UNITED STATES
 SECURITIES AND EXCHANGE
COMMISSION
 Washington, D.C.
20549
 ______________
 FORM 20-F
 (Mark One)
  £
              REGISTRATION STATEMENT PURSUANT TO
      SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
      1934
  OR
  S
              ANNUAL REPORT PURSUANT TO SECTION
      13 OR 15 (d) OF THE
      SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
      2007
  OR
  £
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  FOR THE TRANSITION PERIOD FROM
      ___________ TO ___________
  OR
  £
              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 .....................
  For the transaction period from
      __________ to __________
  COMMISSION FILE NUMBER 1-
32332
 _________________________________________
  CHINA NETCOM GROUP CORPORATION (HONG
KONG) LIMITED
 (Exact name of Registrant as specified
in its charter)
 _________________________
  Hong Kong, The People’s Republic of China
 (Jurisdiction of incorporation or
organization)
 _________________________
  No. 21, Financial
Street
 Xicheng District, Beijing,
100140
 The People’s Republic of China
 (Address of principal executive
offices)
 _________________________
 Securities registered or to be
registered pursuant to Section 12 (b) of the Act.
  Title
      of Each Class
              
              Name of Each
      Exchange
                On
      Which RegisteredAmerican depositary shares, each
      representing
                20 ordinary shares of par value
      US$0.04 per share
              New York Stock Exchange,
      Inc.Ordinary shares of par value
      US$0.04 per
      share
              New York Stock Exchange,
    Inc.*
  *
              Not for trading, but only in
      connection with the registration of American depositary
      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, 2007,6,674,328,400ordinary shares were issued
andoutstanding.
  Indicate by check mark if the registrant
is a well-known seasoned issuer, asdefined in Rule 405 of the Securities
Act.
  YesXNo__
  If this report is an annualor transition report, indicate by check
mark if theregistrant is not required to file
reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of
1934.
  Yes__NoX
  The Registrant is required to file
reports pursuant toSection
13 or 15(d) ofthe Securities Exchange Act of
1934.
  Note - Checking the box above will
notrelieve any registrant required to file
reports pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
from their obligations under thoseSections.
  Indicate by check mark whether the
registrant (1) has filed all reports requiredto be filed by Section 13 or 15 (d) of
the Securities Exchange Act of 1934during the preceding 12 months (or for
such shorter period that the Registrantwas required to file such reports), and (2) has
been subject to such filingrequirements for the past 90
days.
  YesXNo__
  Indicate by check mark whether the
registrant is a large acceleratedfiler, an accelerated filer, or a
non-accelerated filer.  See definition of
“accelerated filer and
large accelerated filer”in
Rule 12b-2of the Exchange Act. (Check
one):
  Large accelerated filerXAccelerated filer __Non-accelerated filer
__
  Indicate by check mark which
financial statement item
the Registranthas elected to
follow.
  Item 17 ___Item 18X
  If this is an annual report, indicate by
check mark whether theregistrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
  Yes__NoX
  _______________
 
 
  Table of Contents
  Page
 PART
      I
              
              2ITEM
      1.
              IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
              2ITEM
      2.
              OFFER
      STATISTICS AND EXPECTED TIMETABLE
              3ITEM
      3.
              KEY
      INFORMATION
              3ITEM
      4.
              INFORMATION
      ON THE COMPANY
              18ITEM
      4A.
              UNRESOLVED
      STAFF COMMENTS
              44ITEM
      5.
              OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
              44ITEM
      6.
              DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
              68ITEM
      7.
              MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              80ITEM
      8.
              FINANCIAL
      INFORMATION
              88ITEM
      9.
              THE
      OFFER AND LISTING
              88ITEM
      10.
              ADDITIONAL
      INFORMATION
              89ITEM
      11.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              94ITEM
      12.
              DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
              94PART
      IIITEM
      13.
              DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
              94ITEM
      14.
              MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
              94ITEM
      15.
              CONTROLS
      AND PROCEDURES
              95ITEM
      16A
              AUDIT
      COMMITTEE FINANCIAL EXPERT
              96ITEM
      16B
              CODE
      OF ETHICS
              96ITEM
      16C
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              96ITEM
      16D
              EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
              96ITEM
      16E
              PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
              97ITEM
      17.
              FINANCIAL
      STATEMENTS
              97ITEM
      18.
              FINANCIAL
      STATEMENTS
              97ITEM
      19.
              EXHIBITS
              97
  
  FORWARD-LOOKING
STATEMENTS
  This annual report filed on Form 20-F
contains certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to financial condition,
results of operations, cash
flows, dividends, financing plans, business strategies, capital and other
expenditures, competitive positions, availability of capital, growth
opportunities for new and existing products, availability and deployment of new
technologies, plans and objectives of management, mergers and
acquisitions, and other matters.
  Statements in this Form 20-F that are not historical facts are
hereby identified as “forward looking statements”for the purpose of the safe harbor
provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. The words “estimate,”“project,”“intend,”“expect,”“believe,”“plan”and similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this annual
report. In addition, other written or oral statements which constitute forward
looking statements have been made and may in the future bemade by us or on our behalf, including
with respect to the matters referred to above. These forward looking statements
are necessarily estimates reflecting the best judgment of senior management that
rely on a number of assumptions concerning future events, many of which are outside of our
control, and involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the forward-looking
statements. These forward-looking statements should, therefore, beconsidered in light of various important
factors, including those set forth in this annual report. Important factors that
could cause actual results to differ materially from estimates or projections
contained in the forward-looking statements include, without limitation:
  ·
              the level of demand for
      telecommunications services, particularly with regard to access lines,
      traffic and new value-added
services;
  ·
              competitive forces in more
      liberalized markets, including pricing pressures and our ability to retain
      market share in the
      face of competition from existing telecommunications companies and
      potential new market
entrants;
  ·
              the effects of tariff reduction
      initiatives, particularly in our core fixed-line telephone
      business;
  ·
              changes in the regulatory policies
      of theMII of China
      and other relevant government authorities, which could affect, among other
      things, the granting of requisite government approvals, licenses and
      permits, interconnection and transmission line arrangements, tariff
      policies, capital investmentpriorities, and spectrum
      allocation;
  ·
              the success of new business
      initiatives, some of which involve start-up costs, and new systems and
      applications, particularly with regard to the integration of our service
      offerings;
  ·
              our ability to secure or renew the
      licenses we need to
      offer telecommunications services and the cost of these licenses and
      related network infrastructure
  build-outs;
  ·
              the availability, terms and
      deployment of capital, and the impact of regulatory and competitive
      developments on capital outlays;
  ·
              changes in the assumptions upon
      which we have prepared our projected financial information and capital
      expenditure plans; and
  ·
              changes in the general political,
      economic, legal and social conditions in China, including the PRC
      government’s specific policies with respect to new entrants
      in the telecommunications industry, the entry of foreign operators into
      China’s telecommunications market,
      economic growth, foreign exchange and the availability of
      credit.
  1
 
 CONVENTIONS
  Definitions
  References in this annualreport to “we”, “us”, the “Company”, the “Group”or “CNC Hong Kong”mean China Netcom Group Corporation
(Hong Kong) Limited and, as the context may require, its subsidiaries.
References to “China Netcom
Group”mean China Network
Communications Group Corporation and, as the context may require,
its subsidiaries, other than us and our subsidiaries.
  As used in this annual
report:
  ·
              references to “China”or “PRC”mean the People’s Republic of China, excluding,
      for purposes of this annual report, Hong Kong, Macauand Taiwan, and references to the
      “central
      government”mean the
      central government of the
PRC;
  ·
              references to “State Council”mean the State Council of the PRC
      and references to the “National Development and Reform
      Commission”and the
      “NDRC”mean the National Development and Reform
      Commission of the PRC;
  ·
              “MII”refers to both the Ministry of
      Industry and Informatization, and prior to the PRC government
      restructuring in March 2008, its predecessor, the Ministry of Information
      Industry.
  ·
              references to “our service region”mean the ten municipalities and
      provinces where we operate in northern China, consisting of Beijing and
      Tianjin Municipalities, and Hebei, Henan, Shandong, Liaoning,
      Heilongjiang, Jilin, and Shanxi Provinces, and the Neimenggu Autonomous
      Region;and references to “our southern service
      region”mean Shanghai
      Municipality and Guangdong Province. We sold our telecommunications
      assets, liabilities and business operations in our southern service region
      to China Netcom Group on February 28, 2007. See “Item 4. Information on the
      Company--History and Development--Recent Development--Sale of Southern
      Service Region Business;”
  ·
              references to “HKSE”, “SEHK”or “Hong Kong Stock
      Exchange”mean The
      Stock Exchange of Hong Kong Limited, and references to “NYSE”or“New York Stock
      Exchange”mean New
      York Stock Exchange, Inc;
  ·
              references to “Renminbi”or “RMB”are to the currency of the PRC,
      references to “U.S.
      dollars”or
      “US$”are to the currency of the United
      States of America, and references to “HK dollars”or “HK$”are to the currency of the Hong
      Kong Special Administrative Region of the PRC;
  and
  ·
              references to “U.S. GAAP”mean the generally accepted
      accounting principles in the United States, references to “HKFRS”mean Hong Kong Financial
      Reporting Standards issuedby Hong Kong Institute of
      Certified Public Accountants, and references to “PRC GAAP”mean the PRC Accounting Standards
      for Business Enterprises and the implementing rules
      thereof.
  Market Share Data
Convention
  Certain statements made in this annual
reportthat refer to our
market share or competitive position are based on statistical and other
information from a number of government and private sources, including the
information published by the MII. Unless otherwise indicated, the information
has not beenverified by us independently and may not
be consistent with the information from other sources within or outside
China.
  PART
I
  ITEM
      1.
              IDENTITY OF DIRECTORS, SENIOR
      MANAGEMENT AND ADVISORS
  Not applicable.
  2
  ITEM
      2.
              OFFER STATISTICS AND EXPECTED
      TIMETABLE
  Not applicable.
  ITEM
      3.
              KEY INFORMATION
  SELECTED FINANCIAL
DATA
  The following tables present our
selected consolidated financial data as of and for the years ended December 31,
2003, 2004, 2005, 2006and 2007.
  You should read the selected
consolidated financial data below together with our consolidated financial statements,
including the notes thereto, included elsewhere in this annual report, and
“Item 5. Operating and
Financial Review and Prospects.”
  We publish our financial statements in
Renminbi. We have derived the selected consolidated financial data as of and for the
years ended December 31, 2003, 2004, 2005, 2006and 2007from our consolidated financial
statements. Our consolidated financial statements have been prepared in
accordance with Hong Kong Financial Reporting Standards, orHKFRS, which differ in significant
respects from U.S. GAAP.
  Since we and the 2005 Acquired Assets
and Liabilities were under the common control of China Netcom Group, our 2005
Acquisition has been treated as a “combination of entities under common
control,”which was accounted for in a manner
similar to pooling-of-interestsaccording to Accounting Guideline No. 5
- Merger Accounting for Common Control Transactions (“AG 5”) issued by the Hong Kong Institute of
Certified Public Accountants.The 2005 AcquiredAssets and Liabilities have been
recognized at historical carrying amounts under HKFRS and our consolidated
financial statements as of and for the years ended December 31, 2003 and 2004
include the financial position and results of operations of the 2005Acquired Assets and Liabilities on a
combined basis.
  On August 22, 2006, we sold our 100%
equity interest in Asia Netcom to Connect Holdings Limited for US$168.84
million. The results of operations of Asia Netcom have been classified as
discontinued operations,
and our consolidatedincomestatementsand cash flow statementfor the years ended December 31, 2004
and 2005 have been restated.The revenue of Asia Netcom,
the major source of revenue
of our international telecommunication services, has accordingly been separately
disclosed as discontinued operations for the years ended December 31, 2004 and
2005.Since the remaining revenue derived
from our international telecommunication services historically has not been
material, we do not separately set forth the revenue from our remaining
international telecommunication services.
  OnFebruary 28, 2007, we sold ourtelecommunications operations inour southern service
regiontoChina Netcom Group for a cash
consideration of RMB 3.5billionand China Netcom Group agreed to assume an aggregate
principal amount ofRMB3,000 million of debt.Theresults and cash flows of the operation
ofour southern service
regionhave been presented
as discontinued operations, and our consolidated income statements and cash flow
statement for the years
ended December 31,2003,
2004,2005 and 2006 have
been restated.
  On December 31, 2007, we acquired the
entire equity interest of Beijing Planning and Designing Institute, or Design
Institute, from China Netcom Group Beijing Communications Corporation. Weaccounted for this acquisition in
manner similar to pooling of interest method according to Accounting Guideline
No. 5 - Merger Accounting for Common Control Transactions(“AG 5”)issued by the Hong Kong Institute of
Certified Public Accountants. The acquired businesses and assets are
recorded at book value under HKFRS as if the businesses and assets of Design
Institute have been owned byussince the beginning of the period
presented.Accordingly, our
financial statements have been restated to include the financialposition andresults ofoperations ofDesign Institute as if the acquisition
had occurred as of January 1, 2003.All data and information relating to our
businesses and operations for the years ended December 31, 2003,2004,2005, 2006and 2007are presented based on those restated
amounts.
  3
  Selected Consolidated Financial
Information
  For the Years Ended December
      31,2003
                  
                  
                  2004
                  
                  
                  2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2007(Restated)
                  
                  
                  (Restated)
                  
                  
                  (Restated)
                  
                  
                  (Restated)(RMB)
                  
                  
                  (RMB)
                  
                  
                  (RMB)
                  
                  
                  (RMB)
                  
                  
                  (RMB)
                  
                  
                  (USD)(in millions, except per share and
      per ADS information)Consolidated Income Statement
      Data:HKFRSContinuing
      operations:Revenues:Fixed-line telephone services(1)
                  
                  
                  66,911
                  
                  
                  
                  69,646
                  
                  
                  
                  69,729
                  
                  
                  
                  66,462
                  
                  
                  
                  59,226
                  
                  
                  
                  8,108Broadband and other
      Internet-related service
                  
                  
                  4,233
                  
                  
                  
                  6,097
                  
                  
                  
                  7,845
                  
                  
                  
                  10,432
                  
                  
                  
                  14,367
                  
                  
                  
                  1,967Business and data communications
      services(2)
                  
                  
                  4,242
                  
                  
                  
                  4,087
                  
                  
                  
                  3,997
                  
                  
                  
                  3,953
                  
                  
                  
                  3,805
                  
                  
                  
                  521Other
    services
                  
                  
                  1,323
                  
                  
                  
                  1,221
                  
                  
                  
                  2,356
                  
                  
                  
                  3,347
                  
                  
                  
                  6,607
                  
                  
                  
                  904Subtotal
                  
                  
                  76,709
                  
                  
                  
                  81,051
                  
                  
                  
                  83,927
                  
                  
                  
                  84,194
                  
                  
                  
                  84,005
                  
                  
                  
                  11,500Operating
      expenses:Depreciation and
      amortization
                  
                  
                  (26,641
                  )
                  
                  
                  (24,501
                  )
                  
                  
                  (24,328
                  )
                  
                  
                  (24,913
                  )
                  
                  
                  (25,495
                  )
                  
                  
                  (3,490
                  )Network, operations and
      support
                  
                  
                  (14,576
                  )
                  
                  
                  (12,363
                  )
                  
                  
                  (12,610
                  )
                  
                  
                  (13,344
                  )
                  
                  
                  (14,145
                  )
                  
                  
                  (1,936
                  )Staff costs
                  
                  
                  (10,823
                  )
                  
                  
                  (11,493
                  )
                  
                  
                  (11,830
                  )
                  
                  
                  (11,849
                  )
                  
                  
                  (12,223
                  )
                  
                  
                  (1,673
                  )Selling, general and
      administrative
                  
                  
                  (10,090
                  )
                  
                  
                  (12,282
                  )
                  
                  
                  (12,726
                  )
                  
                  
                  (12,607
                  )
                  
                  
                  (10,615
                  )
                  
                  
                  (1,453
                  )Other operating
      expenses
                  
                  
                  (1,976
                  )
                  
                  
                  (1,930
                  )
                  
                  
                  (1,374
                  )
                  
                  
                  (1,930
                  )
                  
                  
                  (4,261
                  )
                  
                  
                  (583
                  )Subtotal
                  
                  
                  (64,106
                  )
                  
                  
                  (62,569
                  )
                  
                  
                  (62,868
                  )
                  
                  
                  (64,643
                  )
                  
                  
                  (66,739
                  )
                  
                  
                  (9,135
                  )Other
income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  621
                  
                  
                  
                  1,221
                  
                  
                  
                  167Interest and dividend
      income
                  
                  
                  136
                  
                  
                  
                  85
                  
                  
                  
                  163
                  
                  
                  
                  135
                  
                  
                  
                  113
                  
                  
                  
                  15Deficit on revaluation of fixed
      assets(3)
                  
                  
                  (24,888
                  )
                  
                  
                  (11,318
                  )
                  
                  
                  -
                  
                  
                  
                  (1,335
                  )
                  
                  
                  -
                  
                  
                  
                  -Profit/(loss) from
      operations
                  
                  
                  (12,149
                  )
                  
                  
                  7,249
                  
                  
                  
                  21,222
                  
                  
                  
                  18,972
                  
                  
                  
                  18,600
                  
                  
                  
                  2,547Financial
    costs
                  
                  
                  (4,294
                  )
                  
                  
                  (3,767
                  )
                  
                  
                  (3,346
                  )
                  
                  
                  (3,767
                  )
                  
                  
                  (3,333
                  )
                  
                  
                  (456
                  )Share of loss of associated
      companies and jointly controlled entity
                  
                  
                  (416
                  )
                  
                  
                  (1
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Profit/(loss) before
      taxation
                  
                  
                  (16,859
                  )
                  
                  
                  3,481
                  
                  
                  
                  17,876
                  
                  
                  
                  15,205
                  
                  
                  
                  15,267
                  
                  
                  
                  2,091Taxation
                  
                  
                  6,914
                  
                  
                  
                  238
                  
                  
                  
                  (3,526
                  )
                  
                  
                  (3,727
                  )
                  
                  
                  (3,796
                  )
                  
                  
                  (520
                  )Profit/(loss) after
      taxation
                  
                  
                  (9,945
                  )
                  
                  
                  3,719
                  
                  
                  
                  14,350
                  
                  
                  
                  11,478
                  
                  
                  
                  11,471
                  
                  
                  
                  1,571Minority
      interests
                  
                  
                  1Profit/(loss) for the year from
      continuing operations
                  
                  
                  (9,944
                  )
                  
                  
                  3,719
                  
                  
                  
                  14,350
                  
                  
                  
                  11,478
                  
                  
                  
                  11,471
                  
                  
                  
                  1,571Discontinued
      operations(4):Profit/(loss)  for the
      year from discontinued operations
                  
                  
                  (906
                  )
                  
                  
                  (951
                  )
                  
                  
                  (400
                  )
                  
                  
                  1,487
                  
                  
                  
                  624
                  
                  
                  
                  85
  4
  Profit/(loss) for the
      year
                  
                  
                  (10,850
                  )
                  
                  
                  2,768
                  
                  
                  
                  13,950
                  
                  
                  
                  12,965
                  
                  
                  
                  12,095
                  
                  
                  
                  1,656Dividends proposed after the
      balance sheet date
                  
                  
                  -
                  
                  
                  
                  259
                  
                  
                  
                  3,196
                  
                  
                  
                  3,695
                  
                  
                  
                  3,700
                  
                  
                  
                  507Earnings/(losses)  per share for
      profit/(loss)  from continuing operations attributable to shareholders of
      the Company for the yearBasic
      earnings/(losses)  per share
                  
                  
                  (1.81
                  )
                  
                  
                  0.66
                  
                  
                  
                  2.18
                  
                  
                  
                  1.74
                  
                  
                  
                  1.72
                  
                  
                  
                  0.24Diluted
      earnings/(losses)  per share
                  
                  
                  (1.81
                  )
                  
                  
                  0.66
                  
                  
                  
                  2.17
                  
                  
                  
                  1.72
                  
                  
                  
                  1.70
                  
                  
                  
                  0.23(Losses)/earnings  per
      share for (loss)/
      profit from discontinued operations attributable to shareholders of the
      Company for the yearBasic earnings /( losses ) per
      share
                  
                  
                  (0.16
                  )
                  
                  
                  (0.17
                  )
                  
                  
                  (0.06
                  )
                  
                  
                  0.22
                  
                  
                  
                  0.09
                  
                  
                  
                  0.01Diluted earnings /( losses ) per
      share
                  
                  
                  (0.16
                  )
                  
                  
                  (0.17
                  )
                  
                  
                  (0.06
                  )
                  
                  
                  0.22
                  
                  
                  
                  0.09
                  
                  
                  
                  0.01Earnings/(losses) per share from
      operations attributable to shareholders of the Company for the
      yearBasic earnings/(losses) per
      share
                  
                  
                  (1.97
                  )
                  
                  
                  0.49
                  
                  
                  
                  2.12
                  
                  
                  
                  1.96
                  
                  
                  
                  1.81
                  
                  
                  
                  0.25Diluted earnings/(losses) per
      share
                  
                  
                  (1.97
                  )
                  
                  
                  0.49
                  
                  
                  
                  2.11
                  
                  
                  
                  1.94
                  
                  
                  
                  1.79
                  
                  
                  
                  0.24Basic earnings/(losses) per
      ADS
                  
                  
                  (39.40
                  )
                  
                  
                  9.80
                  
                  
                  
                  42.40
                  
                  
                  
                  39.20
                  
                  
                  
                  36.20
                  
                  
                  
                  5.00Diluted earnings/(losses) per
      ADS
                  
                  
                  (39.40
                  )
                  
                  
                  9.80
                  
                  
                  
                  42.20
                  
                  
                  
                  38.80
                  
                  
                  
                  35.80
                  
                  
                  
                  4.80U.S.
      GAAPProfit/(loss) for the
      year/period
                  
                  
                  6,421
                  
                  
                  
                  7,999
                  
                  
                  
                  10,526
                  
                  
                  
                  10,891
                  
                  
                  
                  8,950
                  
                  
                  
                  1,225-Continuing
      operations
                  
                  
                  6,731
                  
                  
                  
                  8,982
                  
                  
                  
                  10,962
                  
                  
                  
                  9,310
                  
                  
                  
                  8,959
                  
                  
                  
                  1,226-Discontinued
      operations
                  
                  
                  (310
                  )
                  
                  
                  (983
                  )
                  
                  
                  (436
                  )
                  
                  
                  1,581
                  
                  
                  
                  (9
                  )
                  
                  
                  (1
                  )Basic earnings/(losses) per
      share(5)
                  
                  
                  1.17
                  
                  
                  
                  1.43
                  
                  
                  
                  1.59
                  
                  
                  
                  1.65
                  
                  
                  
                  1.35
                  
                  
                  
                  0.18-Continuing
      operations
                  
                  
                  1.23
                  
                  
                  
                  1.60
                  
                  
                  
                  1.66
                  
                  
                  
                  1.41
                  
                  
                  
                  1.35
                  
                  
                  
                  0.18-Discontinued
      operations
                  
                  
                  (0.06
                  )
                  
                  
                  (0.17
                  )
                  
                  
                  (0.07
                  )
                  
                  
                  0.24
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted earnings/(losses) per
      share(5)
                  
                  
                  1.16
                  
                  
                  
                  1.43
                  
                  
                  
                  1.58
                  
                  
                  
                  1.64
                  
                  
                  
                  1.33
                  
                  
                  
                  0.18-Continuing
      operations
                  
                  
                  1.22
                  
                  
                  
                  1.60
                  
                  
                  
                  1.65
                  
                  
                  
                  1.40
                  
                  
                  
                  1.33
                  
                  
                  
                  0.18-Discontinued
      operations
                  
                  
                  (0.06
                  )
                  
                  
                  (0.17
                  )
                  
                  
                  (0.07
                  )
                  
                  
                  0.24
                  
                  
                  
                  -
                  
                  
                  
                  -Basic earnings/(losses) per
      ADS
                  
                  
                  23.40
                  
                  
                  
                  28.60
                  
                  
                  
                  31.80
                  
                  
                  
                  33.00
                  
                  
                  
                  27.00
                  
                  
                  
                  3.60-Continuing
      operations
                  
                  
                  24.60
                  
                  
                  
                  32.00
                  
                  
                  
                  33.20
                  
                  
                  
                  28.20
                  
                  
                  
                  27.00
                  
                  
                  
                  3.60-Discontinued
      operations
                  
                  
                  (1.20
                  )
                  
                  
                  (3.40
                  )
                  
                  
                  (1.40
                  )
                  
                  
                  4.80
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted earnings/(losses) per
      ADS(6)
                  
                  
                  23.20
                  
                  
                  
                  28.60
                  
                  
                  
                  31.60
                  
                  
                  
                  32.80
                  
                  
                  
                  26.60
                  
                  
                  
                  3.60-Continuing
      operations
                  
                  
                  24.40
                  
                  
                  
                  32.00
                  
                  
                  
                  33.00
                  
                  
                  
                  28.00
                  
                  
                  
                  26.60
                  
                  
                  
                  3.60-Discontinued
      operations
                  
                  
                  (1.20
                  )
                  
                  
                  (3.40
                  )
                  
                  
                  (1.40
                  )
                  
                  
                  4.80
                  
                  
                  
                  -
                  
                  
                  
                  -Dividend declared per
    share
                  
                  
                  -
                  
                  
                  HKD0.04
                  
                  
                  HKD0.47
                  
                  
                  HKD0.55
                  
                  
                  HKD0.59
                  
                  
                  USD0.08Dividend declared per
      ADS
                  
                  
                  -
                  
                  
                  HKD0.74
                  
                  
                  HKD9.32
                  
                  
                  HKD11.06
                  
                  
                  HKD11.84
                  
                  
                  USD1.62
  (1)
              Revenues from fixed-line telephone
      services included local usage fees, monthly fees, upfront installation
      fees, domestic and
      international long distance service charges, value-added service charges,
      interconnection fees from domestic carriers and upfront connection
      fees.
 (2)
              Revenues from business and data
      communications services include fees charged for managed data and leased line
      services.
      5
  (3)
                See “Item. 5. Operating and Financial
      Review and Prospects - Critical Accounting Policies - Revaluation of fixed
      assets”for a
      discussion of this
revaluation.
 (4)
                Results of Asia Netcom, the major
      source of revenueof
      our international telecommunication services, has been disclosed as
      discontinued operations for the years ended December 31, 2004,2005 and2006. The results of our southern
      service region have been disclosed as discontinued operations for years
      endedDecember
      31,2003, 2004, 2005, 2006 and
      2007.
 (5)
                Basic/diluted earnings/(losses)
      per share for the years ended December 31, 2003, 2004, 2005, 2006and 2007set forth above have been
      computed by dividing profit/(loss) for each of the year by the weighted
      average number of
      ordinary shares during the
year.
 (6)
                Basic/diluted
      earnings/(losses)  per ADS for the years ended December 31,
      2003, 2004, 2005, 2006and 2007set forth above have computed by
      multiplying basic earnings/(losses) per share for the year by20, which is the number of
      ordinary shares represented by each
ADS.
 As of December
      31,
 2003
                  
                  2004
                  
                  2005
                  
                  2006
                  
                  2007
                  
                  2007(Restated)
                  
                  (Restated)
                  
                  (Restated)
                  
                  (Restated)
 (RMB)
                  
                  (RMB)
                  
                  (RMB)
                  
                  (RMB)
                  
                  (RMB)
                  
                  (USD)Consolidated Balance Sheet
      Data:HKFRSCash and bank
      deposits
                  
                  7,549
                  
                  10,804
                  
                  5,065
                  
                  7,728
                  
                  5,395
                  
                  739Accounts
      receivable
                  
                  7,519
                  
                  7,145
                  
                  7,361
                  
                  8,283
                  
                  8,458
                  
                  1,158Total current
      assets
                  
                  20,787
                  
                  24,628
                  
                  14,675
                  
                  18,226
                  
                  15,508
                  
                  2,124Fixed assets and construction in
      progress
                  
                  199,783
                  
                  177,591
                  
                  175,582
                  
                  174,476
                  
                  160,938
                  
                  22,032Total
assets
                  
                  236,305
                  
                  216,696
                  
                  203,122
                  
                  204,082
                  
                  186,428
                  
                  25,522Accounts
      payable
                  
                  20,196
                  
                  21,128
                  
                  16,726
                  
                  17,661
                  
                  15,639
                  
                  2,141Short-term bank loans and current
      portion of long-term bank and other loans
                  
                  67,383
                  
                  56,609
                  
                  54,187
                  
                  38,284
                  
                  17,172
                  
                  2,351Total current
      liabilities
                  
                  118,404
                  
                  106,092
                  
                  98,404
                  
                  90,833
                  
                  74,593
                  
                  10,211Long-term bank and other loans
                  
                  30,172
                  
                  26,052
                  
                  18,143
                  
                  23,219
                  
                  14,425
                  
                  1,975Deferred
      revenues
                  
                  17,585
                  
                  13,988
                  
                  10,925
                  
                  6,198
                  
                  4,314
                  
                  591Total
      liabilities
                  
                  182,473
                  
                  151,870
                  
                  139,835
                  
                  129,888
                  
                  104,376
                  
                  14,289Owner's
    equity
                  
                  53,829
                  
                  64,826
                  
                  63,287
                  
                  74,194
                  
                  82,052
                  
                  11,233U.S. GAAPFixed assets and construction in
      progress
                  
                  222,579
                  
                  204,313
                  
                  197,194
                  
                  191,922
                  
                  173,902
                  
                  23,807Total
assets
                  
                  248,929
                  
                  234,765
                  
                  217,602
                  
                  215,771
                  
                  196,151
                  
                  26,853Owner's
    equity
                  
                  66,453
                  
                  82,895
                  
                  77,767
                  
                  85,883
                  
                  91,775
                  
                  12,563
 
 For the Years Ended December
      31,2003
              
              2004
              
              2005
              
              2006
              
              2007
              
              2007(Restated)
              
              (Restated)
              
              (Restated)
              
              (Restated)(RMB)
              
              (RMB)
              
              (RMB)
              
              (RMB)
              
              (RMB)
              
              (USD)
  6
  (in
    millions)Consolidated Cash Flow Statement
      Data:HKFRSContinuing
      operations:Net cash inflow from
      operating activities
              29,163
              32,696
              32,191
              32,050
              32,459
              4,443Net cash outflow from investing
      activities
              (32,800)
              (26,893)
              (22,993)
              (24,051)
              (19,138)
              (2,620)Purchase of fixed assets and
      construction in
      progress, repayments for leased land
              (34,398)
              (26,507)
              (25,964)
              (24,242)
              (20,684)
              (2,832)Net cash
      inflow/(outflow)  from financing
    activities
              3,608
              (2,237)
              (14,746)
              (6,477)
              (19,131)
              (2,619)Discontinued
      operations:Net outflow/(inflow) from operating
      activities
              1,693
              888
              1,344
              2,085
              388
              53Net cash outflow/(inflow) from
      investing activities
              (2,048)
              (1,740)
              (1,584)
              (921)
              3,103
              425Net cash inflow  from
      financing activities
              -
              503
              108
              -
              -
              -Decrease/(increase) in cash and
      cash equivalents
              (384)
              3,217
              (5,680)
              2,686
              (2,319)
              (318)
  EXCHANGE RATE
INFORMATION
  We prepare our financial statements in
Renminbi. Translations of amounts from Renminbi and Hong Kong dollar into U.S.
dollars, and vice versa, are solely for the convenienceof the reader. Unless otherwise
indicated, any translations from Renminbi to US dollars or from US dollars to
Renminbi were translated at the average rate announced by the People’s Bank of China (the “PBOC Rate”) on December 31, 2007at RMB7.3046 = US$1.00and translations from Hong Kong dollars
to US dollars or from US dollars to Hong Kong dollars were translated at
HK$7.7984 = US$1.00, the noon buying rate on December 31, 2007in the City of New York for cable
transfers as certified for customs purposes by the Federal Reserve Bank of New York.
You should not assume that Renminbi and Hong Kong dollar amounts could actually
be converted into U.S. dollars at these rates or at all.
  On April 30, 2008, the latest practicable date, the PBOC
Rate was RMB 7.002 = US$1.00 and the noon buying rate in the
City of New York for cable transfers as certified for customs purposes by the
Federal Reserve Bank of New York was HK$7.7950 = US$1.00.
  The following table sets forth the high
and low noon buying rates in the City ofNew York for cable transfers as
certified for customs purposes by the Federal Reserve Bank of New York between
Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for
each of the periods shown.
  Noon Buying
      RateRMB per US$
              
              
              HK$ per US$High
              
              
              Low
              
              
              High
              
              
              LowNovember 2007
              
              
              7.4582
              
              
              
              7.3800
              
              
              
              7.7890
              
              
              
              7.7573December 2007
              
              
              7.4120
              
              
              
              7.2946
              
              
              
              7.8073
              
              
              
              7.7879January 2008
              
              
              7.2946
              
              
              
              7.1818
              
              
              
              7.8107
              
              
              
              7.7961February 2008
              
              
              7.1973
              
              
              
              7.1100
              
              
              
              7.8012
              
              
              
              7.7807March 2008
              
              
              7.1110
              
              
              
              7.0105
              
              
              
              7.7897
              
              
              
              7.7642April 2008
              
              
              7.0185
              
              
              
              6.9840
              
              
              
              7.7963
              
              
              
              7.7863
  The following table sets forth the
period-end noon buying rates and the average noon buying rates in the City of
New York for cable transfers as certified for customs purposes by the Federal
Reserve Bank of New York between Renminbi and U.S. dollars and between Hong Kong
dollars and U.S. dollars for each of 2003, 2004, 2005, 2006, 2007and 2008(through April 30). The average noon
buying rates for the periods shown are calculated by averaging the noon buying
rates on the last day ofeach month in the period.
  Period-End Noon Buying
      Rate
              
