USD1 billion (the “Convertible Bonds”) to SK Telecom Co., Ltd. (“SK Telecom”), an overseas telecommunications service operator in Korea. The bondholder has the option to convert the Convertible Bonds into shares of the Company with a par value of HKD0.10 each at a conversion price of HKD8.63 (an equivalent of approximately USD1.11) per share subject to adjustment for, among other matters, consolidation, subdivision or reclassification of shares, capitalization of profits or reserves, rights issues and other events, which have diluting effects on the issued share capital of the Company at any time from and including the first anniversary after the date of issuance up to the close of business in Hong Kong on the day falling seven days prior to July 5, 2009, the maturity date of the Convertible Bonds. Unless previously redeemed, converted, or purchased and cancelled, the Convertible Bonds will be redeemed at 104.26% of its principal amount on July 5, 2009.

At any time after July 5, 2007 or on the occurrence of a relevant event as defined in the Convertible Bonds agreement, a bondholder may freely assign or transfer any of the Convertible Bonds registered in its name to any third party provided that no assignment or transfer may be made to a person who is (i) a fixed line or mobile telecommunications operator in the PRC (a competitor operator), or (ii) directly or indirectly an affiliate of a competitor operator.

On July 5, 2008 (the Put Option Date), each bondholder will have the right at such holder’s option, to require the Company to redeem all or some of the Convertible Bonds held by such holder on the Put Option Date at 102.82% of the principal amount. To exercise such right, the holder of the relevant Convertible Bonds must deliver its notice of redemption together with the Certificate evidencing the Convertible Bonds to be redeemed not later than 40 days prior to the Put Option Date.

As the functional currency of the Group is the RMB, the conversion of the Convertible Bonds denominated in Hong Kong Dollars will not result in settlement by the exchange of a fixed amount of cash in RMB, the functional currency of the Group, for a fixed number of the Company’s shares. In accordance with the requirements of HKAS 39, Financial Instruments – Recognition and Measurement, the bond contract must be separated into two components: a derivative component consisting of the conversion option and a liability component consisting of the straight debt element of the bonds. The conversion option is carried at fair value on the balance sheet with any changes in fair value being charged or credited to the statement of income in the period when the change occurs.

The fair value of the derivative component of the Convertible Bonds was calculated using the Binomial model with the major inputs used in the model as of July 5, 2006 and December 31, 2006 as follows:


	July 5, 2006			December 31, 2006
Stock price	HKD6.95			HKD11.40
Exercise price	HKD8.63			HKD8.63
Volatility		31	%		31	%
Dividend yield		2	%		2	%
Risk-free rate		4.57-4.63	%		3.51-3.55	%
Expected life	2.25-3 years			1.76-2.51 years
Option value	HKD0.96			HKD3.56

F - 55

Any changes in the major inputs into the model will result in changes in the fair value of the derivative component. The change in the fair value of the conversion option from July 5, 2006 to December 31, 2006 resulted in a fair value loss of RMB2.397 billion, which has been recorded as the “Unrealized loss on changes in fair value of derivative component of Convertible Bonds” in the statement of income for the year ended December 31, 2006.

The initial carrying amount of the liability component is the residual amount after deducting the issuance cost of the Convertible Bonds and the fair value of the derivative component as of July 5, 2006, and is subsequently carried at amortized cost. Interest expense is calculated using the effective interest method by applying the effective interest rate of 5.53% to the adjusted liability component. Should the aforesaid derivative component not be separated out and the entire Convertible Bonds is considered as the liability component, the effective interest rate would have been 1.46%.

18.

OBLIGATIONS UNDER FINANCE LEASES

Obligations under finance leases are analyzed as follows:


	2005			2006
Total minimum lease payments under finance leases:
- 2006		443,400			—
- 2007		152,058			104,663
- 2008		875			8,059
- 2009		—			423
- 2010		—			1,396
- 2011		—			820
- Thereafter		—			58


		596,333			115,419
Less: Future finance charges		(30,335	)		(5,623	)


Present value of minimum obligations		565,998			109,796


Representing obligations under finance leases:
- current liabilities		420,631			99,566
- non-current liabilities		145,367			10,230

The present value of obligations under finance leases:
- 2006		420,631			—
- 2007		144,541			99,566
- 2008		826			7,666
- 2009		—			399
- 2010		—			1,335
- 2011		—			776
- Thereafter		—			54


		565,998			109,796
Less: Portion classified as current liabilities		(420,631	)		(99,566	)


		145,367			10,230

Obligations under finance leases were mainly related to the leasing of wireless public phone equipment (Note 6).

F - 56

For the year ended December 31, 2006, interest rates of obligations under finance leases ranged from 4% to 5% (2004 and 2005: 4% to 6%) per annum.

The carrying amounts of obligations under finance leases approximated their fair value.

19.

PAYABLES AND ACCRUED LIABILITIES


	Note			2005		2006
Payables to contractors and equipment suppliers					11,156,462		16,184,898
Accrued expenses					1,835,353		2,236,137
Payables to telecommunications product suppliers					1,372,853		1,875,356
Customer deposits					1,456,601		1,857,849
Maintenance expense payables					542,540		1,208,902
Salary and welfare payables					464,372		601,270
Amounts due to services providers / content providers					716,180		797,586
Provision for subscriber bonus point expenses		4.1	(d)		337,414		555,586
Others		(a	)		644,853		972,490


					18,526,628		26,290,074

(a)

Others included miscellaneous accruals for housing fund and other government surcharges.

The aging analysis of payables and accrued liabilities is as follows:


	2005		2006
Less than six months		11,260,366		20,162,555
Six months to one year		4,766,400		3,981,712
More than one year		2,499,862		2,145,807


		18,526,628		26,290,074

20.		SHORT-TERM BONDS

		On July 19, 2005, CUCL completed an offering of short-term bonds, consisting of two tranches, in the PRC interbank debenture market. The first tranche of the bonds was issued in an aggregate amount of RMB9.0 billion with a maturity period of 365 days and was repaid in July 2006. The second tranche of the bonds was issued in an aggregate amount of RMB1.0 billion with a maturity period of 180 days and was repaid in January 2006.

		In March 2006, CUCL completed an offering of short-term bonds of RMB1.0 billion with a maturity period of 365 days. In July 2006, CUCL completed another offering of short-term bonds in an aggregate amount of RMB6.0 billion, consisting of three tranches of RMB2.0 billion each, with a maturity period of 180 days, 270 days and 365 days, respectively. The weighted average effective interest rate of these short-term bonds as of December 31, 2006 was 3.19% (2005: 2.89%).

F - 57

21.		SHORT-TERM BANK LOANS

		Supplemental information with respect to short-term bank loans is as follows:


								Average
			Weighted average			Maximum		amount		Weighted average
			interest rate at			amount		outstanding		interest rate
	Balance at		year end			outstanding		during the		during the year
	year end		Per annum			during the year		year*		Per annum**
December 31, 2005
RMB denominated bank loans:
- secured		1,000,000
- unsecured		4,302,661

		5,302,661		4.86	%		10,046,495		6,767,046		4.86	%

HKD denominated bank loans (Note (a)):
- unsecured		1,721,697		3.10	%		1,761,748		1,209,342		2.00	%

		7,024,358


December 31, 2006
RMB denominated bank loans:
- secured		—
- unsecured		—

		—		—			5,302,661		2,651,331		4.34	%

HKD denominated bank loans:
- unsecured		—		—			1,721,697		860,849		1.55	%

		—

Notes:

(a)		As of December 31, 2005, HKD denominated short-term bank loans of approximately HK$1,665 million (equivalent to approximately RMB1,722 million) were borrowed by the Company to finance the working capital of the Group. The bank loans were repayable in 1 year and carried at interest rate of 0.22% to 0.25% over HIBOR per annum. The loan has been fully repaid in 2006.

(b)		The carrying amounts of short-term loans approximated their fair value.

*		The average amount outstanding is computed by dividing the total of outstanding principal balance as of January 1 and December 31, as applicable, by 2.

**		The weighted average interest rate is computed by dividing the total of weighted average interest rates as of January 1 and December 31, as applicable, by 2.

F - 58

22.		INVESTMENT IN SUBSIDIARIES

		As of December 31, 2006, the details of the Company’s subsidiaries are as follows:

Place

Percentage of

Particular

and date of

equity interests

of issued

Principal activities

incorporation and

held

share

and place of

Name

nature of legal entity

Direct

Indirect

capital

operation

The PRC,

April 21, 2000,

Telecommunications

China Unicom

limited liability

operation in the

Corporation Limited

company

100

—

47,425,763

PRC

British Virgin Islands,

November 5, 2003,

Unicom New World

limited liability

11,000 shares,

Investment holding

(BVI) Limited

company

100

—

HKD1 each

in BVI

Hong Kong,

China Unicom

May 24, 2000,

Telecommunications

International
Limited

limited liability
company

100

—

100,000 shares,
HKD1 each

service in Hong
Kong

USA,

May 24, 2002,

USD

Telecommunications

China Unicom USA Co.

corporation

—

100

10,000

service in USA

Macau,

China Unicom (Macau)

October 15, 2004,

Company Limited

limited liability

MOP

Telecommunications

company

60,000,000

operation in Macau

Unicom Huasheng

The PRC,

Telecommunications

July 1, 2005,

Sales of

Technology Company

limited liability

telecommunication

Limited (i)

company

—

99.5

500,000

products in the PRC

(i)

On July 1, 2005, CUCL together with Unicom Xingye Science and Technology Trade Co. (“Unicom Xingye”, a subsidiary of Unicom Group) set up Unicom Huasheng. The paid-in capital of Unicom Huasheng as of December 31, 2005 was RMB50 million, CUCL had contributed capital of RMB47.5 million, whereas the minority shareholder Unicom Xingye contributed the remaining capital of RMB2.5 million, thus CUCL effectively held 95% in the entire issued capital of Unicom Huasheng. In August 2006, CUCL increased its investment in Unicom Huasheng by RMB450 million, and the paid-in capital of Unicom Huasheng was then increased to RMB500 million. As of December 31, 2006, CUCL held 99.5% in the entire issued capital of Unicom Huasheng whereas Unicom Xingye held the remaining 0.5%.

F - 59

23.		REVENUE (TURNOVER)

		Revenue primarily comprises usage fees, monthly fees, interconnection revenue, leased line rental income, value-added services revenue and sales of telecommunications products earned by the Group. Tariffs for these services are subject to regulations by various government authorities, including the State Development and Reform Commission, the Ministry of Information Industry (“MII”) and the provincial price regulatory authorities.

		Revenue is presented net of business tax and government surcharges. Relevant business tax and government surcharges amounted to RMB2,285 million for the year ended December 31, 2006 (2004: RMB2,051 million; 2005: RMB2,166 million).

		The major components of revenue are as follows:


	Note			2004		2005		2006
GSM Business
Usage fee		(a	) (i)		31,997,020		32,077,305		33,609,094
Monthly fee		(b	)		6,922,400		6,840,720		7,370,440
Interconnection revenue		(c	)		2,614,268		3,466,067		4,914,964
Value-added service revenue		(e	)		4,818,822		7,966,629		11,543,343
Other revenue					1,156,442		1,784,807		1,852,580


Total GSM service revenue					47,508,952		52,135,528		59,290,421


CDMA Business
Usage fee		(a	) (i)		16,164,333		16,726,678		14,695,758
Monthly fee		(b	)		4,638,024		4,905,538		5,025,422
Interconnection revenue		(c	)		927,288		1,398,577		1,732,360
Value-added service revenue		(e	)		2,370,872		4,115,542		5,314,118
Other revenue					277,157		430,601		525,484


Total CDMA service revenue					24,377,674		27,576,936		27,293,142


Data and Internet Business
Usage fee		(a	) (ii)		2,685,083		2,540,574		1,770,321
Interconnection revenue		(c	)		131,371		102,989		92,140
Leased lines rental		(d	)		344,014		393,659		473,708
Other revenue					502,266		12,745		39,147


Total Data and Internet service revenue					3,662,734		3,049,967		2,375,316


Long Distance Business
Usage fee		(a	) (ii)		879,281		599,251		64,337
Interconnection revenue		(c	)		454,383		434,577		424,792
Leased lines rental		(d	)		512,134		489,969		574,728
Other revenue					2,211		776		4,565


Total Long Distance service revenue					1,848,009		1,524,573		1,068,422


Total service revenue					77,397,369		84,287,004		90,027,301

Sales of telecommunications products					1,689,755		2,761,827		4,267,192


Total revenue					79,087,124		87,048,831		94,294,493

F - 60

(a)

Usage fees comprise:

	(i)		charges for incoming and outgoing calls made by cellular subscribers including charges for local calls, domestic direct dial (“DDD”) and international direct dial (“IDD”) as well as roaming fees for calls made by cellular subscribers outside their local service areas; and

	(ii)		charges for IP telephone calls, data and Internet services and fixed line long distance calls.

	(b)		Monthly fees represent fixed amounts charged to cellular subscribers on a monthly basis for maintaining their access to the related services.