              Average(1)Noon Buying
      Rate
  7
  RMB per US$
              
              HK$ per US$
              
              RMB per US$
              
              HK$ per
  US$2003
              8.2767
              
              7.7640
              
              8.2771
              
              7.78642004
              8.2765
              
              7.7723
              
              8.2768
              
              7.78992005
              8.0702
              
              7.7533
              
              8.1826
              
              7.77552006
              7.8041
              
              7.7771
              
              7.9723
              
              7.76852007
              7.2946
              
              7.7984
              
              7.5806
              
              7.80082008(up to April 30,
      2008)
              6.9870
              
              7.7950
              
              7.0731
              
              7.7884
 
 (1)
              Determined by averaging the rates
      on the last business day of each month during the relevant year, except
      for the average rate of the relevant periods in 2008, which is determined by averaging
      the daily rates during the respective
  periods.
  CAPITALIZATION AND
INDEBTEDNESS
  Not applicable.
  REASONS FOR THE OFFER AND USE OF
PROCEEDS
  Not applicable.
  RISK FACTORS
  Risks Relating to Our
Business
  Ifthereported industryrestructuring fails to occur, it
mayinfluence the expectation of our future
development andnegativelyaffectour share price.
  In recent years, there have been reports
in the press or media on the possible restructuring of the telecommunication industry by the PRC
government. Various reported structures have appeared in the press regarding the
consolidation of telecommunication operators in China. A number of these reports
have suggested thatthe
industry restructuring may enableus tobecomea full services provider andhave apositive impact onourfuture growth.However, if the industryrestructuring does notoccur based on the timeframe suggested
in these reports, our share
pricemay be adversely
affected.
  Competition in our services may result in lower tariffs, a
smaller customer base and lower usage for our services, thereby adversely
affecting our business growth and financial condition.
  The telecommunications industry in China
is rapidly evolving. In recent years, the central government has implemented a number of
measures to restructure, and encourage fair and orderly competition in the
telecommunications industry. As a result, we face increasing competition from
other licensed telecommunications operators in China, includingChina Telecom Group, or China Telecom;
China Mobile Communications Corporation, or China Mobile; China United
Telecommunications Corporation, or China Unicom; China Railway Communications
Corporation Limited, or China Railcom; and China Satellite Communications Corporation, or China Satcom. We
expect our competitors to further expand their network coverage and increase
their sales and marketing efforts in our service region. We will also face
competition from foreign-invested telecommunications operators asa result of China’s accession into the World Trade
Organization, or the WTO, and the entry of foreign telecommunications companies
into the Chinese market. As we operate in an increasingly competitive market, we
have experienced and may continue to experience pressure on operating revenues and
operating margins for some of our telecommunications
services.
  Mobile service substitution for our
fixed-line telephone services has also created considerable competition in the
markets for local and long distance telephone services. Consistent with trends
in global markets in recent years, an increasing proportion of total voice
traffic is being carried by mobile networks. Currently, China Mobile and China
Unicom are the only licensed providers of mobile communications services in China and, in recent
years, significant traffic from our fixed-line networks has been diverted to the
networks of these two companies. In 2006and 2007, mobile substitution accelerated as a
result of stronger pricing pressure from mobile operators, which
  8
  increasingly lowered tariffs through
various discount programs. The usage volume of local calls in our service region
decreased to 202.55billion pulses in 2007from 214.47billion pulses in 2006, mainly due to migration of our local
voice traffic to mobile
services. Mobile operators may further reduce tariffs for mobile services, which
may result in further migration from fixed-line services to mobile
services.
  We compete with other fixed-line service
providers, including China Telecom, ChinaUnicom and China Railcom, each of which
has been licensed to provide fixed-line telephone services. We have experienced
limited competition from other fixed-line service providers to date in the
market for local telephone services, primarily because ourcompetitors have not built significant
local fixed-line access infrastructure. However, competition for the provision
of these services may increase in the future as our competitors develop their
own networks, including through the use of alternative technologies. In the markets for domestic and
international long distance telephone services, we face strong competition from
voice over Internet protocol, or VoIP services, provided by China Telecom, China
Mobile, China Unicom and China Railcom. The market share of domestic long distancetelephone servicesin our service region decreased to
27.9% in 2007 from 33.9% in 2006.Tariffs for VoIP services are
market-based and therefore not subject to minimum pricing restriction. In
addition, we face increasing competition from Internet phone service
providers such as Skype and Vonage. This competition may become more severe if
current restrictions on the provision of these services are liberalized.
Increased competition from these operators may force us to lower our
tariffs or may reduce the size of our
customer base and the usage of our networks. Any of these developments may
materially adversely affect our business growth and financial
condition.
  For managed data services and broadband
Internet access services, or broadband services, we primarily compete
with China Unicom, China Telecom, China Railcom and other broadband Internet
access service providers such as Beijing Gehua CATV Network Co., Ltd. on the
basis of pricing, the coverage and quality of networks, abilityto provide end-to-end connectivity,
quality of network management and customer service. We are a major broadband
Internet access service provider in northern China and have a leading market
position. We will be increasingly relying on our broadband services in the future as the trend of
declination in fixed-line telephone services continue. While other major
telecommunications operators in China have been leasing transport facilities
from us to serve their customers, some of them, such as China Mobile
andChina Unicom, have in recent years begun
to build their own long distance networks for voice services and fiber-optic
networks for data services. Increased competition from these domestic
telecommunications providers may result in lower revenues for us dueto competitive pricing policies and
increased sales and marketing costs to attract or retain subscribers. Our
broadband Internet access services will face more competition and we may lose
market share if cable television companies and other broadband service providers enhance their network and
promotion of their broadband Internet access services.
  We began offering information and
communication technology services, or ICT services, in 2006. Our major
competitors for such services are other telecommunication operators such as China Telecom, and
system integration service providers such as Digital China Holdings Limited and
Taiji Computer Corporation Limited. Due to our short operating history in the
ICT business, our ability to operate and expand such business remains unproven.As a result, we may not be able to
effectively compete against our competitors.
  Competition from foreign-invested
operators and other new entrants may further increase the competition for
employees, exacerbate price competition and increase our operating expenses, thereby
adversely affecting our financial condition and growth
prospects.
  As a result of China’s accession to the WTO in December 2001,
and the adoption of the Regulations on the Administration of Foreign-Invested
Telecommunications
Enterprises in January 2002, which implement China’s commitments to the WTO, the PRC
government has agreed to gradually liberalize the various segments and regions
of the telecommunications market in China to foreign investors. Beginning on
December2, 2007, foreign investorswaspermitted to increase their ownership
of fixed-line telecommunication operators that provide domestic and
international voice, packet-switched and circuit-switched data transmission and
other services to not more than 49%. More foreign-invested operators may enter
China’s telecommunications market as a result
of this liberalization. They may have greater financial, managerial and
technical resources and more expertise in network management and sales and
marketing than we do.
  Increased competition from these and
other new entrants into the Chinese telecommunications market may further
increase the competition for skilled and experienced employees, exacerbate price
competition and increase
  9
  our customer acquisition costs and
other operating expenses, and thereby
adversely affect our financial condition and growth
prospects.
  Competition from alternative
technologies to our PHS business and an introduction of TD-SCDMA technology may
cause our PHS services to be less competitive, andadversely affect our growth prospects
and revenues.
  We currently provide personal
handyphone system, or PHS, services to reduce
the impact of mobile substitution on our fixed-line operations. PHS is a
telecommunications technology that allows us to offerto our customers wireless local access
services with mobility within an area with the same area code. Our ability to
realize acceptable returns from our investment in PHS technology will depend on
continued customer adoption of this technology. However,this market may not continue to develop,
since potential customers are and will be able to choose from a variety of
alternative fixed-line and wireless communication technologies, including both
existing technologies and new technologies to be offered in the future, such as third generation, or
3G mobile telephone services. For instance, if China Mobile or China Unicom
reduces the tariffs for mobile telecommunications services, our existing and
potential PHS customers may choose to use these services insteadof our PHS services to take advantage
of the less geographically restricted service scope and other features of mobile
technology. In addition, more mobile licenses may be issued in the near future,
which will increase the level of competition in the provision of mobile telephone services,
which will in turn increase pricing pressure and adversely affect the growth
prospects of our PHS services. Furthermore, if we introduce mobile telephone
services, traffic on our PHS services may migrate to ourmobile networkand thereby materially and adversely
affect the growth prospects of our PHS services.
  Furthermore, part of the radio spectrum
currently used by our PHS services may be reallocated by the PRC government to
time division synchronization code division multiple access technology, or TD-SCDMA
technology, which is one of the three technologies adopted by the International
Telecommunications Union andbegin touse in providing 3G mobile telephone
servicesby China Mobile in
its eight trial areas on April 1,2008.However,the PRC government has not officially
announced its decisions on issues such as the timing of the grant of the 3G
licenses, the number of 3G licenses to be granted, any technical requirements,
or any selection of preferred technologies. If TD-SCDMA technology isto use in providing 3G mobile telephone
services all over PR China,
our ability to use the existing PHS spectrum may be restricted, thereby limiting
the volume of usage we can handle and adversely affecting our
revenues.
  Any of the risks described above may cause our PHS
services to become less competitive and thereby materially and adversely affect
our growth prospects and revenues.
  Because we rely on certain arrangements
with other telecommunications operators, changes to the terms or availability of these arrangements may
result in disruptions to our services and operations.
  Our ability to provide
telecommunications services depends upon certain arrangements with other
telecommunications operators. In particular, interconnection is necessary to complete all calls between
our subscribers and subscribers of other telecommunications operators. We,
either through ourselves or through China Netcom Group, have entered into
interconnection and transmission line leasing agreements with otherfixed-line operators, including our
parent company, China Netcom Group, mobile telephone operators and other
telecommunications providers, as required to conduct our current business. Any
disruption to our interconnection with the networks of those operators or other international
telecommunications carriers with which we interconnect due to technical or
competitive reasons may affect our operations, service quality and customer
satisfaction, thus adversely affecting our business. Furthermore, we are
generally not entitled to collect indirect or
consequential damages resulting from disruptions in the networks to which we are
interconnected. Our failure to renew our existing interconnection and leased
line agreements on commercially acceptable terms may result in disruptions to our services. If we
are unable to enter into arrangements with such operators in a timely manner or
on acceptable terms, it may result in a delay in providing services to our
customers and disrupt our operations, as we may need to seekalternative arrangements with other
operators, which may adversely affect our financial condition and our results of
operations.
  10
  Disruptions to our network or operating
systems, or to those with which we interconnect, may result in customer
dissatisfactionand reduced
revenues from operations.
  Our network infrastructure and the
networks with which we interconnect are vulnerable to potential damage or
interruption from floods, wind, storms, fires, power loss, severed cables, acts
of terrorism and similar events. Our networks and systems and the
networks with which we interconnect also require regular maintenance and
upgrades that may cause service disruptions. The occurrence of a natural
disaster or other unanticipated problems at our facilities or any
otherfailure of our networks or systems, or
the networks to which we are interconnected, may result in consequential
interruptions in services across our telecommunications infrastructure. Network
or system failures, as well as high traffic volumes, may also affect the quality of our services and
cause temporary service interruptions. Although we have not experienced material
disruptions or damage to our network and operating systems in the past, any such
future occurrence may result in customer dissatisfactionand reduced revenues from
operations.
  Failure to successfully respond to
technological and industry developments may hinder our revenue growth and
adversely affect our competitive position.
  The telecommunications sector has
recently experienced rapid increases in the diversity and sophistication
of the technologies and services offered. As a result, we expect that we will
need to constantly upgrade our telecommunications technologies and services in
order to respond to competitive industry conditions and customer requirements. For example, the
next generation network has the capability of providing new value-added services
and content that combine voice, data and images with increased efficiency and
flexibility. Next generation networks may replace the traditional public switched telephone
networks in the future. We have not experienced significant difficulties in
upgrading new technologies and equipment in the past, but if we fail to smoothly
upgrade or achieve a balanced transition of our existing networkto the next generation network, we may
lose our customers and market share, which may adversely affect our operations
and financial condition. Furthermore, if the new technologies adopted by us do
not perform as expected, or if we are unable to effectivelydeliver new services based on these
technologies in a commercially viable manner, our revenue growth may decline and
our competitive position may be adversely affected.
  If we fail to successfully implement our
business strategies, we may not achieve acceptable investment returns or manage growth
in certain services and markets, and our financial condition may be adversely
affected.
  We may not be able to successfully
implement all of our business strategies. For example, we have made substantial
investmentsin developing
our broadband network infrastructure and technology. However, the broadband
market in China may not continue to expand at recent rates of growth, and we may
not be able to attract enough customers and generate sufficient usage to achieve
anacceptable return on our significant
broadband investment. Failure to successfully implement our business strategies
may adversely affect our financial condition. We believe that theICT businessisan important partof our corporate strategy.However,thedemand for ICT service may shrinkwhich will reduce our
revenues from operations.
  We rely substantially on short-term
borrowings and our inability to obtain sufficient funding may adversely affect
our liquidity and financial condition.
  Similar to many enterprises in China, a significant
percentage of our funding requirements is satisfied through short-term
borrowings. In our experience, a substantial portion of our short-term
borrowings is rolled over upon maturity and these borrowings have been, in the
past, a stable source of funding, no
assurances can be given that this will continue to be the case. If our lenders
do not roll over our short-term borrowings, or if we are unable to secure
sufficient borrowings, our liquidity position would be adversely affected, and we may be required to seek
more expensive sources of short-term or long-term funding to finance our
operations. In addition, implementing our strategies may require substantial
capital expenditures. To the extent these expenditures exceed our cash resources, we will be required to seek
additional debt or equity financing. If we are unable to obtain sufficient
funding for our operations or development plans on commercially acceptable
terms, or at all, our liquidity and financial condition may be adversely affected.
  11
  Our ultimate controlling shareholder,
China Netcom Group, may cause us to enter into transactions or take (or fail to
take) other actions or make decisions that conflict with the best interests of
our other shareholders.
  As of April 30,2008, China Netcom Group beneficially owned
approximately69.52% of our outstanding shares. As a
result, China Netcom Group, subject to our articles of association and
applicable laws and regulations, will effectively be able to control our
management, policies and
business by controlling the composition of our board of directors, determining
the timing and amount of our dividend payments, approving significant corporate
transactions, including mergers and acquisitions, and approving our annual
budgets. Therefore, China Netcom Group may cause us
to enter into transactions or take (or fail to take) other actions or make
decisions that conflict with the best interests of our other
shareholders.
  We rely on China Netcom Group to provide
certain services and facilities for which we currently have
limited alternative sources of supply. Changes in the availability, pricing or
quality of these services or facilities may have a material adverse effect on
our business and profitability.
  Pursuant to various
agreementsand
arrangements, China Netcom Group provides us with services and facilities
necessary for our business activities, including but not limited to, the use of
fiber-optic networks inour
service region,
international gateways, leases for properties locatedinour service region.
  The interests of China Netcom Group as
provider of these services and facilities may conflict with our interests. We
currently have limited alternative sources of supply for these services and
facilities and, as a result, may have limited ability to negotiate with China
Netcom Group regarding the terms for providing these services and facilities.
Changes in the availability, pricing or quality of these services or facilities
may have a material adverse effect on our business and profitability.
  Failure by China Netcom Group to fulfill
its obligations under certain existing arrangements may have a material adverse
effect on our business operations, growth prospects and
profitability.
  China Netcom Group has committed to
certain arrangements to
support our existing operations and future development, including through a
letter of undertakings, a non-competition agreement and a restructuring
agreement. In the letter of undertakings, China Netcom Group agreed to, among
other things, extend its full support to our current operations
and future developments. China Netcom Group has also entered into a
non-competition agreement whereby China Netcom Group has agreed not to compete
with us in our service region and our international markets withoutour consent. In addition, under a
restructuring agreement, China Netcom Group agreed to indemnify CNC China and us
for losses arising from certain matters. Failure by China Netcom Group to
fulfill its obligations under any of these arrangements may have amaterial adverse effect on our business
operations, growth prospects and profitability.
  The PRC National Audit Office and other
governmental or third parties may audit or investigate our ultimate controlling
shareholder and us from time to time. The outcome of these governmental or third party
investigations may adversely affect our corporate image, the reputation and
credibility of our management, our business and financial condition and the
prices of our shares and ADSs.
  PRC’s National Audit Office, or
the NAO, from time to time
performs audits on state-owned companies, such as China Netcom Group, our
ultimate controlling shareholder. If, as a result of an NAO audit, material
irregularities are found within China Netcom Group or China Netcom Group
becomesthe target of any negative publicity,
there would be a material adverse effect on our corporate image, the reputation
and credibility of our management, our business and financial condition and the
prices of our shares and ADSs. In addition, we may be thesubject of other governmental or third
party investigations or similar events that, depending on their outcome, could
have a material adverse effect on our business and financial condition and the
prices of our shares and ADSs.
  12
  Risks Relating to the PRC Telecommunications
Industry
  Extensive government regulation of the
telecommunications industry in China may restrict our ability to respond to
market conditions or competition, and may have a material adverse effect on our
operations, business and financialcondition.
  As a telecommunications operator in
China, weweresubject to extensive regulation by and
under the supervision of the MII, which is the primary telecommunications
industry regulator in China. The MII is responsible for formulating policies
andregulations for the
telecommunications industry, granting telecommunications licenses, allocating
frequency spectrum and numbers, formulating interconnection and settlement
arrangements between telecommunications operators, and enforcing industry
regulations. Other PRC governmental authorities
also regulate tariff policies, capital investment and foreign investment in the
telecommunications industry. See “Item 4. Information on the Company --
Regulation.”The regulatory
framework within which we operate may constrain our ability to implement our
business strategies and limit our ability to respond to market conditions or to
changes in our cost structure. Moreover, we operate our businesses pursuant to
approvals granted by the State Council and under licenses granted by the MII. If these approvals
or licenses were revoked or suspended, our business and operations would be
materially and adversely affected. In addition, we are subject to various
regulatory requirements as to service quality, pricing and otheractions, and failure to comply with such
requirements may subject us to mandatory penalties or other punitive measures,
any of which could have a material adverse effect on our operations and
financial condition.
  In addition, some of our competitors,
suchas China Unicom and
China Railcom, enjoy preferential treatment from the PRC government with respect
to tariff setting. These companies are currently permitted to set their
respective tariffs for certain services, such as long distance calls over the
public switched telephone network, or the
traditional network, at price levels above or below the government fixed tariffs
on a long-term basis, subject to filings with, and approvals from, the relevant
regulatory authorities. This preferential treatment is not available to us. Our competitors who
enjoy this preferential treatment may be able to provide certain services at
prices that are more competitive than our prices, and our business and financial
condition may be adversely affected as a result.
  Future changes to the regulations and policies
governing the telecommunications industry in China, including possible future
industry restructurings, may have a material adverse effect on our
businesses.
  Possible future changes to regulations
and policies governingthe
telecommunications industry in China may have a material adverse effect on our
businesses and operations. As part of the comprehensive plan to restructure the
telecommunications industry in China, as approved by the State Council in 2001,
the centralgovernment stated its intention to
further adjust and improve its regulatory oversight of the telecommunications
industry, including gradual further deregulation of telecommunications
tariffs.
  The MII, under the direction of the
State Council, is currentlypreparing a telecommunications law to provide a uniform regulatory framework for
the telecommunications industry. If and when the telecommunications law is
adopted by the National People’s Congress, it will provide a new
framework for telecommunicationsregulations in China. The proposed nature
and scope of the telecommunications law have not yet been announced by the PRC
government. The telecommunications law and other new telecommunications
regulations or rules, or future changes thereto, such as enforcement of existing regulations and
policies, may materially and adversely affect our business and financial
condition.
  Issues may also arise regarding the
interpretation and enforcement of China’s WTO commitments regarding
telecommunications services, whichmay affect telecommunications
regulations and the telecommunications industry in China. Any future regulatory
changes, such as those relating to the issuance of additional telecommunications
licenses, tariff setting, interconnection and settlement arrangements, changes in technical and service
standards, universal service obligations and spectrum and number allocations,
may have a material adverse effect on our business and
operations.
  The PRC government may issue additional
mobile telecommunications licenses in the future. The timing of issuance
and terms of these licenses, if any, have not yet been announced. We cannot
assure you that we will be able to obtain a mobile license. In addition, if we
do obtain a mobile license, we cannot assure you that we will have
  13
  sufficient resources to establish mobile
operations or that our mobile operations will generate satisfactory returns for
our shareholders. The issuance of additional licenses would also increase the
competition we face.
  The PRC telecommunications
industry has been
extensively restructured in recent years and may be subject to further
restructuring. Such further industry restructuring may materially affect the
operations of all telecommunications operators in China, including us.
Accordingly, we cannot predict the scope and effect of any
further restructuring on our operations.
  New regulations, regulatory changes or
changes in enforcement policies relating to telecommunications tariffs may
adversely affect our competitiveness, business and profitability.
  Tariffs are the prices we charge our
customers for our telecommunications services. We are subject to extensive
government regulations on tariffs, especially those relating to our basic
telecommunications services, such as local and long distance fixed-line telephone services, managed data
services, leased line services and interconnection agreements. The relevant
provincial telecommunications administrations and provincial price bureaus
currently determine the monthly fees and usage fees for our fixed-line local telephone services based on a
fixed tariff set by the MII in consultation with the National Development and
Reform Commission, or NDRC. The MII and the NDRC jointly set tariffs for all
long distance services using the traditional network, leasedlines and data services. We derive a
substantial portion of our revenues from services that are subject to tariffs
determined by the PRC government. In the past, our revenues have been adversely
affected by reductions in tariffs mandated by the PRC government.
  We cannot predict with accuracy the
timing, likelihood or magnitude of tariff adjustments by the government or the
extent or potential impact on our business of future tariff adjustments. If the
government substantially lowers the tariffs for local fixed-line telephone services, our
business and profitability may be adversely affected. In particular, monthly
fees on fixed-line services have recently drawn attention from customers and the
government. Revenues from some of our customers have decreasedas a result of discounts on monthly fees
that we offered through bundled service packages. Our revenues will be adversely
affected if the government abolishes such monthly fees.
  In addition, the tariffs for some of our
services in certain locations have been set at levels above or below the
levels mandated by the government. The MII may order us to adjust these tariffs
and may impose fines on us for repeated failures to comply with the mandated
tariff levels for these services, or even suspend our businesswhere the situation becomes serious, as
determined at the discretion of the MII. According to a regulatory circular
issued by the MII, the MII reaffirmed its intention to strictly enforce these
minimum tariff levels. In addition, such enforcement may be undertaken in a selective manner. The
enforcement of such tariff levels and the imposition of fines or other
penalties, whether done on a selective or industry-wide basis, may materially
and adversely affect our competitiveness and, consequently, our
businessand profitability.
  The PRC government may promulgate new
regulations to abolish fees on mobile service incoming calls, which will
accelerate mobile substitution of our fixed-line services. In addition, as a
result of the growth in customer base of mobileservices and the reduction in tariffs,
voice traffic originated from fixed-line networks to mobile networks has
exceeded that originated from mobile networks to fixed-line networks.
Furthermore, new regulations may require us to pay interconnections feesto mobile operators for calls originating
from our networks that are terminated on their networks. Interconnection fees
that we earn from mobile operators may decrease and may be exceeded by those
that they earn from us.
  The PRC government may require
major operators, including
us, to provide universal services with specified obligations, and we may not be
compensated adequately for providing such services.
  Under the Telecommunications
Regulations, as promulgated by the State Council on September 25, 2000,telecommunications
operators 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 universal service
obligations. The MII, together with governmental
finance and pricing authorities, is also responsible for formulating
administrative rules relating to the establishment of a universal service fund
and
  14
  compensation schemes for universal
services. These rules have not yet been promulgated, and there are
currently no specific regulatory requirements relating to the provision of
universal services in China.
  While the scope of specific universal
services obligations is not yet clear, we believe that such services may
include mandatory provision
of basic telecommunications services in less economically developed areas in
China. We may not be adequately compensated by the government or 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.
  The MII requiredChina Telecom, China Netcom
Group, China Mobile, China
Unicom, China Railcom and China Satcom to participate in a project to provide
telephone services in a number of remote villages in China as transitional
measures prior to the formalization of a universal service obligation
framework. In order to fulfill such obligations
under these transitional measures, China Netcom Group has agreed with us that it
will assume the responsibility for investing in and constructing the necessary
network facilities. If we operate and maintain such network facilities in our service region,
China Netcom Group has agreed to compensate us for the related expenses based on
their fair market value. However, China Netcom Group may fail to fulfill its
obligations under this project, and we may not be adequately compensated by China Netcom Group for
the cost and expenses resulting from our operation and maintenance of any such
network. Either of these events may adversely affect our financial
condition.
  Risks Relating to
China
  Our operations may be adversely
affected by
China’s economic, political and social
conditions.
  Most of our assets are located in China
and most of our revenues are derived from our operations in China. Accordingly,
our results of operations and prospects are subject, to a significant
extent, to economic,
political and social developments in China. In particular, our operating results
may be adversely affected by:
  ·
              changes in China’s political, economic and social
      conditions;
  ·
              changes in policies of the
      government or changes in laws and regulations, or the interpretation of
      laws and regulations;
  ·
              changes in foreign exchange
      regulations;
  ·
              measures that may be introduced to
      control inflation, such as interest rate increases;
    and
  ·
              changes in the rate or method of
      taxation.
  In the past twenty years, China has been one of the
world’s fastest growing economies in gross
domestic product, or GDP. We cannot assure you that such growth will be
sustained in the future. Moreover, a slowdown in the economies of the United
States, the European Union and certainAsian countries may adversely affect
economic growth in China. Our financial condition and results of operations, as
well as our future prospects, would be materially and adversely affected by an
economic downturn in China.
  Economic growth in China has
also historically been
accompanied by periods of high inflation. The government has implemented various
policies from time to time to control the rate of economic growth, limit
inflation and otherwise regulate economic expansion. Some of these measures
benefit the overall economy of China, but may
also have a negative effect on us. For example, our operating results and
financial condition may be adversely affected by government control over capital
investments,by changes in the tax
regulationsor the
increase of interest
rateapplicable to
us.
  15
  The PRC legal system has inherent
uncertainties that may limit the legal protections available to you as an
investor or to us in the event of any claims or disputes with third
parties.
  The Chinese legal system is basedon written statutes. Prior
court decisions may be cited for reference but have limited values as
precedents. Since 1979, the central government has promulgated laws and
regulations dealing with economic matters such as foreign investment, corporate
organization and governance, commerce, taxation
and trade. In particular, legislation since 1979 has significantly enhanced the
protections afforded to various forms of foreign investment in China. CNC China,
our primary operating subsidiary, was incorporated inChina as a “wholly foreign-owned
enterprise.”Although we
are the sole shareholder of, and therefore have full control over, CNC China,
the exercise of our shareholder rights in CNC China are subject to its articles
of association and PRC laws applicableto foreign investment enterprises in
China, which may be different from the laws of the United States. As Chinese
foreign investment laws and regulations are relatively new and the Chinese legal
system is still evolving, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit the remedies available to you as an investor and
to us in the event of any claims or disputes with third parties. In
addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and
management attention.
  Since we are a Hong Kong company, you
will not have certain investor rights as our shareholder, such as the right to
bringlegal action against
other shareholders on behalf of the company.
  We were incorporated in Hong Kong. Under
the Company Ordinance of Hong Kong, any of our shareholders, including our
controlling shareholder China Netcom Group Corporation (BVI) Limited, or
CNC BVI, do not have the
right to bring legal action against any other shareholder on our behalf to
enforce any claim against such party or parties if we fail to enforce such claim
ourselves.
  You may experience difficulties in
effecting service of legal process and enforcing judgments against us
and our management.
  Most of our current operations are
conducted in China and most of our assets are located in China. In addition,
most of our directors and executive officers reside within China, and
substantiallyall of the
assets of these persons are located within China. As a result, it may not be
possible to effect service of process within the United States or elsewhere
outside China upon these directors or executive officers, including with respect
to mattersarising under U.S. federal securities
laws or applicable state securities laws. Moreover, our PRC counsel has advised
us that China does not have treaties with the United States or many other
countries providing for the reciprocal recognition and enforcement of court judgments. Our Hong Kong
counsel has also advised us that Hong Kong has no arrangement for the reciprocal
enforcement of judgments with the United States. As a result, recognition and
enforcement in China of judgments of a court of the UnitedStates or any other jurisdiction,
including judgments against us or our directors, executive officers,
underwriters or experts, may be difficult or impossible.
  Government control of currency
conversion may adversely affect our operations and financial results.
  We receive substantially all of our
revenues in Renminbi, which is not a freely convertible currency. A portion of
such revenues will need to be converted into other currencies to meet our
foreign currency obligations. Our foreign currency requirementsprimarily include:
  ·
              debt service on foreign
      currency-denominated debt;
  ·
              purchases of imported equipment;
      and
  ·
              payment of any dividends declared
      in respect of our shares.
  Our primary operating subsidiary will be
permitted to undertake current account foreignexchange transactions by producing
commercial documents evidencing such transactions, provided that they are
processed through certain banks in China. However, foreign exchange transactions
under the capital account, including principal payments with respect to foreign currency-denominated
obligations, will be subject to limitations of the
  16
  State Administration of Foreign
Exchange. These limitations may affect our ability to obtain foreign exchange
through debt or equity financing, or to obtain foreign exchange for capital
expenditures.
  Fluctuations in exchange rates may
adversely affect our financial condition and results of operations and the
prices of our shares and ADSs or any dividends payable on our shares and ADSs in
foreign currency terms.
  We conductour business primarily in Renminbi,
which is also our functional and reporting currency. The Renminbi is not a fully
convertible currency. From 1994 to July 20, 2005, the official exchange rate for
the conversion of Renminbi to U.S. dollars was generallystable. On July 21, 2005, the PRC
government introduced a managed floating exchange rate system to allow the value
of the Renminbi to fluctuate within a regulated band based on market supply and
demand and by reference to a basket of currencies. From July22, 2005 to April 30, 2008, the value of
the Renminbi has appreciated by approximately 15.87% against the U.S. dollar.
The PRC government has since made and in the future may make further adjustments
to the exchange rate system. Substantially all of our revenues are denominated in Renminbi, while
a portion of our capital expenditures are denominated in foreign currencies,
such as U.S. dollars and Hong Kong dollars. Future movements in the exchange
rate of Renminbi and other currencies may have an adverse effect on our financial condition and
results of operations, particularly our international long distance services. In
addition, any revaluation of the Renminbi may adversely affect the prices of our
shares and ADSs or any dividends payable on our shares andADSs in foreign currency
terms.
  Our corporate structure may restrict our
ability to receive dividends from, and transfer funds to, our Chinese operating
subsidiary, which may restrict our ability to act in response to changing market
conditions.
  Substantially all of our operations are conducted
through our Chinese operating subsidiary, China Netcom (Group) Company Limited,
or CNC China. The ability of our Chinese subsidiary to make dividend and other
payments to us may be restricted by factors that includechanges in applicable foreign exchange
and other laws and regulations. As a wholly foreign-owned enterprise in China,
CNC China is required to provide for a reserve fund and a staff and
workers’bonus and welfare fund, each of which
is appropriated from net profit after taxation but before
dividend distribution according to the prevailing accounting rules and
regulations in the PRC. CNC China is required to allocate at least 10% of its
net profit to the reserve fund until the balance of this fund has
reached 50% of its registered capital. In
addition, the profit available for distribution from our Chinese subsidiary is
determined in accordance with generally accepted accounting principles in China.
This calculation may differ from one performed in accordancewith either HKFRS or U.S. GAAP. As a
result, we may not receive sufficient distributions from our Chinese subsidiary
to enable us to make dividend distributions to our shareholders in the future,
even if our HKFRS or U.S. GAAP financial statements indicate that our operations have been
profitable.
  Distributions by our Chinese subsidiary
to us other than as dividends may be subject to governmental approval and
taxation. Any transfer of funds from our company to our Chinese subsidiary,
either as a shareholder
loan or as an increase in registered capital, is subject to registration or
approval with or by Chinese governmental authorities, including the relevant
administration of foreign exchange and/or other relevant examining and approval
authorities. These limitations on the free flow of funds
between us and our Chinese subsidiary may restrict our ability to act in
response to changing market conditions.
  We
may be treated as a resident enterprise for PRC tax purposes after the EIT Law
becomes effective on January 1, 2008, which may subject us to PRC income tax for
any dividends we receive from our subsidiary and withholding for any dividends
we pay to our non-PRC Shareholders and ADS holder on profits earned after
January 1, 2008.
  Under
the EIT Law, enterprises established outside of China whose “de facto management
bodies” are located in China are considered “resident enterprises,” and will
generally be subject to the uniform 25% enterprise income tax rate for their
global income. Under the Implementation Rules of the EIT Law, “de facto
management body” is defined as the body that has material and overall management
and control over the business, personnel, accounts and properties of the
enterprise. Substantially all of our management is currently located in the PRC.
Accordingly, we may be considered a resident enterprise and may therefore be
subject to the enterprise income tax of 25% of our global income. We cannot
confirm whether we will be considered resident enterprise as the
  17
  Implementation
Rules of the EIT Law are unclear at the moment. In addition, the EIT Law
provides that dividend income between two “resident enterprises” is exempted
from enterprise income tax. If we are not considered as a “resident enterprise”,
we will be required to pay income tax for any dividends we receive from CNC
China, and as a result, the amount of dividends we can pay to our Shareholders
and ADS holders could be reduced.
  Under
the Implementation Rules of the EIT Law, withholding for any dividends paid to
non-resident enterprises by resident enterprises on profits earned after January
1, 2008 are subject to PRC income tax while profits earned before January 1,
2008 are not subject to PRC income tax. Because we may be treated as a resident
enterprise, any dividends we pay to our non-PRC Shareholders and ADS holder on
profits earned after January 1, 2008 may be subject to PRC income tax. Subject
to applicable tax agreements or treaties between the PRC and other tax
jurisdictions, non-resident are ordinarily subject to a maximum 10% withholding
tax with respect to dividend income from resident enterprises.
  Risk relating to our
ADSs
  Holders of our ADSs will not have the
same voting rights as the holders of our shares and may not receive voting
materials in time to be able to exercisetheir right to
vote.
  Except as described in this annual
report and in the deposit agreement, holders of our ADSs will not be able to
exercise voting rights attaching to the shares evidenced by our ADSs on an
individual basis. Holders of our ADSs will receive proxy materials with respect to
matters to be voted on at a meeting of shareholders through the depositary and
may only exercise voting rights by appointing the depositary or its nominee as
their representative to exercise the voting rights attachingto the shares represented by the ADSs.
Consequently, if the materials are slow to be forwarded to holders of ADSs by
the depositary or are otherwise delayed or if the depositary sets deadlines by
which holders of ADSs must give their instructions regardinghow to vote that fall too soon after
mailing of the proxy materials, you may not receive voting materials in time to
instruct the depositary to vote. Thus, it is possible that you, or persons who
hold their ADSs through brokers, dealers or other third parties, may not have the opportunity to
exercise a right to vote.
  ITEM
      4.
              INFORMATION ON THE
      COMPANY
  HISTORY AND
DEVELOPMENT
  Our legal and commercial name is China
Netcom Group Corporation (Hong Kong) Limited. Our principal executive offices
are located at No. 21, Financial Street, Xicheng District,
Beijing, PRC 100140. Our telephone number is (86-10)
6625-8899. Our registered offices are located at 6701, 67/F, The Center, 99
Queen's Road Central, Hong Kong. We have appointed CT Corporation System, 111
Eighth Avenue,13th Floor,
New York, New York 10011, United States of America, with telephone number
1-212-894-8940, as our agent for service of processes for actions brought under
the U.S. securities laws.
  Our current principal operating
subsidiary, CNC China, was incorporated as a PRC limited liability
company in August 1999 by its four founders and shareholders, the Academy of
Sciences, INC-SARFT, CRTC and Shanghai Alliance, as a facilities-based
telecommunications operator in China. We were established on October
22,1999 to facilitate investments by
foreign investors, including CNC Fund, L.P., in CNC China. Shortly thereafter,
the four founders, using their respective equity interests in CNC China as
capital contributions, established China Netcom (Holdings) CompanyLimited, or China Netcom Holdings, which
in turn contributed its entire interests in CNC China through CNC BVI to us. CNC
Fund, L.P. purchased from us 30,967,127 Series A preferred shares of par value
US$0.01 each in February 2001 for a cash considerationof US$325,000,000.
  We, through China Netcom Corporation
International Limited, established Asia Netcom in 2002. Asia Netcom remained
inactive until it acquired substantially all the assets, including cash, and
most of the subsidiaries, of the former Asia Global Crossing Ltd., or AGC, by the end
of 2003.
  18
  Formation of the China Netcom
Group
  Pursuant to a PRC government-issued
directive in 2001 to restructure the PRC fixed-line telecommunications industry,
which has been in operation for decades, China TelecomGroup, the then incumbent fixed-line
carrier, in May 2002, divided its operations between:
  ·
              China Telecom Group, which
      retained:
  °
              the principal fixed-line networks
      that were located in 21 southern and western provinces and municipalities
      of China; and°
              assets constituting 70% of the
      bandwidth of the nationwide inter-provincial fiber-optic network that were
      owned by the former China Telecom Group;
  and
  ·
              China Netcom Group, which was
      established with:
  °
              the principal fixed-line networks
      that were locatedin
      the Beijing and Tianjin Municipalities and the provinces of Hebei, Henan,
      Shandong, Liaoning, Shanxi, Jilin and Heilongjiang and the Neimenggu
      Autonomous Region; and
  °
              assets constituting 30% of the
      bandwidth of the nationwide inter-provincial fiber-optic network that were owned by the
      former China Telecom Group.
  Pursuant to the same directive, China
Netcom Group purchased the entire equity interest in Jitong Communications
Company Limited on May 28, 2003. In April 2004, the shareholders of China NetcomHoldings agreed to transfer
their respective interests in China Netcom Holdings to China Netcom
Group.
  Restructuring in Anticipation of the
November 2004 Global Offering
  The asset and liability
transfers
  In anticipation of our global offering
in November 2004, we
entered into certain transactions, including a series of transfers of assets and
liabilities between us and China Netcom Group. Following our restructuring, we
provided:
  ·
              telecommunications businesses in
      our northern and southern service regions; and
  ·
              international telecommunications
      services in the Asia-Pacific
region.
  China Netcom Group continued
to:
  ·
              provide telecommunications
      services in provinces, autonomous regions and municipalities outside our
      northern and southern service regions; and
  ·
              own non-core
      businesses.
  Our subsidiaries
  We own the entire equity interest of CNC
China, a company registered in China. CNC China is our operating subsidiary in
China. All businesses in our service region are operated through the local
branch offices of CNC
China.
  19
  Change of our financial year
end
  In order to conform our financial year
end, which was March 31 previously, to the financial year end of the businesses
that were transferred to us in connection with the restructuring, we changed our
financialyear end from
March 31 to December 31 beginning April 1, 2003.
  Name changes
  We were incorporated in Hong Kong under
the Companies Ordinance as a private limited liability company on October 22,
1999 under the name of Target Strong Limited.
  ·
              We changed ourname from Target Strong Limited to
      China Netcom (Hong Kong) Corporation Limited on December 9,
      1999.
  ·
              We changed our name from China
      Netcom (Hong Kong) Corporation Limited to China Netcom Corporation (Hong
      Kong) Limited on August 4,
2000.
  In connectionwith our restructuring in anticipation
of the November 2004 global offering:
  ·
              We changed our company name from
      China Netcom Corporation (Hong Kong) Limited to China Netcom Group
      Corporation (Hong Kong) Limited on July 23,
  2004;
  ·
              CNC China’s company name waschanged from China Netcom
      Corporation Limited to China Netcom (Group) Company Limited on September
      10, 2004; and
  ·
              CNC BVI’s company name was changed from
      China Netcom Holdings (BVI) Limited to China Netcom Group Corporation
      (BVI) Limited on August 31,
2004.
  Our Initial Public Offering in November
2004
  In November 2004, we successfully
completed our initial public offering of shares, or IPO, raising approximately
RMB 8,944 million in aggregate net proceeds for us, after deduction of fees and
expenses. Our shares are
listed and traded on the Hong Kong Stock Exchange and ADSs representing our
shares are listed and traded on the New York Stock Exchange.
  Our 2005 Acquisition
  On September 12, 2005, we, CNC BVI and
China Netcom Group entered into a conditional saleand purchase agreement whereby we agreed
to acquire the entire equity interests of China Netcom Group New Horizon
Communications Corporation (BVI) Limited, or CNC New Horizon BVI, from CNC BVI
for a consideration of RMB 12,800 million, RMB 3,000 million ofwhich was paid out to China Netcom
Group on October 31, 2005 at the consummation of our 2005
Acquisition.
  Our 2005 Acquisition resulted in the
transfer from China Netcom Group to us its fixed-line telecommunications assets
and related liabilities in Heilongjiang Province, Jilin Province, the
Neimenggu Autonomous Region and Shanxi Province, or the 2005 Acquired Assets and
Liabilities.
  On November 3, 2006, CNC China completed
its merger with CNC New Horizon BVI, with CNC China being the surviving
entity.
  Sale of Asia Netcom
  On August 22, 2006, we sold our 100%
equity interest in Asia Netcom to Connect Holdings Limited for US$168.84
million. Asia Netcom was a wholly owned subsidiary through which we provided
international telecommunications services in the Asia-Pacific region. The sale of Asia
Netcom is in line with our strategy to focus
  20
  on development of telecommunications
services in China. After the completion of the sale, we continued to have
business relationships with Asia Netcom in connection with ourremaining international operations,
including the purchase of network capacity from Asia Netcom, which is not
expected to be significant.
  Sale of Southern Service Region
Business
  On February 28, 2007, we sold our
telecommunications assets, liabilities and business operations in Guangdong Province
and Shanghai Municipality, or our southern service region, to China Netcom Group
for a cash consideration of RMB 3,500 million. China Netcom Group assumed an
aggregate principal amount of RMB 3,000 million of debtwhich is due and owing from our southern
service region to independent third parties upon completion of the disposal. We
believe that the sale of our southern service region business has increased our
ability to allocate more resources to solidifying and strengthening our leading position in our
service region.
  PurchaseofDesignInstitute
  On December 5, 2007, our wholly-ownedsubsidiary, China Netcom Group System Integration
Limited Corporation or China Netcom System Integration, entered into
an equityinteresttransferagreement with China Netcom Group Beijing
Communications Corporation, a wholly-owned subsidiary of China Netcom Group,
pursuanttowhich China Netcom System Integration
acquired the entire equity interest of Design Institutefor a totalcashconsideration ofRMB298,915,300. Thistransactionwas completed on December 31, 2007.We believe that thepurchase of Design
Institutewill contribute to our diversification
effortsbystrengtheningouroperationaland technicalcapabilitiesinprovidingconsultancy services and comprehensivecommunicationssolutions, which are two of our key ICT
services.
  Strategic Alliance to Telefónica
  In
November 2005, we entered into a strategic alliance agreement with Telefónica Internacional S.A., or
Telefónica, pursuant to
which we and Telefónica
identified a number of areas in the telecommunications business for potential
cooperation. In 2006, we strengthened our cooperative relationship with
Telefónica in the areas of
strategy, innovation, budgeting and operations. We believe our cooperation with
Telefónica has helped improve our management. On January 18, 2008, we were informed by
the beneficiary ownersof
our148,015,436 shares
which were held in trust with China Netcom Group (BVI) Limited, our direct
shareholder, that they have
entered into a share purchase agreement withTelefónicato transfer the their shares toTelefónicaor its related entities.Upon the completion of this transaction,
the shares held byTelefónicaand itsentities willbeapproximately 7.2%of our outstanding shares.Closing of the transaction is subject to
a number of conditions including PRC government approval.
  21
  BUSINESS OVERVIEW
  Unless otherwise indicated, all data and
information relating to our businesses and operations for the year
ended December 31, 2005
include the data and information relating to the 2005 Acquired Assets and
Liabilities, and all data and information relating to our business and
operations for the years ended December 31, 2005 are presented as if the sale of
Asia Netcom occurred on January 1, 2005.All data and information relating to our
business and operations for the years ended December 31, 2005and 2006are presented as if the sale of
southernserviceregionbusinessoccurred on January 1, 2005.
  Our Services
  Weare a leading broadband and fixed-line
communications operator in China and a dominant provider of fixed-line telephone
services, broadband and other Internet-related services, information and
communications technology services, business and data communications services,as well asother servicessuch as
advertising and media businessin our service region. The services that
we offer include:
  ·
              fixed-linetelephone services (including
      Personal Handyphone System, or PHS services), including local, domestic
      long distance and
      international long distanceservices;
  ·
              broadband and other
      Internet-related services, including XDSL, LAN, wireless and other
      Internet access services, broadband content and applications
      services;
  ·
              ICTservices, includinginformation technologyandcommunication
      technologybased
      integrated solutions such as system integration, software, outsourcing,
      special advisory, and professional services, such as Internet information
      and disaster recovery
services.
  ·
              business and data communications
      services, including
      managed data and leased line services;
  and
  ·
              other services such as
      advertising and media
      business.
  Tariffs forsomeof our services are regulated by the
government, including the MII, the NDRC, and provincial telecommunications
administrations and price
bureaus in China. We describe, in this “Item 4. Information on the Company --
Business Overview”section,
tariffs for services for which we have sole discretion in setting the
market-based tariff levels, including VoIP and broadband Internet
services. For a discussion of
government-fixed tariffs and guidance tariffs, such as those for fixed-line
telephone services, see “--
Regulation -- Tariff Setting.”Prices for some of our services may be
subject to promotional discounts.
  Fixed-line telephone services (including
PHS)
  We are the dominant provider of
fixed-line telephone services in our service region, with a market share of90.4%as of December 31, 2007, based on the number of fixed-line
subscribers.
  Our fixed-line telephone services
consist of local telephone,
domestic long distance, international long distance, value-added and
interconnection services. The number of our fixed-line subscribersdecreased from 114.7million as of December 31,
2005to 114.0million as of December 31,
2006. In 2007,as domestic mobile operators launched
service packages at competitive prices, the migration from fixed-line to mobile
communicationsbecomes
moreintensified, and the
number of our fixed-line subscribers decreased to 110.8million as of December 31,
2007,down by 2.8% over the same period of the
previous year. Of the total
number of fixed-line subscribers, as of December 31, 2007, approximately 60.6% were residential customers,
9.6% were business customers,
6.2% were public telephones and
23.6% were PHS subscribers. Fixed-line telephone services
represent our principal business activity.
  In 2007, we continued to capitalize on
our multi-service capabilities and rich network resources by launching
“Family1+”bundled services and “Same Number”providing convergent functions of fixed-line and mobile
voice services. “Family1+”is a service branded targeted at family
subscribers under which we offer a
  22
  selection of packages bundling various
communication services. Through the trial launch of intelligent terminals
andHomeBox, we have enhanced our service
offering under the “Family1+”brand to satisfy family demands for
multimedia information service. In 2007, “Family1+”significantly contributed to the growth
of our innovative businesses, and enhanced the overall values of fix-line telephone users. As of
the end of 2007, the number of our “Family1+”subscribers reached 8.4
million.
  We believed that, with the increasing
penetration rate of “Family1+”and “Same number”and the increased ability of
“Family1+”tosatisfy all multimedia needs for our
residential users, we will be able to enhance our revenue generation from our
fixed-line telephone subscribers.
  We have selectively built wireless local
access networks based on PHS technology to offer PHS services as an
alternative to mobile
services. Our PHS services have been introduced in most cities in our service
region, where we have rolled out our PHS networks as an extension to our
existing fixed-line network. We believe that our PHS services have mitigated the
substitution effect of mobile
services.
  PHS services are wireless telephone
services that have features similar to traditional mobile telephone services.
For example, both types of services offer voice services over handsets as well
as short messaging functions.However, as PHS services have smaller
cellular coverage than traditional mobile networks, PHS networks require more
cellular sites for the same area coverage. In addition, due to regulatory
constraints in China, users of PHS services are only permitted toroam within an area with the same area
code while traditional mobile telephone services offer nationwide or
international roaming capabilities. Tariffs for PHS services are similar those
for traditional fixed-line voice services. Incoming calls are freewhen using PHS services but are generally
charged on a per minute basis when using traditional mobile
services.
  Beginning in 2006, as mobile operators
continued to launchmoreaggressive tariff packages,
the tariff advantage of PHS services diminished, andour PHS subscribers as of December 31,
2007decreased by approximately1.1 millionfrom approximately 27.3 million as of
December 31, 2006. In 2007, wecontinue toreduce our capital expenditures on PHS
services and decreased our subsidies of PHS terminals. Our PHS services focused more on
selected consumer segments such as hospitals, school campus, hotels and other
commercial buildings, and were offered as a key component of our bundled
services.
  We also operate a network of
approximately 6.9 million public telephones located in our service
region. We provide local, domestic long distance and international long distance
call services and Internet services through our public telephones. An important
contributing factor to the demand for public telephones services is China’s large and growing migrant
population.
  The following table summarizes key
information regarding our local telephone services in our service region in
China as of the dates indicated:
  As of December
      31,2005
              
              
              2006
              
              
              2007(in thousands, except
      percentages)Total number of
      fixed-line
                subscribers(1)Number of fixed-line
      subscribers
                Residential
              
              
              70,273
              
              
              
              68,803
              
              
              
              67,162Business
              
              
              10,725
              
              
              
              10,946
              
              
              
              10,575PHS
              
              
              27,329
              
              
              
              27,316
              
              
              
              26,189Public
      telephones
              
              
              6,331
              
              
              
              6,907
              
              
              
              6,894Total
              
              
              114,658
              
              
              
              113,972
              
              
              
              110,820Market share(2)
              
              
              92.3%
              
              
              
              91.5%
              
              
              
              90.4%
 
 (1)
              Fixed-line subscribers consist of
      all access lines in service as well as PHS subscribers. We calculate PHS
      subscribers based on the number of active telephone numbers for our PHS
      services. In cases
      where a PHS subscriber uses the same telephone number as an access line in
      service, the designation as a PHS subscriber or access line in service
      depends on which service is first activated. We increase our total number
      of fixed-line
  23
 subscribers as soon as practicable after
      activation of the service. We remove a fixed-line subscriber from the
      total number of fixed-line subscribers as soon as practicable after the
      fixed-line subscriber deactivates the service voluntarily or three months
      afterthe date on which the fixed-line
      subscriber’s bill becomes overdue. Prepaid
      and postpaid telephone card customers are not counted toward our
      fixed-line subscribers.
 (2)
              Calculated by dividing the number
      of our fixed-line subscribers by the total number of fixed-line subscribers in our
      service region published by the provincial telecommunications
      administrations or the MII, as the case may be, as of each of December 31,
      2005, 2006and 2007.
  Local telephone
services
  Our local telephone services, which
represent the largest
portion of our fixed-line telephone services in terms of revenues experienced
declines in 2006and
2007.
  Service usage
  The following table sets forth
information regarding usage of our local telephone services provided in our
service region for the
periods indicated:
  For the Years EndedDecember
31,2005
              
              
              2006
              
              
              2007Total usage (pulses in
      millions)(1)
              
              
              226,609
              
              
              
              214,474
              
              
              
              202,547Internet dial-up usage (pulses in
      millions)(1)
              
              
              8,534
              
              
              
              5,251
              
              
              
              3,660Total usageexcludingInternet dial-up usage(pulses in
      millions)
              
              
              218,074
              
              
              
              209,223
              
              
              
              198,887
 
 (1)
              Pulses are the billing units for
      calculating local telephone usage fees. See “-- Regulation -- Tariff Setting --
      Local telephone services”for a discussion of
      pulses.
  In 2007, total usage in local
telephone services was
202,547 million, whichincluded3,660 millionInternet dial-up usage.Totalusage of local telephone
servicesexcluding Internet
dial-up usagewas198,887 million, representing a 4.9%
decrease from 209,223 millionin 2006, reflectingincreasing migration of local fixed-linevoice trafficto mobileservices.
   Domestic long distance
services
  We offer traditional long distance
services and VoIP long distance services in our service
region.
  Service usage
  The following table shows the total
minutes of domestic long
distance calls carried through our long distance network for the periods
indicated:
  For the Years EndedDecember
31,2005
              
              
              2006
              
              
              2007Total minutes of domestic long
      distance calls (in millions)(1)Traditional
              
              
              15,653
              
              
              
              17,327
              
              
              
              18,482VoIP
              
              
              12,122
              
              
              
              11,482
              
              
              
              10,315Total
              
              
              27,775
              
              
              
              28,809
              
              
              
              28,797
 
 (1)
              Includes calls originated by
      prepaid phone cards users and VoIP subscribers that are carried over our
      long distance networks.
  The increase in minutes of usage in our
domestic longdistance
services in recent years was mainly due to economic development, declining
effective tariffs, increased cross-regional business activities, growth in our
  24
  customer base and new service offerings.
However, in 2007, the usage
of our domestic long distance call decreased by 11 millionminutes, or 0.04% from
2006,primary due to increased competition
frommobileservice providers in the form ofdecreasedroamingchargesand usage fee for domestic long distance
calls.
  Tariffs
  In 2001, the PRC governmentabolished regulatory controls on tariffs
for VoIP long distance calls and allowed operators to set their own rates. We
currently charge RMB 0.30 per minute in addition to a local usage fee for our
VoIP domestic long distance services.
   International long distance services
  We are the leading provider of
international long distance services in our service region, with a39.1%market share for the overall
international long distance service in that region for the year ended December
31, 2007, as compared to41%for the year ended December 31,
2006. This decrease was primarily due to
increasing competitions from other international long distance service
providers.
  In 1999, we began to offer VoIP
international long distance services in our service region. The usage of our VoIP international long
distance services as a percentage of the total usage of our international long
distance servicesdecreased from55.6% as of December 31,2006to55.0% as of December 31, 2007, as basically stable during 3
years.
  Service usage
  The following table sets forth certain
information related to the usage of our international long distance services for
the periods indicated:
  For the Years EndedDecember
31,2005
              
              
              2006
              
              
              2007International long distance
      outbound call minutes (in millions)(1)Traditional
              
              
              155
              
              
              
              144
              
              
              
              155VoIP
              
              
              197
              
              
              
              180
              
              
              
              189Total
              
              
              352
              
              
              
              324
              
              
              
              344
 
 (1)
              Includes calls originated by
      prepaid phone cards users and VoIP subscribers that are carried over our
      international long distance
networks.
 In 2007, we proactivelyimplemented marketing programs to
stimulate long distance voice traffic, international long distance voice traffic
increased by 6.2% over the corresponding period of the
previous year.
  Our principal outgoing international
long distance calls are to Hong Kong, Taiwan, the United States, Japan
and South Korea.
  Tariffs
  The following table sets forth our
current VoIP international long distance tariffs:
  Tariff(RMB per
      minute)VoIP
    services:Hong Kong, Macau and
      Taiwan
              1.50United States and
      Canada
              2.40Asia-Pacific and certain European
      countries(1)
              3.60Kuwait, Honduras, Sierra Leone,
      Cape Verde, Kenya, Fiji, Sri Lanka, Equatorial
                Guinea, Togo, Surinam, Nigeria,
      Ethiopia, Uruguay, South Africa
              6.00
  25
  Qatar, Afghanistan, Nepal,
      Bulgaria, Guyana, Syria, Haiti, Belgium,
      Malta
              8.00Cuba, Somalia, Papua New Guinea,
      Sao Tome and Principe Peru
              12.00All other international
      destinations
              4.60
 
 (1)
              Includes the United Kingdom,
      France, Italy, Germany, Australia, New Zealand, Japan, South Korea,
      Singapore, Malaysia,
      Thailand, the Philippines and
Indonesia.
  We offer international long distance
services through international gateways that we lease from China Netcom Group,
and pay for the use of networks of operators in foreign jurisdictions for
outgoinginternational
calls. We negotiate bilateral settlement arrangements and rates with operators
in foreign jurisdictions based on international settlement standards in the
telecommunications industry.
   Value-added services
  In addition to basic telephone
services, we offer a range
of value-added services, including caller identification, PHS short messaging
and “personalized
ring”services.
Personalized ring service enables our traditional fixed-line telephone and PHS
telephone to emit a distinctive ring forincoming calls designated numbers. Our
value-added services generate additional usage on our network and increase our
average revenues per fixed-line subscriber, thus mitigating the impact of mobile
substitution and contributing to our revenues.
  In 2007,we completed the renovation of
intelligent network and developedthenext generation network (NGN)
value-added business.As for residential customers, we promoted
servicesbundled
fixed-line“Personalized Ring”and“Phonemate”with“Family1+”.“Phonemate”is a service that provides voice
messaging, speed dial and other value added services. For SME(Small and MediumEnterprises) customers, we bundled switchboard, corporate“Personalized Ring”,virtualfax and internet hard diskwith“CNC Connected”.Virtualfax service allows the users to send and
receive facsimile through the internet. We provide internet hard disk to users
so that they can store documents, emails and facsimile
online.
  As of December 31, 2007,the number of“Personalized Ring”subscribers was 28.1 million, representing an increase
ofapproximately78.6% over that of 2006.Thenumber of Phonemate subscribers was 5.3
million, representing an increase of 401.2% over that of 2006.Thepenetrationrate of caller identification amounted
to 72.2%, increasing by 3.4
percentage points over that of 2006.
  Tariffs
  We charge RMB 3.00 to RMB 6.00 per
month, depending on the region, for our caller identification service. We charge
RMB 0.08 to RMB 0.10 per message for PHS messages sent within our own networkor to the network of China
Telecom, and RMB 0.10 to RMB 0.15 per message for messages sent outside our own
network or the network of China Telecom. We charge RMB 2.00 to RMB 10.00 per
month for using our “personalized ring”and charge separately for
downloading “ring tones”.
   Interconnection
  We earn interconnection fees for
terminating or transiting calls that originate from other domestic
operators’networks and pay interconnection fees
to other operators in respect of calls originating from our networks
that are terminated on
their networks. We earn and pay such fees in respect of local and domestic and
international long distance calls and Internet services.
  All interconnection and settlement
arrangements among domestic operators in China are governed bythe Telecommunications Regulations and
the rules on interconnection arrangements and settlement promulgated by the MII.
Most of the agreements pursuant to which we interconnect with other domestic
operators were entered into by China Netcom Group prior toour restructuring. We have entered into
an agreement with China Netcom Group pursuant to which we have agreed with China
Netcom Group that the costs and benefits arising under these agreements, as they
relate to our operations, will be for our account. Wehave also entered into an
interconnection
  26
  settlement agreement with China Netcom
Group to interconnect with networks owned by China Netcom Group outside of our
service region.
  For information about our domestic and
international telecommunications arrangements, see “--Regulation -- Tariff Setting --
Interconnection”and
“Item 7. Major Shareholders
and Related Party Transactions -- Related Party Transactions -- Continuing
connected transactions relating to CNC China and CNC New Horizon --
Interconnection Settlement Agreement.”
  Broadband and other Internet-related
services
  We are the leading provider of broadband
and other Internet-related services in our service region. Broadband services
are increasingly becoming one of our emphasis as part of our strategy
to focus on high growth
services.This growth has been driven by the
increasing affordability and rising use of personal computers and other Internet
access devices, gradual recognition by businesses of the importance of
information, and the proliferation of content and applications, such as
online games and video-on-demand.
  The following table sets forth selected
information regarding our broadband, dial-up and dedicated Internet access
services.
  As of and For the Years EndedDecember
      31,2005
              
              
              2006
              
              
              2007Broadband services:(1)DSL subscribers (in
      thousands)
              
              
              8,529.2
              
              
              
              11,287.9
              
              
              
              15,777.1LAN subscribers (in
      thousands)
              
              
              2,507.0
              
              
              
              3,140.7
              
              
              
              39,85.4Others (in
      thousands)
              
              
              0
              
              
              
              0
              
              
              
              5.2Subtotal
              
              
              11,036.2
              
              
              
              14,428.6
              
              
              
              19,767.7Market share(2)
              
              
              87.6%
              
              
              
              87.5%
              
              
              
              88.9%Dial-up and dedicated Internet
      access services:Dial-up online usage
      (minutes in
      millions)
              
              
              6,645.6
              
              
              
              5,384.3
              
              
              
              2139.3Dedicated Internet
      access lines in service (in thousands)
              
              
              2.0
              
              
              
              1.8
              
              
              
              2.7
 
 (1)
              We calculate DSL subscribers based
      on the numberof
      active accounts. LAN subscribers consist of end-users and dedicated line
      users. We calculate LAN end-users based on the number of ports subscribed
      for. The number of LAN dedicated line users equals total monthly fees paid
      by such users divided by set average revenue per unit. The
      current set revenue per unit is RMB 90. We consider an account active or a
      service subscribed for as soon as practicable after activations of the
      applicable service. We remove a subscriber from the total number of
      subscribers assoon as practicable after that
      subscriber deactivates the service voluntarily or three months after the
      date on which that subscriber’s bill becomes
      overdue.
 
 (2)
              Calculated by dividing the number
      of our own broadband subscribers by the total number ofbroadband subscribers in our
      service region, as published by the provincial telecommunications
      administrations or the MII, as the case may be, as of each of December 31,
      2005, 2006 and 2007.
 
 Broadband services
  We seek to achieve a leading position in
thefast growing market for
broadband services in China by capitalizing on our extensive fixed-line network,
large customer base, experienced sales force and established brand. In
2007, we continued to develop our broadband
business models focusing on providing access through computers and
television set-top boxes and charging fees on access and content and adopted
measures such as selectively upgrading our network speed, introducing more
diversified product and price offerings to satisfy the needs of
differentmarket segments.
  In 2006, we established “China Netcom Group Broadband Online
Limited Corporation,”a
wholly-owned subsidiary of CNC China specially designated for broadband content
and launched the first comprehensive audio-
  27
  visual entertainment portal
inthe PRC named
“CNC MAX.”In 2007, we upgraded broadband access
speed, and provided multi-speed access service to
customers.We also
capitalised on our status as an official partner of the 2008 Olympic Games to
develop the “2008 Broadband
Hotels”services.As of December
31, 2007, 1,741hotels offered to their guests
broadband services provided by us. In addition, in 2007, we devoted more efforts in promoting
our comprehensive information services for corporate customers, especially small
and medium size enterprises. We provided them
comprehensive communication and information services including information
technology applications and basic communication products.
  Our broadband subscribers increased to
19.77 million as of December 31, 2007, representing an increase of5.34million, or37.0%, from14.43million as of December 31,
2006.
  DSL services
  We promote DSL services as the primary
broadband service means for residential customers and small and medium-sized
enterprise customers in our service region. We provide DSL services by upgrading our
existing copper-based local switching network. DSL technology allows us to roll
out our broadband network at lower incremental costs than other types of
broadband networks. In our service region, where we are the dominant fixed-line operator, the number of
subscribers to our DSL services has grown steadily in recent years, with
approximately15.78million DSL subscribers as of December
31, 2007, compared with approximately11.29million subscribers as of the end of
2006.As of December 31, 2007, our DSL subscribers accounted for
79.8% of our total number of broadband
subscribers in our service region.
  LAN services
  In addition to DSL technology, we also
use Ethernet technology-based local-area networks, or LANs, to
provideour customers with
broadband services. We have selectively rolled out LANs in high density
residential and office buildings in our service region, where customers demand a
large bandwidth and high-speed Internet access. LAN uses fiber-optic technology
andEthernet protocol to connect our users
to a telecommunications network and greatly expands capacity of the access
network. As of December 31, 2007, we had 3.99 million subscribers of our
LAN services, representing20.2% of our total broadband
subscribers.
  Internet application-related
services
  In 2007, we focused on innovation of the
content and application sales model and the improvement of broadband content and
applications. In 2007, we launched “CNC MAX”Clients, which provides rich broadband
content and applications
directly to the user’s desktop. We also developed video
programs as “Interacting
Voice-Over”, “Car World”channel, “CNC MAX”Clients competition channel and
“CNC MAX Virtual Game
Platform.”Through the
“My Commercial
World”channel, we
strengthened our business model in respect of
corporate video advertising.
  We focus on strengthening ourbroadband content and
applications from PC to TV. Asof December 31,2007,ourAVS-IPTV technical experiments in
Dalian successfully passed theMII’s inspectionand havestarted commercialoperation.The number of IPTV subscribers reached
324,000 as of December 31, 2007, representing an increase of49.4% from217,000 as of December 31,
2006.
  In 2007, under the brand “CNC Connected”, we provided integrated communication and information services,
including information technology application, communication value-added services
and basic communication products, to small and medium enterprise customers of
different industries and with different needs. The number ofsubscribers to our “CNC Connected”platform continued to grow
rapidly.
  28
  Tariffs
  We charge an upfront installation fee to
both DSL and LAN subscribers. DSL subscribers may choose a monthly package for
unlimited usage, or a monthly package with limited usage, with additional fees charged for
overtime usage. For customers connected through LANs, we offer a monthly package
with unlimited usage.
   Dial-up and dedicated Internet
access
  We are also one of the largest providers
of dial-up Internet access services in our service region in terms of number
of subscribers. Total usage by our dial-up Internet subscribers decreased
significantly in 2007. We believe that the decrease was
primarily attributable to the migration of some high-usage customers from
dial-up Internet services
to broadband services.
  We offer high speed Internet access
through dedicated lines to our business customers, particularly
communications-intensive corporate customers. As of December 31, 2007, we had a total of approximately2.7 thousanddedicated Internet access subscribers in
our service region. We bundle this service with voice and data services to
provide integrated communications solutions to our business
customers.
  Tariffs
  Dial-up
Internet access
  We offer dial-up Internet access on
botha postpaid and prepaid
basis. We charge a network usage fee ranging from RMB 1.00 to RMB 3.00 per hour.
In addition, a communication fee of RMB 0.02 per minute is charged and recorded
as fixed-line telephone services revenues. Postpaid customers are
billed for this service together with their
monthly telephone service bills. Prepaid customers must purchase stored value
cards that enable them to access the Internet. The network usage fee is charged
against the stored value card, while the communication feeis billed to the telephone number from
which the Internet connection is made.
  Dedicated
Internet access
  We charge a subscription fee of RMB 100
and a monthly network usage fee ranging from RMB 2,400 to RMB 5,400, depending
on bandwidth, for our dedicated Internet access. Where the dedicated
Internet access is provided through DDN, frame relay, ATM or digital circuits
access, their respective tariffs apply in addition to the subscription fee and
network usage fee. For a more detailed description of the tariffs for DDN, frame relay, ATM or digital
circuits, please see “--
Regulation -- Tariff Setting.”
  ICT services
  We
began offering ICT services in 2006. In 2007, we sought to establish core
strengths and capabilities in providing integrated solutions in E-government,
environmental monitoring, “Safe City” and the Olympic Games. With the growing of
the professional team, the Company gradually moved up the value chain of ICT
business, and strengthened its capabilities in solution designs, software
development and operation management and maintenance. With the extension of the
Company’s ICT business to the high end of the value chain, the Company will
explore the call centers and IDC outsourcing service sectors by leveraging the
advantage of Company’s brands, customer base and network resources, penetrating
from the resources leasing to provision of integrated information solutions to
customers.
  Business and data communications
services
  We are the leading provider of business
and data communications services in ourservice region. We offer managed data
products, such as DDN, frame relay, ATM and IP-VPN, and leased line products,
including domestic and international leased circuits. Our customers for these
services include government entities, large financial
  29
  institutions and other domestic and
multinational businesses, ISPs and other telecommunications operators. We focus
on diversifying our business and data communications services and products and
providing quality customer service to our large corporate and carriercustomers.The usage of our business and data
communications service has decreased since 2006 due to market
competition.
   Manageddata services
  We provide a variety of managed data
services to our business customers, including DDN, frame relay, ATM and
IP-VPN services. We
anticipate that demand for data communications services will be fueled by growth
in the emerging services segment, which includes e-commerce, broadband content,
network applications and IP-VPN services. The following table sets forth
selected information regarding our managed
data services.
  As of December
      31,2005
              
              
              2006
              
              
              2007Number of
    portsDDN
              
              
              131,713
              
              
              
              115,315
              
              
              
              101,815Frame
      relay
              
              
              43,449
              
              
              
              41,254
              
              
              
              37,337ATM
              
              
              4,193
              
              
              
              6,361
              
              
              
              6,876Leased
      bandwidthDDN
      (x64kbps)
              
              
              197,925
              
              
              
              192,395
              
              
              
              172,573Frame relay
      (x128kbps)
              
              
              171,251
              
              
              
              183,757
              
              
              
              173,896ATM
      (x2Mbps)
              
              
              11,907
              
              
              
              15,857
              
              
              
              13,837
  DDN services
  DDN systems, composed of fiber-optic
cables, digital transmission paths and digital nodes, are capable of providing
high-quality privatecircuits and other services at various speeds to satisfy the multimedia
communications needs of customers. Our DDN services provide high quality and
reliable transmission at speeds ranging from 9.6kbps to 2Mbps to meet the
increasing demand for low- to medium-speed transmission capacity from
business customers and government agencies.
  Framerelay and ATM
services
  We offer advanced high-speed data
communications services based on frame relay and ATM technologies to major
business customers, including multinational corporations, government
agencies and financial institutions. These services enable flexible and
cost-effective use of bandwidth resources. Our frame relay service provides
high-speed, cost-effective data transmission services linking different
business sites for high volume data
traffic. ATM is a data transmission service using high bandwidth and
multiplexing technology intended to handle high bandwidth, integrated voice,
text, data, video and Internet traffic. Many of our customers are
increasingly using frame relay and ATM services to
form VPNs to link their local area networks in different locations. VPNs enable
large companies to link multiple sites and offices through a single network that
uses existing switched lines to reduce cost but has capabilities comparable to a dedicated
private circuit.
  IP-VPN
  Our IP-VPN service targets business
customers that require direct IP connections between multiple sites. These
customers are provided with private networks connected to our Internet backbone
network and intended for
secure data transmission.
   Leased line services
  We are a major provider of dedicated
leased line services to businesses, government agencies and other
telecommunications operators in our service region. These leased lines allow
point-to-point connection
for voice and
  30
  data traffic. Leased lines are used by
business customers to assemble their own private networks and by
telecommunications operators to establish their service networks. We lease
network elements, including digital circuits,digital trunk lines and optical fibers,
to business and government customers as well as other telecommunications
operators.
  As of December 31, 2007, we leased circuits totaled219,881(x2Mbps) in bandwidth, including198,793(x2Mbps) in bandwidth to
business customers. An
increasing percentage of our leased circuits are of higher speed as well as
capacity. Revenues generated from our leased line services have grown steadily
in recent years. The following table sets forth the respective amounts of
bandwidthof our leased line services provided to
our business customers and carrier customers as of the dates
indicated.
  As of December
      31,2005
              