	(c)		Interconnection revenue represents amounts received from other operators, including Unicom Group, for calls from their networks to the Group’s networks. It also includes roaming-in fees received from other operators, including Unicom Group, for calls made by their subscribers using the Group’s cellular networks (Notes 33.1(a) and 33.2(a)).

	(d)		Rental income represents rentals received for leasing of transmission lines and IRU to Unicom Group, business customers and other major telecommunications service operators in Mainland China. Other major telecommunications service operators include China Telecommunications Corporation and its subsidiaries, China Mobile Communications Corporation and its subsidiaries and China Network Communication Group Corporation and its subsidiaries. These entities are collectively referred to as “Domestic Carriers”.

	(e)		Value-added services revenue mainly represents revenue from the provision of services such as short message, cool ringtone, CDMA1X wireless data services and secretarial services to subscribers.

F - 61

24.		EXPENSES BY NATURE

		The following expenses are analyzed by nature:


	Note			2004			2005			2006
Depreciation of property, plant and equipment		6			18,175,605			19,931,501			22,005,461
Amortization of goodwill		7			171,184			—			—
Amortization of other assets		8	(d)		664,285			436,680			417,351

Total depreciation and amortization					19,011,074			20,368,181			22,422,812

Amortization of direct incremental costs for activating cellular subscribers		8	(a)		936,105			1,582,282			1,817,220

Amortization of customer acquisition costs of contractual CDMA subscribers		8	(b)		6,120,737			5,947,631			4,205,253

Provision for doubtful debts:
- GSM Business					1,317,374			867,154			1,124,113
- CDMA Business					645,470			458,161			457,942
- Data and Internet Business					164,514			139,327			106,883
- Long Distance Business					64,462			33,868			52,827

Total provision for doubtful debts		11			2,191,820			1,498,510			1,741,765

Write-down of inventories to net realizable value		10			69,475			20,392			42,886

Cost of inventories		10			2,524,483			3,575,316			4,929,988

Auditors’ remuneration					57,522			59,884			120,323

Operating lease charges:
- Leased lines					809,202			822,673			685,093
- CDMA network capacities		4.2	(c)		6,588,926			7,924,644			8,078,772
- Others					1,068,020			1,157,518			1,476,406

Total operating lease expenses					8,466,148			9,904,835			10,240,271

Other expenses:
- Repair and maintenance					1,648,986			2,397,501			2,925,717
- Traveling, entertainment and meeting					1,322,438			663,774			779,220
- Power and water charges					1,763,766			2,219,480			2,652,960
- Office expenses					706,892			986,502			1,120,756

Finance costs:
- Interest on bank loans repayable over 5 years					537,261			18,033			956
- Interest on bank loans and bonds repayable within 5 years					1,750,209			1,955,231			1,162,582
- Interest element of finance lease					28,848			42,697			28,633
- Interest expense on convertible bonds		17			—			—			193,123
Less: Amounts capitalized in construction-in-progress					(647,851	)		(682,590	)		(422,797	)

Total interest expense					1,668,467			1,333,371			962,497
- Exchange loss/(gain), net					7,657			(273,647	)		(372,691	)
- Bank charges					19,951			39,597			64,414

Total finance costs					1,696,075			1,099,321			654,220

F - 62

25.

EMPLOYEE BENEFIT EXPENSES


	Note		2004		2005		2006
Employee benefit expenses:
- Salaries and wages				3,647,629		4,268,004		5,158,789
- Contributions to defined contribution pension schemes		26		244,397		412,825		474,831
- Contributions to supplementary defined contribution pension schemes		26		41,596		58,222		54,037
- Monetary housing benefits		27		21,907		41,136		35,528
- Contributions to other housing fund		27		224,686		280,393		286,253
- Other housing benefits		27		345,885		447,315		492,967
- Share-based compensation		29		88,957		108,417		146,294


Total				4,615,057		5,616,312		6,648,699

26.		RETIREMENT BENEFITS

		Full time employees in Mainland China are covered by a state-sponsored defined contribution pension scheme under which the employees are entitled to an annual pension equal to a fixed proportion of their basic salaries at their retirement dates. The PRC government is responsible for the pension liability to these retired employees. The Group was required to make defined contributions to the pension scheme at the rate of 19% of the employees’ basic salaries for the year ended December 31, 2006 (2004 and 2005: 19%). Under this scheme, the Group has no obligation for post-retirement benefits beyond the annual contributions.

		In addition, effective from August 11, 1998, a supplementary defined contribution pension plan managed by an independent insurance company was established. Under this plan, the Group makes a monthly defined contribution of 2% to 16% (2004: 2% to 24%; 2005: 2% to 16%) of the monthly salaries of the relevant employees. There were no vested benefits attributable to past services upon adoption of the plan.

		Retirement benefits charged to the statement of income are as follows:


	2004		2005		2006
Contributions to defined contribution pension schemes		244,397		412,825		474,831
Contributions to supplementary defined contribution pension schemes		41,596		58,222		54,037

27.		HOUSING BENEFITS

		Under housing reform schemes in accordance with government regulations at the provincial level in Mainland China, the Group provided benefits to certain qualified employees to enable them to purchase living quarters at a discount. For GSM Business, certain of these living quarters were provided by Unicom Group and the related benefits were not charged to the Group. Housing benefits which were not charged to the Group amounted to approximately RMB14.9 million for 2006 (2004 and 2005: RMB14.9 million).

		In addition, full time employees in Mainland China are entitled to participate in a state-sponsored housing fund. The fund can be used for the construction of living quarters or may be withdrawn upon the retirement of the employees. The Group is required to make annual contributions to the housing fund at a rate of 10% (2004 and 2005: 10%) of the employees’ basic salaries.

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According to the central government policy on housing reform based on a State Council circular issued in 1998, monetary housing subsidies in the form of special cash payments are to be made by certain Mainland China enterprises to their employees in order to enable them to purchase living quarters. Under this general policy, enterprises are allowed to establish their own housing reform schemes taking into consideration the actual financial capability of the enterprises.

The Group finalized its monetary housing benefit scheme as a special employee incentive scheme for all qualified employees in 2001. According to the scheme, the total amount of monetary housing benefit for each employee is determined based on the working age of the employee and the property market price prevailing in the relevant location. The total monetary housing benefit is divided into three annual payments in the proportion of 40%, 30% and 30% respectively. In order to be included in the incentive scheme, employees are required to sign a service contract with a minimum service period. The employees will be entitled to the first 40% payment only when the following criteria are met in a particular year:

	(i)		the provincial branch in which the employees are working has achieved the annual performance budget set by head office management; and

	(ii)		the employees continue to be under the employment of the Group at the time of the payment.

Similarly, the employees will only be entitled to the second and then the third annual payments when and only when the above two conditions are also fulfilled in subsequent years.

For the years ended December 31, 2004, 2005 and 2006, certain provinces achieved the annual performance budget and were thus approved by management to distribute and pay out such monetary housing benefits. The provision for special monetary housing benefits for qualified employees of these provinces for the years ended December 31, 2004, 2005 and 2006 amounted to approximately RMB22 million, RMB41 million and RMB36 million, respectively, based on the aforementioned distribution plan. The remaining provinces were not entitled to the special monetary housing benefits since they did not achieve their annual performance budget in these years and accordingly, no provision for such benefits was made.

The expenses incurred by the Group in relation to the housing benefits described above are as follows:


	2004		2005		2006
Special monetary housing benefits		21,907		41,136		35,528
Contributions to other housing fund		224,686		280,393		286,253
Other housing benefits		345,885		447,315		492,967


		592,478		768,844		814,748

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28.

NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS

	(a)		CUCL has registered as foreign investment enterprises in the PRC. In accordance with the Articles of Association of CUCL, it is required to provide for certain statutory reserves, namely, general reserve fund and staff bonus and welfare fund, which are appropriated from income after tax and minority interests but before dividend distribution.

			CUCL is required to allocate at least 10% of its income after tax and minority interests determined under PRC GAAP to the general reserve fund until the cumulative amounts reach 50% of the registered capital. The statutory reserve can only be used, upon approval obtained from the relevant authority, to offset accumulated losses or increase capital.

			CUCL appropriated approximately RMB584 million (2004: RMB429 million; 2005: RMB463 million) to the general reserve fund for the year ended December 31, 2006.

			Appropriation to the staff bonus and welfare fund is at the discretion of the directors. The staff bonus and welfare fund can only be used for special bonuses or the collective welfare of the employees and are not distributable as cash dividends. Under HKFRS, the appropriations to the staff bonus and welfare fund will be charged to the statement of income as expenses incurred since any assets acquired through this fund belong to the employees. For the year ended December 31, 2006, no appropriation to staff bonus and welfare fund has been made (2004 and 2005: Nil).

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29.		SHARE OPTION SCHEME

		The Company adopted a share option scheme (the “Share Option Scheme”) and a fixed award pre-global offering share options scheme (“Pre-Global Offering Share Option Scheme”) on June 1, 2000 for the granting of share options to qualified employees, with terms amended on May 13, 2002 to comply with the requirements set out in the Chapter 17 to the Rules Governing the Listing of Securities on SEHK.

		All of the share options granted are governed by the amended terms of the Share Option Scheme and Pre-Global Offering Share Option Scheme as mentioned below.

		Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:


	2004					2005					2006
	Average					Average					Average
	exercise					exercise					exercise
	price in		Number of			price in		Number of			price in		Number of
	HKD per		share options			HKD per		share options			HKD per		share options
	share		involved			share		involved			share		involved
Balance, beginning of year		6.72		172,367,400			6.45		274,063,400			6.51		257,602,000
Granted		5.92		113,322,000			—		—			6.35		167,466,000
Forfeited		4.30		(1,306,000	)		7.15		(5,688,200	)		6.92		(4,088,000	)
Exercised		5.85		(10,320,000	)		4.60		(10,773,200	)		4.95		(106,724,000	)


Balance, end of year		6.45		274,063,400			6.51		257,602,000			6.95		314,256,000

Employee share options exercised for the year ended December 31, 2006 resulted in 106,724,000 shares being issued (2004: 10,320,000 shares; 2005: 10,773,200 shares), with exercise proceeds of approximately RMB535 million (2004: RMB64 million; 2005: RMB52 million).

As of December 31, 2006, out of the 314,256,000 outstanding share options (2004: 274,063,400 options; 2005: 257,602,000 options), 115,683,600 share options (2004: 87,611,360 options; 2005: 162,981,160 options) were exercisable, and the weighted average exercise price was HKD8.09 (2004: HKD8.69; 2005: HKD7.12).

F - 66

As of December 31, 2006, information of outstanding share options is summarized as follows:

Number of share

The period during

The price per

options outstanding

which an option may

share to be paid on

as of December 31,

Date of options grant

be exercised

exercise of options

2005

2006

Share options granted under the Pre-Global Offering Share Option Scheme:

June 22, 2002 to

June 22, 2000 (a)

June 21, 2010

HKD15.42

24,309,600

24,178,000

Share options granted under the Share Option Scheme:

June 30, 2001 to

June 30, 2001 (b)

June 22, 2010

HKD15.42

6,508,000

6,292,000

July 10, 2003 to

July 10, 2002 (c)

July 9, 2008

HKD6.18

25,012,800

11,540,400

May 21, 2004 to

May 21, 2003 (d)

May 20, 2009

HKD4.30

91,381,600

25,611,600

May 21, 2004 to

May 30, 2003 (d)

May 20, 2009

HKD4.66

212,000

—

July 20, 2005 to

July 20, 2004 (e)

July 19, 2010

HKD5.92

109,524,000

80,224,000

December 21, 2005 to

December 21, 2004 (f)

December 20, 2010

HKD6.20

654,000

February 15, 2008 to

February 15, 2006 (g)

February 14, 2012

HKD6.35

—

165,756,000

257,602,000

314,256,000

F - 67

(a)

Pursuant to the resolution passed by the Board of Directors in June 2000, a total of the 27,116,600 share options were granted on June 22, 2000 to the senior management, including directors, and certain other employees (which represent, on their full exercise, 27,116,600 shares of the Company) under the fixed award Pre-Global Offering Share Option Scheme adopted by the Company on June 1, 2000 in the following terms:

	(i)		the exercise price is equivalent to the share issue price of the Global Offering of HKD15.42 per share (excluding the brokerage fee and SEHK transaction levy); and

	(ii)		the share options are vested and exercisable after 2 years from the grant date and expire 10 years from the date of grant.

No further option can be granted under the Pre-Global Offering Option Scheme.

The Pre-Global Offering Option Scheme had been amended in conjunction with the amended terms of the Share Option Scheme on May 13, 2002. Apart from the above two terms, the principal terms are the same as the amended Share Option Scheme in all material aspects.

(b)

On June 1, 2000, the Company adopted the Share Option Scheme pursuant to which the directors of the Company may, at their discretion, invite employees, including executive directors, of the Company or any of its subsidiaries, to take up share options to subscribe for shares up to a maximum aggregate number of shares (including those that could be subscribed for under the Pre-Global Offering Share Option Scheme as described above) equal to 10% of the total issued share capital of the Company. Pursuant to the Share Option Scheme, the nominal consideration payable by a participant for the grant of share options will be HKD1.00. The exercise price payable by a participant upon the exercise of an option will be determined by the directors at their discretion at the date of grant, except that such price may not be set below a minimum price which is the higher of:

	(i)		the nominal value of a share; and

	(ii)		80% of the average of the closing prices of shares on the SEHK on the five trading days immediately preceding the date of grant of the option on which there were dealings in the shares on the SEHK.

The period during which an option may be exercised will be determined by the directors at their discretion, except that no option may be exercised later than 10 years from June 22, 2000. According to a resolution of the Board of Directors in June 2001, the Company has granted 6,724,000 share options under the Share Option Scheme which represent, on their full exercise, 6,724,000 shares to certain employees of the Group in the following terms:

	(i)		the price of a share payable by a participant upon the exercise of an option shall be HKD15.42 (excluding the brokerage fee and SEHK transaction levy); and

	(ii)		the share options are vested on the date of grant and exercisable from the date of grant to June 22, 2010.

F - 68

The terms of the Share Option Scheme were amended on May 13, 2002 to comply with the requirements set out in the Chapter 17 of the Listing Rules which came into effect on September 1, 2001 with the following major amendments:

	(i)		share option may be granted to employees including executive directors of the Group or any of the non-executive directors;

	(ii)		the option period commences on a day after the date on which an option is offered but not later than 10 years from the offer date; and

	(iii)		minimum subscription price shall not be less than the higher of:

	•		the nominal value of the shares;

	•		the closing price of the shares of the stock exchange as stated in the stock exchange’s quotation sheets on the offer date in respect of the share options; and

	•		the average closing price of the shares on the stock exchange’s quotation sheets for the five trading days immediately preceding the offer date.

(c)

Pursuant to the resolution passed by the Board of Directors and the Independent Non-Executive Directors of the Company dated July 10, 2002, a total of 36,028,000 share options were granted to eligible individuals including directors, independent non-executive directors, and the non-executive directors of the Company under the amended Share Option Scheme in the following terms:

	(i)		aggregate of 2,802,000 share options were granted to the executive directors, non-executive directors and independent non-executive directors of the Company;

	(ii)		the exercise price per share option is HKD6.18; and

	(iii)		the vesting dates and exercisable periods of the share options are as follows:


Vesting dates	Exercisable periods	Portions
July 10, 2003	July 10, 2003 to July 9, 2008		40	%
July 10, 2004	July 10, 2004 to July 9, 2008		30	%
July 10, 2005	July 10, 2005 to July 9, 2008		30	%

F - 69

(d)

Pursuant to the resolution passed by the Board of Directors and the Independent Non-Executive Directors of the Company dated May 21, 2003 and May 30, 2003, a total of 105,590,000 share options and 366,000 share options were granted to eligible individuals (including directors, independent non-executive directors, non-executive directors, middle to senior management of the Group) respectively, under the amended Share Option Scheme in the following terms:

	(i)		an aggregate of 2,772,000 share options were granted to the executive directors, non-executive directors and independent non-executive directors of the Company;

	(ii)		the exercise prices per share option are HKD4.30 and HKD4.66, respectively; and

	(iii)		the vesting dates and exercisable periods of the share options are as follows:


Vesting dates	Exercisable periods	Portions
May 21, 2004	May 21, 2004 to May 20, 2009		40	%
May 21, 2005	May 21, 2005 to May 20, 2009		30	%
May 21, 2006	May 21, 2006 to May 20, 2009		30	%

(e)

Pursuant to the resolution passed by the Board of Directors and the Independent Non-Executive Directors of the Company dated July 20, 2004, a total of 112,668,000 share options were granted to eligible individuals (including directors, independent non-executive directors, non-executive directors, middle to senior management of the Group), under the amended Share Option Scheme in the following terms:

	(i)		an aggregate of 3,366,000 share options were granted to the executive directors, non-executive directors and independent non-executive directors of the Company;

	(ii)		the exercise price per share option is HKD5.92; and

	(iii)		the vesting dates and exercisable periods of the share options are as follows:


Vesting dates	Exercisable periods	Portions
July 20, 2005	July 20, 2005 to July 19, 2010		40	%
July 20, 2006	July 20, 2006 to July 19, 2010		30	%
July 20, 2007	July 20, 2007 to July 19, 2010		30	%

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(f)

Pursuant to the resolution passed by the Board of Directors and the Independent Non-Executive Directors of the Company dated December 21, 2004, a total of 654,000 share options were granted to the executive directors of the Company, under the amended Share Option Scheme in the following terms:

	(i)		the exercise price per share option is HKD6.20; and

	(ii)		the vesting dates and exercisable periods of the share options are as follows:


Vesting dates	Exercisable periods	Portions
December 21, 2005	December 21, 2005 to December 20, 2010		40	%
December 21, 2006	December 21, 2006 to December 20, 2010		30	%
December 21, 2007	December 21, 2007 to December 20, 2010		30	%

(g)

Pursuant to the resolution passed by the Board of Directors and the Independent Non-Executive Directors of the Company dated February 15, 2006, a total of 167,466,000 share options were granted to eligible individuals (including directors and middle to senior management of the Group) under the amended Share Option Scheme in the following terms:

	(i)		this grant comprises basic and conditional portions. The criterion for the exercise of the conditional portion of share options are based on the achievement of revenue and profit targets of the 2006 budget of the Company and respective provincial branches. Under this scheme, out of the total of 167,446,000 share options granted, 37,762,000 share options were granted with performance conditions;

	(ii)		an aggregate of 2,840,000 share options were granted to the then executive directors of the Company;

	(iii)		the exercise price per share option is HKD6.35; and

	(iv)		the vesting dates and exercisable periods of the share options are as follows:


Vesting dates	Exercisable periods	Portions
February 15, 2008	February 15, 2008 to February 14, 2012		50	%
February 15, 2009	February 15, 2009 to February 14, 2012		50	%

The Group recognized share-based employee compensation costs based on the estimated fair value of share options at the grant date by using the Black-Scholes valuation model. Because the Black-Scholes valuation model requires the input of subjective assumptions, including the volatility of share price, any change in subjective input assumptions can materially affect the fair value estimate. The fair value of share options granted under the above scheme in 2006 was HKD2.10 per option. The significant assumptions used was the closing price of HKD6.35 at the grant date, exercise price of HKD6.35 per share, volatility of 39%, expected life of share options of 5 years, expected dividend yield of 2% and annual risk-free interest rate of 4%. The volatility measured at the standard deviation of expected share price returns is based on statistical analysis of daily share prices over the last 5 years.

For the year ended December 31, 2006, employee share-based compensation costs amortized over the vesting periods of the share options amounted to approximately RMB146 million (2004: RMB89 million; 2005: RMB108 million).

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	(h)		Details of share options exercised during 2005 and 2006 were as follows:

			For the year ended December 31, 2005:


			Weighted average
			closing price per
			share at respective
			days immediately
			before the exercise				Number of
Grant date	Exercise price		of options		Proceeds received		shares involved
	HKD		HKD		HKD
July 10, 2002		6.18		7.69		5,821,560		942,000
May 21, 2003		4.30		7.76		37,793,560		8,789,200
May 30, 2003		4.66		7.80		716,870		154,000
July 20, 2004		5.92		6.90		5,256,960		888,000


						49,588,950		10,773,200

For the year ended December 31, 2006:


			Weighted average
			closing price per
			share at respective
			days immediately
			before the exercise				Number of
Grant date	Exercise price		of options		Proceeds received		shares involved
	HKD		HKD		HKD
July 10, 2002		6.18		8.82		81,180,480		13,136,000
May 21, 2003		4.30		8.35		282,742,200		65,754,000
May 30, 2003		4.66		8.51		986,860		212,000
July 20, 2004		5.92		8.80		163,522,240		27,622,000


						528,431,780		106,724,000

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30.		EARNINGS PER SHARE

		Earnings per Share and ADS:

		Basic earnings per share for the years ended December 31, 2004, 2005 and 2006 were computed by dividing the income attributable to equity holders by the weighted average number of ordinary shares outstanding during the years.

		Diluted earnings per share for the years ended December 31, 2004, 2005 and 2006 were computed by dividing the income attributable to equity holders by the weighted average number of ordinary shares in issue during the years, after adjusting for the effects of the dilutive potential ordinary shares. All potential ordinary shares arose from (i) share options granted under the amended Pre-Global Offering Share Option Scheme; (ii) share options granted under the amended Share Option Scheme and (iii) the Convertible Bonds. The potential ordinary shares which are not dilutive mainly arose from share options granted under the amended Pre-Global Offering Share Option Scheme and the Convertible Bonds and are therefore excluded from the weighted average number of ordinary shares for the purpose of diluted earnings per share.


	2004						2005						2006
	Income						Income						Income
	attributable						attributable						attributable
	to equity				Per share		to equity				Per share		to equity				Per share
	holders		Shares		amount		holders		Shares		amount		holders		Shares		amount
	RMB’000		’000		RMB		RMB’000		’000		RMB		RMB’000		’000		RMB
Basic earnings		4,493,451		12,561,242		0.36		4,931,052		12,570,398		0.39		3,731,824		12,599,018		0.30
Effect of conversion of share options		—		31,812		—		—		37,078		—		—		50,288		—


Diluted earnings		4,493,451		12,593,054		0.36		4,931,052		12,607,476		0.39		3,731,824		12,649,306		0.30

		Basic and diluted earnings per ADS have been computed by multiplying the earnings per share by 10, which is the number of shares represented by each ADS.

31.		DIVIDENDS

		At the annual general meeting held on May 12, 2006, the shareholders of the Company approved the payment of a final dividend of RMB0.11 per ordinary share for the year ended December 31, 2005 totaling approximately RMB1.4 billion which has been reflected as an appropriation of retained profits in 2006. As of December 31, 2006, such dividends have been fully paid by the Company.

		At a meeting held on March 29, 2007, the Board of Directors of the Company proposed the payment of a final dividend of RMB0.18 per ordinary share to the shareholders for the year ended December 31, 2006 totaling approximately RMB2.3 billion. This proposed dividend has not been reflected as a dividend payable in the financial statements as of December 31, 2006, but will be reflected as an appropriation of retained profits in the financial statements for the year ending December 31, 2007.


	2004		2005		2006
Proposed final dividend of RMB0.18 (2004 RMB0.10 and 2005: RMB0.11) per ordinary share		1,256,349		1,383,169		2,282,578

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32.		FAIR VALUE OF FINANCIAL INSTRUMENTS

		Financial assets of the Group mainly include cash and cash equivalents, short-term bank deposits, accounts receivable, amounts due from related parties and Domestic Carriers. Financial liabilities of the Group mainly include payables and accrued liabilities, bank loans, convertible bonds, short-term bonds, lease payables and amounts due to related parties and Domestic Carriers.

		Cash and cash equivalents and short-term bank deposits denominated in foreign currencies, as summarized below, have been translated to RMB at the applicable rates quoted by the People’s Bank of China as of December 31, 2005 and 2006.


	2005						2006
	Original				RMB		Original				RMB
	currency		Exchange rate		equivalent		currency		Exchange rate		equivalent
	’000				RMB’000		’000				RMB’000
Cash and cash equivalents:
- denominated in HK dollars		45,791		1.04		47,636		651,551		1.00		654,613
- denominated in US dollars		83,023		8.07		670,010		478,397		7.81		3,735,659
- denominated in MOP		92		1.01		93		—		0.98		—
- denominated in EURO		87		9.90		861		1,700		10.27		17,457


Sub-total						718,600						4,407,729


Short-term bank deposits:
- denominated in HK dollars		—		1.04		—		13,000		1.00		13,060
- denominated in US dollars		35,000		8.07		282,457		22,333		7.81		174,389


Sub-total						282,457						187,449


Total						1,001,057						4,595,178

F - 74

		The Group did not have and does not believe it will have any difficulty in exchanging its foreign currency cash into RMB at the exchange rates quoted by the People’s Bank of China. The carrying amounts of the Group’s cash and cash equivalents, short-term bank deposits, other current financial assets and liabilities approximated their fair values as of December 31, 2005 and 2006 due to the nature or short maturity of those instruments.

		The carrying amounts of receivables and payables which are all subject to normal trade credit terms approximated their fair values.

		The derivative component of convertible bonds is carried at fair value with any changes in fair value reflected through profit or loss in the period when such changes occur. The liability component of convertible bonds is carried at amortized cost, which approximates their fair values (Note 17).

		The carrying amounts of long-term bank loans approximated their fair values based on prevailing market borrowing rates available for comparable bank loans with similar terms and maturities.

33.		RELATED PARTY TRANSACTIONS

		Unicom Group is a state-owned enterprise directly controlled by the PRC government. The PRC government is the Company’s ultimate controlling party. State-owned enterprises and their subsidiaries, in addition to Unicom Group, directly or indirectly controlled by the PRC government are also considered to be related parties of the Group. Neither Unicom Group nor the PRC government publishes financial statements available for public use.

		The PRC government also controls a significant portion of the productive assets and entities in the PRC. The Group provides telecommunications services as part of its retail transactions, thus, is likely to have extensive transactions with the employees of other state-controlled entities, including their key management personnel and their close family members. These transactions are carried out on commercial terms that are consistently applied to all customers. Management considers other state-owned enterprises that have other material transactions with the Group include other telecommunications service operators, equipment vendors, construction vendors and state-owned banks in the PRC. Management believes that meaningful information relative to related party transactions has been adequately disclosed below.