              
              2006
              
              
              2007Bandwidth of leased circuits
      (x2Mbps)Business
      customers
              
              
              96,674
              
              
              
              137,792
              
              
              
              198,793Carrier
      customers
              
              
              29,602
              
              
              
              23,790
              
              
              
              21,088Total
              
              
              126,276
              
              
              
              161,582
              
              
              
              219,881
 
  Advertising and Media
Service
  We have significantmedia resources andhavestarted to establishourcompetitive edge in themultimediaadvertisingbusiness in 2007 through
integratingandleveragingourdiversified mediarelatedresources with extensive coverage and
comprehensive support.Our advertising and mediaservicesfocus on yellow pages,telephone information
serviceandinternetadvertisingthrough our websites.
  Marketing, Sales, Distribution and Customer
Services
  In 2007,webegan establishinga customer-oriented sales and marketing
systemby dividing our
customers intothree groups, namely LargeCorporations andGovernment, Small and MediumEnterprises (SME) andResidential.Webegan allocatingour marketing resources on the basisof customergroups, and various products and
applications werebundledtogether to satisfy the needs ofthe respectivecustomer groups.
  In addition, webegan changingthe functional organization structure
bylaterallyintegrating variousprofessionallines, and by vertically streamlining
the management structure.
  Trademarks
  We market our services under the
“CNC”brand name and logo, which are
registered trademarks in China owned by our parent company, China
Netcom Group. China Netcom
Group has also registered the “CNC Connected”brand name as a trademark for our
broadband services targeted at business customersand“CNC MAX”brand name as a trademark. On October 8, 2004, we entered into a
new trademark licensingagreement with China Netcom Group for
our use of, among other things, the “CNC”brand name and logo, and “CNC Connected”brand name. Under this agreement, China
Netcom Group has agreed to grant to us and our subsidiaries the right to use
these trademarkson a royalty-free basis for ten years,
which is automatically renewable at our option.
  Billing services and credit
control
  We bill our residential customers on a
monthly basis and payments are usually due, depending on the location of the
customer, withina month
and a half of the last date of the billing period. We provide a range of payment
choices for the convenience of our customers, including a direct-debit service,
which automatically deducts the monthly payment from the subscriber’s designated bankaccount. We also provide specially
tailored billing and collection services to our large business customers to help
them more effectively plan and monitor their telecommunications
needs.
  31
  We charge a late payment fee on
subscriber accounts that are not paidby the monthly due date. We generally
deactivate services for subscribers whose accounts are more than 30 days
overdue. These subscribers whose services have been deactivated must pay all
overdue amounts, including applicable late payment fees, to reactivate their services. We will terminate a
subscriber’s service and will remove him or her
from the subscriber list if his or her account is overdue for more than three
months. We have implemented subscriber registration procedures, including credit
and background checking for PHS customers to
strengthen credit control. We also actively promote our prepaid telephone
services as a means of controlling bad debts. Upon the completion of the
upgrading of our local network to include intelligent functionalities,
wewill gradually provide customers with
detailed breakdown of fee charges.
  Network
Infrastructure
  We operate a network which provides
extensive coverage in China. This network is technologically advanced and
conducive to the introduction of the next generation network and 3G technology. This
network supports a wide range of end-to-end fixed-line telecommunications
services and enables customized products to be delivered to meet a variety of
telecommunications needs in “real-time.”
  The network which we operate consists of transport networks,
service networks and support and information systems. The transport networks are
primarily fiber-optic based networks covering our service region, supplemented
by satellite transmission and digital microwave links. The service networks, which support our basic
and value-added telecommunications services, consist of our local access
networks, including PHS networks, fixed-line telephone switch networks, Internet
and data service networks and intelligent networks. The support and information systems include an
operation support system and a business support system to support the reliable
and effective operation of our networks.
  In 2007, wecontinued to focus our networkconstructionon supporting our strategic
transformationto ensure
continuing rapid growth of the innovative services.In addition, we are in the process of
upgrading our network to include intelligent functionalities and other
supporting infrastructure.In 2007, our total capital expenditure
amounted to RMB 20,684
million,or adecrease of 15.8% from 2006,andrepresented 25.1% of our revenuein 2007,representinga decrease of 4.9percentagesover that of 2006.
  Suppliers
  We make most of our purchases through a
competitive bidding process primarily based on product and service quality, system
compatibility and price.
  Research and
Development
  Our research and development
requirements are primarily fulfilled by China Netcom Group in return for a
service fee that is negotiated on a case-by-case basis. These research and development activities are
focused primarily on operational planning and development of value-added
services. China Netcom Group has established a centralized research and
development center. On January 62006, China Netcom Group and its partners
jointly established the
National Lab of Next Generation Network in Broadband Application. This lab is
the only national level research and development center in China in the
information and communications industry. Its research and development efforts
willfocus on next generation internet IPv6,
Triple-Play and 3G operating and supporting systems. The acquisition of the
Design Institute increased our ICT research and development
capabilities.
  Strategic Alliance with
Telefónica
  In November 2005, we entered
into a strategic alliance
agreement with Telefónica,
pursuant to which we and Telefónica identified a number of areas in the
telecommunications business for potential cooperation. In 2006, we strengthened
our cooperative relationship with Telefónica in the areas of strategy, innovation, budgeting
and operations. We believe our cooperation with Telefónica has helped improve our management.On January 18, 2008, we
were informed by the beneficiary ownersof our148,015,436 shares which were held in
trust with China Netcom
Group (BVI) Limited, our direct shareholder, that they have entered into a share
purchase agreement with
  32
  Telefónicato transfer the their shares toTelefónicaor its related entities.Upon the completion of this transaction,
the shares held byTelefónicaand itsentities willbeapproximately 7.2% of our outstanding
shares.Closing of the
transaction is subject to a number of conditions including PRC government
approval.
  Competition
  We compete with other telecommunications
providers in virtuallyall
aspects of our business, including our fixed-line telephone services, broadband
and other Internet-related services, business and data communications services
and information communication technology services. All of our principal
competitors in Chinaare telecommunications carriers wholly
or majority-owned by the PRC government, including three fixed-line service
providers and two licensed mobile service providers. In February 2007, our
controlling shareholder, China Netcom Group, entered into a one-year agreement with China
Telecommunications Corporation, the controlling shareholder of China Telecom,
whereby China Netcom Group agreed not to acquire new customers outside our
service region and China Telecommunications Corporation agreed not to acquirenew customers in our service region.
Although the agreement with China Telecommunications Corporation was not
renewed, we believe the competition has become more orderly.
  Fixed-line telephone
services
  In our service region, we are the
dominant provider of fixed-line telephone services, including
local telephone services, domestic and international long distance services and
value-added services. We currently compete with China Telecom, China Unicom and
China Railcom, each of which has been licensed to provide fixed-line telephone services in our
service region. In the markets for domestic and international long distance
telephone services, we face stronger competition from lower-priced VoIP services
provided by China Telecom, China Unicom, China Railcom andChina Mobile. Mobile service substitution
for our fixed-line telephone services has also created considerable competition
for our local and long-distance telephone services. Currently, China Mobile and
China Unicom are the only licensed providers of mobilecommunications services in China and, in
recent years, some of the traffic from our fixed-line networks has been diverted
to these two companies. Our PHS services provide an alternative for many of our
existing and potential customers who would otherwisechoose mobile services instead of
fixed-line services.
  Internet-related access services;
business and data communications services
  For Internet-related access services and
business and data communications services, we compete with China Telecom, China
Unicom, China Railcom and
other Internet service providers on the basis of pricing, coverage and quality
of networks, ability to provide end-to-end connectivity, quality of network
management and customer service.
  Information and communications
technology services
  Our major competitors for information
and communications technology services are other telecommunication operators
such as China Telecom, and system integration service providers such as Digital
China Holdings Limited and Taiji Computer Corporation Limited.
  REGULATION
  Overview of Regulation of the
Telecommunications Industry in China
  The telecommunications industry in China
is subject to extensive government regulation. Under the State Council, a number
of central government authorities have regulatoryresponsibilities for various aspects of
the telecommunications industry. These authorities primarily
include:
  ·
              The MIIis responsible for, among other
      things:
  33
  o
              formulating and enforcing
      telecommunications industry policies and regulations as well as
      technical
      standards;
  o
              granting telecommunications
      service licenses;
  o
              supervising the operations and
      quality of service of telecommunications
  operators;
  o
              allocating and administering
      telecommunications resources, such as spectrum and
      numbers;
  o
              together with other relevant government
      regulatory authorities,  formulating tariff
      standards;
  o
              formulating interconnection and
      settlement policies between telecommunications networks;
      and
  o
              maintaining fair and orderly
      market competition among
operators;
  ·
              Provincial telecommunications administrations
      under the MII, which oversee the implementation of the MII’s regulations and exercise
      regulatory authority delegated by the MII within their respective
      provinces, autonomous regions and municipalities;
    and
  ·
              The National Development and Reform Commission, or
      the NDRC, which, together with the MII, sets government fixed tariffs and
      government guidance tariffs for certain telecommunications services. See
      “-- Tariff
      Setting”below. It
      also approves investment projects within the restricted sectors specified in the
      annually adjusted catalogue released by the State
      Council.
  The PRC government is in the process of
drafting a telecommunications law. We expect that, if and when the
telecommunications law is adopted by the National People’s Congress or its standing committee, it
will become the basic telecommunications statute and provide a regulatory
framework for the telecommunications industry in China.
  Telecommunications
Regulations
  The Telecommunications Regulations,
effective as of September
25, 2000, were promulgated by the State Council, and provide the primary
regulatory framework for China’s telecommunications industry in the
interim period prior to the finalization and adoption of the telecommunications
law. The stated goals ofthe Telecommunications Regulations are to
develop a transparent and fair regulatory environment to encourage fair and
orderly competition and the development in the telecommunications industry. The
key aspects which the Telecommunications Regulations address include entry into the
telecommunications industry, network interconnection, telecommunications
resource allocation, tariffs and service standards.
  Licensing
  The Telecommunications Regulations
distinguish between basic and value-added telecommunicationsservices, which are subject to different
licensing requirements. According to the adjusted Catalog of Telecommunications
Services, as promulgated by the MII and effective as ofMarch 7, 2006:
  ·
              basic telecommunications services
      include, among other things, fixed-line local and domestic long
      distance telephone services, international telecommunications services, IP
      telephone services, mobile communications services (such as 900/1800MHz
      GSM, 800MHz CDMA and 3G mobile communications services), satellite
      communications services, paging services,
      data communications services (such as Internet data transmission services,
      international data communications services, and wireless data communications
      services), network
      access services(including wireless network accessservice and CPNservice),the domestic and international
      telecommunications facility services;
and
  34
  ·
              value-added telecommunications
      services include, among other things, IP-VPN services, call center, voice
      mail and video conferencing call services, Internetdata center and Internet access
      services, electronic data interchange services and information
      services.
  Under the Telecommunications
Regulations, all telecommunications operators in China must obtain a
telecommunications service operating license from theMII or from the provincial
telecommunications administrations. Providers of value-added services within a
single province are required to obtain licenses from provincial
telecommunications administrations. Providers of basic telecommunications
services and providers of value-added services in
two or more provinces, autonomous regions and municipalities are required to
obtain licenses from the MII. TD-SCDMA technology is one of the three
technologies adopted by the International Telecommunications Union
andunder review by the PRC government for
use in providing 3G mobile telephone services. The MII is currently conducting
tests on TD-SCDMA related products. The PRC government has not publicly
announced its decisions on issues such as the timing of the grantof the 3G licenses, the number of 3G
licenses to be granted, any technical requirements, or any selection of
preferred technologies. In accordance with the approval of the MII, CNC China,
our principal operating subsidiary in China, as an indirect subsidiary of China Netcom Group, has the right
to operate our telecommunications business in ten provinces and municipalities
under the authorization of China Netcom Group, which holds the license required
for operating our telecommunications businesses in China.
  Tariff Setting
  Overview
  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 administrations
and price bureaus. Under the Telecommunications Regulations,
telecommunications tariffs are categorized into government-fixed tariffs,
government guidance tariffs and market-based tariffs.
  The monthly fee and usage fee for local
telephone service are regulated as fixed tariffs, which are fixed jointly by the MII and the NDRC. The
MII regulates the maximum tariffs for traditional domestic long distance
services, traditional international long distance services to Hong Kong, Macau
and Taiwan. Leased line and data services (other than ATM service) are charged at government-guidance
tariffs, which are determined jointly by the MII and the NDRC. We derive a
substantial portion of our revenues from services that are subject to government
guidance tariffs and government-fixed tariffs.
  The Notice on Implementation of Market-Based Tariffs for
Certain Telecommunications Services, promulgated jointly by the MII and the NDRC
in 2002, specifies the telecommunications businesses to which market-based
tariffs are applicable, including VoIP, Internet access services, and certain value-added services
provided over fixed-line telephone networks, such as telephone information,
caller identification and voice mail. Market-based tariffs shall be applicable
to those telecommunications services for which effective competition exists in the market. The
tariffs of such telecommunications services are determined at the sole
discretion of the operators, and will be implemented after filing with the MII
or provincial telecommunications administrations, as applicable. Thereis uncertainty regarding how the MII
determines the existence of effective competition, as the MII has not publicly
disclosed the criteria it uses for determining whether a certain type of service
should be subject to market-based tariffs. Under the Telecommunications Regulations, cost is the
primary basis for tariff setting, but the tariff levels also take into account
social and economic development, the development of the telecommunications
industry and the purchasing power of the customers. The MII hasnot provided a timetable for tariff
deregulation or indicated that operators will eventually be permitted to freely
set all tariffs. We expect that increased flexibility in setting certain tariffs
will allow us to better respond to changes in market demandand competitive
conditions.
  In December 2000, the PRC government
issued a notice of tariff adjustments. The tariff adjustments changed the tariff
levels for various telecommunications services, including local and long
distance telephone, data and leased line services. In general, these
adjustments have stimulated the overall usage of our telecommunications
services. In July 2001, the government eliminated the upfront connection fee for
fixed-line telephone services. For a discussion of the impact of
theseadjustments on our financial condition
and results of operations, see “Item 5. Operating and Financial Review
and Prospects.”
  35
  The PRC government retains the ultimate
authority to adopt changes to tariffs. However, the Telecommunications
Regulations requirethe
government to hold public hearings before setting or changing a fixed or
guidance tariff, which should be attended by, among others, telecommunications
operators and consumers. In 2002, the MII indicated in writing that it did not
intend to initiateany adjustment to tariffs for fixed-line
local telephone services during the three to five years commencing in September
2002. Our average realized tariffs may vary from levels set forth below. See
“Item 3. Key
Information--Risk Factors -- Risks Relating tothe PRC Telecommunications Industry --
New regulations, regulatory changes or changes in enforcement policies relating
to telecommunications tariffs may adversely affect our competitiveness, business
and profitability.”
  Tariffs
  The following tables set forth the tariff rates of certain services
provided by us, where government fixed tariffs or government guidance tariffs
are applicable.
   Local telephone
services
  For our local telephone services, we
charge a registration fee for initial installation that varies depending on whether the subscriber
is a residential or a business customer, a fixed monthly fee, local call usage
fees based on call duration and fees for certain value-added services. The
following table sets forth our current tariffs for local telephone services provided on our
traditional and PHS network:
  Tariff (in
    RMB)Monthly
fee:Residential
      subscribers in:Provincial
      capitals
              20.00 to
    25.00Other cities and
      counties
              12.00 to
    18.00Rural areas
              10.00 to
    15.00Business subscribers
              25.00 to
    35.00Usage
      fee:Intra-district
              0.18 to 0.22 for the first two
      pulses (first three minutes or less) and 0.09 to 0.11 for each additional
      pulse (one minute intervals)Inter-district
              up to 0.30 per pulse (one minute
      intervals)(1)Communication
      fee:Internet
      dial-up
              0.02 per pulse (one minute
      intervals)
 
 (1).       
 Prior to January 1, 2008, inter-district usage fee was up to 0.40 per
pulse (one minute intervals).
   Domestic long distance
services
  Our revenues from domestic
longdistance services
consist of charges based on the duration, time of day and day of the week a call
is placed. The following table sets forth the current tariffs for our domestic
long distance telephone services using our traditional
network:
  Tariff (inRMB)Domestic long distance services on
      our traditional Network
              0.07 per six seconds(1)
 
 (1)
              Subject to filing with the
      provincial telecommunications administrations, our provincial level
      headquarters may apply a 10% to 50% discount rate to calls made during off-peak
      hours.
  36
  International long distance
services
  The MII regulates the maximum tariffs
that we may charge for international long distance services. The following table
sets forth our current international long distance tariffs:
  Tariff (in RMB)International long distance
      services on our traditional network(1):To Hong Kong, Macau and
      Taiwan
              0.20 per six
      secondsTo all international
      destinations
              0.80 per six
      seconds
 
 (1)
              Subject to filing with the
      provincial telecommunicationsadministrations, our provincial
      level headquarters may apply a 10% to 50% discount rate to calls made
      during off-peak hours.
  Managed data
services
  The PRC government publishes guidance
tariffs for certain managed data services, including DDN and frame
relay services, provided by
operators in China. Interim tariffs for our ATM services are determined at our
discretion, subject to approval by the MII. An initial fee is generally charged
for installation and testing for our data services, as well as a fixed
monthly fee for each of the
services.
  DDN services
  The following table sets forth the
monthly fees for DDN services at the bandwidths of 64kbps, 128kbps, 512kbps and
1Mbps:
  Monthly Fee64kbps
              
              
              128kbps
              
              
              512kbps
              
              
              1Mbps(RMB)Intra-district
              
              
              1,500
              
              
              
              2,000
              
              
              
              3,800
              
              
              
              5,000Inter-district
              
              
              2,000
              
              
              
              2,500
              
              
              
              5,200
              
              
              
              7,500Domestic long
      distance
              
              
              3,500
              
              
              
              5,000
              
              
              
              7,000
              
              
              
              9,000
  Frame relay
services
  The following tables
set forth the monthly fees for frame relay services, which include monthly fees
for port access and permanent virtual circuits, or PVCs(1):
  Monthly Fee64kbps
              
              
              256kbps
              
              
              512kbps
              
              
              1Mbps(RMB)Port AccessMonthly
      fees
              
              
              260
              
              
              
              400
              
              
              
              500
              
              
              
              750PVCIntra-district
              
              
              550
              
              
              
              800
              
              
              
              1,000
              
              
              
              1,250Inter-district
              
              
              800
              
              
              
              1,150
              
              
              
              1,450
              
              
              
              2,000Domestic long
      distance
              
              
              1,700
              
              
              
              2,200
              
              
              
              2,500
              
              
              
              3000
 (1)   One-way tariff for
PVCs frame relay services.
  Leased line services
  We charge monthly fees for subscribers
to our leased line services based on guidance tariffs set by the PRC government,
which vary based on bandwidth and whether the leased line is local or long distance. Leased
line tariffs have generally decreased in recent years.
  37
  The following table sets forth the
tariffs for 2Mbps, 8Mbps, 34Mbps and 155Mbps digital
circuits:
  Monthly Fee2Mbps
              
              
              8Mbps
              
              
              34Mbps
              
              
              155Mbps(RMB)Intra-district
              
              
              2,000
              
              
              
              6,000
              
              
              
              16,000
              
              
              
              44,000Inter-district
              
              
              4,000
              
              
              
              11,000
              
              
              
              31,000
              
              
              
              88,000Domestic long distance(1)
              
              
              6,000
              
              
              
              17,000
              
              
              
              47,000
              
              
              
              132,000
  (1)
              Does not include the tariffs for
      local digital circuits and access
lines.
  Interconnection
  According to the
Telecommunications
Regulations and the Administrative Rules on Interconnection between the
inter-public telecom network, as promulgated by the MII in May 2001, major
telecommunications operators in China may not refuse a request from another
operator to interconnect with its network. Upon such a request, the
relevant operator shall enter into an interconnection agreement with the other
operator, and file such agreement with the MII. In addition, the interconnected
networks and services based on the agreement can not beterminated unilaterally without an
approval from the MII.
  The Telecommunications Regulations
further provides that the MII shall establish rules relating to technical
standards and settlement procedures of interconnection. Accordingly, the MII
promulgated the Measures on
Settlement of Usage Fees between Telecommunications Networks in March 2001,
which specify the methods for revenue sharing and settlement between
telecommunications operators. China Netcom Group has entered into agreements on
interconnectionwith other telecommunications operators,
including China Telecom, China Mobile, China Unicom, China Railcom and China
Satcom.
  In December 2003, the MII revised the
rules on interconnection technical standards and settlement procedures for
public telecommunications
networks by promulgating the Measures on Settlement of Interconnection between
Public Telecommunications Networks and Sharing of Relaying Fees.In October 2005, the MII issued the
Notice on Adjustment to Settlement for Interconnection Fees of fixed-lineLocal Telephone Networks, which provides
for a new settlement arrangement standards for fixed-line local telephone
operators. In January 2007, the MII issued a second notice, which provides for a
further adjustment of the settlement standards for fixed-line local telephone operators. The
following table sets forth selected interconnection revenue sharing and
settlement arrangements for local calls:
  Operator from whose Network Calls
      are Originated
              
              Operator at whose Network Calls
      are Terminated
              
              CurrentMain Settlement
      ArrangementMobile
operator
              
              Local fixed-line
      operator
              
              (1) Mobile operator collects the
      usage fees from its subscribers.
                  (2) Mobile operator pays RMB 0.06
      per minute to local fixed-line operator.Local fixed-line
      operator
              
              Mobileoperator
              
              No revenue sharing or
      settlement.Local fixed-line operator
      A
              
              Local fixed-line operator
      B
              
              (1) Operator A collects the usage
      fees from its subscribers.
                (2) In the case of Intra-district
      calls, operator A pays operator B 50% of the intra-district usage
      fees.
                (3)(i)In the case of local
      inter-district calls from operator A using operator B’s local inter-district trunk
      circuit, operator A collects the usage charge from its subscribers and pay
      RMB0.15 per minute to operator
B.
  38
 (ii)In the case of local inter-district
      calls from operator Anotusing operator B’s local inter-district trunk
      circuit, operator A collects the usage charge from its subscribers andpaysoperator B 50% of the
      intra-district usage
fees.
  The following table sets forth selected current major main
interconnection revenue sharing and settlement arrangements for domestic long
distance calls:
  Operator at whose Network Calls
      are Originated
              
              Operator at whose Network Calls
      are Terminated
              
              Settlement
      ArrangementLocalfixed-line or mobile operator
      A
              
              Local fixed-line or mobile
      operator B, through the long distance network of operator
      C
              
              RMB 0.06 per minute to operator A,
      RMB 0.06 per minute to operator B, the balance for operator
      C.
 
  The following table sets forth
selected current main
interconnection revenue sharing and settlement arrangements for public switched
telephone network international long distance calls, including calls originated
from and terminated in Hong Kong, Macau and Taiwan:
  Operator at whose Network
      Calls are
      Originated
              
              Operator at whose Network Calls
      are Terminated
              
              Settlement
      ArrangementLocal fixed-line or mobile
      operator A
              
              Without
      using the carrier identity code of operator B, through the domestic and
      international long distance network of operator B
              
              (1)
      Operator A collects the tariff from the subscribers;
                (2)
      If operator A is a mobile operator, operator A retains RMB0.06 per
      minute;
                (3)
      Operator B receives the rest of the international long distance
      tariff.Using
      the carrier identity code of operator B, through the domestic and
      international long distance network of operator B
              
              (1)
      Operator B collects the tariff from the subscribers;
                (2)
      Operator B pays operator A RMB0.06 per minute, and operator B gets the
      rest of the international long distance tariff.Local
      fixed-line or mobile operator A
              
              Without
      using the carrier identity code of operator, through domestic long
      distance network of operator A and international gateway of domestic
      operator B to international end users.
              
              (1)
      If operator A is a fixed-line operator, operator A retains a maximum
      amount of RMB0.54 per minute, and operator B receives the rest of the
      international long distance tariff;
                (2)
      If operator A is a mobile operator, operator A retains local call tariff
      and RMB0.54 per minute.
 The following table sets forth selected
current main interconnection revenue sharing and settlement arrangements for
VoIP long distance calls:
  Operator from whose Network Calls
      are Originated
              
              Operator at whose Network Calls
      are Terminated
              
              Settlement ArrangementFixed-line or mobile operator
      A
              
              Fixed-line or mobile operator
      B
              
              (1) Operator C collects the
      VoIP
 
 39
 Fixed-line or mobile operator
      A
                
                through the VoIP network of
      operator C
                
                long distance usage fees from its
      subscribers.
                  (2) Operator C pays RMB 0.06 per
      minute to operator B on theterminating
      end.
                  (3) No settlement between operator
      C and operator A on the originating end.
                  (4) Operator A collects local
      usage fees.
 Technical Standards
  The MII sets industry technical
standards for telecommunications terminal and interconnection-related equipment used in the public
telecommunications networks. A network access license from the MII and other
relevant regulatory authorities is required for all such equipment. Most of the
standards set by the MII conform to standards recommended by the International Telecommunications Union
and other international telecommunications standards
organizations.
  Capital Investment
  Prior to July 16, 2004, the State
Council authorized the NDRC to approve any plan to construct a nationwide
telecommunications network
or any network construction plan involving a capital investment that totals from
RMB 50 million to RMB 200 million. The State Council also authorized the MII to
approve certain aspects of such investment projects. Any investment project with
totalcapital investment in excess of RMB 200
million was required to obtain approval from the State
Council.
  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
unlessthe 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 NDRC’s approval 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.
  Accessing International Capital
Markets
  Prior to accessing the international
capital markets, we may be required to obtain approval from various government
authorities depending on the type of international financing we intend to seek.
For example, documents relating toour future public offerings of new
shares must be filed with the China Securities Regulatory Commission, or the
CSRC. If such offerings involve certain new acquisitions of assets or exchanges
of equity interest within China, the CSRC’s prior approval willbe required. In addition, China Netcom
Group and our other state-owned
  40
  shareholders are required to obtain
approval from relevant PRC government authorities prior to their participation
in any future share offering by our company confirming their
respective sales of shares and related
contributions to the PRC national social security fund, as required by PRC law.
Furthermore, any use of the proceeds that we receive from international capital
markets by CNC China, either as a shareholder loan or as a capitalcontribution, will be subject to
registration or approval requirements under PRC law.
  Telecommunications
Resources
  The MII is responsible for the
administration and allocation of telecommunications resources in China,
including spectrum frequencies and telecommunications network numbers. The
use of these resources by telecommunications operators is subject to the
approval of the MII or the relevant provincial telecommunications
administrations or provincial radio administrations and the payment of a
telecommunications resources usage fee. The
provincial radio administrations have allocated the 1900-1915 MHz frequency
spectrum to us for PHS services, and we have the exclusive rights to use that
frequency spectrum in our service region. On January 1, 2005, the MII issued a regulation imposing fees
for the use of telephone numbers. Under the regulation, starting from April 1,
2005, all telecommunications operators, including us, are required to pay RMB
0.01 per telephone number per month.
  Quality of Service
  Under the Telecommunications Regulations,
the MII and the relevant provincial telecommunications administrations are
responsible for supervising and monitoring the quality of services provided by
telecommunications operators in China. Under the Telecommunications Regulations, customers of
telecommunications operators have the right to submit their complaints to the
MII and the relevant provincial telecommunications administrations or other
relevant government authorities.
  Universal Services
Obligations
  Under the Telecommunications Regulations,
telecommunications operators 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 thescope of universal service obligations.
The MII, together with governmental finance and pricing authorities, is also
responsible for formulating administrative rules relating to the establishment
of a universal service fund and compensation schemes for universal services. These rules have not yet
been promulgated, and there are currently no specific regulatory requirements
relating to the provision of universal services in China.
  While the scope of specific universal
services obligations is not yet clear, webelieve that such services may include
mandatory provision of basic telecommunications services in economically less
developed areas in China. The MII requires China Telecom, China Netcom Group,
China Mobile, China Unicom, China Railcom and China Satcomto participate in a project to provide
telephone services in a number of remote villages in China as transitional
measures prior to the formalization of a universal service obligation framework.
In order to fulfill such obligations under those transitionalmeasures, China Netcom Group has agreed
with us that it will assume the responsibility for investing in and constructing
the necessary network facilities. If we operate and maintain such network
facilities in our service region, China Netcom Group has agreed to compensate us for the related
expenses based on fair market value.
  41
  ORGANIZATIONAL
STRUCTURE
  Our Shareholding
Structure
  Sale of Southern Service Region
Business
  On February 28, 2007, we sold our
telecommunications assets, liabilities and business operations in our southern service region
to China Netcom Group for a cash consideration of RMB 3,500
million.
  PurchaseofDesignInstitute
  On December31, 2007,we purchased Design Institute
fromChina Netcom Group for
a total consideration of RMB298,915,300.
  Strategic Alliance with
Telefónica
  On January 18, 2008, we were informed by
the beneficiary ownersof
our148,015,436 shares
which were held in trust with China Netcom Group (BVI) Limited, our direct
shareholder, that they have entered into a share purchase agreement withTelefónicato transfer the their shares toTelefónicaor its related entities.Upon the completion of this transaction,
the shares held byTelefónicaand itsentities willbeapproximately 7.2% of our outstanding
shares.Closing of thetransaction is subject to a
number of conditions including PRC government approval.
  The following chart sets forth our main
operational and shareholding structure asof April 30, 2008.
  42
 
 
       43
  (1)
              China Netcom Group is a
      state-owned enterprise. China Netcom Group owns certain telecommunications
      companies outside our service region. None of these companies have any
      ownership interest in us, nor do we have any ownership interest in
      them.
 (2)
              The principal business is
      provision of telecommunications
services.
 (3)
              The principal business is
      investment holding.
 (4)
              All of the ordinary shares owned
      by our five PRC shareholders are registered in the name of China Netcom
      Group Corporation
      (BVI) Limited, or CNC BVI, which holds such ordinary shares in trust for
      each of the five PRC shareholders. Consequently, the ownership percentages
      of our five PRC shareholders in the chart above reflect the aggregate
      beneficial interests ofthese shareholders as held
      through CNC BVI. The ownership of CNC BVI as indicated in the table above
      reflects CNC BVI’s own beneficial
      ownership.
 (5)
              Indicates jurisdiction of
      incorporation.
 (6)
              Previously wholly-owned
      subsidiaries of Asia NetcomCorporation Limited. The ownership of each of these
      entities was transferred to China Netcom Corporation International Limited
      as of March 15, 2006.
 (7)
              Incorporated in the United Kingdom
      on November 8, 2006.
 (8)
              Incorporated in Japan on January
      25, 2007.
 (9)
              Incorporated in the PRC in March,
      2006.
 (10)
              Incorporated in the PRC in April,
      2006.
 (11)
              Incorporated in the PRC in April,
      2008.
 
 PROPERTY, PLANT AND
EQUIPMENT
  Our principal executive offices are
located in Beijing. We also maintain an executive officein Hong Kong. We own, lease or have
usage rights in various properties, which consist of offices, administrative
centers, staff quarters, retail outlets and technical facilities. We have
certain properties transferred to us by China Netcom Group which donot have vested proper legal titles, and
we have certain properties the titles for which have not been transferred to us.
We believe it is unlikely that we would be denied our right to use a large
number of these properties with title defects at any giventime. China Netcom Group agreed to
indemnify us against any loss or damage suffered or incurred by us, caused by or
arising from any challenge to or interference with our title to and/or right to
use properties transferred to us in respect of which we havenot obtained long-term title
certificates or those properties rented by us from China Netcom Group where
there are title defects.
  ITEM
      4A.
                UNRESOLVED STAFF
      COMMENTS
 None.
  ITEM
      5.
              OPERATING AND FINANCIAL REVIEW AND
      PROSPECTS
  The following discussion and analysisshould be read in
conjunction with our consolidated financial statements and selected consolidated
financial data, in each case together with the accompanying notes, all included
elsewhere in this annual report.
  OVERVIEW
  We are a leading broadband
communications and
fixed-line telecommunications operator in China and a dominant provider of
fixed-line telephone services, broadband and other Internet-related services, as
well as business and data communications services in our service
region.
  In 2007, we continued to face increasing mobile
substitution and as a result experienced increasing migrationof fixed-linevoice traffic, particularly local
fixed-line voice traffic,to mobileservices. As part
of our strategy to mitigate the effect of mobile substitution on our fixed-line telephone
services, we have increased our efforts to diversify into broadband and other
Internet-related services, information and communications services as well as
value added services as part of our fixed-line services. We also began offeringadvertising and mediaservices in 2007.
  44
  FACTORS AFFECTING OUR RECENT RESULTS OF
OPERATIONS
  Sale of Southern Service Region Business
and Acquisition of Design Institute
  On February 28, 2007, we sold our assets
and liabilities in relation to ourtelecommunications operations in our
southern service region. In accordance with HKFRS 5 “Non-current assets held for sale and
discontinued operations”issued by the HKICPA, we have presented the results of operations and cash flow
from operations of oursouthern service region as discontinued
operations.Our income statement and statement of
cash flow for2005
and2006 have been
restatedaccordingly.
  On December 31, 2007, we acquired the
entire equity interest of Design Institute from China Netcom GroupBeijing Communications Corporation, a
wholly owned subsidiary of China Netcom Group. Since China Netcom Group is the
ultimate holding company of us, this acquisition is a business combination under
common control. Weaccounted for this acquisition using amethod similar to the pooling of
interest method according to Accounting Guideline No. 5 - Merger Accounting for
Common Control Transactions(“AG 5”). The acquired businesses and assets are
recorded at book value under HKFRS as if the businesses and assetsof Design Institute have been owned by
us since the beginning of the period presented.Accordingly, our financial statements
for 2005 and 2006 have been restated to include the financial results of Design
Institute as if the acquisition had occurred as ofJanuary 1, 2005.
  The following tablesset forth the financial impact of the
sale of our southern service region business and acquisition of the Design
Institute as of and for the year ended December 31,2005 and2006.
  