		The Group’s telecommunications networks depend, in large part, on interconnection with the public switched telephone network and on transmission lines leased from other Domestic Carriers.

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33.1		Unicom Group and its subsidiaries

		The table set forth below summarizes the names of significant related parties (excluding Domestic Carriers and other major state-owned enterprises which are summarized in Note 33.2 and 33.3 respectively) and nature of relationship with the Group as of December 31, 2006:


		Nature of relationship with the
Name of related parties		Company
China United Telecommunications Corporation (“Unicom Group”)		Ultimate holding company
Unicom NewSpace Co., Limited (“Unicom NewSpace”)		A subsidiary of Unicom Group
Unicom Xingye Science and Technology Trade Co., Limited (”Unicom Xingye”)		A subsidiary of Unicom Group
Beijing Unicom Xingye Science and Technology Company Limited (“Beijing Xingye”)		A subsidiary of Unicom Group
Unicom Import and Export Company Limited (“ Unicom I/E Co”)		A subsidiary of Unicom Group
Unicom New Horizon Mobile Telecommunications Corporation Limited (“New Horizon”)		A subsidiary of Unicom Group
Unicom New Guoxin Telecommunications Corporation Limited (“New Guoxin”)		A subsidiary of Unicom Group
China Information Technology Designing & Consulting Institute (“CITDCI”)(Newly became a wholly-owned subsidiary of Unicom Group in December 2006)		A subsidiary of Unicom Group
UNISK (Beijing) Information Technology Co., Limited (“UNISK”)		A joint venture company of Unicom Group

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	(a)		Transactions with Unicom Group and its subsidiaries

			The following is a summary of significant recurring transactions carried out by the Group with Unicom Group and its subsidiaries. In the directors’ opinion, these transactions were carried out in the ordinary course of business.


	Note			2004		2005		2006
Transactions with Unicom Group and its subsidiaries:
Interconnection and roaming revenues	(i), (iii)				220,174		207,526		212,178
Interconnection and roaming charges	(ii), (iii)				63,891		57,902		59,125
Rental income for premises and facilities	(iv)				19,475		18,662		16,257
Charge for operator-based subscriber value-added services by New Guoxin		(v	)		858,778		412,549		365,076
Charge for customer services by New Guoxin	(vi)				524,718		562,003		675,373
Agency fee incurred for subscriber development services by New Guoxin	(vii)				9,054		15,312		58,982
CDMA network capacity lease rental	(viii)				6,588,926		7,924,644		8,078,772
Constructed capacity related cost of CDMA network	(ix)				305,903		176,130		167,367
Sales of CDMA handsets		(x	)		—		2,921		84,190
Charges for cellular subscriber value-added services by UNISK and Unicom NewSpace	(xi)				4,228		28,418		45,618
Rental charges for premises, equipment and facilities	(xii)				25,528		21,059		27,931
Charges for the international gateway services	(xiii)				17,062		19,797		17,143
Charges for leasing of satellite transmission capacity	(xiv)				14,152		11,794		—
Revenue for leasing of transmission line capacity	(xv)				38,853		25,841		17,682
Purchase of telephone cards	(xvi)				1,087,498		671,715		702,409
Agency fee incurred for procurement of telecommunications equipment	(xvii)				17,759		15,791		13,148
Purchase of CDMA handsets	(xviii)				14,655		—		—
Commission expenses for sales agency services incurred for telephone cards	(xix)				16,023		—		—

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(i)		Interconnection revenues represent the amounts received or receivable from Unicom Group for calls from its networks to the Group’s networks. Roaming revenues represent revenue from calls made by Unicom Group’s subscribers using the Group’s networks.

(ii)		Interconnection charges are for calls made from the Group’s networks to Unicom Group’s networks. Roaming expenses represent expenses for calls made by the Group’s subscribers using Unicom Group’s networks.

(iii)		Interconnection settlement between Unicom Group’s network and the Group’s network is based on standards established from time to time by the MII. In the case of calls between cellular subscribers in different provinces, settlement is based on either the standards established by the MII or an internal settlement arrangement applied by Unicom Group based on their respective internal costs of providing this service. Also, charges for roaming services between the Group and Unicom Group are based on the respective internal costs of providing these services.

(iv)		Pursuant to the premises leasing agreement signed between the Group and New Guoxin in 2005 (the “2005 Guoxin Premises Leasing Agreement”), the Group agreed to provide premises to New Guoxin. The rental amount is based on the higher of depreciation costs and market price for similar premises in that locality.

(v)		Pursuant to the agreement signed between the Group and New Guoxin in 2005 (the “2005 Comprehensive Operator Services Agreement”), the Group shall retain 40% of the actually received revenue generated from the value-added services provided by New Guoxin to the Group’s subscribers and allocate 60% of such revenue to New Guoxin. The settlement should be made among branches of the Group and New Guoxin respectively.

(vi)		Pursuant to the 2005 Comprehensive Operator Services Agreement, New Guoxin provides business inquiries, tariff inquiries, account maintenance, complaints handling, and customer interview and subscriber retention services to the Group’s customers. The service fee payable by the Group shall be calculated on the basis of the customer service costs plus a profit margin, which shall not exceed 10%. The customer service costs were determined by the actual cost per operator seat and the number of effective operator seats.

(vii)		Pursuant to the 2005 Comprehensive Operator Services Agreement, New Guoxin provides subscriber development services to the Group through telephone or other channels by utilizing its own network, equipment and operators. The agency fee chargeable to the Group does not exceed the average of agency fees chargeable by any independent third party agent in the same region.

(viii)		Pursuant to the 2005 CDMA Lease Agreement entered among CUCL, Unicom Group and Unicom New Horizon, Unicom New Horizon agreed to lease the capacity of CDMA network to CUCL. Details please refer to Note 4.2(c).

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	(ix)		Pursuant to the 2005 CDMA Lease Agreement, the constructed capacity related costs in connection with the CDMA network capacity used by the Group, including the rentals for the exchange centers and the base stations, water and electricity charges, heating charges and fuel charges for the relevant equipment etc., as well as the maintenance costs of a non-capital nature, are charged to the Group as part of the 2005 CDMA Lease Arrangement. The proportion of the constructed capacity related costs to be borne by the Group shall be calculated on a monthly basis by reference to the actual number of cumulative CDMA subscribers of the Group at the end of the month prior to the occurrence of the costs divided by 90%, as a percentage of the total capacity available on the CDMA network.

	(x)		Pursuant to the framework agreement for the procurement of CDMA mobile handsets entered between the Guizhou branch of Unicom Huasheng and the Guizhou branch of Unicom Group on December 19, 2006, the Guizhou branch of Unicom Huasheng agreed to sell CDMA mobile handsets to the Guizhou branch of Unicom Group from January 1, 2006 to December 31, 2008. The selling price of the CDMA mobile handsets are determined based on the factors including without limitation on the cost of handsets acquired by the Guizhou branch of Unicom Huasheng for sale and the cost in distributing those handsets to recipients designated by the Guizhou branch of Unicom Group.

	(xi)		Pursuant to the Cellular Subscriber Value-Added Services Agreements (the “Agreements”) entered among CUCL, UNISK and Unicom NewSpace respectively in March 2004, CUCL agreed to provide its telecommunications channel and network subscriber resources to UNISK and Unicom NewSpace, enable them to provide value-added services to subscribers through CUCL’s cellular telecommunications network and data platform. The Agreements also stipulate that the content service fees paid by subscribers for using UNISK’s or Unicom NewSpace’s value-added services are shared between CUCL and UNISK, or CUCL and Unicom NewSpace based on an agreed proportion. The content service fees are collected from subscribers by CUCL and the relevant portion is paid to UNISK and Unicom NewSpace on a regular basis.

	(xii)		CUCL signed service agreements with Unicom Group to mutually lease premises, equipment and facilities from each other. Rentals are based on the lower of depreciation costs and market rates.

	(xiii)		Charges for international gateway services represent the amounts paid or payable to Unicom Group for international gateway services provided for the Group’s international long distance networks. The charge for this service is based on the cost of operation and maintenance of the international gateway facilities incurred by Unicom Group, including depreciation, together with a margin of 10% over cost.

	(xiv)		Satellite transmission capacity leasing fees represented the amounts paid or payable to Unicom NewSpace for the use of satellite transmission capacity. The charges were based on the MII regulations then in effect less the applicable discount up to 10% as agreed with Unicom NewSpace. The leasing agreement was terminated at the end of year 2005.

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	(xv)		Unicom Group leases transmission line capacity from the Group in accordance with the relevant provision of the services agreement. Revenue for leasing of transmission line capacity is based on tariffs stipulated by MII from time to time less a discount of up to 10%.

	(xvi)		The Group signed a service agreement with Unicom Group to purchase telephone cards from Unicom Group (to be imported by Unicom Xingye) at cost plus a margin to be agreed from time to time, but not to exceed 20%, and subject to appropriate volume discounts.

	(xvii)		The Group signed a service agreement with Unicom I/E Co., in which Unicom I/E Co. agreed to provide equipment procurement services to the Group. Unicom I/E Co. charges the Group 0.55% (for contract up to an amount of USD30 million (inclusive)) and 0.35% (for contract with an amount of more than USD30 million) of the value of imported equipment, and 0.25% (for contract up to an amount of RMB200 million (inclusive)) and 0.l5% (for contract with an amount of more than RMB200 million) of the value of domestic equipment for such services.

	(xviii)		In 2004, according to the purchase of CDMA handset agreement entered into between Unicom NewSpace and certain subsidiaries of the Group, the Group agreed to purchase CDMA handsets from Unicom NewSpace.

	(xix)		Unicom International provided sales agency services such as selling of telecommunications cards, leased lines and transfer calls to the Group.

			Prior to September 2004, the Group’s transactions with Unicom International (previously a subsidiary of Unicom Group) were treated as related party transactions, and had been included in the related party transactions described above for the period before its acquisition by the Group in 2004. Subsequent to its acquisition, such transactions become inter-group transactions and have been eliminated in the Group’s consolidated financial statements starting from September 2004.

	(xx)		In 2006, State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”) transferred 100% equity interest in CITDCI to Unicom Group, CITDCI became a wholly-owned subsidiary of Unicom Group effective from December 28, 2006 upon obtaining relevant approvals from the government authorities. Accordingly, CUCL entered into a new agreement, “2006 Comprehensive Services Agreement” with Unicom Group and CITDCI on October 26, 2006, in which CITDCI agreed to provide engineering design and technical services to the Group based on the pricing terms agreed among CUCL, Unicom Group and CITDCI. The service fee standards for the engineering design and technical services are determined based on standards promulgated by the relevant government authorities. In addition, such prices shall not be higher than those adopted by an independent third party providing services in the same industry.

	(xxi)		Unicom Group is the registered proprietor of the “Unicom” trademark in English and the trademark bearing the “Unicom” logo, which are registered at the PRC State Trademark Bureau. Pursuant to an exclusive PRC trademark licence agreement entered into between Unicom Group and CUCL, CUCL and its affiliates are granted the right to use these trademarks on a royalty free basis for an initial period of 5 years, renewable at CUCL’s option.

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	(b)		Amounts due from and to related parties/Unicom Group

			Amounts due from and to related parties or Unicom Group and its subsidiaries are unsecured, interest free, repayable on demand/on contract terms and arise in the ordinary course of business in respect of transactions with Unicom Group or its subsidiaries as described in (a) above.

	(c)		Amount due to/ (from) Unicom Group


	2004			2005			2006
Due to/(from) Unicom Group, beginning of year		432,047			(61,401	)		38,094
Interconnection and roaming revenues		(220,174	)		(207,526	)		(212,178	)
Interconnection and roaming charges		63,891			57,902			59,125
Revenue for leasing of transmission line capacity, premises and facilities		(38,853	)		(25,841	)		(17,682	)
Rental charges for premises, equipment and facilities		25,528			21,059			27,931
Charges for the international gateway services		17,062			19,797			17,143
Leasing of satellite transmission capacity		7,076			11,794			—
Proceeds received/receivable from sale of New Guoxin		450,000			—			—
Net (settlement)/receipt during the year		(797,978	)		222,310			132,648


Due (from)/to Unicom Group, end of year		(61,401	)		38,094			45,081

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	(d)		Renewal of continuing connected transactions in 2006 year-end

			The significant related party transactions disclosed in (a) above between the Group and Unicom Group and its subsidiaries had expired by December 31, 2006. On October 26, 2006, CUCL entered into the new agreements, “2006 Comprehensive Services Agreement” and “2006 CDMA Lease Agreement”, with Unicom Group and Unicom New Horizon to continue to carry out the related party transactions. The new agreements have been approved by the minority shareholders of the Company on December 1, 2006, and become effective from January 1, 2007. Major changes of the key terms between the new agreements and the previous agreements are set out as follows:

	•		2006 CDMA Lease Agreement

			Pursuant to 2006 CDMA Lease Agreement, the CDMA lease has an initial term of one year. The lease fee has been determined based on the same pricing mechanism as under the 2005 CDMA Lease Agreement, but with a conditional increase in the lease fee of 1% from 30% to 31% if the audited CDMA income before taxation of CUCL for the relevant year is not less than the audited CDMA income before taxation of CUCL for the year 2006 as set out in the relevant annual audited financial statements of CUCL. The key terms of 2006 CDMA Lease Agreement are disclosed in Note 4.2(c).