  Year ended December 31,
      2005Originally
      stated
              
              
              Disposal ofour southern
      service region
              
              
              Acquisition of Beijing Telecom
      P&D Institute
              
              
              Elimination of intercompany
      transactions
              
              
              RestatedRMB million
              
              
              RMB million
              
              
              RMB million
              
              
              RMB million
              
              
              RMB millionContinuing
      operations:Revenues
              
              
              85,861
              
              
              
              (2,120
              )
              
              
              186
              
              
              
              3⁄4
              
              
              
              83,927Profit for the year from
      continuing operation
              
              
              14,114
              
              
              
              174
              
              
              
              62
              
              
              
              3⁄4
              
              
              
              14,350Discontinued
      operations:Profit/(loss) from discontinued
      operations
              
              
              (226
              )
              
              
              (174
              )
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              (400
              )Profit for the
      year
              
              
              13,888
              
              
              
              3⁄4
              
              
              
              62
              
              
              
              3⁄4
              
              
              
              13,950Net cashinflow from operating
      activities
              
              
              33,557
              
              
              
              3⁄4
              
              
              
              (22
              )
              
              
              3⁄4
              
              
              
              33,535Net cash outflow from investing
      activities
              
              
              (24,608
              )
              
              
              3⁄4
              
              
              
              31
              
              
              
              3⁄4
              
              
              
              (24,577
              )Net cash outflow from financing
      activities
              
              
              (14,656
              )
              
              
              3⁄4
              
              
              
              18
              
              
              
              3⁄4
              
              
              
              (14,638
              )Total current assets at December
      31, 2005
              
              
              14,499
              
              
              
              3⁄4
              
              
              
              176
              
              
              
              3⁄4
              
              
              
              14,675Total assets at December 31,
      2005
              
              
              202,840
              
              
              
              3⁄4
              
              
              
              282
              
              
              
              3⁄4
              
              
              
              203,122Total current liabilities at
      December 31, 2005
              
              
              98,399
              
              
              
              3⁄4
              
              
              
              5
              
              
              
              3⁄4
              
              
              
              98,404Total liabilities at December 31,
      2005
              
              
              139,830
              
              
              
              3⁄4
              
              
              
              5
              
              
              
              3⁄4
              
              
              
              139,835Shareholders’equity at December 31,
      2005
              
              
              63,010
              
              
              
              3⁄4
              
              
              
              277
              
              
              
              3⁄4
              
              
              
              63,287
 
 45
  Year ended December 31,
      2006Originally
      stated
              
              
              Disposal ofour southern
      service region
              
              
              Acquisition of Beijing Telecom
      P&D Institute
              
              
              Elimination of intercompany
      transactions
              
              
              RestatedRMB million
              
              
              RMB million
              
              
              RMB million
              
              
              RMB million
              
              
              RMB millionContinuing
      operations:Revenues
              
              
              86,921
              
              
              
              (3,222
              )
              
              
              165
              
              
              
              330
              
              
              
              84,194Profit for the year from
      continuing operation
              
              
              11,141
              
              
              
              332
              
              
              
              27
              
              
              
              (22
              )
              
              
              11,478Discontinued
      operations:Profit/(loss) from discontinued
      operations
              
              
              1,819
              
              
              
              (332
              )
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              1,487Profit for the
      year
              
              
              12,960
              
              
              
              3⁄4
              
              
              
              27
              
              
              
              (22
              )
              
              
              12,965Net cash inflow from operating
      activities
              
              
              34,133
              
              
              
              3⁄4
              
              
              
              20
              
              
              
              (18
              )
              
              
              34,135Net cash outflow from investing
      activities
              
              
              (24,991
              )
              
              
              3⁄4
              
              
              
              (2
              )
              
              
              21
              
              
              
              (24,972
              )Net cash outflow from financing
      activities
              
              
              (6,447
              )
              
              
              3⁄4
              
              
              
              (30
              )
              
              
              3⁄4
              
              
              
              (6,477
              )Totalcurrent assets at December 31,
      2006
              
              
              18,059
              
              
              
              3⁄4
              
              
              
              218
              
              
              
              (51
              )
              
              
              18,226Total assets at December 31,
      2006
              
              
              203,835
              
              
              
              3⁄4
              
              
              
              318
              
              
              
              (71
              )
              
              
              204,082Total current liabilities at
      December 31, 2006
              
              
              90,802
              
              
              
              3⁄4
              
              
              
              80
              
              
              
              (49
              )
              
              
              90,833Total liabilities at December 31,
      2006
              
              
              129,857
              
              
              
              3⁄4
              
              
              
              80
              
              
              
              (49
              )
              
              
              129,888Shareholders’equity at December 31,
      2006
              
              
              73,978
              
              
              
              3⁄4
              
              
              
              238
              
              
              
              (22
              )
              
              
              74,194
 Sale of Asia Netcom
  On
August 22, 2006, we sold our 100% equity interest in Asia Netcom to Connect
Holdings Limited for US$168.84 million. The results of operations and cash flows
of Asia Netcom for the 2005 and 2006 have been classified as discontinued
operations.
  Our 2005 Acquisition
  On October 31, 2005, we acquired from
China Netcom Group the fixed-line telecommunications assets and related
liabilities in Heilongjiang Province, Jilin Province, the Neimenggu
Autonomous Region and Shanxi Province. Since we and the 2005 Acquired Assets and
Liabilities were under the common control of China Netcom Group, our 2005
Acquisition has been treated as a “combination of entities
undercommon control”which was accounted for in a manner
similar to pooling-of-interests. Accordingly, the 2005 Acquired Assets and
Liabilities have beenrecorded at book value under HKFRS as if
the businesses and assets have been owned by us as of January 1, 2005.
  Revaluation of our fixed assets
  According to ouraccounting policies, each class of our fixed assets other
than buildingswere last
revaluedat December 31,
2006 by the PRC valuer on a depreciated replacement cost basis. The value of
such fixed assets was
determined at RMB147,573million. The net deficit arising on the
revaluation(includingthe impact of theSouthern Service Region
Businessand presented as
discontinued operations)was RMB453 million, the net deficit was split between a credit to the revaluation reserve amounting to
RMB1,071 million and an expense to theincome statementof RMB1,524 million for thatyear.
  RESULTS OF
OPERATIONS
  The table below sets forth a breakdown
of the revenues of our services and total operating expenses in terms of amount and as a percentage of our
total revenues, as well as net cash flow, for the periods
indicated.
  Unless otherwise specified, the
following analysis is made on the basis of continuing
operations.
  46
  For the
      Years Ended December 31,2005
              
              2006
              
              2007Amount
              
              Percentage of
      Revenues
              
              Amount
              
              Percentage of
      Revenues
              
              Amount
              
              Percentage of
      Revenues(Restated)
              
              (Restated)(millions of RMB, except
      percentage data)CONTINUING
      OPERATIONSRevenues:Fixed-line telephone
      services(1):Local:Local usage
      fees
              24,440
              
              29.1%
              
              22,059
              
              26.2%
              
              19,989
              
              23.8%Monthly
fees
              18,170
              
              21.7%
              
              16,546
              
              19.6%
              
              12,387
              
              14.8%Upfront installation
      fees
              1,433
              
              1.7%
              
              1,364
              
              1.6%
              
              1,283
              
              1.5%Subtotal
              44,043
              
              52.5%
              
              39,969
              
              47.4%
              
              33,659
              
              40.1%Domestic long distance(2)
              9,773
              
              11.7%
              
              9,495
              
              11.3%
              
              8,769
              
              10.4%International long
      distance(2)(3)
              874
              
              1.0%
              
              819
              
              1.0%
              
              791
              
              0.9%Value-added
      services
              3,970
              
              4.7%
              
              5,341
              
              6.3%
              
              6,114
              
              7.3%Interconnection
      fees
              7,664
              
              9.1%
              
              8,432
              
              10.0%
              
              8,376
              
              10.0%Upfront connection
      fees(4)
              3,405
              
              4.1%
              
              2,406
              
              2.9%
              
              1,517
              
              1.8%Subtotal
              69,729
              
              83.1%
              
              66,462
              
              78.9%
              
              59,226
              
              70.5%Broadband
      services
              7,289
              
              8.7%
              
              9,916
              
              11.8%
              
              13,835
              
              16.5%Other Internet-related
      services
              556
              
              0.7%
              
              516
              
              0.6%
              
              532
              
              0.6%Managed data
      services
              1,621
              
              1.9%
              
              1,413
              
              1.7%
              
              1,284
              
              1.5%Leased line income
              2,376
              
              2.8%
              
              2,540
              
              3.0%
              
              2,521
              
              3.0%ICT
services
              186
              
              0.2%
              
              855
              
              1.0%
              
              3,990
              
              4.8%Other
    services
              2,170
              
              2.6%
              
              2,492
              
              3.0%
              
              2,617
              
              3.1%Total
              83,927
              
              100.0%
              
              84,194
              
              100.0%
              
              84,005
              
              100.0%Operating
      Expenses:Depreciation and
      amortization
              (24,328)
              
              (29.0%)
              
              (24,913)
              
              (29.6%)
              
              (25,495)
              
              (30.3%)Network, operations and
      support
              (12,610)
              
              (15.0%)
              
              (13,344)
              
              (15.8%)
              
              (14,145)
              
              (16.8%)Staff costs
              (11,830)
              
              (14.1%)
              
              (11,849)
              
              (14.1%)
              
              (12,223)
              
              (14.6%)Selling, general and
      administrative
              (12,726)
              
              (15.2%)
              
              (12,607)
              
              (15.0%)
              
              (10,615)
              
              (12.6%)Other operating
      expenses
              (1,374)
              
              (1.6%)
              
              (1,930)
              
              (2.3%)
              
              (4,261)
              
              (5.1%)Total
              (62,868)
              
              (74.9%)
              
              (64,643)
              
              (76.8%)
              
              (66,739)
              
              (79.4%)Other
income
              -
              
              0.0%
              
              621
              
              0.7%
              
              1,221
              
              1.4%Interest
    income
              134
              
              0.2%
              
              135
              
              0.2%
              
              113
              
              0.1%Dividend
    income
              29
              
              0.0%
              
              -
              
              0.0%
              
              -
              
              0.0%Deficit on revaluation of fixed
      assets
              -
              
              0.0%
              
              (1,335)
              
              (1.6%)
              
              -
              
              0.0%Profit from
      operations
              21,222
              
              25.3%
              
              18,972
              
              22.5%
              
              18,600
              
              22.1%Finance
    costs
              (3,346)
              
              (4.0%)
              
              (3,767)
              
              (4.4%)
              
              (3,333)
              
              (3.9%)Profit before
      taxation
              17,876
              
              21.3%
              
              15,205
              
              18.1%
              
              15,267
              
              18.2%Taxation
              (3,526)
              
              (4.2%)
              
              (3,727)
              
              (4.5%)
              
              (3,796)
              
              (4.5%)Profit for the year from
      continuing operations
              14,350
              
              17.1%
              
              11,478
              
              13.6%
              
              11,471
              
              13.7%DISCONTINUED
      OPERATIONSLoss/(profit) for the year from
      discontinued operations
              (400)
              
              (0.5%)
              
              1,487
              
              1.8%
              
              624
              
              0.7%
  47
  Profit for the
      year
              13,950
              
              16.6%
              
              12,965
              
              15.4%
              
              12,095
              
              14.4%CONTINUING
      OPERATIONSCash
      inflow from operating activities of
      continuing  operation
              32,191
              
              38.4%
              
              32,050
              
              38.1%
              
              32,459
              
              38.6%Cash
      outflow from investing activities of continuing operations
              (22,993)
              
              (27.4%)
              
              (24,051)
              
              (28.6%)
              
              (19,138)
              
              (22.8%)Cash outflow from financing
      activities of continuing operations
              (14,746)
              
              (17.6%)
              
              (6,477)
              
              (7.7%)
              
              (19,131)
              
              (22.8%)Cash
      flows from continuing operations
              (5,548)
              
              (6.6%)
              
              1,522
              
              1.8%
              
              (5,810)
              
              (7.0%)DISCONTINUED
      OPERATIONScash (outflow)/inflow from
      operating activities of discontinued operations
              1,344
              
              1.6%
              
              2,085
              
              2.5%
              
              388
              
              0.5%cash (outflow)/inflow from
      investing activities of discontinued operations
              (1,584)
              
              (1.9%)
              
              (921)
              
              (1.1%)
              
              3,103
              
              3.7%cash inflow from financing
      activities of discontinued operations
              108
              
              0.1%
              
              -
              
              0.0%
              
              -
              
              0.0%Cash
      flows from discontinued operations
              (132)
              
              (0.2%)
              
              1,164
              
              1.4%
              
              3,491
              
              4.2%Increase/(decrease) in cash and
      cash equivalents
              (5,680)
              
              (6.8%)
              
              2,686
              
              3.2%
              
              (2,319)
              
              (2.8%)
  (1)
              Includes revenues from our
      PHS services.
 (2)
              Includes revenues from our
      long distance VoIP services.
 (3)
              Includes revenues from calls
      to Hong Kong, Macau and
Taiwan.
 (4)
              Upfront connection fees for
      basic telephone
      access services were eliminated by the MII in July
      2001.
 
 Operating results for the year ended
December 31, 2007and the year ended December 31,
2006
  Revenues
  Our revenue consist of revenues from the
provision of telecommunications services, net ofbusiness tax and government levies.
Sources of our revenues primarily consistof revenues fromfixed-line telephone services,
broadbandservices, other Internet-related
services,managed data services, leased line services,ICT servicesand other service.
  Our revenue for 2007amounted to RMB84,005million,decreased from RMB 84,194 million for
2006,of which upfront
connection fees amounted to RMB1,517million. Excluding upfront connection
fees*, our revenue for 2007would amount to RMB 82,488 million,
representing a growth of RMB700million, or0.9%, from RMB81,788million in 2006. The growth primarily reflected
increases in revenues from broadband services, ICT servicesandvalue-added services,partially offset by thedecrease in revenues from fixed-line
telephone services.
  *Upfront connection fee represents the
amortization of deferred upfront connection fee received from the customers
before July 1, 2001. No upfront connection fee was received from the customers
since then. Therefore, we
consider that analyses of our operating results excluding upfront connection fee
is more relevant to the readers of this report.
  48
  Fixed-line
telephone services
  Local
telephone services
  Revenues from our local telephone
services (including PHS
services) comprise local usage fees, monthly fees and installation fees. These
fees generally vary based on the number of our fixed-line subscribers, average
realized tariffs and the usage volume of local calls (including those made to
connect toour dial-up Internet service). In
2007, revenues from our local telephone
services were RMB33,659million, representing a decrease of RMB6,310million, or15.8%, from RMB39,969million in 2006, and accounting for 40.1% of our total revenues in
2007,representing a decrease of 7.3 percentage
points from 2006. The decrease in revenues from local
telephone services reflected a combination of decreases in revenues from local
usage fees, monthly fees and upfront installation fees as a result of
increasinglyintensecompetition in the telecommunications
market and increasing mobile substitution.
  Local usage
fees. Usage fees for local
services include local usage fees charged for local telephone calls and VoIP
long distance calls, and communications fees for dial-up Internet access. In 2007, revenues
from our local usage fees were RMB19,989million, representing a decrease of RMB2,070million, or9.4%, from RMB22,059million in 2006. The decrease was primarily due to a
combination of (i) declining usage volume of local calls, which decreased by
11.92 billion pulses, or 6%, to 202.55 billion pulses in 2007from 214.47 billion in 2006; and (ii) a decrease in our average
realized tariff caused by changes in tariff policies and increased
competition.
  Monthly
fees. Monthly fees
represent the fixed amount of service charges to our customers for using our
fixed-line telephone services. In 2007, our revenues from monthly fees were
RMB12,387million, representing adecreaseof RMB4,159million, or25.1%, from RMB16,546million in 2006, primarily due tothe decrease in actual monthly fees
resulting from our promotion of special price packagesin response toincreasedmarket competition.
  Upfront installation
fees. Installation fees
represent the amortized amount of the upfront fees received for installation
of non-PHS fixed-line telephone services. These upfront installation fees are
deferred and recognized over the expected customer relationship period, which is
currently estimated to be ten years. Revenues from theupfront installation fees were RMB1,283million in 2007, representing a decrease of RMB81million, or5.9%, from RMB1,364million in 2006. The decrease was principally
attributable to upfront installation discount offered to new subscribers,
coupled witha decrease in
the number of new subscribers in 2007to7.15million from8.66million in 2006.
  Domestic
long distance services
  Revenues from our domestic long distance
services consist of usage fees for domestic long distance calls originated by
our fixed-line subscribers,
users of our prepaid phone cards and certain other customers. In 2007, our domestic long distance revenues
were RMB8,769million, representing a decrease of RMB726million, or7.6%, from RMB9,495million in 2006, primarily due to a decrease in the average realized
tariffresulting from
competition with other carriers.Revenues from our traditional domestic
long distance service totaled RMB6,613million, representing a decrease of RMB370million, or5.3%, from RMB6,983 million in 2006.Revenues from our VoIP long
distance service totaled RMB 2,156million, representing a decrease of RMB356million or14.2% from RMB2,512million in 2006.
  International
long distance services
  Revenues from our international long
distance services consist
of usage fees charged to our customers for their international long distance
calls originated in northern China, including those made to Hong Kong, Macau and
Taiwan. In 2007, this revenue was RMB791million, representing a decrease of RMB28million,or3.4%, from RMB819million in 2006. The revenue decrease was primarily
attributable to a decrease inour realized tariff,resulting from competition with other
carrierspartially offset
by an increase in usage volume to344million minutes in2007from324million minutes in 2006, or anincrease of20million minutes, or6.2%.
  49
  Value-added
services
  Revenues from our value-added services
consist of fees that we charge our customers for the provision of caller
identification, PHS short-messaging, personalized ring, telephone information
services, video- and tele-conferencing and other value-added services. Revenues
from our value-added services in 2007were RMB6,114million, representing an increase of
RMB773million, or14.5%, from RMB5,341million in2006. The increase was primarily
attributable to the rapid growth in the personalized ring and voice mail
services.
  Interconnection
services
  Revenues from our interconnection
services represent interconnection fees charged to other domestic
telecommunications
carriers, principally China Mobile, China Unicom and China Telecom, for both
local and long distance calls, and revenues from our interconnections with China
Netcom Group. Revenue from our interconnection services amounted to RMB 8,376
million in 2007, representing an decrease of RMB 56
million, or 0.7%, from RMB 8,432million in 2006. Thedecreasein revenues was mainly due to a
decrease invoice traffic from other telecommunications
carriers resulted frommobilesubstitution andadecrease in our realized tariff as a result of the policy
to adjust the inter-district tariff.
  Upfront connection
fees
  Upfront connection fees represent the
amortized amount of the upfront fees received for the initial activation of
fixed-line telephone services. As a result of the elimination of this fee on
July 1, 2001, revenues from the amortized portion of upfront connection fees
were RMB1,517million in 2007, representing a decrease of RMB889million, or36.9%, from RMB2,406million in 2006, and will continue to decline in the coming years until the
expiration of the amortization period.
  Broadband
services
  Revenues from our broadband services
represent revenuesgenerated fromDSL, LAN, andbroadband-related value-addedservices. Total revenues
from our broadband services
in 2007were RMB13,835million, representing an increase of
RMB3,919million, or39.5%, from RMB9,916million in 2006. Thisgrowth in revenue frombroadbandservices was mainly attributable to
theexpansion of our
broadband subscriber baseand thesustained growth in
ARPUas a result
ofanincreasing number of
subscribers of high-speed broadband access and
broadband contentservices. At the end of 2007, thenumber of our broadbandservicessubscriberswas19.8 million, representing an increase of 5.3 million, or37.0%,from 14.4millionat the end of 2006.
  Other
Internet-relatedservices
  Revenues from ourOther Internet-relatedservicesrepresent revenuesgenerated fromtheprovisionof internet dial-up service (other than
communication fees) and dedicated internet access
service.Revenues from
other Internet-related services were RMB532million in 2007, representingan increaseof RMB16million, or3.1%, from RMB516million in 2006. The increase was primarily due to an
increase in revenues from dedicated Internet access service of RMB75million from RMB391million in 2006, partially offset by a decrease in
revenues from Internet dial-up service.
  Managed
dataservices
  Revenues from ourmanageddata services represent fees that we
charge for our DDN, frame
relay, ATM, MPLS VPN and X.25 services. Revenues from our managed data services
were RMB1,284million in 2007, representing a decrease of RMB129million, or9.1%, from RMB1,413million in 2006. The decrease was primarily due to
decrease inusage of traditional services as a result of
thesubstitutionby new ways of
access.
  50
  Leased line
services
  Revenues from our leased line services
represent fees that we receive from our business and carrier customers for
leasing circuit capacity to them, including the lease of digital circuits,
digital trunk lines and optic fibers. Revenues from our leased line services
were RMB2,521million in 2007, representing adecreaseof RMB19million, or0.7%, from RMB2,540million in 2006. Thisdecreasewas primarilydue tothe decrease in realized
tariff, partially offset bytheincrease in domestic circuit bandwidth
leased to218
thousand(x2Mbps) as of
December 31, 2007from160 thousand(x2Mbps) as of December 31,
2006.
  ICT
services
  Through our ICT services, we
provide integrated services
of system, software development, management applications and fixed-line
communication. In 2007, our ICT services have become an important driver of our
overall revenue. In 2007, revenue from information and communications
technology services amounted to RMB 3,990
million, representing an increase of RMB 3,135 million, or 366.7%, from RMB855
million in 2006. Revenue from information and communications technology
accounted for 4.8% of our total revenue in 2007, representing an
increase of 3.8 percentage points from 2006.
The increase in our ICT revenue was mainly due to continued strengthening of our
capability to provide total solutions to large corporations and government,
which results in the significant increase in ICT service contracts.
  Other
services
  Revenues from other services, including
revenues from service and maintenance fees, lease payments for our
non-telecommunications equipment, revenues from sales of products,
andadvertising and media
service.Revenues from
other serviceswere RMB2,617million in 2007representing an increase of RMB125million, or5.0%, from RMB2,492million in 2006. The increase was primarily due tothe increase in the revenue
from advertising and media business.In 2007, the revenue from
advertising and media
service was RMB380 million, representing an increase of RMB332 millionfrom2006.
  Operating
expenses
  The key components of our operating
expenses are depreciation and amortization expenses, network operations and
support expenses, selling, general and administrative expenses,
staff costs and other expenses. Our total operating expenses in 2007were RMB66,739million, representing an increase of
RMB2,096million, or3.2%, from RMB64,643million in 2006, as compared to the0.9% increase in our revenues (excluding upfront
connection fees)during this period. The increase in our
total operating expenses is principally attributable to increased other
expenses,network, operations and support
expenses,depreciation and amortization
expenses,staff costs, and, partially offset by
decreases in selling, general and administrative expenses.
  51
  The following table sets forth the
components of our operating expenses as percentages of our revenues for the
periods indicated.
  For
      the YearsEnded
      31 December,2006
              
              2007Amount
              
              Percentage of
                revenues
              
              Amount
              
              Percentage of
                revenues(in millions of RMB, except
      percentage data)Depreciation and amortization
      expenses
              24,913
              
              29.6%
              
              25,495
              
              30.3%Network, operations and support
      expenses
              13,344
              
              15.8%
              
              14,145
              
              16.8%Staff costs
              11,849
              
              14.1%
              
              12,223
              
              14.6%Selling, general and
      administrative
              12,607
              
              15.0%
              
              10,615
              
              12.6%Other operating
      expenses
              1,930
              
              2.3%
              
              4,261
              
              5.1%Total
      operating expenses
              64,643
              
              76.8%
              
              66,739
              
              79.4%
  Depreciation and
amortization
  We depreciate our property, plant and equipment
on a straight-line basis over the estimated useful lives of the assets, after
taking into account their estimated residual value. For example, our
telecommunication network and equipment are depreciated over periodstypically ranging from five to ten years.
In 2007, our depreciation and amortization
expenses were RMB25,495million, representingan increaseof RMB582million, or2.3%, from RMB24,913million in 2006. Theincreasewas primarily attributable to an
increase in the total
amount of fixed assetsand
intangible assetssubject
to depreciation and amortization.
  Network, operations and
support
  Network, operations and support expenses
primarily consist of repair and maintenance expenses incurred in connection
with the operation of our
telecommunications networks, interconnection expenses, utility expenses and
expenses relating the installation costs for additional access lines that are
put in service each year, which are amortized on a straight-line basis over
tenyears to the extent that such costs
match the incremental revenues from new customers. In 2007, these expenses amounted to RMB14,145million, representing an increase of
RMB801million, or6.0%, from RMB13,344million in 2006.The increase in network,
operations and support expenses was mainly due to the increase in customer
access cost as a result of the expansion in broadband services. In addition, the costs of both the power
and fuel consumed by our equipment also increased under the impact of the
rise in energy
prices.
  Staff costs
  Staff costs principally consist of
expenses for salary and benefits, contributions to pension plans and a housing
fund, and the payment of early retirement benefits. Our staff costs amounted to
RMB 12,223 million in 2007, representing an increase of RMB374
million, or 3.2%, from RMB11,849 million in 2006. The increase in staff costs
was mainly due to our increase in the staff cost in ICT services and the
increase in the insurance premiums and welfare brought by the averageincrease in social
salaries.
  Selling, general and
administrative
  Selling,
general and administrative expenses primarily consist of sales and marketing
expenses, general and administrative expense and provision for doubtful
accounts. Our selling, general and administrative expenses amounted to RMB10,615
million in 2007, representing a decrease of RMB1,992 million, or 15.8%, from
RMB12,607 million in 2006. The decrease in selling, general and administrative
expenses was mainly due to the decrease in the selling expenses, which in turn
was due to the decrease in investments in mass market users, leading to the
decrease in the cost of acquiring customers and the cost of retaining
customers.
  52
  Other operating
expenses
  Other operating expenses amounted to
RMB4,261 million in 2007,
representing an increase of RMB2,331 million, or 120.8%, from RMB1,930 million
in 2006. The increase in other operating expenses was mainly due to the
significant increase in thecosts related to hardware sales ofinformation and communications technology
services.
   Deficit on revaluation of fixed
assets
  In 2006, we recorded an expense of
RMB1,335 million relating tothedeficitarisingfromtherevaluation of fixed assetsfollowing the completion of a valuationby an independent valuerofourfixed assets other than land and
buildings on a depreciated replacement basisaccording to our accounting policies
under HKFRS. We did not record any such expenses in 2007as our management performed a valuation
of our fixed assets other than land and buildings and concluded that the value of
fixed assetsapproximatesthe carrying value of these fixed
assets as at December 31, 2007.
   Finance costs
  In 2007, our finance costs amounted to
RMB3,333 million, representing a decrease of RMB434 million, or 11.5%,from RMB3,767 million in
2006. The decrease in finance costs was mainly due to the Company’s utilizing the sufficient cash flow to
repay substantial amount of interest bearing debts, at the same time eliminating
the impact caused by the increasing bank loan interest rates through the issue of
short-term commercial papers and corporate bonds which reduced the average level
of our funding costs.
  Other
income
 
 Other
income amounted to RMB1,221 million in 2007, representing an increase of RMB600
million from RMB621 million in 2006. Other income is the subsidy income the we
received from reinvesting the profit distributions received from a subsidiary in
the PRC to that subsidiary.
  Taxation
  The statutory tax rate on most of our
operations in the PRC is 33%, although some of our subsidiaries and
affiliates in the PRC are subject to lower statutory tax rates or enjoy
preferential tax rates. Our income tax for 2007 amounted to RMB3,796 million,
representing an effective taxation rate of 24.9%. The effective taxationrate was lower than the statutory
taxation rate, mainly because upfront connection fees and other income was
exempt from income tax.
   Profits from continuing
operations
  Our profit for the year from continuing
operations amounted to RMB11,471 million in 2007, compared to RMB 11,478 million in
2006. If the effect of the
income from upfront connection fees is excluded, our profit for 2007 from
continuing operations would amount to RMB9,954 million, representing an increase
of RMB882 million, or 9.7% from RMB9,072 million in 2006. The main reason for
the increase was that a deficit on revaluation of fixed assets of RMB1,335
million was recognized as an expense in 2006.
   Profits from discontinued
operations
  Net profit for the year from
discontinued operation in 2007 amounted to RMB624 million as a result
of the disposal of our southern service region by CNC China, our wholly-owned
subsidiary, on February 28, 2007. Of that
  53
  amount, the net loss of our southern
service region prior to the completion date amounted to RMB2 million, and the investment gain net
of taxes from the disposal of our southern service region amounted to RMB626
million.
   Profit for the year
  In 2007, our profit from operations
(including continuing and discontinued operations) was RMB12,095million, as compared to RMB12,965 million in
2006.If excluding the upfront
connectionfee, our profit for 2007wouldamount to RMB10,578million,compared toRMB10,559million in 2006.
   Profit/(Loss) for the Year Reconciled to
U.S. GAAP
  Our consolidated profitfor 2007 under US GAAP was RMB8,950
million. Our profit for 2007 under US GAAP was lower than that under Hong Kong
GAAP. This was principally due to the revaluation of certain classes of fixed
assets under Hong Kong GAAP, which resulted in lower depreciation charges recorded of RMB4,482 million
under Hong Kong GAAP compared to that under US GAAP. In addition, a gain net of
taxes from the disposal of our southern service region business of RMB626
million was recognized in the income statement under Hong KongGAAP, while the gain was recognized
directly in the shareholders’equity under U.S.
GAAP.
  Operating results for the year ended
December 31, 2006 and the year ended December 31, 2005
  Revenues
  Our revenue for 2006 amounted to
RMB84,194million,as comparedto RMB83,927 million for 2005,of which upfront connection
fees amounted to RMB 2,406 million. Excluding upfront connection fees, our
revenue for 2006 would amount to RMB81,788million, representing a growth of RMB1,266million, or1.6%, from our revenue(excluding upfront connection fees) of
RMB80,522million in 2005. The growth primarily
reflected increases in revenues from broadband services, value-added services,
interconnectionfeesand ICT
services.
  Fixed-line
telephone services
  Local
telephone services
  Revenues from our local telephone
services (including PHS services) comprise local usage fees, monthly fees and
installation fees. They vary depending on the number of our fixed-line
subscribers, average realized tariffs and the usage volume of local calls (including those made to connect
to our dial-up Internet service).
  In 2006, revenues from our local
telephone services were RMB39,969million, representing a decrease of RMB4,074million, or9.3%, from RMB44,043million in 2005, and accountingfor 47.4% of our total revenues in
2006.
  Local usage
fees. Usage fees for local
services include local usage fees charged for local telephone calls and VoIP
long distance calls, and communications fees for dial-up Internet access. In
2006, revenues from our
local usage fees were RMB 22,059million, representing a decrease of RMB
2,381million, or 9.7%, from RMB 24,440million in 2005. The decrease was
primarily due to a decrease of12.14billion pulses, or5.4%, in the usage volume of local calls to214.47billion pulses in 2006 from226.61billion in 2005, coupled with a
decrease in our realized tariff as a result of increased
competition.
  Monthly
fees. Monthly fees
represent the fixed amount of service charges to our customers for using our
fixed-line telephone
services. In 2006, our revenues from monthly fees were RMB 16,546million, representing adecreaseof RMB 1,624million, or 8.9%, from RMB 18,170million in 2005, primarily due to a
decrease in the number of our fixed-line subscribers in our serviceregions and a decrease in our realized
tariff.
  54
  Upfront installation
fees. Installation fees
represent the amortized amount of the upfront fees received for installation of
non-PHS fixed-line telephone services. These upfront installation fees are
deferredand recognized
over the expected customer relationship period, which is currently estimated to
be ten years. Revenues from the upfront installation fees were RMB
1,364million in 2006, representing a
decrease of RMB69million, or4.8%, from RMB 1,433million in 2005. The decrease was
principally attributable to upfront installation discount offered to new
subscribers, coupled with a decrease in the number of new subscribers in 2006 to8.66million from9.23million in 2005.
  Domestic
long distance services
  Revenues from our domestic long distance
services consist of usage fees for domestic long distance calls originated by
our fixed-line subscribers, users of our prepaid phone cards and certain other
customers. In 2006, our domestic long distance revenues were RMB9,495million, representing a decrease of RMB278million, or2.8%, from RMB9,773million in 2005. The decrease was
primarily due to a combination of (i)revenues from our traditional
domestic long distance service totaled RMB6,983 million, representing a
decreased of RMB79 million, or 1.1%, from RMB 7,062 million in 2005; and (ii)revenues from our VoIP
long distance service totaled RMB 2,512 million, representing a decrease of RMB
199 million or 7.4% from RMB 2,711 million in 2005.
  Internationallong
distance services
  Revenues from our international long
distance services consist of usage fees charged to our customers for their
international long distance calls originated in our service regions, including
those made to Hong Kong, Macau and Taiwan.
  In 2006, this revenue was RMB819million, representing a decrease of RMB55million, or6.3%, from RMB874million in 2005. The revenue decrease
was primarily attributable to a decrease in the volume of international long
distance calls.  In 2006, the usage of international long distance
calls decreased from352million minutes in 2005 by
28million minutes, or8.1%, to324million minutes.
  Value-added
services
  Revenues from our value-added services
consist of fees that we charge our customers for theprovision of caller identification, PHS
short-messaging, personalized ring, telephone information services, video- and
tele-conferencing and other value-added services.
  Revenues from our value-added services
in 2006 were RMB 5,341million, representing anincrease of RMB 1,371million, or 34.5%, from RMB3,970million in 2005. The increase was
primarily attributable to increases in the number of subscribers and average
usage volume per customer. In 2006, the number of subscribers of our caller
identification service
totaled 78.4million, which reached a penetration
rate of 68.8% of our access lines in service as of
December 31, 2006.  The number of PHS short messages sent from our
network in 2006 increased to 7.8 billion from 6.8 billion in 2005 and the
number of our personalized
ring subscribers totaled 15.76million, representing an increase of
131.3% from that in 2005.
  Interconnection
services
  Revenues from our interconnection
services represent interconnection fees charged to other domestic
telecommunications
carriers, principally China Mobile, China Unicom and China Telecom, for both
local and long distance calls, and revenues from our interconnections with China
Netcom Group.
  Revenue from our interconnection
services amounted to RMB8,432million in 2006, representing an increase of
RMB768million, or10.0%, from RMB7,664million in 2005. The growth in revenue
was mainly due to an increase in interconnection fees from other domestic and
international telecommunication carriers and an increase in revenuefrom settlement of interconnection fees
with our associates.
  55
  Upfront
connection fees
  Upfront connection fees represent the
amortized amount of the upfront fees received for the initial activation of
fixed-line telephone services. As a result of the elimination of this fee on July 1, 2001,
revenues from the amortized portion of upfront connection fees were RMB 2,406
million in 2006, representing a decrease of RMB 999 million, or 29.3%, from RMB
3,405 million in 2005, and will continue to decline in the coming years until the expiration of the
amortization period.
  Broadband
services
  Revenues from our broadband services
represent revenuesgenerated fromDSL, LAN, andbroadband-related value-addedservices. Total revenues
from our broadband services in 2006 were RMB9,916million, representing an increase of RMB
2,627million, or 36.0%, from RMB 7,289million in 2005. This increase reflects
the rapid expansion of our broadband subscriber base. The total number of
subscribers of our broadband services increased by approximately 3.4million, or 30.7%, or to 14.4million as of December 31, 2006 from
approximately 11.0million as of December 31,
2005.
  Other
Internet-relatedservices
  Revenues from our other Internet-relatedservicesrepresent revenuesgenerated fromtheprovisionof internet dial-up service (other than
communication fees) and dedicated internet access service.Revenues from other Internet-related
services were RMB516million in 2006, representing adecreaseof RMB40million, or7.2%, from RMB 556million in 2005. Thedecreasewas primarily due to adecrease in revenues from Internet dial-up
service of RMB92million from RMB217million in 2005, partially offset by
anincreasein revenues from dedicated Internet
access services.
  Managed
dataservices
  Revenues from ourmanageddata services represent fees that we
charge for our DDN, frame relay, ATM, MPLS VPN and X.25 services. Revenues from
our managed data services were RMB1,413million in 2006, representing a
decrease of RMB208million, or12.8%, from RMB 1,621million in 2005. The decrease was
primarily due to decrease in average realized tariff as a result of increased
market competition.
  Leased line
services
  Revenues from our leased line services
represent fees that we receive from our business and carrier customers for leasing circuit
capacity to them, including the lease of digital circuits, digital trunk lines
and optic fibers. Revenues from our leased line services were RMB2,540million in 2006, representing an
increase of RMB164million, or6.9%, from RMB2,376million in 2005. This increase was
primarily due to an increase in domestic circuit bandwidth leased to
160 thousand(x2Mbps) as of December 31, 2006 from
126 thousand(x2Mbps) as of December 31,
2005.
  ICT
services
  Through our ICT services, we provide integrated services
of system integration, software development, management applications and
fixed-line communication. In 2006, revenue from information and
communications technology services amounted to RMB855million, representing anincrease of RMB669million, or 359.7%, from RMB186million in 2005. The increase was mainly due to
continued strengthening of our capability to provide total solutions to large
corporations and government, which results in the significant increase in
contractsfor ICT services.
  Other
services
  Revenues from other services, including
revenues from service and maintenance fees, lease payments for our
non-telecommunications equipment, revenues from sales of products,
andadvertising and media
service.Revenues from other services were RMB
2,492million in 2006, representing an
increase of RMB322million, or
  56
  14.8%, from RMB 2,170million in 2005. The increase was
primarily due to an increase in businesses such as the maintenance of equipment
for customers andproject
construction.
  Operating
expenses
  The key components of our operating
expenses are depreciation and amortization expenses, network operations and
support expenses, selling, general and administrative expenses, staff costs and
other expenses. Our total
operating expenses in 2006 were RMB 64,643 million, representing an increase of
RMB 1,775 million, or 2.8%, from RMB 62,868 million in 2005. The increase in our
total operating expenses is principally attributable to increased network
operations and support expenses, depreciation and
amortization expenses and other expenses, partially offset by decreases in
selling, general and administrative expenses.
  The following table sets forth the
components of our operating expenses as percentages of our revenuesfor the periods
indicated.
  For
      the Years Ended 31 December,2005
              