	•		2006 Comprehensive Services Agreement

			Pursuant to 2006 Comprehensive Services Agreement, the customer service fees payable shall be calculated on the same basis as under previous agreements, except Guangdong has been added as one of the economically developed metropolises in determining the cost per operator seat.

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33.2

Domestic Carriers

	(a)		Transactions with Domestic Carriers

			The following is a summary of significant transactions with Domestic Carriers in the ordinary course of business:


	Note			2004		2005		2006
Interconnection revenue		(i	)		2,889,497		3,964,977		5,460,211
Interconnection charges		(i	)		7,003,262		7,886,395		9,118,314
Leased line revenue		(ii	)		247,676		62,865		54,912
Leased line charges		(ii	)		628,173		548,481		328,701

(i)		The interconnection revenue and charges mainly represent the amounts due from or to Domestic Carriers for telephone calls made between the Group’s networks and the public switched telephone network of Domestic Carriers. The interconnection settlements are calculated in accordance with interconnection agreements reached between the branches of the Group and Domestic Carriers on a provincial basis. The terms of these agreements are set in accordance with the standard settlement arrangement stipulated by the MII.

(ii)		Leased line charges are paid or payable to Domestic Carriers by the Group for the provision of transmission lines. At the same time, the Group leases transmission lines to Domestic Carriers in return for leased line rental income. The charges are calculated at a fixed charge per line, depending on the number of lines being used by the Group and Domestic Carriers.

(b)

Amounts due from and to Domestic Carriers


	2005			2006
Amounts due from Domestic Carriers
- Receivables for interconnection revenue and leased line revenue		139,099			158,894
- Less: Provision for doubtful debts		(614	)		(20,373	)


		138,485			138,521

Amounts due to Domestic Carriers
- Payables for interconnection charges and leased lines charges		822,006			850,975

All amounts due from and to Domestic Carriers were unsecured, non-interest bearing and repayable within one year.

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33.3

Other major state-owned enterprises

	(a)		Transactions with other major state-owned enterprises

			The following is a summary of significant transactions with other major state-owned enterprises in the ordinary course of business:


	2004		2005		2006
Purchase of CDMA handsets		1,818,500		1,795,009		1,144,181
Construction and installation fee		707,829		290,170		218,904
Purchase of equipment		5,757,356		3,588,153		1,654,891
Line leasing revenue		179,450		153,837		166,559
Finance income/costs, include:
- Interest income		102,907		96,196		226,065
- Interest expense		1,994,986		1,587,260		832,681
Short-term bank loan received		10,151,971		11,946,716		2,070,000
Long-term bank loan received		6,893,990		5,772,746		1,315,000
Short-term bank loan repaid		12,271,753		14,363,131		7,372,661
Long-term bank loan repaid		17,245,367		25,869,531		8,442,468

	(b)		Amounts due from and to other major state-owned enterprises

			The balances with other major state-owned enterprises in various line items of the consolidated balance sheets were listed as follows:


	2005		2006
Current assets
Prepayment and other current assets		160,681		288,930
Short-term bank deposits		282,457		21,432
Cash and cash equivalents		5,191,067		11,994,563

Non-current liabilities
Long-term bank loans		7,946,418		235,000

Current liabilities
Payables and accrued liabilities		341,446		661,403
Short-term bank loans		6,431,208		—
Current portion of long-term bank loans		5,145,190		80,000

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34.

CONTINGENCIES AND COMMITMENTS

	34.1		Capital Commitments

			As of December 31, 2005 and 2006, the Group had capital commitments, mainly in relation to the construction of telecommunications networks, as follows:


	2006						2005
	Land and
	buildings		Equipment		Total		Total
Authorized and contracted for		499,280		2,199,345		2,698,625		3,879,666
Authorized but not contracted for		63,993		879,287		943,280		329,258


Total		563,273		3,078,632		3,641,905		4,208,924

As of December 31, 2006, approximately RMB203 million (2005: RMB218 million) of capital commitment outstanding was denominated in US dollars, equivalent to USD26 million (2005: USD27 million).

	34.2		Operating Lease Commitments

			As of December 31, 2005 and 2006, the Group had total future aggregate minimum operating lease payments under operating leases as follows:


	2006								2005
					CDMA
	Land and				network
	buildings		Equipment		capacity (a)		Total		Total
Leases expiring:
- 2006		—		—		—		—		7,873,407
- 2007		935,718		129,951		7,270,895		8,336,564		586,064
- 2008		654,349		24,397		—		678,746		500,276
- 2009		512,527		21,647		—		534,174		469,502
- 2010		399,639		16,431		—		416,070		434,837
- 2011		323,432		15,333		—		338,765		—
- Thereafter		1,082,987		24,804		—		1,107,791		1,168,106


Total		3,908,652		232,563		7,270,895		11,412,110		11,032,192

(a)

In relation to the above CDMA network capacity commitment, it is estimated based on 90% of the total amount of lease fee paid by the Group to Unicom New Horizon in 2006 pursuant to 2006 CDMA Lease Agreement (See Note 4.2(c) for details).

	34.3		Commitment to purchase CDMA handsets

			As of December 31, 2006, the Group committed to purchase CDMA handsets from third party vendors amounting to approximately RMB1,237 million (2005: RMB1,232 million).

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35.

EVENTS AFTER BALANCE SHEET

	35.1		Non-adjusting post balance sheet event

			Pursuant to the PRC enterprise income tax law passed by the Tenth National People’s Congress on March 16, 2007, the new enterprise income tax rates for domestic and foreign enterprises are unified at 25% and will be effective from January 1, 2008. The impact of this change in enterprise income tax rates on the Group’s consolidated financial statements will depend on detailed implementation pronouncements that are to be issued subsequently. The Group is currently assessing the impact on the Group’s results of operations and financial position of this change in enterprise income tax rates.

	35.2		Proposed final dividend

			After the balance sheet date, the Board of Directors proposed a final dividend. For details, see Note 31.

36.		COMPARATIVE FIGURES

		For comparative purposes, the carrying value of land use rights underlying the buildings acquired from third parties was reclassified from “Property, plant and equipment” to “Other assets” on the 2005 comparative consolidated balance sheet. Please refer to Note 6 for details.

37.		APPROVAL OF FINANCIAL STATEMENTS

		The financial statements were approved by the Board of Directors on June 21, 2007.

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38.

SIGNIFICANT DIFFERENCES BETWEEN HKFRS AND US GAAP

The consolidated financial statements of the Group prepared under HKFRS differ in certain material respects from those prepared under generally accepted accounting principles in the United States of America (“US GAAP”). Significant differences between HKFRS and US GAAP relating to the Group are summarized below:

(A)		Effect of the acquisitions of entities under common control

		In 2002, 2003 and 2004, the Company acquired the entire equity interests in (i) Unicom New Century (which was merged into CUCL and legally dissolved on June 30, 2004); (ii) Unicom New World (which was merged into CUCL and legally dissolved on September 1, 2005); and (iii) Unicom International, respectively.

		Prior to the adoption of HKFRS in 2005, the Group had adopted the purchase method of accounting to account for the acquisitions of Unicom New Century, Unicom New World and Unicom International (the “Acquisitions”) under the previous accounting principles generally accepted in Hong Kong (“HK GAAP”). Under the purchase method, the operating results of these acquired subsidiaries were included in the consolidated statements of income of the Group after the Acquisitions were effective. The differences between the costs of the Acquisitions and the fair values of the separately identifiable net assets acquired were recorded as goodwill/negative goodwill. Upon the adoption of HKFRS, under HKFRS 3 “Business Combinations”, goodwill is no longer amortized but is instead subject to impairment testing on an annual basis or when there are indications of impairment. This policy is applied prospectively from January 1, 2005. Upon the adoption of HKFRS 3, negative goodwill has been derecognized at January 1, 2005, with a corresponding adjustment to the balance of retained earnings as of January 1, 2005 of the Group.

		As the Group, Unicom New Century, Unicom New World and Unicom International were under the common control of Unicom Group prior to the Acquisitions, these Acquisitions are considered as a transfer of businesses under common control and accounted for in a manner similar to a pooling of interests under US GAAP. Accordingly, the acquired assets and liabilities are accounted for at historical cost under US GAAP. The consolidated financial statements prepared under US GAAP for all periods presented have been retroactively restated as if Unicom New Century, Unicom New World and Unicom International were always part of the Group. The cash considerations paid by the Company are treated as capital distribution in the respective years of the Acquisitions. Goodwill/negative goodwill arising from the Acquisitions and the related amortization of goodwill/negative goodwill in prior periods has been reversed under US GAAP. Transaction costs, which are capitalized as part of the cost of investment under HKFRS, have been expensed in full under US GAAP. Upfront non-refundable revenue and direct incremental costs of these subsidiaries occurring prior to the Acquisitions were not recognized as assets and liabilities under the purchase method of accounting in the financial statements prepared under HKFRS, whereas as a transfer of business under common control under US GAAP, such assets and liabilities have been recognized as if the subsidiaries had always been part of the Group.

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(B)		Consolidation of variable interest entities

		Under HKFRS, consolidation of business enterprises is based on voting control. In addition, special purpose entities (“SPE”) are consolidated where the substance of the relationship indicates that an entity controls the SPE. Indicators of control mainly arise where: (i) the SPE conducts its activities on behalf of the entity; (ii) the entity has the decision-making power to obtain the majority of the benefits of the SPE; (iii) the entity has other rights to obtain the majority of the benefits of the SPE; or (iv) the entity has the majority of the residual or ownership risks of the SPE or its assets.

		Under US GAAP, pursuant to Financial Accounting Standard Board (“FASB”) Interpretation No. 46 (revised in December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”), consolidation by business enterprises is based on an economic risks and rewards model rather than a traditional voting interest model. Entities subject to consolidation under the economic risks and rewards model is called a Variable Interest Entity (“VIE”). In accordance with the provision of FIN 46R, the Group has identified one VIE, Unicom New Horizon, in which it holds a variable interest in the form of lease renewal options. Unicom New Horizon is a 100% owned subsidiary of the Group’s controlling shareholder, from which the Group leases its CDMA assets under operating leases subject to indefinite renewal options. Lease fees are calculated based on a percentage of CUCL’s CDMA service revenues. The Group has concluded that its ultimate controlling shareholder, Unicom Group, is the primary beneficiary of Unicom New Horizon, since it absorbs all of Unicom New Horizon’s expected losses (through its ownership of 100% of Unicom New Horizon’s equity and an unconditional guarantee of 100% of Unicom New Horizon debt) and is indirectly associated with the operations of the leased CDMA assets through its majority ownership of the Group. As such, the adoption of FIN 46R did not result in any differences from the Group’s HKFRS consolidated financial statements.

(C)		Employee housing schemes

		Prior to April 2000, Unicom Group provided housing benefits to qualified employees of the Group to enable them to purchase living quarters at a discount. Under HKFRS, housing benefits incurred and borne by Unicom Group for these employees were not recognized by the Group. Under US GAAP, the amount of such housing benefits is being recognized as part of the Group’s operating expenses over the estimated average service period of the participating employees. The corresponding credits are being accounted for as capital contributions.

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(D)		Revaluation of property, plant and equipment

		Under HKFRS, revaluation surplus in relation to buildings is recorded by the Group as part of the property, plant and equipment. Thereafter, depreciation is provided based on the revalued amounts.

		Under US GAAP, all property, plant and equipment are stated at historical cost less accumulated depreciation.

(E)		Share option scheme

		Under HKFRS, the fair value of the employee services received in exchange for share options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. Upon the adoption of HKFRS 2 effective on January 1, 2005, the Group expenses the cost of share options in the statements of income. As a transitional provision, the cost of share options granted after November 7, 2002 and not yet vested on January 1, 2005 was expensed retrospectively in the statements of income of the respective periods. Refer to Note 29 for details of share option schemes adopted by the Company.

		Under US GAAP, in December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment” (“SFAS 123R”), which is a revision of Statement of Financial Accounting Standard for “Stock-Based Compensation” (“SFAS 123”) and supersedes Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting periods. Under SFAS 123 (R), the pro forma disclosures of the statements of income effects of share-based payments are no longer an alternative. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 regarding the SEC’s Interpretation of SFAS 123(R) and the valuation of share-based payment for public companies. SFAS 123(R) is effective for all stock-based awards granted on or after June 15, 2005. In addition, companies must also recognize compensation expense relating to any awards that are not fully vested as of June 15, 2005. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS 123 and will be amortized over the remaining vesting period.

		The Group adopted SFAS 123(R) and relevant implementation guidances on January 1, 2006 using the Modified Prospective Application (“MPA”) method. By using the MPA method, the Group will not restate its prior period financial statements. Instead, the Group applies SFAS 123(R) for any unvested options as of and for new options granted after June 15, 2005.

F - 89

Prior to adopting the provision of SFAS 123(R), the Company applied APB 25 to account for its fixed award stock options issued to employees. Under APB 25, compensation expense is recorded in the amount of the excess, if any, of the quoted market price of the shares on the date of grant over the exercise price of the options, which is amortized over the vesting period of the option. Since the market price of the underlying stock on the date of grant did not exceed the exercise price of the options granted, no compensation cost for options has been recognized in the reconciliation of net income for the relevant years to US GAAP. For purposes of pro forma disclosure under SFAS 123, as further amended by Statement of Financial Accounting Standards, No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”(“SFAS 148”), for the years ended December 31, 2004 and December 31, 2005, the estimated fair values of the share options were assumed to be amortized to expense over the share options’ vesting periods. The pro forma effects of recognizing estimated compensation expense under the fair value method on net income and earnings per share for the years ended December 31, 2004 and December 31, 2005 were as follows:


	2004			2005
Net income under US GAAP:
As reported (RMB’000)		4,712,687			5,012,812
Less: Total stock-based employee compensation expense determined under fair value based method		(146,541	)		(108,950	)

Pro forma		4,566,146			4,903,862


Basic earnings per share:
As reported (RMB)		0.38			0.40
Pro forma (RMB)		0.36			0.39

Diluted earnings per share:
As reported (RMB)		0.37			0.40
Pro forma (RMB)		0.36			0.39

Basic earnings per ADS:
As reported (RMB)		3.75			3.99
Pro forma (RMB)		3.64			3.90

Diluted earnings per ADS:
As reported (RMB)		3.74			3.97
Pro forma (RMB)		3.62			3.89

F - 90

(F)		Capacity transaction

		Under HKFRS, sales of indefeasible right-of-use (“IRU”) are recognized at the time of delivery and acceptance where the following conditions are met: (i) the purchaser’s right of use is exclusive and irrevocable; (ii) the asset is specific and separable; (iii) the term of the contract is for the major part of the asset’s useful economic life; (iv) the attributable carrying value can be measured reliably; and (v) no significant risks are retained by the Group.

		Under US GAAP, sales of IRUs are evaluated under the guidance in FASB Interpretations No. 43 “Real Estates Sales” as the leased asset is considered as real estate. The title of the leased assets must be transferred to the lessee in order to be classified and accounted for as a sales-type lease such that the sale can be recognized. Accordingly, such sales of IRUs are not recognized under US GAAP as the title to the asset is not transferred.

(G)		Convertible bonds

		Under HKFRS, the Convertible Bonds contract must be separated into two component elements: a derivative component consisting of the conversion option and a liability component consisting of the straight debt element of the bonds. Since the functional currency of the Group is RMB, the conversion option of the Convertible Bonds denominated in Hong Kong Dollars will not result in settlement by the exchange of a fixed amount of cash in RMB (functional currency of the Group) for a fixed number of the Company’s shares. The derivative component, the embedded conversion option, is carried at fair value on the balance sheet with any changes in fair value being charged or credited to the statement of income in the period when the change occurs. The remainder of the proceeds is allocated to the debt element of the bonds, net of transaction costs, and is recorded as the liability component. The liability component is subsequently carried at amortized cost until extinguished on conversion or redemption. Interest expense is calculated using the effective interest method by applying the effective interest rate to the liability component through the maturity date. Refer to Note 2.13 and Note 17 for details of the Convertible Bonds.

		Under US GAAP, pursuant to Statement of Financial Accounting Standards No.133, “Accounting for derivative instruments and hedging activities” (“SFAS 133”), the conversion option of the Convertible Bonds is not separated from the bond contract as it does not satisfy the net settlement characteristic of a derivative instrument and no portion of the proceeds from the issuance of the Convertible Bonds should be accounted for as attributable to the conversion feature. All of the proceeds are attributed to the bond contract and is carried as a long-term liability on the amortized cost basis until extinguished on conversion or redemption. Interest expense is calculated at the effective interest rate of 1.40% to the host contract through the maturity date. The transaction costs of the Convertible Bonds with puts at the option of the holder are amortized at 2 years through the first put date, July 5, 2008.

(H)		Rental cost

		Under HKFRS, the rental costs associated with ground or building operating leases that are incurred during the construction period are capitalized as these costs are considered as necessary costs of the construction which are directly attributable costs of bringing the asset to its working condition and location for its intended use.

		Under US GAAP, effective from January 1, 2006, the Group applies FASB Staff Position (“FSP”) 13-1, “Accounting for Rental Costs Incurred During a Construction Period”, which requires that rental cost associated with ground or building operating leases that are incurred during the construction period be recognized as rental expense.

F - 91

(I)		Deferred taxation

		The adjustment related to deferred taxation represents the deferred tax effects of other US GAAP adjustments.

(J)		New Accounting Pronouncements

		The following are new accounting pronouncements not yet effective, but may be applicable to the Group.

		The Financial Accounting Standards Board (“FASB”) recently issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), and Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (“SFAS 157”). The FASB ratified Emerging Issue Task Force (“EITF”) No. 06-03, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement”(“EITF 06-03”). Also, EITF issued No. 06-01, “Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider”(“EITF 06-01”). U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”(“SAB 108”).

	(a)		In June 2006, the EITF issued No. 06-03, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-03”). EITF 06-03 requires disclosure of the presentation of taxes on either a gross or a net basis as an accounting policy decision. The provisions are effective for interim and annual reporting periods beginning after December 15, 2006. The Group does not expect the adoption of EITF 06-03 will have a material impact on the consolidated financial statements of the Group.

	(b)		In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on tax audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal year beginning after December 15, 2006, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Group does not expect the adoption of FIN 48 will have a material impact on the consolidated financial statements of the Group.

	(c)		In September 2006, the FASB issued Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Group does not expect the adoption of SFAS 157 will have a material impact on the consolidated financial statements of the Group.

F - 92

	(d)		In September 2006, the Staff of the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year’s financial statements are materially misstated. SAB 108 is effective for fiscal years beginning after November 15, 2006. The Group does not expect the adoption of SAB 108 will have a material impact on the consolidated financial statements of the Group.

	(e)		In September 2006, EITF issued No. 06-01, “Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider” (“EITF 06-01”). EITF 06-01 provides guidance regarding whether the consideration given by a service provider to a manufacturer or reseller of specialized equipment should be characterized as a reduction of revenue or an expense. This Issue is effective for fiscal years beginning after June 15, 2007. The Group believes the adoption of EITF 06-01 will not have significant impact on its consolidated financial statements.

F - 93

Differences between HKFRS and US GAAP which affect net income of the Group are summarized below:


	Note			2004			2005			2006
Net income under HKFRS					4,493,451			4,931,052			3,731,824

Impact of US GAAP adjustments:
- Reversal of goodwill amortization of Unicom New Century		(A	)		114,237			—			—
- Recognition of depreciation expenses based on historical cost of property, plant and equipment of Unicom New Century		(A	)		(28,761	)		(28,761	)		(28,761	)
- Reversal of goodwill amortization of Unicom New World		(A	)		57,247			—			—
- Recognition of depreciation expenses based on historical cost of property, plant and equipment of Unicom New World		(A	)		(20,740	)		(20,740	)		(20,740	)
- Effect of acquisition of Unicom International		(A	)		6,106			—			—
- Transaction costs for the acquisition of Unicom International		(A	)		(325	)		—			—
- Recognition of depreciation expenses based on historical cost of property, plant and equipment of Unicom International		(A	)		61			1,448			1,448
- Upfront non-refundable revenue and direct incremental costs not recognized under purchase method of accounting under HKFRS		(A	)		19,807			21,001			21,001
- Employee housing benefits		(C	)		(14,942	)		(14,942	)		(14,942	)
- Reversal of depreciation for revalued property, plant and equipment		(D	)		4,127			4,127			4,127
- Reversal of employee compensation costs for share option scheme under HKFRS		(E	)		88,957			108,417			—
- Effect on sale of indefeasible right-of-use		(F	)		—			(3,747	)		(142	)
- Adjustment of differences on Convertible Bonds between HKFRS and US GAAP:
(i) Reversal of unrealized loss on changes in fair value of derivative component of Convertible Bonds		(G	)		—			—			2,396,592
(ii) Amortization of transaction costs on Convertible Bonds		(G	)		—			—			(3,540	)
(iii) Difference in provision for interest expense on Convertible Bonds under HKFRS		(G	)		—			—			137,973
(iv) Difference in exchange gain on Convertible Bonds under HKFRS		(G	)		—			—			(58,090	)
- Expense the capitalized rental cost under HKFRS		(H	)		—			—			(25,935	)
- Deferred tax effects of US GAAP adjustments		(I	)		(6,538	)		14,957			14,957


Net income under US GAAP					4,712,687			5,012,812			6,155,772

F - 94

Differences between HKFRS and US GAAP which affect shareholders’ equity of the Group are summarized below:


				The Group
	Note			2005			2006
Shareholders’ equity under HKFRS					76,284,345			79,408,817

Impact of US GAAP adjustments:
- Effect of acquisition of Unicom New Century		(A	)		(2,052,554	)		(2,052,554	)
- Transaction costs for the acquisition of Unicom New Century		(A	)		(109,221	)		(109,221	)
- Reversal of goodwill amortization and recognition of depreciation expenses based on historical cost of property, plant and equipment of Unicom New Century		(A	)		145,509			116,748
- Effect of acquisition of Unicom New World		(A	)		(946,370	)		(946,370	)
- Transaction costs for the acquisition of Unicom New World		(A	)		(49,378	)		(49,378	)
- Reversal of goodwill amortization and recognition of depreciation expenses based on historical cost of property, plant and equipment of Unicom New World		(A	)		15,767			(4,973	)
- Effect of acquisition of Unicom International		(A	)		392			392
- Transaction costs for the acquisition of Unicom International		(A	)		(325	)		(325	)
- Reversal of goodwill amortization and recognition of depreciation expenses based on historical cost of property, plant and equipment of Unicom International		(A	)		(5,977	)		(4,529	)
- Upfront non-refundable revenue and direct incremental costs not recognized under purchase method of accounting under HKFRS		(A	)		69,775			90,776
- Reversal of revaluation surplus of property, plant and equipment:
- Cost		(D	)		(82,531	)		(282,861	)
- Accumulated depreciation		(D	)		23,605			27,732
- Effect on sale of indefeasible right-of-use		(F	)		(3,747	)		(3,889	)
- Adjustment of differences on Convertible Bonds between HKFRS and US GAAP:
(i) Reversal of unrealized loss on changes in fair value of derivative component of Convertible Bonds		(G	)		—			2,396,592
(ii) Amortization of transaction costs on Convertible Bonds		(G	)		—			(3,540	)
(iii) Difference in provision for interest expense on Convertible Bonds under HKFRS		(G	)		—			137,973
(iv) Difference in exchange gain on Convertible Bonds under HKFRS		(G	)		—			(58,090	)
- Expense the capitalized rental cost under HKFRS		(H	)		—			(25,935	)
- Deferred tax effects of US GAAP adjustments		(I	)		(24,004	)		96,082


Shareholders’ equity under US GAAP					73,265,286			78,733,447

F - 95

The following are the condensed statements of income, changes in shareholders’ equity and cash flow information for the years ended December 31, 2004, 2005 and 2006, condensed balance sheets information for the Group as of December 31, 2005 and 2006, restated to reflect the impact of the effects of acquisition of entities under common control which is accounted for at historical cost with retroactive restatement under US GAAP.

Condensed Statements of Income


	2004			2005			2006
Revenue (Turnover):		79,388,314			87,254,524			94,500,184

Operating expenses:
Leased lines and network capacities		(7,398,429	)		(8,747,317	)		(8,763,865	)
Interconnection charges		(7,508,866	)		(8,372,370	)		(9,595,622	)
Depreciation and amortization		(18,944,473	)		(20,412,108	)		(22,467,946	)
Employee benefit expenses		(4,547,892	)		(5,522,837	)		(6,663,641	)
Selling and marketing		(18,989,186	)		(20,721,974	)		(19,415,800	)
General, administrative and other expenses		(10,471,208	)		(11,741,560	)		(13,441,503	)
Cost of telecommunications products sold		(3,342,797	)		(3,594,844	)		(4,949,516	)


Total operating expenses		(71,202,851	)		(79,113,010	)		(85,297,893	)


Operating income		8,185,463			8,141,514			9,202,291
Interest income		103,441			96,196			259,040
Finance costs		(1,688,418	)		(1,099,321	)		(577,877	)
Other gains — net		95,932			30,111			21,353


Net income before taxation and minority interests		6,696,418			7,168,500			8,904,807
Taxation		(1,983,731	)		(2,155,454	)		(2,748,928	)


Net income before minority interests		4,712,687			5,013,046			6,155,879
Minority interests		—			(234	)		(107	)


Net income		4,712,687			5,012,812			6,155,772

F - 96


	Note			2004		2005		2006
Basic earnings per share (RMB):		(1	)		0.38		0.40		0.49

Diluted earnings per share (RMB):		(2	)		0.37		0.40		0.46

Basic earnings per ADS (RMB):		(1	)		3.75		3.99		4.89

Diluted earnings per ADS (RMB):		(2	)		3.74		3.97		4.62


Notes

(1)		Basic earnings per share for the years ended December 31, 2004, 2005 and 2006 were computed by dividing the net income for the financial years under US GAAP by the weighted average number of ordinary shares in issue during the years.