              
              2006Amount
              
              
              Percentage of
                revenues
              
              
              Amount
              
              
              Percentage of
                revenues(in millions of RMB, except
      percentage data)Depreciation and amortization
      expenses
              
              
              24,328
              
              
              
              29.0%
              
              
              
              24,913
              
              
              
              29.6%Network, operations and support
      expenses
              
              
              12,610
              
              
              
              15.0%
              
              
              
              13,344
              
              
              
              15.8%Staff costs
              
              
              11,830
              
              
              
              14.1%
              
              
              
              11,849
              
              
              
              14.1%Selling, general and
      administrative
              
              
              12,726
              
              
              
              15.2%
              
              
              
              12,607
              
              
              
              15.0%Other operating
      expenses
              
              
              1,374
              
              
              
              1.6%
              
              
              
              1,930
              
              
              
              2.3%Total
      operating expenses
              
              
              62,868
              
              
              
              74.9%
              
              
              
              64,643
              
              
              
              76.8%
  Depreciation and
amortization
  We depreciate our property, plant and
equipment on a straight-line basis over the estimated useful lives of the
assets, after taking into account their estimated residual value. For example,
our telecommunication
network and equipment are depreciated over periods typically ranging from five
to ten years. In 2006, our depreciation and amortization expenses were RMB24,913million, representing an increase of
RMB585million, or 2.4%, from RMB 24,328millionin 2005. The increase was primarily
attributable to an increase in the total amount of fixed assetsand intangible assetssubject to depreciation and
amortization. As of December 31, 2006, the value of our fixed assets totaled RMB
335.9billion, representing an increase of 8.7billion, or 2.7%, from RMB 327.2billion as of December 31,
2005.
  Network, operations and
support
  Network, operations and support expenses
primarily consist of repair and maintenance expenses incurred in connection with
the operationof our
telecommunications networks, interconnection expenses, utility expenses and
expenses relating the installation costs for additional access lines that are
put in service each year, which are amortized on a straight-line basis over ten
years to theextent that such costs match the
incremental revenues from new customers. In 2006, these expenses amounted to RMB
13,344million, representing an increase of
RMB734million, or5.8%, from RMB 12,610million in 2005. The increase was
primarily attributable toan increase of RMB 882million in interconnection expenses
with China Netcom Group and other carriers.
  Staff costs
  Staff costs principally consist of
expenses for salary and benefits, contributions to pension plans and a housing
fund, and the payment of early retirement benefits. In 2006, our
staff costs were RMB 11,849million compared to RMB11, 830 million in 2005.
  57
  Selling, general and
administrative
  Selling, general and administrative
expenses primarily consist of sales and marketing expenses, general
and administrative expense
and provision for doubtful accounts. Our selling, general and administrative
expenses amounted to RMB12,607million in 2006, representing adecreaseof RMB119million, or 0.9%, from RMB12,726million in 2005. Thedecreasewas mainly attributable to adecrease insubscribers acquisitioncost resulting from a decrease in the
growth in the number of new PHS customers.Thedecrease was partially offset by an
increase in subscribers retention cost, sales channel cost and other
marketingexpenses
resulting from increased competition.
  Other operating
expenses
  In 2006, other operating expenses were
RMB1,930million, representing an increase of
RMB556million, or 40.5%, from RMB 1,374million in 2005, primarily due to an
increase in expenses
relating to developing ICT services.
  Deficit on revaluation of fixed
assets
  In 2006, we recorded an expense of RMB
1,335million relating to the deficit arising
from the revaluation of fixed assets following the completion of a valuation by
the PRC Valuer of our fixed
assets other than land and buildings on a depreciated replacement basis
according to our accounting policies under HKFRS. We did not record any such
expenses in 2005 as our management performed a valuation of our fixed assets
other thanland and buildings and concluded that
the value of fixed assets were close to the carrying value of these fixed assets
as at December 31, 2005.
  Finance costs
  In 2006, our finance costs were RMB
3,767million, representing an increase of RMB421million, or12.6%, from RMB 3,346million in 2005, which was primarily
attributable to an increase of RMB136million in interest expenses and a
decrease of RMB 221 million in foreign exchange gains primarily resulting from
the depreciation of the value of Renminbi against the Euro in 2006. For more
details, see "Risk Factors--Risks relating to China --Fluctuations in exchange
rates may adversely affect our financial condition and results of operations and
the prices of our shares and ADSs or any dividends payable onour shares and ADSs in foreign currency
terms." The increase in interest expenses was primarily attributable to an
increase of RMB 392 million in 2006 resulting from deferred payments in respect
of the 2005 Acquired Assets and Liabilities.
  Taxation
  The statutory tax rate on most of our operations
in the PRC is 33%, although some of our subsidiaries and affiliates in the PRC
are subject to lower statutory tax rates or enjoy preferential tax
rates.
  In 2006, our taxation expense was RMB
3,727million, representing an increase of RMB201million from RMB 3,526million in 2005.
  Our effective tax rate in 2006 was
24.5%, as compared to 19.7% in 2005. The effective tax rate in
2005 was lower primarily because we benefited from a non-recurring tax reduction
of RMB 837million after
offsetting the accumulated pre-restructuring losses with a taxable profit in
2005. The tax rate in 2006 was lower than the statutory tax rate mainly because
the revenues from upfront connection fees and certain revenues from investment
werenot taxable under the PRC
law.
  58
  Profits from continuing
operations
  Our profit for the year from continuing
operations amounted to RMB11,478million in 2006, as compared to RMB14,350 million in
2005. Excluding income from
upfront connection fees, our profit for 2006 amounted to RMB9,072million, representing a decrease of
RMB1,873million, or 17.1%, from RMB10,945million in 2005. The decrease was
primarily attributable to the RMB1,335million of expenses relating to deficit
on revaluation of fixed asset.
  Profits from discontinued
operations
  In 2006, our profit from discontinued
operations was RMB 1,487million, representing a net gain of RMB
1,878 million from the sale of Asia Netcom,a net loss of RMB 59 million incurred
by Asia Netcom in 2006 prior tothe closing of the sale of Asia
Netcomanda net loss of RMB332million incurred bythe telecommunications business in our
southern service region.
  Profit for the year
  In 2006, our profit from operations
(including continuing and discontinued operations) was RMB 12,965million, representing a decrease of RMB
985million, or7.1%, from RMB 13,950million in 2005.
  Profit/(Loss) for the Year Reconciled to
U.S. GAAP
  Our consolidated profit for 2006
(including continuing and discontinued operations) determined under U.S. GAAP was RMB
10,891million. Our profit for 2006 determined
under U.S. GAAP was lower than that under HKFRS. The difference principally
reflects the revaluation deficits in 2003 and 2004 taken to the carrying value
of our assets under HKFRS,making our depreciation and amortization
expenses in 2006 RMB 4,619 million lower under HKFRS than under U.S.
GAAP.  In addition, the carrying value of our assets decreased by RMB
1,524 million under HKFRS as a result of the revaluation of assets in
2006.Such decrease will not be recorded as
an expenses relating to deficit on revaluation of assets under U.S. GAAP. We
expect this factor to continue to contribute to the difference in our
consolidated profit under U.S. GAAP compared to our consolidated
profit under HKFRS in the
future.
  LIQUIDITY AND CAPITAL
RESOURCES
  Overview
  Our primary source of funding have been
cash provided by operating activities,short-term bank loansandcommercialpapers and our primary uses of funds
have been capital expenditures and repayment of bank loans, for the year
ended December 31, 2007.
  The following table summarizes our cash
flows for the periods indicated:
  For the Years Ended December
      31,2005
              
              
              2006
              
              
              2007(in millions of
      RMB)Net cash inflow from operating
      activitiesfrom
      continuing operations
              
              
              32,191
              
              
              
              32,050
              
              
              
              32,459Net cash outflow for investing
      activities from continuing operations
              
              
              (22,993
              )
              
              
              (24,051
              )
              
              
              (19,138
              )Net cash outflow from financing
      activities from continuing operations
              
              
              (14,746
              )
              
              
              (6,477
              )
              
              
              (19,131
              )Increase/(decrease) in cash from
      continuing operations
              
              
              (5,548
              )
              
              
              1,522
              
              
              
              (5,810
              )Increase/(decrease) in cash from
      discontinued operations
              
              
              (132
              )
              
              
              1,164
              
              
              
              3,491Increase/(decrease) in cash and
      cash equivalents
              
              
              (5,680
              )
              
              
              2,686
              
              
              
              (2,319
              )
  59
  Taking into account cash
generated from operating
activities and short-term and long-term bank loans, we believe that we have
access to sufficient working capital for the next 12 months.
   Net cash inflow from operating
activities
  Our net cash inflow from operating
activities in 2007was RMB 32,459million, representing anincrease of RMB409million, or1.3%, from RMB 32,050million in 2006. Theincrease principally reflects a
combination of:
  ·
              anincreaseof RMB 153 million in net cash
      inflows generated from operations from 2006 to
  2007;
  ·
              an increase of RMB 429 million in
      cash outflow for profit tax paid from 2006 to 2007;
    and
  ·
              a decrease of RMB 708 million in
      interest paid from 2006 to 2007 resulting fromrepayment of debt.
  Our net cash inflow from operating
activities in 2006 was RMB 32,050 million, representing adecrease of RMB141million, or0.4%, from RMB 32,191million in 2005. Thedecrease principally reflects a
combination of:
  ·
              a decrease of RMB 147 million in
      net cash inflows generated from operations from 2005 to
      2006;
  ·
              a decrease of RMB 350 million in cash outflow
      for profit tax paid from 2005 to 2006;
  and
  ·
              an increase of RMB 320 million in
      interest paid from 2005 to 2006 resulting primarily from interest on a
      deferred payment for the 2005 Acquired Assets and
      Liabilities.
  Set out below is a breakdown of our net cash inflow
from operating activities for the periods indicated:
  Years Ended December
      31,2005
              
              
              2006
              
              
              2007(RMB in
      millions)Net cash inflows generated from
      operations
              
              
              39,303
              
              
              
              39,156
              
              
              
              39,309Interest
      received
              
              
              131
              
              
              
              136
              
              
              
              113Dividends
      received
              
              
              29
              
              
              
              -
              
              
              
              -Interest
    paid
              
              
              (3,244
              )
              
              
              (3,564
              )
              
              
              (2,856
              )Profits tax
      paid
              
              
              (4,028
              )
              
              
              (3,678
              )
              
              
              (4,107
              )Cash inflow from operating
      activities of continuing operations
              
              
              32,191
              
              
              
              32,050
              
              
              
              32,459Cash inflow from operating
      activities of discontinued operations
              
              
              1,344
              
              
              
              2,085
              
              
              
              388Net cash inflow from operating
      activities
              
              
              33,535
              
              
              
              34,135
              
              
              
              32,847
  All of our operations in the PRC are
conducted through our wholly foreign-owned subsidiary, CNC China. Our
telecommunications businesses outside of the PRC are primarily owned and conducted by China Netcom
(USA) Operations Limited and China Netcom (Hong Kong) Operations Limited, our
wholly owned subsidiaries incorporated in the U.S. and Hong Kong, respectively.
Accordingly, our future cash flow will consist principallyof dividends from our subsidiaries. Our
ability to pay dividends depends substantially on the payment of dividends to us
by CNC China. CNC China must follow the laws and regulations of the PRC and
their respective articles of association in declaring andpaying dividends to us. As a wholly
foreign-owned enterprise in China, CNC China is required to provide for a
reserve fund and staff and workers’bonus and welfare fund, each of which
is allocated
  60
  from net profit after taxation but
before dividend distribution according to the prevailing
accounting rules and regulations in the PRC. CNC China is required to allocate
at least 10% of its net profit to the reserve fund until the balance of this
fund has reached 50% of its registered capital. Appropriations to the staff and workers’bonus and welfare fund, which are
determined at the discretion of the directors of CNC China, are charged as
expenses as incurred in the consolidated financial statements. In 2005, 2006 and
2007, CNC China contributed approximately RMB1,044 million, RMB 855 million, and RMB
868 million respectively, to these statutory funds. None of the contributions by
CNC China to these statutory funds may be used for dividend purposes. For more
details, see “Item 8.
Financial Information -- DividendPolicy.”
  Net cash outflow for investing
activities
  Our net cash outflow in investment
activities in 2007 amounted to RMB19,138 million, representing a decrease of
RMB4,913 million, or 20.4%, from RMB24,051 million in 2006, which was mainly due
to the significant decrease
in our capital expenditures in 2007compared to2006,as we focused on controlling our capital
expenditure levels by improving our network efficiency and developing new
products and services to better utilize our existing networks.
  Our netcash outflow from investing activities
in 2006was RMB 24,051million, representing an increaseof RMB 1,058million, or4.6%, from RMB22,993million in 2005.The increasewas primarily attributableto the fact thatwe had more cash inflow in 2005 as wesold certainshort-term investments in that
year.
  We must obtain approvals from the NDRC
and the MII, and in some cases, the State Council for any government-funded
project involving significant capital investment in our operations. In addition,
approvalsfrom the NDRC and
the MII are required for investment projects concerning national security, such
as the construction of domestic backbone transmission networks, international
gateways, and other telecommunications infrastructure projects. For a more
detailed description, see "Item 4.
Information on the Company -- Regulation -- Capital
Investment."
  Net cash inflow/(outflow) from financing
activities
  Our net cash outflow in financing
activities in 2007 amounted to RMB19,131 million, representing an increaseof RMB12,654 million, or
195.4%, from RMB6,477 million in 2006..Theincreasewas mainly dueto theincrease in the repayment of interest
bearing debtsin
2007compared to2006.
  Our net cash outflow from financing
activities in 2006 was RMB6,477million, representing a decrease of RMB
8,269million, or 56.1%, from RMB 14,746 million in 2005. The decrease was mainly
due to:
  ·
              an increaseof RMB11,429 million innew bank loans and
      other loans from 2005 to
2006;
  ·
              an increaseof RMB9,676 million inproceeds from the issuance of short-term
      commercial papers from 2005 to 2006;
and
  ·
              an increase of RMB13,223 million
      in repayment of bank loans from 2005 to
  2006.
  Net cash inflow/(outflow) from
discontinued operations
  In 2007, our net cash inflow from
discontinued operations was
RMB 3,491 million, compared to a net cashinflow of RMB 1,164 million from
discontinued operations in 2006. The primary reason for this trend was that we
received RMB3,500 million as consideration for the disposal of assets,
liabilities and operations
on telecommunications operations our of southern service
region.
  61
  In 2006, our net cash inflow from
discontinued operations was RMB 1,164million, compared to a net cash outflow
of RMB 132million from discontinued operations in
2005.  The increase resulted from the consideration we received
from the sale of Asia Netcom.
  Working
capital
  As at December 31, 2007, the shortfall
of our working capital amounted to RMB59,085 million, a decrease of RMB13,522
million or 18.6% in shortfall from RMB72,607 million in 2006. The decrease in shortfall of
working capital was mainly due to a decrease in our short-term loans
outstanding.
  Indebtedness
  We issued two tranches of commercial
paper for the aggregate amount of RMB20 billion in 2007. One tranche of the
commercialpaper was issued
for the amount of RMB10 billion at an interest rate of 3.34% with a maturity
period of 365 days, and the other tranche of the commercial paper was issued for
the amount of RMB10 billion at an interest rate of 3.93% per annum with a
maturity period of 270 days.
  Our indebtedness as of the dates
indicated was as follows:
  As of December
      31,2005
              
              
              2006
              
              
              2007(in millions of
      RMB)Short term bank
      loans
              
              
              47,341
              
              
              
              30,980
              
              
              
              11,850Current portion of long term bank
      and other
      loan
              
              
              6846
              
              
              
              7,304
              
              
              
              5,322Long term bank and other loans net
      of current portion
              
              
              18,143
              
              
              
              23,219
              
              
              
              14,425Short term commercial
      paper
              
              
              -
              
              
              
              9,811
              
              
              
              20,000Corporate
      bonds
              
              
              -
              
              
              
              
              
              
              
              2,000Current portion ofamounts due to holding companies
      and fellow subsidiaries
              
              
              1,960
              
              
              
              1,960
              
              
              
              1,960Amounts due to holding companies
      and fellow subsidiariesnet of current
      portion
              
              
              7,840
              
              
              
              5,880
              
              
              
              6,169Total
              
              
              82,130
              
              
              
              79,154
              
              
              
              61,726
  As at December 31, 2007, our total
indebtedness amounted to RMB61,726 million, representing a decrease of RMB17,428
million or 22% from
RMB79,154 million as at the end of 2006. The source of capital for the repayment
was our free cash-flow and the consideration for the disposal of assets,
liabilities and operations of our southern service region
business.
  As at December 31, 2007, the proportion of our
short-term debts to our total indebtedness was 63.4%, which approximately
equaled to 63.2% as at December 31, 2006.
  As at December 31, 2007, our debt to
capital ratio was 39.8%, calculated as the ratio of total indebtedness
to the sum of total
indebtedness, owner’s equity and the balance of deferred
revenues, representing a decrease of 7.5 percentage points from 47.3% as at
December 31, 2006. Our financial position was significantly
improved.
  As at December 31, 2007, our
aggregate outstanding
banking facilities available amounted to RMB106,824 million in
total.
  Contractual obligations and commitments,
including off-balance sheet arrangements
  The following table sets forth
information regarding our aggregate payment obligationsin future years of the contractual
obligations and commercial commitments that we had as of December 31,
2007.(1)
  62
  Payments Due (by stages as
      indicated)
                (RMB
    millions)Total
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              ThereafterShort-term bank
      loans
              
              
              12,134
              
              
              
              12,134
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —long term bank and other
      loans
              
              
              21,616
              
              
              
              6,407
              
              
              
              10,272
              
              
              
              1,887
              
              
              
              106
              
              
              
              104
              
              
              
              2,840Short term commercial
      paper
              
              
              20,629
              
              
              
              20,629
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Corporate
    bonds
              
              
              2,900
              
              
              
              90
              
              
              
              90
              
              
              
              90
              
              
              
              90
              
              
              
              90
              
              
              
              2,450Amounts due to holding companies
      and fellow subsidiaries
              
              
              8,870
              
              
              
              2,319
              
              
              
              2,214
              
              
              
              4,337
              
              
              
              —
              
              
              
              —
              
              
              
              —Operating lease
      commitments
              
              
              2,004
              
              
              
              579
              
              
              
              346
              
              
              
              305
              
              
              
              247
              
              
              
              236
              
              
              
              291Capital
      commitments
              
              
              677
              
              
              
              661
              
              
              
              —
              
              
              
              16
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              
              68,830
              
              
              
              42,819
              
              
              
              12,922
              
              
              
              6,635
              
              
              
              443
              
              
              
              430
              
              
              
              5,581
 
 (1)
              The amounts shown include interest
      charged for each yearand the amounts of interest charged on variable rate
      debt have been calculated using the interest rate as of December 31,
      2007.
   Capital expenditures
 Capital expenditure includes cash paid
towards the purchase of fixed assets, construction in progress, prepayment for
leased network capacity and
prepayment for leased land. The following table sets forth our actual and
planned total capital expenditure requirements for the periods
indicated:
  Capital
      Expenditures(in millions of
      RMB)2005
              25,9642006
              24,5602007
              20,6842008
      (planned)
              19,600
  Historically, most of our capital
expenditures were budgeted for the improvement of our networks and related
equipment. In particular, capital expenditures related to our local access,
switching, broadband services, data and transport networks each accounted for a
significant percentage of our total capital expenditures. Expenditures for other
projects were mainly related to investments in facilities to house our
telecommunications equipment and other facilities. Our total capital
expenditures in each of 2005,
2006and 2007 were lower than that of each
previous year as we focused on controlling our capital expenditure levels by
improving our network efficiency and developing new products and services to
better utilize our existing networks.
  Our capital expenditure in 2007 amounted
to RMB20,684 million, representing a decrease of RMB3,876 million, or 15.8%,
from RMB24,560 million in 2006, which was mainly due to our emphasis on
enhancing the utilization rate of our existing network and our implementation of a policy which
focused on cost-effectiveness, which reasonably reduced capital expenditure. In
2007, we continued to increase our investment in broadband and Internet, and we
also accordingly reduced our investment in local telephonesand network transmission
equipment.
  We expected to further reduce our
capital expenditure in 2008, which was estimated at RMB19,600 million. Many
factors could affect the timing, amount and nature of our capital expenditure,
including the overall economicenvironment, customer demand, technology
development and other related factors. Our estimated capital expenditure had a
certain degree of uncertainty, and the future actual capital expenditure may
deviate from the estimated amount. We anticipate that we will meet our capital expenditure
requirements with cash generated from operating activities, short-term and
long-term loans, debentures and other borrowings and equity financing. We
consider that we shall have sufficient capital to meet our future capitalexpenditure
requirements.
  63
  Capital
resources
  We expect to fund our capital
expenditure needs with a combination of cash generated from operating
activities, short-term and long-term bank loans, short-term commercial paper and
other borrowings or equity financings. We believe that we will have
sufficient capital resources to satisfy our capital expenditure requirements in
the foreseeable future periods.
  RECONCILIATION OF HKFRS AND U.S.
GAAP
  Our consolidated financial statements
have been prepared in accordancewith HKFRS, which differs significantly
in certain respects from U.S. GAAP. Differences between HKFRS and U.S. GAAP may
have a significant impact on our consolidated net profit/(loss) and
shareholders’equity. For example, U.S. GAAP requires
fixed assetsto be recorded at cost less impairment
while HKFRS allows revaluation of the fixed assets other than in an impairment
situation. Consequently, under U.S. GAAP there was no charge to income in 2004
and 2006 resulting from the revaluation of our fixed assetsin the amount of RMB 11,318 million in
2004 or RMB 1,524 million in 2006, as the case may be, while such charges were
recorded under HKFRS. Thus, in future periods we expect our depreciation and
amortization expense as reported in accordance with U.S. GAAP to be significantly higher than as
reported in our financial statements prepared in accordance with
HKFRS.
  We have summarized these differences and
their effect on our shareholders’equity as of December 31, 2005 , 2006
and 2007 and the results of our operations for each of the years ended
December 31, 2005 , 2006 and 2007 in Note 40 to our consolidated financial
statements included elsewhere in this annual report. These differences relate
primarily to the treatment of the revaluation of fixed assets, anddeferred tax.
  The effect on net profit/(loss) of
differences between HKFRS and U.S. GAAP for the years ended December 31, 2005 ,
2006 and 2007is as set forth in the following table.
  For the Years Ended December
      31,2005
              
              
              2006
              
              
              2007(in millions of
      RMB)Net profit/(loss) under
      HKFRS
              
              
              13,950
              
              
              
              12,965
              
              
              
              12,095U.S. GAAP
      adjustments
              
              
              (3,424
              )
              
              
              (2,074
              )
              
              
              (3,145
              )Net profit under U.S.
      GAAP
              
              
              10,526
              
              
              
              10,891
              
              
              
              8,950
  The effect on shareholders’equity of differences between HKFRS and
U.S. GAAP as of December 31, 2004, 2005 and 2006 is as set forth in the
following table.
  As of December
      31,2005
              
              
              2006
              
              
              2007(in millions of
      RMB)Owners’equity under
      HKFRS
              
              
              63,287
              
              
              
              74,194
              
              
              
              82,052U.S. GAAP
      adjustments
              
              
              14,480
              
              
              
              11,689
              
              
              
              9,723Owners’equity under U.S.
      GAAP
              
              
              77,767
              
              
              
              85,883
              
              
              
              91,775
  CRITICAL ACCOUNTING
POLICIES
  We have prepared the consolidated
financial statements in accordance with HKFRS issued by the Hong Kong Institute
of Certified Public Accountants. HKFRS require us to adopt accounting policies
and make estimates and
assumptions in the preparation of these financial statements. When we make these
estimates and assumptions, we base our estimates on historical experience and
are required to make judgments about matters that are inherently uncertain.
Accordingly, the reported financial position and
results of operations are sensitive to these estimates and assumptions, and
actual results may differ from those estimates as facts, circumstances and
conditions change. Our principal accounting policies are set out in
detail in Note 4 to our consolidated
financial statements included elsewhere in this annual report. The following
sections discuss the accounting policies which involve the most significant
estimates and judgments made in the preparation of our consolidatedfinancial statements.
  64
  Depreciation of fixed
assets
  We depreciate our property, plant and
equipment at rates sufficient to write off their costs or revalued amounts less
accumulated impairment losses and estimated residual values over their estimated
usefullives on a
straight-line basis. We review the useful lives periodically to ensure that the
method and rates of depreciation are consistent with the expected pattern of
economic benefits from property, plant and equipment. We estimate the useful
lives of the property, plant and equipment based on
our historical experience with similar assets, taking into account anticipated
technological changes. The depreciation expense in the future periods will
change if there are significant changes from previous estimates. As of December 31, 2007, we did not
change the estimate of useful lives.
  Revaluation of fixed
assets
  In connection with our restructuring in
anticipation of our global offering in 2004, our property, plant and equipment
were revalued as of December 31,2003 on a depreciated replacement cost
basis. The property, plant and equipment acquired as part of our 2005
Acquisition were revaluated as of December 31, 2004 on a depreciated cost basis.
In preparation for our 2005 Acquisition, apart from lease prepayment for land and buildings, which are
carried at cost, other property, plant and equipment are carried at the revalued
amounts, being the fair value at the date of revaluation, less subsequent
accumulated depreciation and impairment losses. Revaluations are performed with sufficient regular
intervals by independent valuers and, in each of the intervening years,
valuations are undertaken by our executives. As of December 31, 2006, apart from
land and buildings, all our fixed assets were evaluated by an independent valuer. If the revalued amounts
differ significantly from the carrying amounts of the property, plant and
equipment in the future, the carrying amounts will be adjusted to the revalued
amounts. This will have an impact on our future results, sinceany subsequent decreases in valuation are
first set off against increases on earlier valuations in respect of the same
item and thereafter are charged as expense to the income statement and any
subsequent increases are credited as income to the income statement up to the amount previously
charged. In addition, the depreciation expense in future periods will change as
the carrying amounts of the fixed assets change as a result of the
revaluation.
  Impairment of non-current
assets
  At each balance sheet date,
weconsider both internal
and external sources of information to assess where there is any indication that
non-current assets, including property, plant and equipment are impaired. If any
such indication exists, the recoverable amount of the asset is
estimated and an impairment loss is recognized
to reduce the carrying amount of the asset to its recoverable amount. The
recoverable amount is the higher of value in use or net selling price. Estimated
recoverable amounts are determined based on estimated discounted future cash flows of the
cash-generating unit at the lowest level to which the asset belongs. Key
assumptions made to determine the estimated discounted cash flows include the
estimated growth rate and our estimated weighted cost of capital. Such
impairment losses are recognized in the
income statement, except where the asset is carried at valuation and the
impairment loss does not exceed the revaluation surplus for that same asset, in
which case the impairment loss is treated as a revaluation decreaseand charged to the revaluation reserve.
Accordingly, there will be an impact to our future results if there is a
significant change of the recoverable amounts of our non-current assets. As of
December 31, 2007, we did not identify any indication that non-current assets were
impaired.
  Revenue recognition for upfront
connection and installation fees
  We defer the recognition of upfront
customer connection and installation fees and amortize them over the expected
customer relationship period of ten years. The related direct incremental installation
costs are deferred and amortized over the same expected customer relationship
period of ten years, except when the direct incremental costs exceed the
corresponding installation fees. The excess of the direct incremental costs over the corresponding
installation fees, if any, are immediately amortized as expenses to the income
statement. We estimate the expected customer relationship period based on our
historical customer retention experience and other factoring in the expected level of future competition,
the risk of technological or functional obsolescence to our services,
technological innovation, and the expected changes in the regulatory and social
environment. If our estimate of the expected customer relationshipperiod changes as a result of increased
competition, changes in telecommunications
  65
  technology or other factors, the amount
and timing of recognition of our deferred revenues may change for future
periods. As of December 31, 2007, we did not change the estimate of customer relationship
period.
  Provision for doubtful
debts
  We maintain an allowance for doubtful
debts for estimated losses resulting from the inability of our customers to make
the required payments. We make our estimates based on the aging of
our accounts receivable
balance, customer creditworthiness, and historical write-off experience. If the
financial condition of our customers were to deteriorate, actual write-offs
might be higher than expected, we would be required to revise the basis of
making the allowance and our future results
would be affected.
  Discontinued
operations
  A discontinued operation is a component
of our Company that may be a major line of business or geographical area of
operations that has been disposed or is held for sale. The result of that component is
separately reported as “discontinued operations”in the income statement. The
comparative income statement is restated as if the operation had been
discontinued from the start of the comparative period. The assets and
liabilities and minority interests of such
component classified as “discontinued operations”or “held for sale”is presented separately in the assets
and liabilities and minority sections, respectively, of the consolidated Balance
Sheet, from the date it is firstdetermined to be discontinued or held
for sale.
  Fair value
  We estimate the fair value of our
financial assets and financial liabilities including the accounts receivable,
prepayments, other receivables and other current assets, accounts payable, and
bankand other loans for
disclosure purposes by discounting its future contractual cash flows at the
estimated current market interest rate that is available to us for similar
financial instruments. The future disclosed values will change if there are
changesin the estimated market interest
rate.
  Accounting for business combinations
under common control
  We completed our 2005 Acquisition on
October 31, 2005. We completed our 2007 Acquisition on December 31, 2007. Our
acquisitions are treated as a business combination under common control. Under HKFRS,
we can choose to adopt either acquisition accounting or merger accounting to
record our 2005 Acquisition and 2007 Acquisition. We adopted merger accounting
to account for the business combinations under common control as we believe that the financial
statements prepared under merger accounting are more relevant to those
transactions.
  New accounting
pronouncements
  For a detailed discussion of new
accounting pronouncements, see Notes 3 and 41(D) to the Financial
Statements.
  INFLATION
  According to China’s National Bureau of Statistics,
China’s overall national inflation rate, as
represented by the general consumer price index, was approximately 1.8% in 2005,
1.5% in 2006 and 4.8% in 2007. Inflation or deflation has nothad a significant impact on our results
of operations in recent years.
  MARKET RISK AND RISK
MANAGEMENT
  Market risk is the risk of loss related
to adverse changes in market prices, including interest rates and foreign
exchange rates, of financial instruments we hold or have issued, all of which
were for purposes other than trading purposes. In the normal course of business,
we are routinely subject to a variety of risks, including market risk associated
with interest rate movements and currency rate movements on non-Renminbi denominated assets
and liabilities.
  66
  Foreign exchange rate
risk
  We conduct our business primarily in
Renminbi, which is also our functional and reporting currency. The Renminbi is
not a fully convertible currency. From 1994 to July 20, 2005, the official exchange rate for the
conversion of Renminbi to U.S. dollars was generally stable. On July 21, 2005,
the RPC government introduced a managed floating exchange rate system to allow
the value of the Renminbi to fluctuate within a regulatedband based on market supply and demand
and by reference to a basket of currencies. On the same day, the value of the
Renminbi appreciated by 2% against the U.S. dollar. The PRC government has since
made and in the future may make further adjustments to theexchange rate system. Fluctuations in
exchange rates may adversely affect the value, translated or converted into
United States dollars or Hong Kong dollars (which are pegged to the U.S.
dollar), of our net assets, earnings and any declared dividends. Fora detailed description of the unitary
managed floating rate system used by the PRC government to set foreign exchange
rates, see “Item 3. Key
Information -- Selected Financial Data -- Exchange Rate
Information.”
  We are exposed to foreign currency risk
primarily as a result of
our foreign currency borrowings for past purchases of telecommunications
equipment from overseas suppliers. In addition, we receive some of our revenues
from our international operations and pay related expenses in foreign
currencies.As a result, our foreign currency
exposure relates to our foreign currency-denominated debt and, to a limited
extent, cash and cash equivalents denominated in foreign
currencies.
  We have, in the past, entered into
currency swap agreements and foreign exchange forward contracts designed to
mitigate our exposure to foreign currency risks and may continue to do so in the
future.
  The following table provides information
regarding our foreign currency-sensitive financial instruments, which consist of
cash and cash equivalents,
short-term and long-term debt obligations and capital commitments as of December
31, 2007 and the expected maturity profile of these debt obligations and capital
commitments.
  Expected
      Maturity2008
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              Thereafter
              