(2)		Diluted earnings per share for the years ended December 31, 2004, 2005 and 2006 were computed by dividing the net income for the financial years under US GAAP by the weighted average number of ordinary shares in issue during the years, after adjusting for the cumulative effects of the dilutive potential ordinary shares. The dilutive potential ordinary shares arose from share options granted (i) under the amended Pre-Global Offering Share Option Scheme; (ii) under the amended Share Option Scheme as described in Note 29 and (iii) the Convertible Bonds as described in Note 17. For 2006, the dilutive potential ordinary shares arose from additional share options granted in 2002, 2003 and 2004 under the amended Share Option Scheme (see Note 29) and the Convertible Bonds, which if converted to ordinary shares would decrease earnings per share.

F - 97

Condensed Balance Sheets


	2005			2006
Assets
Current assets:
Bank balances and cash		5,471,576			12,182,108
Short-term bank deposits		282,457			195,820
Amounts due from related parties		384,531			168,548
Amounts due from Domestic Carriers		138,485			138,521
Accounts receivable		7,636,980			6,462,638
Less: Provision for doubtful debts		(3,088,551	)		(3,043,295	)

Accounts receivable, net		4,548,429			3,419,343
Inventories		2,107,812			2,333,902
Current portion of deferred tax assets		447,556			819,118
Prepayments and other current assets		2,342,467			1,988,019


Total current assets		15,723,313			21,245,379


Non-current assets:
Property, plant and equipment, net		112,549,099			111,285,921
Other assets		11,685,354			11,187,164


Total assets		139,957,766			143,718,464


Liabilities and equity
Current liabilities:
Payables and accrued liabilities		18,526,628			26,290,074
Taxes payable		1,016,128			1,632,195
Amounts due to Unicom Group		38,094			45,081
Amounts due to related parties		116,621			325,308
Amounts due to Domestic Carriers		822,006			850,975
Short-term bonds		9,865,900			7,087,217
Short-term bank loans		7,024,358			—
Current portion of long-term bank loans		5,145,190			3,984,350
Current portion of obligations under finance leases		420,631			99,566
Advances from customers		7,886,624			9,987,771


Total current liabilities		50,862,180			50,302,537


Non-current liabilities:
Long-term bank loans		11,981,518			4,139,349
Convertible bonds		—			7,862,609
Obligations under finance leases		145,367			10,230
Deferred tax liabilities		132,892			410,201
Deferred revenue		3,567,789			2,257,250


Total non-current liabilities		15,827,566			14,679,639


Minority interests		2,734			2,841


Shareholders’ equity		73,265,286			78,733,447


Total liabilities and shareholders’ equity		139,957,766			143,718,464

F - 98

Condensed Statements of Changes in Shareholders’ Equity


Balance of shareholders’ equity as of December 31, 2003	65,946,144
Net income for the year ended December 31, 2004	4,712,687
Deemed capital contribution from owner for employee housing benefits	14,942
Deemed capital distribution relating to the payment to Unicom Group for the transfer of Unicom International	(39,416	)
Dividend paid	(1,256,160	)
Exercise of share options	64,125


Balance of shareholders’ equity as of December 31, 2004	69,442,322
Net income for the year ended December 31, 2005	5,012,812
Deemed capital contribution from owner for employee housing benefits	14,942
Dividend paid	(1,256,924	)
Exercise of share options	52,134


Balance of shareholders’ equity as of December 31, 2005	73,265,286
Net income for the year ended December 31, 2006	6,155,772
Deemed capital contribution from owner for employee housing benefits	14,942
Dividend paid	(1,384,146	)
Value of employee services	146,294
Exercise of share options	535,299


Balance of shareholders’ equity as of December 31, 2006	78,733,447

Condensed Cash Flow Statements


	2004			2005			2006
Net cash inflows (outflows) from:
Operating activities		24,510,430			31,486,278			35,873,954
Investing activities		(19,668,070	)		(17,430,931	)		(17,760,108	)
Financing activities		(9,440,491	)		(13,213,324	)		(11,403,314	)


Net (decrease) increase in cash and cash equivalents		(4,598,131	)		842,023			6,710,532
Cash and cash equivalents, beginning of year		9,227,684			4,629,553			5,471,576


Cash and cash equivalents, end of year		4,629,553			5,471,576			12,182,108


Interest paid (net of amount capitalized)		(1,662,419	)		(1,109,808	)		(784,136	)

F - 99


*associate*		has the meaning ascribed to it in the Listing Rules

*Auditors*		means the auditors for the time being of the Company;

*Board*		means the board of directors from time to time of the Company or a duly authorised committee thereof;

*Board Lot*		means the board lot in which Shares are traded on the Stock Exchange from time to time;

*Companies Ordinance*		means the Hong Kong Companies Ordinance (Chapter 32 of the laws of Hong Kong (as amended from time to time));

*Company*		means China Unicom Limited , a company incorporated in Hong Kong with limited liability;

*Effective Date*		means the date on which the Scheme becomes unconditional;

*Effective Options*		Options granted pursuant to the Scheme and vested in the Grantee according to the relevant Vesting Schedule;

*Employee*		means any employee of the Company or any Subsidiary including (without limitation) any executive director in the employment of the Company or any Subsidiary;

*financial year*		means a year or other period for which the Company’s consolidated accounts are made up;

*Grantee*		means any Employee who accepts the offer of the grant of any Option in accordance with the terms of the Scheme or (where the context so permits) a person who is entitled to exercise any such Option in consequence of the death of the original Grantee or, if necessary, in the case of Incapacity, the Employee’s legal successors, lawful attorney or legal representative;

*HK$*		means Hong Kong dollars.


*Incapacity*		means permanent and entire incapacity, whether or not caused during work, as determined in accordance with the standard formulated by the Company;


*Issue Price*		means the final price per Share (exclusive of brokerage and Stock Exchange transaction levy) to be agreed between the Company, Morgan Stanley Dean Witter Asia Limited and China International Capital Corporation Limited at which Shares are to be sold under the proposed public offering of the Shares in Hong Kong;

*Listing Rules*		means the Rules Governing the Listing of Securities on the Stock Exchange

*Mandatory Transfer*		means a termination of employment by a member of the Group of a Transferred Personnel;

*Offer Date*		means the date on which an Option is offered to an Employee;

*Option*		means a right to subscribe for Shares granted pursuant to the terms of the Scheme;

*Option Period*		means, in respect of any particular Option, the period to be determined and notified by the Board to each Grantee during which the Grantee may exercise such Option in accordance with the terms of the Scheme. Such period may commence on a day after the second anniversary of the Offer Date and in any event shall end not later than 10 years from the Offer Date but subject to the provisions for early termination thereof contained herein;

*Scheme*		means this share option scheme in its present form or as amended from time to time (except that references to the Scheme in Clause 2 shall only refer to the original pre-global offering share option scheme as adopted on 1 June 2000);

*Shares*		means shares of HK$0.10 each in the share capital of the Company (or of such other nominal amount as may result from a sub-division, consolidation, reclassification or reconstruction of such share capital from time to time);

*Stock Exchange*		means The Stock Exchange of Hong Kong Limited;

*Subscription Price*		means the price per Share at which a Grantee may subscribe for Shares on the exercise of an Option as described in Clause 5;


*Subsidiary*		means a company which is for the time being and from time to time a subsidiary (within the meaning of section 2(4) of the Companies Ordinance) of the Company whether incorporated in Hong Kong or elsewhere;

*Transferred Personnel*		means such personnel who are transferred due to reasons which are beyond their control, and in respect of whom such transfer is mandatory. This includes a transfer to entities outside the Group which is initiated by the central government of the People’s Republic of China. All the other personnel who are transferred shall not be regarded as “Transferred Personnel” but will be regarded as a personnel who has left the service, and will be treated in accordance with Clause 6.3(a) of this Scheme. The Board shall be responsible for the determination of the Transferred Personnel; and

*Vesting Schedule*		means the arrangement whereby Options granted at a particular time can be exercised in one lot or in batches in accordance with a pre-determined timetable as set out in the relevant grant letter.

(a)		in the event of the Grantee ceasing to be an Employee for any reason other than his death, retirement, Incapacity, Mandatory Transfer or on one or more of the grounds specified in Clause 7(d) leading to a lapse of the Option, the Grantee may exercise all the Effective Options granted to him at the date of cessation of his employment or office (to the extent not already exercised) on the date of such cessation, which date shall be the last actual working day with the Company or the relevant Subsidiary whether salary is paid in lieu of notice or not. All the Effective Options which have not been exercised on the date of cessation of employment will lapse automatically on the date immediately after such cessation and such Options shall in no circumstances be exercisable. For the avoidance of doubt, a Grantee does not cease to be an Employee only for the reason of an internal transfer to a Subsidiary;

(b)		in the event of the death of the original Grantee and none of the events under Clause 7(d) has occurred, all the Options granted to the Grantee shall be vested in the Grantee automatically on the date of death, and the lawful successors of the Grantee shall be entitled within anytime from the date of death to the earlier of (i) 12 months after the date of death and (ii) the end of the Option Period to exercise all the Options in full (to the extent not already exercised). Any such Options which are not exercised within the 12-month period (or before the end of the Option Period, whichever is earlier) shall lapse automatically. The legal successors to the above Options shall be limited to legal representatives of the deceased Grantee or persons who are entitled to inherit the rights of exercise of the deceased Grantee under this Scheme by will or by law of succession;

(c)		if a general offer (whether by way of take-over offer, share repurchase offer or scheme of arrangement or otherwise in like manner) is made to all the holders of Shares (or all such holders other than the offeror and/or any person controlled by the offeror and/or any person acting in association or in concert with the offeror) the Company shall use its best endeavours to procure that

(d)		in the event of an effective resolution being passed for the voluntary winding-up of the Company or an order of Court is made for the winding-up of the Company, the Grantee may by notice in writing to the Company within 21 days after the date of such resolution elect to be treated as if the Option (to the extent not already exercised) had been exercised immediately before the passing of such resolution either to its full extent or to the extent specified in the notice, such notice to be accompanied by a remittance for the full amount of the aggregate Subscription Price for the Shares in respect of which the notice is given, whereupon the Grantee will be entitled to receive out of the assets available in the liquidation pari passu with the holders of Shares such sum as would have been received in respect of the Shares the subject of such election;

(e)		if, pursuant to the Companies Ordinance, a compromise or arrangement between the Company and its members or creditors is proposed for the purposes of or in connection with a scheme for the reconstruction of the Company or its amalgamation with any other company or companies, the Company shall give notice thereof to all Grantees (together with a notice of the existence of the provisions of this Clause) on the same date as it despatches to each member or creditor of the Company a notice summoning the meeting to consider such a compromise or arrangement, and thereupon each Grantee shall be entitled to exercise all or any of his Options in whole or in part at any time prior to 12 noon on the day immediately preceding the date of the meeting directed to be convened by the Court for the purposes of considering such compromise or arrangement. With effect from the date of such meeting, the rights of all Grantees to exercise their respective Options shall forthwith be suspended. Upon such compromise or arrangement becoming effective, all Options shall, to the extent that they have not been exercised, lapse and determine. The Board shall endeavour to procure that the Shares issued as a result of the exercise of Options under this Clause 6.3(e) shall for the purposes of such compromise or arrangement form part of the issued share capital of the Company on the effective date thereof and that such Shares shall in all respects be subject to such compromise or arrangement. If for any reason such compromise or arrangement is not approved by the Court (whether upon the terms presented to the Court or upon any other terms as may be approved by such Court) the rights of Grantees to exercise their respective Options shall with effect from the date of the making of the order by the Court be restored in full and shall thereupon become exercisable (but subject to the other terms of the Scheme) as if such compromise or arrangement had not been proposed by the Company and no claim shall lie

(f)		in the event of the retirement or Incapacity of the Grantee and none of the events under Clause 7(d) has occurred, all the Options granted to the Grantee shall continue to vest in the Grantee according to the relevant Vesting Schedule, and the Grantee may exercise all Effective Options vested in him according to the Vesting Schedule within the Option Period; and

(g)		in the event of a Mandatory Transfer and none of the events under Clause 7(d) has occurred:

	(i)		the Transferred Personnel may exercise all Effective Options vested in him on or before the date of the Mandatory Transfer (which date shall be the last actual working day of the Transferred Personnel with the relevant member of the Group whether salary is paid in lieu of notice or not); and

	(ii)		in relation to Options granted to the Transferred Personnel which have not vested in him on or before the date of the Mandatory Transfer ( *Unvested Options* ), the Board shall have the right to vest such number of Unvested Options in the Transferred Personnel ( *Effective Unvested Options* ) on the date of the Mandatory Transfer as the Board may decide in its absolute discretion.