              
              Total
              
              
              Fair
    ValueAssets:Cash and cash
      equivalentsU.S.
      dollars
              
              
              172
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              172
              
              
              
              172HK
      dollars
              
              
              148
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              148
              
              
              
              148Japanese
      yen
              
              
              16
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              16
              
              
              
              16Liabilities:U.S. dollar-denominated
      loans
              
              
              37
              
              
              
              32
              
              
              
              30
              
              
              
              30
              
              
              
              29
              
              
              
              449
              
              
              
              607
              
              
              
              334Euro-denominated
      loans
              
              
              45
              
              
              
              39
              
              
              
              38
              
              
              
              37
              
              
              
              37
              
              
              
              286
              
              
              
              482
              
              
              
              302Japanese yen-denominated
      loans
              
              
              41
              
              
              
              40
              
              
              
              39
              
              
              
              39
              
              
              
              38
              
              
              
              56
              
              
              
              253
              
              
              
              221HK dollar-denominated
      loans
              
              
              -
              
              
              
              -
              
              
              
              10
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10
              
              
              
              9
  Interest Rate Risk
  The People’s Bank of China has the sole authority
in the PRC to establish the official interest rates for Renminbi-denominated
loans. Financial institutions in the PRC set their effective interest rates
within the range established by the People’s Bank of China. Interest rates and
payment methods in the PRC on loans denominated in foreign currencies are set by the financial
institutions based on interest rate changes in the international financial
market, cost of funds, risk levels and other factors.
  We are subject to risks arising from
fluctuations in interest rates on our debts. The majorityof our liabilities are loans from banks
in the PRC. Rise in interest rates will increase the cost of new borrowings and
interest expenses of outstanding floating rate liabilities. Accordingly,
fluctuations in interest rates can lead to significant fluctuations in the fair value of these
instruments.
  The following table provides information
regarding our interest rate-sensitive financial instruments, which consist of
short-term and long-term debt obligations as well as the expected maturity
profile of suchobligations.
  67
  Expected
      Maturity2008
              
              2009
              
              2010
              
              2011
              
              2012
              
              Thereafter
              
              Total
              
              Fair Value(RMB equivalent in millions,
      except interest rates)Liabilities:RMB-denominated
      loans
              18,316
              
              10,161
              
              1,770
              
              -
              
              -
              
              2,049
              
              32,296
              
              28,524Fixed
      rate
              14,648
              
              3,225
              
              -
              
              -
              
              -
              
              2,049
              
              19,922
              
              18,008Average rate
              5.7%
              
              5.9%
              
              0.0%
              
              0.0%
              
              0.0%
              
              6.2%
              
              5.7%Variable
      rate
              3,668
              
              6,936
              
              1,770
              
              -
              
              -
              
              -
              
              12,374
              
              10,516Average rate(1)
              5.8%
              
              6.0%
              
              6.7%
              
              0.0%
              
              0.0%
              
              0.0%
              
              6.0%U.S. dollar-denominated
      loans
              37
              
              32
              
              30
              
              30
              
              29
              
              449
              
              607
              
              334Fixed
      rate
              32
              
              27
              
              24
              
              24
              
              24
              
              333
              
              464
              
              265Average
      rate
              1.9%
              
              1.1%
              
              0.7%
              
              0.7%
              
              0.7%
              
              0.6%
              
              1.0%
              
              -Variable
      rate
              5
              
              5
              
              6
              
              6
              
              5
              
              116
              
              143
              
              69Average rate(1)
              0.0%
              
              0.0%
              
              0.0%
              
              0.0%
              
              0.0%
              
              0.0%
              
              0.0%
              
              -Euro-denominated
      loans
              45
              
              39
              
              38
              
              37
              
              37
              
              286
              
              482
              
              302Fixed
      rate
              45
              
              39
              
              38
              
              37
              
              37
              
              286
              
              482
              
              302Average
      rate
              2.5%
              
              2.3%
              
              2.3%
              
              2.3%
              
              2.3%
              
              2.3%
              
              2.4%Japanese yen-denominated
      loans
              41
              
              40
              
              39
              
              39
              
              38
              
              56
              
              253
              
              221Fixed
      rate
              41
              
              40
              
              39
              
              39
              
              38
              
              56
              
              253
              
              221Average
      rate
              2.1%
              
              2.1%
              
              2.1%
              
              2.1%
              
              2.1%
              
              2.1%
              
              2.1%
              
              -HK dollar-denominated
      loans
              -
              
              -
              
              10
              
              -
              
              -
              
              -
              
              10
              
              9Fixed
      rate
              -
              
              -
              
              10
              
              -
              
              -
              
              -
              
              10
              
              -Average
      rate
              0.0%
              
              0.0%
              
              3.8%
              
              0.0%
              
              0.0%
              
              0.0%
              
              3.8%
              
              -
 _____________
 (1)
              The average interest rates for
      variable rate loans are calculated based on the rates reported
      as of December 31, 2007.
 
 ITEM
      6.
              DIRECTORS, SENIOR MANAGEMENT AND
      EMPLOYEES
  DIRECTORS AND SENIOR
MANAGEMENT
  In accordance with Hong Kong law and our
articles of association, members of our board of directors are elected by our
shareholders. Our board of
directors consists of12 members, including four independent
non-executive directors.
  The following table sets forth certain
information about our directors, each of whom were duly elected and will retire
from office at an annualgeneral meeting by rotation every three
years (but will be eligible for re-election at such annual general meeting),
senior management officers, joint company secretaries and qualified
accountant.
  Name
              
              Age
              
              PositionsZhang
    Chunjiang
              
              49
              
              Chairman and Executive
      DirectorZuo
Xunsheng
              
              57
              
              Executive Director and ChiefExecutiveOfficerLi Jianguo(1)
              
              54
              
              Executive
      DirectorZhang Xiaotie
              
              55
              
              Executive Director and Senior Vice
      PresidentLi Fushen(2)
              
              45
              
              Executive Directorand ChiefFinancialOfficerYan Yixun
              
              69
              
              Non-Executive
      DirectorCesareo Alierta Izuel(3)
              
              62
              
              Non-Executive
      DirectorJoséMaría Álvarez-Pallete
              
              44
              
              Non-Executive
      Director
  68
  John Lawson
      Thornton
              
              54
              
              Independent Non-Executive
      DirectorQian Yingyi
              
              51
              
              Independent Non-Executive
    DirectorHou Ziqiang
              
              70
              
              Independent Non-Executive
      DirectorTimpson Chung Shui
      Ming
              
              56
              
              Independent Non-Executive
      DirectorHong Chen Jin(Margaret
      Chen)(4)
              
              45
              
              Alternate DirectortoCesareo Alierta IzuelandJoséMaría Álvarez-PalletePeiAihua
              
              57
              
              Senior Vice
      PresidentZhao Jidong
              
              57
              
              Senior Vice
      PresidentJiang Zhengxin(5)
              
              51
              
              Vice
    PresidentTeng Yong
              
              53
              
              ChiefTechnicalOfficerZhu Lijun
              
              54
              
              Vice
    PresidentHuo Haifeng(6)
              
              43
              
              Joint Company Secretary and Vice
      PresidentMok Kam Wan
              
              45
              
              Joint Company
      SecretaryLeung June
    Man
              
              38
              
              Qualified
      Accountant
 _____________
 (1)
              Appointed asExecutive Director onJuly 12,
  2007.
 (2)
              Appointed asExecutive Director onJanuary15,
  2007.
 (3)
              Appointed asNon-Executive Director
      on December 5,
      2007.
 (4)
              Appointed as Alternate Director to
      Mr.Cesareo Alierta
      Izuelon December 5,
      2007 and ceased to be the Alternate Director to Mr. Mauricio Sartorius
      since December 5, 2007.
 (5)
              Appointed as Vice President on
      December 5, 2007.
 (6)
              Appointed asJoint CompanySecretaryeffective March 25,
      2008.
  Directors, Senior Management Officers,
Joint Company Secretaries and Qualified Accountant
  Directors
  Zhang
Chunjiang, 49, Chairman and
Executive Director, has served as a Director since June 2004. He has been the Chairman of China
Netcom (Group) Company Limited since September 2004 and President of China
Netcom Group since May 2003. He has served as a Non-executive Director of PCCW
Limited (listed on the Hong Kong Stock Exchange with an AmericanDepositary Receipt trading on the Pink
Sheets’OTC Market in U.S.) since April 2005.
Prior to joining China Netcom Group, Mr. Zhang served as Deputy Minister of the
Ministry of Information Industry (MII) and was one of the most senior regulatory
officialsin the PRC telecommunications industry
from December 1999 to May 2003. From August 1993 to December 1999, Mr. Zhang
held a series of senior-level positions at the former Liaoning Provincial Posts
and Telecommunications Bureau, the former Ministry of Postsand Telecommunications (MPT), and the
MII, including serving as the Deputy Director of the former Liaoning Provincial
Posts and Telecommunications Bureau, Director of Mobile Telecommunications
Administration of the MPT and Director of Telecommunications Administration of the MII. Mr. Zhang is a
senior engineer of professor level and has extensive experience in
telecommunications management, operations and technology.  Mr. Zhang
graduated from the Beijing University of Posts and Telecommunications in 1982
with a bachelor’s degree in
telecommunications.
  Zuo
Xunsheng, 57, Executive Director and Chief Executive
Officer, has served as Executive Director and Chief Executive Officer since May
2006, and served as Chief Operating Officer of the Company from December
2005 to May 2006 overseeing
general operations of the Company. Mr.Zuo has served as Senior Vice President
since July 2004. He has also served as Vice President of China Netcom Group
since April 2002. He hasservedas aNon-executiveDirectorand  Deputy Chairman ofPCCW Limited (listed on the Hong Kong
Stock Exchange with an American Depositary Receipt trading on the Pink
Sheets’OTC Market in U.S.)sinceJuly2007. Before joining China Netcom Group,
Mr.Zuo was President of the former
Shandong Telecommunications
Company from May 2000 to April 2002. From October 1997 to May 2000,
Mr.Zuo has served as Director of the
former Posts and Telecommunications Bureau of Shandong Province. From 1993 to
1997, Mr.Zuo has served as Director of the
former Bureau of Telecommunications of Jinan City.
Mr.Zuo graduated from Guanghua School of
Management of Peking University with an EMBA degree.
  69
  Li
Jianguo,54, Executive
Director, has served as Executive Director since July 2007and served as senior management officer
of China Netcom Group since
July 2007. Before joining
China Netcom Group, Ms. Li held a series of senior-level positions at China
United Telecommunications Corporation, including serving as a director and
chairperson of the trade union, and served as the Chairperson of the board of supervisors of
China United Telecommunications Corporation Limited (listed on the Shanghai
Stock Exchange) and Executive Director of China Unicom Limited (listed on the
New York Stock Exchange and the Hong Kong Stock Exchange). Ms. Liheld leading positions in various
enterprises, local governments and state ministries and committees for a
significant period of time, and she has extensive experience in working for the
government and enterprises and in management. Ms. Li graduated fromthe 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.
 
 Zhang
Xiaotie,55, Executive Director and Senior Vice
President, has served as a
Director since October 2004 and SeniorVice President since January 2007
overseeing procurement and logistics management.He served as the JointCompanySecretary from October 2004 to December
2005.Healsohas served asVice President of China Netcom Group since July 2003. From
June2002 to July 2003, Mr. Zhang also served
as Assistant to President and General Manager of Planning and Finance Department
of China Netcom Group. Before joining China Netcom Group, Mr. Zhang served as
Deputy Director andDirector of Economic Planning and
Communication Settlement Department of MII. He also held a series of
senior-level positions at the former MPT andformerBeijing Administration of
Telecommunications. Mr. Zhang graduated from the School of Economics and
Management of Tsinghua
University with an M.S. degree.
  Li
Fushen, 45, Executive DirectorandChief Financial Officer, has
servedas executive director since January
2007, and has served as ChiefFinancial Officer since September
2005.Heserved as Joint Company SecretaryfromDecember2006to March 2008.He served as FinancialController from July 2004 to August
2005. Since October 2005, hehasserved as the Chief Accountant of China
Netcom Group. He hasservedas aNon-executiveDirectorofPCCW Limited(listed on the Hong Kong Stock Exchange with
an American Depositary Receipt trading on the Pink Sheets’OTC Market in the U.S.)sinceJuly2007. From October 2003 to August 2005, he
served as General Manager of theFinance Department of China Netcom
Group. From November 2001
to October 2003, he servedas Deputy General Manager of Jilin
Communications Company and Deputy General Manager of the former Jilin Provincial
Telecommunications Company. He graduated from the Australian National University
with a master’sdegree in management, and from the Jilin
Engineering Institute with a degree in engineering management in
1988.
  Yan
Yixun, 69, Non-executive
Director, has served as a Director since 2001. He was a member of the Standing
Committee of the Eighth,Ninth and Tenth National People's
Congress.He was the Vice Chairman of
the Financial and Economic Committee of the Tenth National People's Congress and
a member of the Education, Science, Culture and Health Committee of the Ninth
National People's Congress. From December 1992 to November 2000, he served
as Vice Chairman of the Chinese Academy of Sciences, and prior to that he served
as Director of Shanghai Technical Physics Research Institute. He was a
first-term Board Director of Legend Holdings Limited and now serves as Chairman of the Board of New
Margin Venture Capital Co., Ltd. and Director of Chinese Academy Sciences
Holdings Co., Ltd.. Mr. Yan received a master's degree from the Institute of
Electronics of the Chinese Academy of Sciences in 1966 and graduatedfrom the Department of Radio Electronics
at Tsinghua University in 1962.
  Cesareo
Alierta Izuel, 62,Non-executive Director, has
served as a Director since December 2007. Hehas been director of Telefónica S.A. (listed on various stock
exchanges including Madrid,New Yorkand London) as from January 1997, member of its Executive Committee
since January 1999,and has
become theExecutiveChairman of
Telefónica S.A. since July
2000.Mr. Cesareo Alierta Izuel is a member of
the Colombia Business School Board of Overseers.Heis also a director of Telecom Italia
(listed on the stock exchange of Milan).Hewasa member of the Board of Directors of
Telefónica O2 Europe,
Plcfrom January 2006 to
January 2008.Between 1970 and 1985, he has been the
General Managerof the
Capital Markets division at Banco Urquijo in Madrid.He has been the Chairman and founder of
Beta Capital.As from 1991, he has also acted as the
Chairman of the Spanish Financial Analysts’Association.He has also been a member of the Board
ofDirectors and the
Standing Committee of the Madrid Stock Exchange.BetweenJune1996 and November 1999, hewasDirector and Chairman of Tabacalera,
S.A.. At that time Tabacalera, S.A. changed its name into Altadis, S.A.
(following the merger of
  70
  Tabacalera,
S.A. with the French Group, Seita)and he became Director and Chairman of Altadis, S.A.. He was the Chairman of
Altadis, S.A. until July 2000, but he continued as a member of the Board of
Directors and Executive Committee of Altadis S.A. until February 2008.
Mr. Cesareo Alierta Izuel holds a degree in law from the University of Zaragoza
and a master’sdegree of business administration from the University of Columbia.
  JoséMaría
Álvarez-Pallete, 44, Non-executive Director, has served
as a Director sinceSeptember 2005. He joined
TelefónicaInternacional S.A.. in February 1999 as General Manager
for Finance. In September of the same year, he became Chief Financial Officer of
TelefónicaS.A.. In July 2002, he was appointed as
Executive Chairman of TelefónicaInternacional S.A.. In July 2006, he was appointed as
General Manager of Telefónica Latinoamérica and a member of the Board of
Telefónica, S.A. (listed on
various Stock Exchanges including Madrid,New York andLondon).  In addition, Mr.
Álvarez-Pallete
is a Director on the boards
of Telecomunicaciones de Sao Paulo, S.A. (listed on the Stock Exchanges of Sao
Paulo and New York), Compañía de Telecomunicaciones de Chile, S.A.
(listed on the Stock Exchanges of Santiago de Chile and New York),
Telefónica de España S.A., Telefónica Móviles España S.A., Telefónica Datacorp, S.A., Telefónica de Argentina, S.A. (listed on the
Stock Exchanges of Buenos Aires and New York), Telefónica de PerúS.A.A. (listed on the Stock Exchange of
Lima), Colombia Telecomunicaciones,S.A. ESP, Telefónica Móviles Colombia, S.A., Telefónica Móviles México, S.A., Brasilcel, N.V., Allianca
Atlantica Holding B.V. and Telefónica O2 Europe, plc. Mr. Álvarez-Pallete received a
bachelor’s degree in economics from the
Universidad Complutense ofMadrid.
  John
Lawson Thornton, 54,
Independent Non-executive Director, has served as a Director since October 2004.
Mr. Thornton is Professor and Director of Global Leadership Project at Tsinghua
University in Beijing.  He was President and a Director of
The Goldman Sachs Group,
Inc. until July 2003.  Mr. Thornton is a Director of Ford Motor
Company (listed on the New York Stock Exchange), Industrial and Commercial Bank
of China Ltd. (listed on the Shanghai Stock Exchange and the Hong Kong Stock
Exchange),Intel Corporation (listed on NASDAQ
Stock Exchange) and News Corporation, Inc. (listed on the New York Stock
Exchange and the Australian Stock Exchange). He is also Chairman of the
Brookings Institution Board of Trustees. Mr. Thornton received an A.B. inhistory from Harvard College in 1976, a
B.A. and M.A. in jurisprudence from Oxford University in 1978 and a M.P.P.M.
from the Yale School of Management in 1980.
  Qian
Yingyi,51, Independent
Non-executive Director, has served as a Director since October 2004. He is a Professor of Economics at the
University of California, Berkeley.  Since 2006, Dr. Qian has been the
Dean of the School of Economics and Management at Tsinghua
University.  Dr. Qian has served as Independent Director of the
Industrial and Commercial Bank of China Ltd. (listed on the
Shanghai Stock Exchange and the Hong Kong Stock Exchange) as from 2005,
Independent Director of Vimicro International Corporation (listed on New York
NASDAQ) as from 2006, and the Chairman of the Supervisory Board ofVtion Wireless Technology AG as from
2007.  Before joining the Berkeley faculty in 2001, Dr. Qian has
taught in the Department of Economics at Stanford University and the University
of Maryland.  In 1990, Dr. Qian received his Ph.D. in Economics from
Harvard University, after receiving an M.Phil.
in management science/operations research from Yale University and an M.A. in
statistics from Columbia University. In 1981, Dr. Qian graduated from Tsinghua
University with a B.S. degree in mathematics.
  Hou
Ziqiang,70, Independent Non-executive Director,
has served as a Director since October 2004.  Since March 2005, Mr.
Hou has served as Independent Non-Executive Director of the Varitronix
International Limited (listed on the Hong Kong Stock Exchange).  Mr.
Hou founded China Kejian Company Limited in
1984 and has also been its Chairman.  From 1993 to 1997, Mr. Hou was
Director of the Institute of Acoustics of the Chinese Academy of Sciences. From
1988 to 1993, Mr. Hou was Secretary General of the Chinese Academy
ofSciences. Mr. Hou graduated from Peking
University in 1958 with a bachelor's degree in physics.
  Timpson
Chung Shui Ming, 56,
G.B.S., J.P., Independent Non-executive Director, has served as a Director since
October 2004. He is a fellow member of the Hong Kong Institute of Certified Public
Accountants and the Association of Chartered Certified Accountants. He is a
Independent Non-executive Director of Tai Shing International (Holdings)
Limited, Glorious Sun Enterprises Limited, The Miramar Hotel &
InvestmentCo. Limited and Nine Dragons Paper
(Holdings) Limited (four companies being listed on the Hong Kong Stock
Exchange). In addition, Mr. Chung is a member of the National Committee of the
11th Chinese People's Political Consultative Conference and the
Chairman of the Council of the City University
of Hong Kong. Formerly, he was a member of the National Committee of the 10th
Chinese People's Political Consultative Conference, an Executive Director of
Hantec Investment Holdings Limited and an Executive Directorof Shimao China Holdings Limited. He was
also
  71
  Chairman of the Hong Kong Housing
Society, a member of the Executive Council of the Hong Kong Special
Administrative Region, the Vice Chairman of the Hong Kong Special Administrative
Region Government Land FundAdvisory Committee, a member of the
Hong Kong Housing Authority, a member of the Managing Board of the
Kowloon-Canton Railway Corporation and a member of the Disaster Relief Fund
Advisory Committee. Mr. Chung holds a bachelor of science degree from the
University of Hong Kong and a
master’s degree of business administration from
the Chinese University of Hong Kong.
  Hong Chen Jin (Margaret Chen), 45,Alternate Director to Mr. Cesareo Alierta
Izuel and Mr. JoséMaría Álvarez-Pallete, served as an Alternate
Director of Mr. Cesareo
Alierta Izuel since December 2007 and an Alternate Director of Mr.
JoséMaría Álvarez-Pallete since December
2006.  She served as an Alternate Director of Mr. Mauricio Sartorius
who was previously a non-executive director of the Company, from December 2006 to December
2007. Ms. Hong Chen Jin began her career in China as faculty member of the
Management School of Shanghai Jiaotong University. She has worked in the United
States of America for seven years.  Among others, she worked asaVice President of research and
development in ACS, a software development company.  Prior to joining
Telefónica as a telecom
senior consultant in 1995, she was a partner of INDETEL, a telecom consulting
company in Spain. During the ten years in TelefónicaGroup prior to her Asia assignment, she
has profound operational experience in fixed-line and mobile business including
IT strategy, marketing and sales. In 2005, she was assigned as Director, Asia,
TelefónicaInternacional S.A.. At the beginning of 2007,Ms. Hong Chen Jin was awarded as one of
the most influential women in telecommunications industry in China for the year
of 2006 by the Ministry of Information Industry of China. Ms. Hong Chen Jin has
been a director of China Netcom Group Broadband ServiceApplications Limited Corporation For
National Engineering Laboratory as from August 2007.  Ms. Hong Chen
Jin holds a bachelor’s degree in computer science of Shanghai
Jiaotong University and a master’s degree of business administration, and
a master’s degree in Industrial Engineering in the
United States of America.
 
 Senior Management
Officers
  Zuo
Xunsheng,Executive Director and Chief Executive
Officer.
  Pei
Aihua,57,Senior Vice President,has served as Senior Vice President
since July 2004 overseeing corporate development, mobile
communications and administration. He has also served as Vice President of China
Netcom Group since April 2002. Before joining China Netcom Group, he was Deputy
General Manager of the former Beijing Telecommunications Company from July 2001 to April 2002, General
Manager of Sichuan Provincial Telecommunications Company from July 2000 to July
2001, and Deputy Director of the former China General Bureau of Posts and
Telecommunications from June 1997 to May 2000. Mr. Pei is a seniorengineer of professor level. He
graduated with a master’s degree in information communication
management jointly sponsored by Fudan University and the Norway Management
School in 2001. He graduated from Changchun Optical Precision Machinery College
withamaster’s degree in electrical engineering in
1993 and Beijing School of Telecommunications in microwave technology in
1976.
  Zhao
Jidong, 57,Senior Vice President,has served as Senior Vice President
since July 2004, and is responsible for Olympics communications, international affairs and
Beijing Municipal Branch Company. He has also served as Vice President of China
Netcom Group since July 2003. Before joining China Netcom Group, Mr. Zhao served
as General Manager of Beijing Communications Company fromJuly 2002 to July 2003, and General
Manager of the former Beijing Telecommunications Company from May 2000 to July
2002. From November 1994 to May 2000, Mr. Zhao served as the Deputy Director and
Director of the former Beijing Telecommunications Bureau. Mr.Zhao graduated with a
master’s degree in information and
communication management jointly sponsored by the Management School of Fudan
University and the Norway Management School, and from Fudan University with a
B.A. degree in English in 1975.
  Zhang
Xiaotie,Executive Director and Senior Vice
President.
  Li
Fushen,Executive Director and Chief Financial
Officer.
  72
  Jiang
Zhengxin,51, Vice President, has served as the
Vice PresidentsinceDecember 2007, in charge of marketing
and major account management, andserved as Vice President of China Netcom
Group since September 2007. He was the General Manager of Zhejiang Branch of
China Netcom GroupfromJune 2004 to September 2007 and served
as the deputy general manager of South Communication Co. Ltd of China
Netcom Group from March
2004 to June 2004. Before joining China Netcom Group, Mr. Jiang was the deputy
general manager of Jilin Mobile Communication Company from July
1999 to March 2004. Mr. Jiang served as deputy director of Bureau of
Telecommunications Administration in Changchun of Jilin Province
from February 1998 to July 1999. Mr. Jiang is a  senior engineerof professor
levelwith the degree of
PHD of political economy from Jilin University, he obtained a master’s degree of Radio engineering from
Beijing University of Posts
and Telecommunications in 1982.
 
 Teng
Yong,53,Chief Technical Officer,has served as Chief TechnicalOfficer since August 2006, responsible
for technical issues and ICT applications. He served as the General Manager of
Hebei Communications
Company from July 2004 to April 2006 and the General Manager of Tianjin
Communications Company from May 2002 to July 2004. Mr. Teng held the position of
General Manager of Tianjin Telecommunications Company from July 2000 to July
2002 and the DeputyDirector and later Director of the Posts
and Telecommunications Administration of Tianjin from May 1995 to May 2000. Mr.
Teng graduated from Nanjing University of Posts and Telecommunications with a
major in automatic telephone switching in February 1980,and later obtained a doctor degree of
management and engineering from Tianjin University.
  Zhu
Lijun,54,Vice President,has served as Vice President since
December 2006, responsible for network operation and consumer rights protection.
Since March 2005, hehas
served as Assistant to thePresidentof China Netcom Group, and served as
General Manager of Department of Planning and Construction starting from July
2004. He was the General Manager of Shanxi Communications Company from August
2002 to July 2004. He was
the General Manager of Shanxi Telecommunications Company from December 2001 to
August 2002. He worked as the General Manager of Telecommunications Company of
Guangxi Zhuang Autonomous Region from July 2000 to December 2001, and served as
the DeputyDirector of the Posts and
Telecommunications Administration of Neimenggu Autonomous Region from August
1996 to July 2000. Mr. Zhu graduated from the Department of Chinese Language and
Literature of Inner Mongolia Normal University in 1986, and later
obtained a master degree of international
business management from Australian National University.
  Huo
Haifeng,43,Joint Company Secretary and Vice
President,has served as
the JointCompany Secretary
from March2008and Vice Presidentfrom December 2006and iscurrently in charge of risk management
and legal affairs of the Company. He was the General Manager of Tianjin
Communications CompanyfromAugust 2004 to November
2006 and served as the General Manager of Dalian Branch of Liaoning
Communications Company from
December 2002 to August 2004. Before joining China Netcom Group, Mr. Huo was the
General Manager of Dalian Branch of Liaoning Telecommunications Company of
former China Telecom Group from April 2001 to December 2002. He worked as the
General Manager ofAnshan Branch of Liaoning
Telecommunications Company from August 2000 to April 2001. Mr. Huo served as
Director of Bureau of Telecommunications Administration in Anshan city of
Liaoning Province from October 1998 to August 2000.Mr. Huo graduatedfrom Changchun University of Posts and
Telecommunicationson the
majorof computer
application inJuly1987,and from Beijing University of Posts and
Telecommunications Graduate School in August 1998,obtained a master’sdegree of business management from
Australian National
University in October 2002.
  Joint Company Secretaries and Qualified
Accountant
  Huo
Haifeng, Joint Company
Secretaryand Vice
President.
  Mok
Kam Wan, 45, Joint Company Secretary. Ms. Mok
joined the Company in October 2005. She holds a bachelor’sdegree of laws from the University of
London and a master’s degree in business administration from
The Hong Kong Polytechnic University. Ms. Mok is an associate member of The
Institute of Chartered Secretaries and Administrators in the United Kingdom andThe Hong Kong Institute of Chartered
Secretaries.
  Leung
June Man, 38, Assistant to the Chief Financial
Officer and Qualified Accountant. Mr. Leung has joined the Company since June
2005. He graduated from Washington State University in 1992 with a
bachelor’s degree in business administration,
major in accounting. Mr. Leung is a member of both of Hong Kong Institute of
Certified Public Accountants and American Institute of Certified Public
Accountants.
  73
  COMPENSATION
  Our executive directors and senior
management officers receive
compensation in the form of salaries and allowances and benefits in kind,
including our contribution to the pension plans for our executive directors and
senior management officers. We have entered into service agreements with our
executive directors.
  Each of our directors is entitled to an
annual director’s fee of HK$200,000 (other than
Executive Directors and all Non-Executive Directors nominated by China Netcom
Group) as proposed by the board of directors and approved by our
shareholders at the
extraordinary general meeting held on 14 February 2007. Director’s fees are payable on a time pro-rata
basis for any non-full year’s service. Such directors shall also be
entitled to an additional fee of HK$10,000 for each Board meeting which
such directors attend. Our executive
directors and senior management officers are entitled to receive annual base
salary and performance-based bonus and any discretionary award of share options
as may be determined by the board of directors. In addition, eachdirector (other than Executive
Directors and all Non-executive Directors nominated by China Netcom Group) who
is the chairperson of any of the Audit Committee, Nominating and Corporate
Governance Committee, Compensation Committee, Strategy Committee andSupervision Committee is entitled to
receive an annual fee of HK$70,000 and each director (other than
Executive Directors and all Non-executive Directors nominated by China Netcom
Group) who is a member of these committees is entitled to receive an annual
fee of
HK$50,000.  Such directors shall also be entitled to an additional fee
of HK$5,000 for each committee meeting which such directors
attend.
  The following table sets out the
emoluments paid to our directors in 2007.
  Fees
              
              Basic
salaries,
                  allowances and benefits
                  in
    kind
              
              Subtotal
              
              Share option benefitamortized
              
              Contributions
      to
                  retirement
      schemes
              
              Total(in thousands of
      RMB)Zhang
    Chunjiang
              -
              
              840
              
              840
              
              149
              
              21
              
              1,010Zuo
Xunsheng
              -
              
              824
              
              824
              
              130
              
              21
              
              975Li Jianguo(1)
              
              
              344
              
              344
              
              --
              
              9
              
              353Zhang
    Xiaotie
              -
              
              724
              
              724
              
              130
              
              21
              
              875Li Fushen(2)
              -
              
              697
              
              697
              
              130
              
              21
              
              848Miao Jianhua(3)
              -
              
              360
              
              360
              
              182
              
              12
              
              554Tian Suning(4)
              -
              
              -
              
              -
              
              239
              
              -
              
              239Li Liming(5)
              -
              
              22
              
              22
              
              114
              
              21
              
              157Yan Yixun
              253
              
              -
              
              253
              
              96
              
              -
              
              349Cesareo Alierta Izuel(6)
              14
              
              -
              
              14
              
              -
              
              -
              
              14JoséMaría Álvarez-Pallete
              318
              
              -
              
              318
              
              -
              
              -
              
              318Mauricio Sartorius(7)
              239
              
              
              
              239
              
              
              
              
              
              239JohnLawson
    Thornton
              464
              
              -
              
              464
              
              -
              
              -
              
              464Victor Cha Mou Zing(8)
              501
              
              -
              
              501
              
              -
              
              -
              
              501Qian Yingyi
              604
              
              -
              
              604
              
              -
              
              -
              
              604Hou Ziqiang
              506
              
              -
              
              506
              
              -
              
              -
              
              506Timpson Chung Shui
      Ming
              520
              
              -
              
              520
              
              -
              
              -
              
              520Total
              3,149
              
              3,811
              
              7,230
              
              1,170
              
              126
              
              8,526
 
 (1)
              Appointed inJuly2007.
 (2)
              Appointed in January
      2007.
 (3)
              Resignedin July
    2007.
 (4)
              Resignedin July
    2007.
 (5)
              Resigned in January
      2007.
 (6)
              Appointed in December
      2007.
 (7)
              Resigned in
      December
      2007.
 (8)
              Retiredin May
    2008.
 