(a)		the expiry of the Option Period;

(b)		the expiry of any of the periods referred to in Clause 6.3 (a), (b), (c), (e) and (g);

(c)		subject to Clause 6.3(d), the date of the commencement of the winding- up of the Company (as determined in accordance with the Companies Ordinance);

(d)		the date on which the Board resolves that the Option of the Grantee shall lapse and not be exercisable as a result of the Grantee ceasing to be an Employee by reason of the summary termination of his employment on any one or more of the grounds that he has been guilty of misconduct, or has been convicted of any criminal offence involving his integrity or honesty. A resolution of the Board or the board of directors of the relevant Subsidiary to the effect that the employment of a Grantee has or has not been terminated on one or more of the grounds specified in this Clause 7(d) shall be conclusive for the purpose of determining whether the employment of the Grantee will be terminated; or

(e)		the date on which the Grantee commits a breach of Clause 6.1.

(a)		the number or nominal amount of Shares, the subject matter of the Option (insofar as it is unexercised); and/or

(b)		the aggregate number of Shares subject to outstanding Options; and/or

(c)		the Subscription Price; and/or

(d)		the method of exercise of the Option,

(a)		The appointing authority shall be the Hong Kong International Arbitration Centre ( *HKIAC* ).

(b)		The place of arbitration shall be in Hong Kong at the HKIAC.

(c)		There shall be only one arbitrator.

(d)		The language(s) to be used in the arbitral proceedings shall be English.

(a)		by the Company shall be deemed to have been served 24 hours after the same was put in the post; and

(b)		by the Grantee shall not be deemed to have been received until the same shall have been received by the Company.


Clause		Page

1.	Definitions		1

2.	Conditions		3

3.	Duration and Administration		3

4.	Grant of Option		4

5.	Subscription Price		4

6.	Exercise of Options		4

7.	Lapse of Option		8

8.	Maximum number of Shares available for Subscription		8

9.	Cancellation		8

10.	Reorganisation of Capital Structure		9

11.	Share Capital		9

12.	Disputes		10

13.	Alteration of the Scheme		10

14.	Termination		10

15.	Miscellaneous		11


		who is entitled to exercise any such Option in consequence of the death of the original Grantee or, if necessary, in the case of Incapacity, the Eligible Participant’s legal successors, lawful attorney or legal representative;

*HK$*		means Hong Kong dollars;

*Incapacity*		means permanent and entire incapacity, whether or not caused during work, as determined in accordance with the standard formulated by the Company;

*Listing Rules*		means the Rules Governing the Listing of Securities on the Stock Exchange;

*Mandatory Transfer*		means a termination of employment by a member of the Group of a Transferred Personnel;

*Non-executive Director(s)*		means the non-executive directors of the Company which include the independent non-executive directors of the Company;

*Offer Date*		means the date on which an Option is offered to an Eligible Participant;

*Option*		means a right to subscribe for Shares granted pursuant to the terms of the Scheme;

*Option Period*		means, in respect of any particular Option, the period to be determined and notified by the Board to each Grantee during which the Grantee may exercise such Option in accordance with the terms of the Scheme. Such period may commence on a day after the Offer Date and in any event shall end not later than 10 years from the Offer Date but subject to the provisions for early termination thereof contained herein;

*Scheme*		means this share option scheme in its present form or as amended from time to time (except that references to the Scheme in Clause 3 shall only refer to the original share option scheme as adopted on 1 June 2000);

*Shares*		means shares of HK$0.10 each in the share capital of the Company (or of such other nominal amount as may result from a sub-division, consolidation, reclassification or reconstruction of such share capital from time to time);

*Stock Exchange*		means The Stock Exchange of Hong Kong Limited;


*Subscription Price*		means the price per Share at which a Grantee may subscribe for Shares on the exercise of an Option as described in Clause 6;

*substantial shareholder*		has the meaning ascribed to it under the Listing Rules;

*subsidiary*		means a company which is for the time being and from time to time a subsidiary (within the meaning of section 2(4) of the Companies Ordinance) of the Company whether incorporated in Hong Kong or elsewhere;

*Transferred Personnel*		means such personnel who are transferred due to reasons which are beyond their control, and in respect of whom such transfer is mandatory. This includes a transfer to entities outside the Group which is initiated by the central government of the People’s Republic of China. All the other personnel who are transferred shall not be regarded as “Transferred Personnel” but will be regarded as a personnel who has left the service, and will be treated in accordance with Clause 7.3(a) of this Scheme. The Board shall be responsible for the determination of the Transferred Personnel; and

*Vesting Schedule*		means the arrangement whereby Options granted at a particular time can be exercised in one lot or in batches in accordance with a pre-determined timetable as set out in the relevant grant letter.

	(i)		the date of the board meeting (as such date is first notified to the Stock Exchange in accordance with paragraph 12 of the Company’s Listing Agreement with the Stock Exchange) for the approval of the Company’s interim or annual results; and

	(ii)		the deadline for the Company to publish its interim or annual results under the Listing Agreement,

(a)		the closing price of the Shares on the Stock Exchange as stated in the Stock Exchange’s quotation sheets on the relevant Offer Date in respect of such Option;

(b)		the average closing price of the Shares on the Stock Exchange as stated in the Stock Exchange’s quotation sheets for the five trading days immediately preceding the relevant Offer Date; and

(c)		the nominal value of the Shares.

(b)		the expiry of any of the periods referred to in Clause 7.3 (a), (b), (c), (e) and (g);

(c)		subject to Clause 7.3(d), the date of the commencement of the winding-up of the Company (as determined in accordance with the Companies Ordinance);

(d)		the date on which the Board resolves that the Option of the Grantee shall lapse and not be exercisable as a result of the Grantee, being an employee (including an executive director) of any member of the Group, ceasing to be such an employee by reason of the summary termination of his employment on any one or more of the grounds that he has been guilty of misconduct, or has been convicted of any criminal offence involving his integrity or honesty. A resolution of the board of directors of the relevant member of the Group to the effect that the employment of a Grantee has or has not been terminated on one or more of the grounds specified in this Clause 8(d) shall be conclusive for the purpose of determining whether the employment of the Grantee will be terminated;

(e)		the date on which the Board resolves that the Option of the Grantee shall lapse as a result of the Board or meeting of the shareholders of the Company having resolved, in accordance with their respective powers granted under the Articles of Association of the Company or relevant laws or regulation, that the Grantee, being a Non-executive Director, shall cease to hold the office of Non-executive Director on any one or more of the grounds that he has been guilty of misconduct, or has been convicted of any criminal offence involving his integrity or honesty, or being prohibited by laws or regulation or court order from being a director, or being reprimanded by the Stock Exchange or the stock exchanges or relevant government authorities of other jurisdictions outside Hong Kong; or

(f)		the date on which the Grantee commits a breach of Clause 7.1.


		Lessor

		Address:		6 ^th Floor, Tower 3, Henderson Centre, 18 Jianguomen
				Nei Dajie, Beijing, 100005, PRC

		Fax:		+86 10 6611 0768

		For the attention of:		Zhao Le

		Lessee

		Address:		40 ^th Floor, Jin Mao Tower, 88 Century Boulevard,
				Shanghai, the PRC

		Fax:		+86 10 6650 4066

		For the attention of:		The Directors


		Unicom Group

		Address:		Room 615, Tower 3, Henderson Centre,
				18 Jianguomen Nei Dajie, Beijing, the PRC

		Fax:		+86 10 6611 4366

		For the attention of:		Li Zhang Ting


Prepared by: Provincial Branch	Unit of Amount: RMB
		Amount for
		the current
Items	Rows	quarter	Note
Total Service Revenues from Business	1=2+3+4+5+6+7-8		Formula for calculating the CDMA network lease fee referred to in row 11:

1. Monthly fee	2		(1) assuming that under PRC GAAP, revenues generated by CUCL from its business (row 1) equals to A;

2. Usage fee	3		(2) CDMA network lease fee payable to Unicom Horizon, i.e. revenues generated by Unicom Horizon from its business equals to B;

3. Revenue from value-added services	4

4. Interconnection revenue	5		(3) under the connected transaction agreements, the settlement represents R% of the operating revenue calculated in accordance with HK GAAP; and

5. Business revenues from digital circuits and leased lines	6		(4) under HK GAAP, the business revenues generated by CUCL equals to C.

6. Others	7		C = A - (A-B)*3%

Business Tax	8		Formula : B = CR%= [A - (A-B)3%]*R%

Costs incurred by Principal Business	9		Where: B=[A*(1-3%)] / (1/R%-3%)

......	10

In which, CDMA network lease fee payable to Unicom Horizon	11


Note ¹		The monthly breakdown of the consolidated income statement prepared by China Unicom Limited in accordance with the Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants does not contain any deferral or amortisation of any upfront non-refundable revenue arising out of the CDMA business.


CLAUSE	PAGE
1. Interpretation		2
2. Lease of Network Capacity		5
3. Conditions		6
4. Term		6
5. Capacity		6
6. Lease fee		8
7. Payment		9
8. Procurement and Construction of the Network		9
9. Revenue and Costs of Management, Operation and Maintenance		10
10. Risk and Title		11
11. Responsibilities of the Parties		11
12. Representations and Warranties		13
13. Purchase Option		15
14. Insurance		16
15. Network Maintenance		17
16. Performance Guarantee and Indemnity		17
17. Confidentiality		18
18. Force Majeure		18
19. Termination		19
20. Notices		20
21. Assignment and Sub-Contracting		21
22. Severability		21
23. Further assurance		21
24. Costs		22
25. Waivers and Variations		22
26. Entire Agreement		22
27. Settlement of Disputes		22
28. Language		23
SCHEDULE 1		25

(1)		Transferor:

		China United Telecommunications Corporation Ltd. (hereinafter referred to as “Unicom A Share Company”)

		Address: 29/F, No. 1033 Changning Road, Shanghai

		Legal representative: Chang Xiaobing

(2)		Transferee:

		China Unicom Corporation Limited (hereinafter referred to as “Unicom Operating Company”)

		Address: Level 12, Office Tower 1, Henderson Centre, 18 Jianguomen Neidajie, Beijing

		Legal representative: Chang Xiaobing

	6.1		The shareholders’ general meeting of Unicom Red Chip approves the transfer by the Transferor of its rights and obligations under the CDMA Network Capacity Leasing Agreement to the Transferee pursuant to the applicable laws, regulations and listing rules;

	6.2		The conditions stipulated in Article 3 of the CDMA Network Capacity Leasing Agreement have been fulfilled.

7.		Force majeure

		If any party is unable to perform the relevant obligations under this Agreement and its relevant annexes in accordance with the applicable provisions as a result of any force majeure events the occurrence and consequence of which are unforeseeable or unavoidable and cannot be overcome, such party shall immediately inform the other party of the situation and within fifteen days of any such occurrence, provide the relevant details and valid supporting documents for the failure or partial failure in performing or the reasons for the postponement of the performance of the relevant obligations under this Agreement and the related annexes. The parties shall negotiate with each other and decide whether to terminate, partly waive or postpone the performance of such obligations according to the extent of the impact of the force majeure events on the performance of the obligations.

8.		Confidentiality

		Save as otherwise required by the laws or the relevant regulatory authorities, or for the purpose of any disclosures to be made by Unicom A Share Company to the SSE or Unicom Red Chip to The Stock Exchange of Hong Kong Limited, neither party shall be entitled to provide or disclose any data or information relating to the operations of the other party to any company, enterprise, organization or individuals without the permission in writing from the other party.

9.		No waiver

		Unless otherwise required by the laws, no failure or delay by either party in exercising any of its rights, powers or privileges shall be deemed to be a waiver of such rights, powers or privileges, and any partial exercise of the rights, powers or privileges shall not prejudice the future exercise of such rights, powers or privileges.

10.		Notification

		Any notice relating to this Agreement shall be made in writing and delivered by

		one party hereto to the other party by hand, by way of facsimile or by mail. If such notice is delivered by hand, it shall be deemed to have been served upon delivery. If it is sent by facsimile, it shall be deemed to have been served when the fax machine indicates the fax has been sent. If such notice is delivered by mail, it shall be deemed to have been served on the third working day (extended in the event of any statutory holidays) after dispatch of the mail. Any notice shall take effect once served.

		Addresses of the parties hereto:


China United Telecommunications Corporation Ltd.		China Unicom Corporation Limited
Attention: Zhao Yilei		Attention: Yang Xiaowei
Postal address: 29/F, No. 1033 Changning Road, Shanghai		Postal address: Room 1029, Level 10, No. 133A Xidan Beidajie, Xicheng District, Beijing
Postal Code: 200050		Postal Code: 100032

11.		Governing law

		This Agreement is governed the PRC law and shall be construed and enforced in accordance with such law.

12.		Settlement of disputes

		All disputes resulting from the execution of this Agreement or relating to this Agreement (including, but not limited to, the duration, rental or minimum rental for any extended lease term) shall be settled by the parties through friendly negotiations. If an agreement for the settlement of the dispute cannot be reached within thirty (30) days upon request by one party for settling the dispute through negotiation, either party shall be entitled to refer the dispute to China International Economic and Trade Arbitration Commission to be solved through arbitration in Beijing by three (3) arbitrators pursuant to the then effective arbitration rules. The language for arbitration shall be Chinese. The arbitration decision shall be final and binding on both parties. Unless otherwise required by the arbitration tribunal, the arbitration fees shall be borne by the losing party.

13.		Others