 74
  The five individuals whose emoluments
were the highest for the years ended December 31, 2007include three directors(2006: two)whose emoluments are reflected in the
analysis presented above. The emoluments payable tothe remaining two individuals are as
follows:
  Year endedDecember 31, 2007in thousands of
      RMBBasic salaries, bonus, allowances
      and benefits in kind
              1,450Share based
      compensation
              260Contributions to retirement
      schemes
              42Total
              1,752
  The aggregate compensation to which our
executive directors and senior management members were entitled (including
amounts paid and accrued) in 2007was RMB 8.8million, including basic salaries,
bonus, share option benefit amortized, allowances and benefitsin kind, as well as contributions to
retirement schemes.
  BOARD PRACTICE
  Our company has entered into service
contracts with each of our executive directors. The directors are subject to
rotation under our articles of association. The service contracts ofexecutive directors are subject to
termination at least sixty days' written notice. Pursuant to our articles of
association, the remuneration of our directors is determined by our shareholders
in a general shareholders' meeting. None of these service contracts will provide benefits to our
directors upon termination.
  Except as disclosed in this annual
report, none of our directors has or is proposed to have a service contract with
us (excluding contracts expiring or determinable by the employer within one
year without payment of
compensation (other than statutory compensation)).
  Board Committees
  Audit Committee
  The primary responsibilities of the
Audit Committee include supervising and managing our financial reporting system,
reviewing the auditors’appointment, and supervising the work of the
internal audit department as well as guiding and supervising our internal
control system. The Audit Committee comprises four Independent Non-executive
Directors, chaired by Mr. Timpson Chung Shui Ming. Other members ofthe committee include Dr. Qian Yingyi
and Mr. Hou Ziqiang.
  Compensation
Committee
  The duties of this committee include
making recommendationsto the Board in respect of the overall
compensation policies and structure of the directors and senior
managementof the company
and the establishment of formal and transparent procedures for the formulation
of these policies, determining the specific compensation package of the senior
management on behalf of the Board and making recommendations to the Board in
respect of the compensation of the
non-executive directors; reviewing and supervising the share option scheme and
option allocation plan of theCompany; and assessing the performance of
the directors as well as the senior management. The members of the
Committee are Dr. Qian
Yingyi, who serves as its chairman, Mr. Zhang Xiaotie, Mr. Li Fushen, Mr. John
Lawson Thornton and Mr. Timpson Chung Shui Ming.
  Nominating and Corporate Governance
Committee
  The Nominating and Corporate Governance
Committee is dedicated to the realization of a sound composition
with industry experience and professional capability within the Board. The
primary duties of the
  75
  committee include the nomination of
directors and senior management, supervising the implementation of corporate
governance system and the operation efficiency
of the Board and making recommendations to the Board with regard to the
optimization of the corporate governance structure. In accordance with our
Guidelines for Directorsof
the Company, the Nominating
and CorporateGovernance
Committee is responsible for formulating the criteria for selecting directors,
working out Directors’succession plan, suggesting candidates
of Directors, and submitting the related proposals to the Board and/or
shareholders’meeting for reviewand approval. For the nomination of
candidates for new appointments of directors, the committee primarily considers
whether the candidates have the necessary professional expertise and experience
to help the Board to perform its duties in a better way andto promote the development of the
Company. The independence of independent non-executive directors is examined by
the committee.
  The committee is chaired by Mr. John
Lawson Thornton, anIndependentNon-executive Director. Other members
include: Mr. Zhang Chunjiang, Mr. Zuo Xunsheng,Dr. Qian Yingyiand Mr. Timpson Chung Shui
Ming.
  Strategy Committee
  The Strategy Committee is primarily
responsible for reviewing the medium to long-term strategies, annual operation
plans and budgets and significant investmentplans of the Company. It also reviews
and monitors the procedures and system for the risk management of the Company
and supervises the implementation of our development
strategies.
  The committee is chaired by Mr. Zhang
Chunjiang. Other members include: Mr. Zuo Xunsheng, Ms. Li
Jianguo,Mr. Li Fushen, Mr. JoséMaría Álvarez-Pallete, Dr. Qian Yingyi and Mr.
Hou Ziqiang.
  Supervision
Committee
  The Supervision Committee is primarily
responsible for identifying any disciplinary breach, violation of regulationsand corrupt acts of the
middle-to-senior management by establishing and improving the supervisory system
and workflow and opening up channels for reporting such behaviors in accordance
with the Listing Rules and regulatory requirements. It urges the
directors and the middle-to senior management
as well as other staff to abide by the rules and be conscious of self-discipline
and faithfully discharge their duties.
  The committee is chaired by Ms.Li
Jianguo. Other members include Mr. Zhang Xiaotie,Dr. Qian Yingyi,Mr. Hou Ziqiang, andMr. Timpson Chung Shui
Ming.
  Summary Corporate Governance
Differences
  There are significant differences
between our corporate governance practices and those of U.S. issuers listed on
the New York Stock Exchange. Pursuant to Section 303A.11 of the NYSE Listing Manual, we
have disclosed certain of these differences on our website at
www.china-netcom.com/eng/about/summary.htm
  EMPLOYEES
  As of December 31, 2007, we had142,110full time employees. Substantially all
of our employees arelocated in China. The following table
sets forth the number of our employees serving in the capacities and for the
periods indicated:
  As of
      December 31,2005
              
              
              2006
              
              
              2007Number of
      Employees
              
              
              Percentage of Total
      Employees
              
              
              Number of Employees
              
              
              Percentage of Total
      Employees
              
              
              Number of
      Employees
              
              
              Percentage of Total
      EmployeesManagement, finance
      and
                Administrative
              
              
              23,784
              
              
              
              17.2
              
              
              
              25,112
              
              
              
              17.8
              
              
              
              25,580
              
              
              
              18Sales and
      marketing
              
              
              67,603
              
              
              
              48.8
              
              
              
              69,926
              
              
              
              49.7
              
              
              
              66,792
              
              
              
              47Operations and
      maintenance
              
              
              42,134
              
              
              
              30.4
              
              
              
              40,837
              
              
              
              29.0
              
              
              
              44,054
              
              
              
              31Others(1)
              
              
              4,919
              
              
              
              3.6
              
              
              
              4,872
              
              
              
              3.5
              
              
              
              5,684
              
              
              
              4Total
              
              
              138,440
              
              
              
              100.0
              
              
              
              140,747
              
              
              
              100.0
              
              
              
              142,110
              
              
              
              100.0
  (1)
              Includes research and development
      employees.
  76
  As of December 31, 2007we also employed approximately39,891temporary
employees.
  We participate in defined contribution
retirement plans for our employees. We are required to contribute a portion of
our employees’total wages to the PRC
government’s pension plan in accordance with
relevant local government regulation. Our contributions wereapproximately RMB1,274million in 2005,RMB 1,345million in 2006and RMB1,445 million in
2007.We also implement an
early retirement scheme whereby employees approaching retirement age may opt for
early retirement in exchange for certain early retirement benefits. The amount expensed as early
retirement benefits was approximately RMB 2 million in 2005,nil in 2006andnilin 2007.
  We have implemented a short-term and
long-term combined incentive remuneration scheme. The primary components of an
employee's remuneration are
a basic salary, a performance-based bonus and a stock option scheme for certain
employees. In addition, we emphasize the importance of employee training and
seek to improve the skills of our employees.
  In 2007, we did not experience anystrikes or other labor disturbances
that interfered with our operations, and we believe that the relationship
between our management and our labor union was good.
  SHARE OWNERSHIP
  Ownership of our shares by our directors
and executive officers
  Certain of our directors and executive officers have
a beneficial interest in our shares through their ownership of options as
further discussed in “--
Share Option Scheme.”
  Share option scheme
  The shareholders of our company passed a
resolution on September 30, 2004to approve and adopt the share option
scheme (the “Share Option
Scheme”). Having considered
the changes following the completion of our 2005 Acquisition and for the purpose
of clarifying the relevant scope of the Share Option Scheme, the Board convened
meetings on December 6, 2005, and made
minor amendments to the Share Option Scheme. The shareholders of the Company
passed a resolution at an extraordinary general meeting held on May 16, 2006 to
approve certain changes to the rules of Share Option Scheme.
  The main contents of the amended Share
Option Scheme are as follows:
  Purpose of the Share Option
Scheme
  The purpose of the Share Option Scheme
is to provide our company with a means to incentivize its senior management, to
attract and retain talent and to encourage other eligible participants to
enhance the value of the Company.
  Participants of the Share Option
Scheme
  The directors may invite any person
belonging to any of the following classes of participants to take up options to
subscribe for the ordinaryshares of the
Company:
  (i) the directors (including executive
and non-executive directors, but excluding independent non-executive
directors);
  (ii) members of the middle-to-senior
management; and
  77
  (iii) such class of “specialized professionals”as may be designated by the Compensation
Committee.
  For the purpose of sub-paragraph (iii)
above, “specialized
professionals”means such
professionals or management staff or technical or marketing staff holding
important positions that are important to the developmentof the Company business. The
Compensation Committee has the right to interpret “specialized professionals”and identify them.
  Maximum number of shares and effective
options
  (i)           The maximum number of shares which may
be allotted and issued upon the exercise of all outstanding options granted
and yet to be exercised under the Share Option Scheme and any other share option
scheme must not in aggregate exceed 30 percent of the shares of the Company then
in issue.
  (ii)           The total number of shares which may beallotted and issued upon
the exercise of all options to be granted under the Share Option Scheme must not
in aggregate exceed 10 percent of the shares in issue immediately after the
completion of the global offering of shares (and American depositary
shares) of the Company in November 2004 (the
“General
Scheme Limit”).
  (iii)           Subject to (i) above, the Company may
seek approval of the shareholders in general meeting to refresh the General
Scheme Limit and may seek separate approval of the shareholders in
general meeting to grant
options beyond the General Scheme Limit.
  (iv)           “Effective Options”means the share options granted under
the Share Option Scheme, irrespective of whether such options are exercisable in
accordance with the relevant vesting schedule; and “Vesting Schedule”means the arrangement whereby options
can be exercised by batch in accordance with the timetable pre-determined by the
Share Option Scheme.
  As at the latest practicable date prior
to the printing of this report, the total number of securities available for issue under the
Share Option Scheme is 140,191,160, representing 2.1 percent of the issued share
capital of the Company as at that date.
  Maximum entitlement of each
participant
  Unless otherwise approved by the
shareholders in general
meeting, the total number of shares issued and which may fall to be issued upon
the exercise of the options granted under the Share Option Scheme (including
both exercised or outstanding options) to any participant in any 12-month period
shall not exceed0.2 percent of the issued share capital
of the Company on the date of grant.
  Minimum period for which an option must
be held before it can be exercised
  With respect to the share options
granted prior to the listing of the Company’s shares on theHong KongStock Exchange, there is a minimum
period of 18 months from the later of the date of grant or the date of the
listing of the shares on theHong KongStock Exchange before an option can be
exercised; with respect to the share options granted after the listing of the Company’s shares on the Hong Kong Stock
Exchange, there is a minimum period of 24 months from the later of the date of
grant or the date of the listing of the shares on the Hong Kong Stock Exchange
before an option can be exercised.
  Period within which the shares must be taken up
under an option
  Any option shall lapse if not exercised
within 6 years from the later of the date of grant or the date of the listing
and commencement of trading of the shares on the Hong Kong Stock
Exchange.
  78
  The basisof determining the exercise price for
shares
  The exercise price is a price determined
by the Board or the Compensation Committee but shall not be less than the
highest of: (i) the closing price of the shares on the Hong Kong Stock Exchange
on the date ofgrant; (ii)
the average closing price of shares on the Hong Kong Stock Exchange for the five
trading days immediately preceding the date of grant; and (iii) the nominal
value of the shares.
  Consideration
  No consideration is payable on
acceptance of the grant of
an option.
  The remaining life of the Share Option
Scheme
  Unless otherwise terminated by the Board
of Directors in exercise of its powers in accordance with the rules governing
the Share Option Scheme, the Share Option Scheme will remain in force
fora period of 10 years
commencing on the date on which the Share Option Scheme is
adopted.
  Amendment to and termination of the
Share Option Scheme
  (i)           The Board of the Company may amend any
of the provisions of the Share Options Scheme and the terms of theoptions at any
time.
  (ii)           Any alterations to the matters set out
in the Listing Rules and alterations which are to the advantage of existing or
future grantees of options shall only be made with the approval of shareholders
at general meeting.
  (iii)           Anyalterations to the terms and conditions
of the Share Option Scheme which are of a material nature shall be approved by
the shareholders of the Company at general meeting, except where the alterations
take effect automatically under the existing terms ofthe Share Option
Scheme.
  (iv)           Any change to the authority of the Board
in relation to alteration of the terms of the Share Option Scheme shall be
approved by shareholders of the Company at general meeting. The amended Share
Option Scheme or the terms thereof shall comply with the relevant
requirements of the Listing Rules.
  (v)           During the effective term of the Share
Option Scheme, the Board may at any time terminate the Share Option Scheme or
decide not to grant any options under the Share Option Scheme, and in such event the options granted
under this Scheme (to the extent not already exercised) may still be exercisable
pursuant to the rules of the Share Option Scheme or may be cancelled by the
Board pursuant to rules thereof.
  (vi)           The Share Option Schemewill be terminated upon the expiry of
its effective term and any new share option scheme to be adopted by the Board
shall be approved by the shareholders of the Company at general
meeting.
  As at December 31, 2007, the directors, chief executive and
employees of our company
had the following personal interests in options to subscribe for shares of our
company granted under the Share Option Scheme.
  No. of shares involved in the
      options outstanding at the beginning of the
    year
              
              No. of shares involved in the
      options outstanding
      at the end of the year
              
              Date of the of grant the
      options
              
              Price per share payable for the
      exercise of the options
                  (in
    HK$)DirectorsZhang
      Chunjiang
              920,000
              
              920,000
              
              October 22,
      2004
              
              8.40Zuo
      Xunsheng
              480,000
              
              480,000
              
              October 22, 2004
              
              8.40Zhang
      Xiaotie
              480,000
              
              380,000
              
              October 22,
      2004
              
              8.40
  79
  Li
      Fushen
              480,000
              
              480,000
              
              October 22,
      2004
              
              8.40Yan
      Yixun
              354,000*
              
              354,000
              
              October 22,
      2004
              
              8.40Employees and other persons
      granted with options after the date of listing of the Company’s shares on theHong KongStock
    Exchange
              79,034,200
              
              71,580,700
              
              December 6,
      2005
              
              12.45Employees and other persons
      granted with options before the date of listing of the Company’s shares on the Hong Kong Stock
      Exchange
              94,898,700
              
              76,649,860
              
              October 22, 2004
              
              8.40Total
              176,646,900
              
              150,844,560
 
 Notes:
 *
              Mr.Yan Yixunhas undertakenthatall after-tax proceeds
      fromthe sale of shares acquired on the
      exerciseof
      hisoptionswill bedonated to the disadvantaged
      groups in society and people and groups in
  need.
 (a)
              The totalnumberof shares involved in the options
      outstanding represents 2.1 percent of the issued share capital of the
      Company as of April 30,
2008.
 (b)
              Grantees of the share options
      granted on October 22, 2004 are entitled to exercise the options in the following
      periods:
 (i)
              in respect of 40 percent of the
      options granted, from May 17, 2006 to November 16,
      2010;
 (ii)
              in respect of a further 20 percent
      of the options granted, from May 17, 2007 to November
      16,  2010;
 (iii)
              in respect of a further 20 percent
      ofthe options
      granted, from May 17, 2008 to November 16,  2010;
      and
 (iv)
              in respect of the remaining 20
      percent of the options granted, from May 17, 2009 to November
      16,  2010.
 (c)
              Grantees of the share options
      granted on December 6, 2005 are entitled to exercise the options in the following
      periods:
 (i)
              in respect of 40 percent of the
      options granted, from December 6, 2007 to December 5,
      2011;
 (ii)
              in respect of a further 20 percent
      of the options granted, from December 6, 2008 to December 5,
      2011;
 (iii)
              in respect of a further
      20 percent of the
      options granted, from December 6, 2009 to December 5, 2011;
      and
 (iv)
              In respect of the remaining 20
      percent of the options granted, from December 6, 2010 to December 5,
      2011.
 (d)
              During the year ended December 31,
      2007, no share option was grantedby the Company under the Share
      Option Scheme.
  According to the requirements under
HKFRS 2, the fair value of the options granted by our company to its employees
(including directors) to subscribe for shares in our company shall be recognized
as expensesin the
Company's consolidated income statement. Our company has made retrospective
adjustments to the recognized employee benefit costs or liabilities in relation
to the grant of options to subscribe for shares in our company to employees
(including directors) in prior years.
  Period during which options were
      exercised
              
              Exercise Price(HK$)
              
              
              Weighted average closing price per
      share immediately before dates of exercise of options
                  (HK$)
              
              
              Proceeds
      received
                  (HK$)
              
              
              Number of shares involved in the
      optionsFrom January 1, 2007 to December 31,
      2007
              
              
              8.40
              
              
              
              22.23
              
              
              
              136,343,760
              
              
              
              16,231,40012.45
              
              
              
              23.92
              
              
              
              92,796,075
              
              
              
              7,453,500
  Apart from the foregoing, at no time
during the year ended December 31, 2007was the Company, any of its holding
companies or subsidiaries or fellow subsidiaries, a party for any
arrangement to enable the directors or senior management of our company or any
of their spouses or children under eighteen years of age to acquire benefits by
means of the acquisition of shares in or debentures of our company or any other body
corporate.
  ITEM
      7.
              MAJOR SHAREHOLDERS AND RELATED
      PARTY TRANSACTIONS
  MAJOR SHAREHOLDERS
  As of April 30, 2008, we had6,684,883,000 shares outstanding. The
table below sets forth information as of the date of this annual report
regarding the beneficial
ownership of our ordinary shares by each person known by us to beneficially own
5% or more of our outstanding ordinary shares. Except as otherwise indicated, we
believe each shareholder named in this table has sole voting and investment
power withrespect to the shares shown as
  80
  beneficially owned. None of our
shareholders listed below has voting rights that are different from any of our
other shareholders.
  Shares
      Beneficially
                  OwnedName of
      Beneficial
      Owner
              
              
              Number
              
              
              Percentage(in
    millions)China Network Communications Group
      Corporation(1)
              
              
              
              4,647,449,014
              
              
              
              69.52
              %AllianceBernstein
      L.P.
              
              
              
              397,382,288
              
              
              
              5.94
              %Telefónica(2)
              
              
              
              333,971,305
              
              
              
              5.00
              %
 
 (1)
              China Network Communications Group
      Corporation’s beneficial interest is
      attributable to its ownership interest in CNC BVI, our direct
      parent company. The registered address of CNC BVI is P.O. Box 3140,
      Wickhams Cay 1, Road Town, Tortola, British Virgin Islands. The registered
      address of China Network Communications Group Corporation is No. 21,
      Financial Street, Xicheng District, Beijing,
      PRC.
 (2)
              On January 18, 2008, we were
      informed by the beneficiary ownersof our148,015,436 shares which were
      held in trust with China Netcom Group (BVI) Limited, our direct
      shareholder, that they have entered into a share purchase agreement withTelefónicato transfer their shares toTelefónicaor its related entities.Upon the completion of this
      transaction, the shares held byTelefónicaand itsentities will approximately reach 7.2%
      of our outstanding shares. Closing of the transaction is subject to
      a number of conditions including PRC government
  approval.
  RELATED PARTY
TRANSACTIONS
  Connected
Transactions
   Our 2005 Acquisition
  See “Item 4.  Business
Overview--History and Development--Our 2005 Acquisition.”
   Sale of Southern Service Region Business
  See “Item 4. Information on the
Company--History and Development-- Sale of Southern Service Region
Business.”
   Acquisition of Design
Institute
   See “Item 4. Information on the
Company--History and Development—Acquisition ofDesignInstitute.
   Cooperation Agreement in relation to the
2008 Beijing Olympic Games
  On September 15, 2005, the
Company’s wholly-owned subsidiary, China Netcom
(Group) Company Limited (“CNC China”) entered into a cooperation agreement
(the “Cooperation
Agreement”) withChina Netcom Group whereby
CNC China agreed to provide telecommunications goods and services to the Beijing
Organization Committee for the Games of the XXIX Olympiad (“BOCOG”). As consideration, CNC China is
entitled to the right and opportunity to conductproducts-related marketing activities
by using the 2008 Olympics composite logo and sponsorship logo as provided for
under the sponsorship agreement between China Netcom Group and BOCOG. The
consideration of the Cooperation Agreement is RMB540 million.
  81
  Loans Borrowed from Fellow Subsidiaries
and Other Holding Companies
  In 2007, the Group borrowed loans from
fellow subsidiaries and other holding companies. The balances bear interest
rates ranged from 3.0% to 3.8% per annum, unsecured and have repayment
terms of 3 years. The fair
value of the balances is RMB1,918 million.
   Continuing Connected
Transactions
  As of the date of this annual report,
China Netcom Group, as the ultimate controlling shareholder of the Company,
beneficially owned69.63%of the Company’s issued share capital. China Netcom
Group is therefore a connected person of the Company. In October 2004, CNC China
entered into certain agreements with China Netcom Group, and certain ongoing
transactions between CNC China on the one hand and China Netcom Group and its subsidiaries or
associates (other than the Group) on the other hand, were conducted in
accordance with the provisions under the aforesaid agreements up to October 31,
2005. In order to facilitate the management of our continuing
connectedtransactions in China after the
completion of our 2005 Acquisition, CNC China, China Netcom Group New Horizon
Communications Corporation Limited (“CNC New Horizon”) and China Netcom Group entered into
certain connected transaction agreements on September12, 2005 to regulate the continuing
connected transactions between China Netcom Group and its subsidiaries or
associates (other than the Group) on one hand and the Group on the other hand in
respect of the Group’s operations in 12 provinces, autonomous
region and municipalities in China, and
these agreements would replace the existing connected transaction agreements
between CNC China and China Netcom Group after the completion of our 2005
Acquisition. Certain ongoing transactions between CNC China and CNCNew Horizon on the one hand and China
Netcom Group and its subsidiaries or associates (other than the Group) on the
other hand as from October 31, 2005, (“Continuing connected transactions
relating to CNC China and CNC New Horizon”) were conducted in accordance with the provisions under the new
agreements. CNC China completed its merger with CNC New Horizon on November 3,
2006 (“Merger”). Pursuant to the aforesaid connected
transaction agreements, all rights and obligations of CNC New Horizon under the
agreements were taken over by CNC China
after the Merger and the agreements remained effective between China Netcom
Group and CNC China. The Company established China Netcom Group System
Integration Limited Corporation (“China Netcom System
Integration”) as
anindirect wholly-owned subsidiary in
April 2006. China Netcom System Integration entered into certain transactions
with China Netcom Group (and its subsidiaries), and on November 7, 2006, China
Netcom System Integration entered into a connected transactionagreement (“Information and Communications
Technology Agreement”) with
China Netcom Group.
  The aforesaid connected transaction
agreements (save for theInformationand Communications Technology
Agreement) have expired on 31 December 2007. On 6 November 2007, the Board of the Company approved
the renewal of certain connectedtransactions agreements between CNC China
and China Netcom Group in order to extend the term of the existing connectedtransactions agreements between CNC China, New
Horizon Communications and
China Netcom Group.Thenew agreements will be effective from 1January2008 for a term of 3years.China Netcom System Integration and
China Netcom Group entered into a newagreementon 6 November 2007 for a term of 3
years commencing from 1 January 2008, to replace the existing
Information and Communications Technology Agreement.The aforesaid renewal connected
transactions agreements were disclosed in the Company’sAnnouncement“Renewal of Continuing Connected
Transactions /Amendmentsto the Articles of Association”dated on 6 November 2007 and the
Circular datedon
9November
2007.
  Continuing connected transactions
relating to CNC China
  The following continuing connected
transaction agreements have come into effect only after the completion ofour 2005
Acquisition.
  Domestic Interconnection Settlement
Agreement
  Pursuant to the Domestic Interconnection
Settlement Agreement:
  82
  CNC Chinaand China Netcom Group agreed to
interconnect the network of China Netcom Group on the one hand and that ofCNC Chinaon the other and settle the charges
received in respect of domestic long distance voice services within their
respective service regions on a quarterly basis.
  For domestic long distance voice
services between China Netcom Group andCNC China, the telephone operator in the location of the
calling party makes a settlement payment to the telephone operator in the
location of the called party at the rate of RMB0.06 per minute (in case where
the call terminates within the network of either China Netcom GrouporCNC China) or RMB0.09 per minute (in case where
the call terminates outside the network of either China Netcom Group orCNC China).
  Thisagreement was renewed on 6November 2007for a term of 3 years commencing on 1January 2008. Pursuant to therenewedagreement,the settlement of payment relating to
domestic long distancevoiceservices shall be made by the telephone
operator in the location of the calling party to the telephone operator in the
location of the called party. For domestic long distance voice services between China Netcom Group
and CNC China, the telephone operator in the location of the calling party makes
a settlement payment to the telephone operator in the location of the called
party at the rate of RMB0.06 per minute, irrespective ofwhether the call terminates within the
network of either China Netcom Group or CNC China or outside the network of
either China Netcom Group or CNC China. The rate of RMB0.06 per minute mentioned
above shall be adjusted with reference to the relevant standards, tariffs or policies formulated by
the relevant regulatory authorities in China from time to time.The aforesaid settlement ratetakesretrospective effect from 1 April
2007.
  International Long Distance Voice
Services Settlement Agreement
  Pursuant tothe International Long Distance Voice
Services Settlement Agreement:
  CNC China and China Netcom Group agreed
to interconnect the networks of China Netcom Group and CNC China and settle the
chargesreceived in respect of international
long distance voice services on a quarterly
basis.
  For outbound international calls, China
Netcom Group reimburses CNC China for any amount it has paid to overseas
telecommunications operators. The revenues received by China Netcom Group less
the amount paid to overseas telecommunications operators are shared between
China Netcom Group and CNC China in proportion to the estimated costs incurred
by China Netcom Group andCNC Chinain connection with the provision of
outbound international long distance voice services.
  For inboundinternational calls, the revenues
received by CNC China from overseas telecommunications operators (other than the
Company and its controlled entities) less the amount paid to China Netcom Group
at the rate of RMB0.06 per minute (in case where the call terminates within the network of China
Netcom Group) or RMB0.09 per minute (in case where the call terminates within
the network of other operators) are shared between China Netcom Group and CNC
China in proportion to the estimated costs incurred by China Netcom Group andCNC Chinain connection with the provision of
inbound international long distance voice services.
  This agreement was renewed on 6November2007 for a term of 3 years commencing
on 1January
2008. Pursuant to the
renewalagreement,for inbound international calls, the settlement
rate between CNC China and China Netcom Group will be RMB0.06 per minute,irrespective of whether the
call terminates within the network of China Netcom Group or within the network
of other operators.The rate of RMB0.06 per minute mentioned above shall be
adjusted with reference to the relevant standards, tariffs or policies
formulated by the relevant regulatory authorities in China from time to
time.The aforesaid settlement ratetakesretrospective effect from 1
April2007.
  Property Leasing
Agreement
  Pursuant to the Property Leasing
Agreement:
  (a) CNC China leases to
China Netcom Group certain properties located throughout the service
regionsofCNC China, for use as offices and other
ancillary purposes; and
  83
  (b) China Netcom
Group leases to CNC China
certain properties located throughout service regionsCNC China, for use as offices,
telecommunications equipment sites and other ancillary
purposes.
  The charges payable by CNC China and by
China Netcom Group are based on market rates or thedepreciationand maintenance charges inrespectof each property, provided such
depreciation and maintenance charges shall not be higher than the market rates.Thecharges are payable quarterly in
arrears and are subject to review every year totake into account the then prevailing
market ratesof the
properties leased in that year.
  This agreement was renewed on 6
November2007 for a term of 3 yearscommencingon 1 January 2008.Pursuantto the renewal agreement, one party can
sub-lease the aforesaid
property to a third partywith theprior written
consent of the other party and provided that the thirdparty assumesthe responsibilities under the renewal
agreement.
  Property Sub-leasingAgreement
  Pursuant to the Property Sub-leasing
Agreement:
  (a)China Netcom Group agreed to sub-let to
CNC China certain properties owned by and leased from independent third parties,
for use as offices, telecommunications equipment sites and other ancillary
purposes.
  (b) The amounts payable by CNC China
under the Property
Sub-leasingAgreementare the same as the rental charges and
other fees (including management fees) payable by China Netcom Group to the
relevant third parties.
  This agreement has expired on 31 December
2007.Asit is expected that the number of
properties to be sublet
from China Netcom Group will besubstantially reduced, the property
sub-leasing agreement will not be renewed.
  Master Sharing
Agreement
  Pursuant to the Master Sharing
Agreement:
  (a)CNC China will provide customer
relationship management
services for large enterprise customers of China Netcom
Group;
  (b)CNC China will provide network
management services to China Netcom Group;
  (c)CNC China will share with China Netcom
Group the services provided by administrative and managerial staff
inrespect of central
management of the business operations, financial control, operation and
maintenance of network, human resources and other related matters of both CNC
China and China Netcom Group;
  (d)CNC China will provide to China Netcom
Group supporting services
such as billing and settlement provided by the business support
centre;
  (e)China Netcom Group will provide
toCNC China supporting services, including
telephone card production, development and related services and IC card
inter-provincial and
inter-network clearing services;
  (f)China Netcom Group will provide to CNC
China certain other shared services, including advertising, publicity, research
and development, business hospitality, maintenance and property
management;
  (g)China Netcom Group will provide certain office space in
its headquarters to CNC China for use as its principal executive
office;
and
  (h)CNC China and China Netcom Group will
share the revenues received by China Netcom Group from other operators whose
networks interconnect with
the Internet backbone network of China Netcom Group and will share the monthly
connection fee that China Netcom Group pays to the State Internet Switching
Centre.
  84
  CNC China and China Netcom Group own
certain equipment and facilities forming the Internet backbone network of China Netcom
Group. This Internet backbone network interconnectswith the networks of other operators.
Such interconnection generates revenue which is settled with China Netcom Group
and shared between China Netcom Group and CNC China under the Master Sharing
Agreement.
  The services set out in paragraphs (a)
to (g) above and the revenue and fee set out in paragraph (h) above are shared
between CNC China and China Netcom Group on an on-going basis from time to time
and the aggregatecosts
incurred by CNC China or China Netcom Group for the provision of the services
set out in paragraphs (a) to (g) above and the revenue and fee receivable and
payable by China Netcom Group as referred to in paragraph (h) above are
apportioned between CNC China and China Netcom Group according
to their respective total assets value as shown in their respective financial
statements on an annual basis.
  This agreement was renewed on 6November2007. The renewal agreement iseffectivefrom 1 January 2008 fora term of 3 years.
  Engineering and Information Technology
Services Agreement
  The Engineering and Information
Technology Services Agreement governs the arrangements with respect to the
provision of certainengineeringand information technology-related
services to CNC China by
China Netcom Group,which
include planning, surveying and design services in relation to
telecommunications engineering projects, construction services in relation to
telecommunications engineering projects, supervision services in relation to telecommunications engineering
projects and information technology services.
  The charges payable for engineering and
information technology-related services described above are determined with
reference to market rates. In addition, where the value of any single item of engineering
designorsupervision-related service exceeds
RMB0.5 million or where the value of any single item of engineering
construction-related service exceeds RMB2 million, the award of such services
will be subject to tender. The charges are settled between CNC China
and China Netcom Group as and when the relevant services are
provided.
  This agreement was renewed on 6 November
2007. The renewal agreement iseffectivefrom 1 January 2008 for a term of 3
years.
  Materials Procurement Agreement
  Pursuant to the Materials Procurement
Agreement, CNC China may request China Netcom Group to act as its agent for the
procurement of imported and domestic telecommunications equipment and other
domestic non-telecommunications equipment, and maypurchase from China Netcom Group
certain products, including cables, modems and yellow pages telephone
directories. China Netcom Group further agreed to provide to CNC China storage
and transportation services related to the procurement and purchase of
materials or
equipment.
  Commission and/or charges for the
domestic materials procurement services shall not exceed the maximum rate of 3%
of the contract value. Commission and/or charges for the above imported
materials procurement services shall not exceedthe maximum rate of 1% of the contract
value. The price for the purchase of China Netcom Group’s products is determined with reference
to the following principles and limits (the “Pricing Principles”)and shall not exceed:
  (a)the government fixed
price;
  (b)where there is no government fixed
price but a government guidance price exists, the government guidance
price;
  (c)where there is neither a government
fixed price nor a government guidance price, the market price;
or
  (d)where none of the above is
applicable, the price to be
agreed between the relevant parties and determined on a cost-plus
basis.
  85
  Commission charges for the storage and
transportation services are determined with reference to market
rates.
  Payments under the Materials Procurement
Agreement will be made as
and when the relevant equipment or products have been procured and
delivered.
  This Agreement was renewedon 6November2007. The renewal agreement iseffectivefrom 1 January 2008 for a term of 3
years.
  Ancillary Telecommunications
Services
Agreement
  The Ancillary Telecommunications
Services Agreement governs the arrangements with respect to the provision of
ancillary telecommunications services to CNC China by China Netcom Group, which
include certain telecommunications pre-sale, on-saleand after-sale services, sales agency
services, printing and invoice delivery services, maintenance of telephone
booths, customers acquisition and servicing and other customers’services.
  The charges payable for the services
described above are determinedwith reference to the Pricing
Principlesand the service charges are settled
between CNC China and China Netcom Group as and when the relevant services are
provided.
  This agreement was renewed on 6 November
2007.Therenewal agreement is effective from 1January 2008 for a term of
3 years.
  Support Services
Agreement
  Pursuant to the Support Services
Agreement, China Netcom Group provides CNC China with various support services,
including equipment leasing (other than equipment covered under the
Telecommunications
Facilities Leasing Agreement) and maintenance services, motor vehicles services,
security services, basic construction agency services, research and development
services, employing training services and advertising services and other support
services.
  The charges payable for the services
described above are determined with reference to the Pricing Principles, and are
settled between CNC China and China Netcom Group as and when relevant services
are provided.
  This Agreement has been renewed on 6November 2007. The renewed agreement takeseffectiveon 1January 2008 for a term of 3
years.
  Telecommunications Facilities Leasing
Agreement
  Pursuant to the Telecommunications
Facilities Leasing Agreement, China Netcom Group leases inter-provincial
fiber-opticcables within
the service regionsofCNC Chinato CNC China, and leases certain
international telecommunications resources (including international
telecommunications channel gateways, international telecommunications service
gateways, international submarine cable capacity, international land
cables and international satellite facilities) to CNC China, and China Netcom
Group leases certain other telecommunications facilities required by CNC
Chinafor its operations.
  The rental charges and service chargesfor the leasing of
inter-provincial fibre-optic cables, international telecommunications resources
and other telecommunications facilities are based on the annual depreciation
charges of such fibre-optic cables, resources and telecommunications
facilitiesprovided that such charges shall not be
higher than market rates. CNC Chinahall be responsible for the on-going
maintenance of such inter-provincial fibre-optic cables and international
telecommunications resources. CNC Chinaand China Netcom Group shall
determine and agree on
which party is to provide maintenance services to the other telecommunications
facilities leased by China Netcom Group to CNC Chinabased on the latter’s operational requirements. Unless
otherwise agreed by CNC Chinaand China NetcomGroup, such maintenance service charges
shall be borne by CNC China. If China Netcom Group shall be responsible for
maintaining the other telecommunications facilities that it leases to CNC
Chinabased on the latter’s operational requirements, CNC China
shall pay to China Netcom
Group the relevant maintenance
  86
  service charges which shall be
determined with reference to market rates. Where there are no marketrates, the maintenance charges shall be
agreed between the parties and determined on a cost-plus basis. The net rental charges and service
charges due to China Netcom Group under the Telecommunications Facilities
Leasing Agreement will be settled between CNC China and China Netcom Group on a
quarterly basis.
  This agreement was renewed on 6 November
2007.The renewal agreement
iseffectivefrom 1 January 2008 for a term of 3
years.
  Continuing Connected Transactions
Relating to China Netcom System Integration
  Information and Communications
Technology Agreement
  Pursuant to Information and
Communications Technology
Agreement:
  (i) China Netcom System Integration (and
itssubsidiaries) providesinformation andcommunicationstechnology services to China Netcom
Group(and its subsidiaries
(other than the Group)),
which include systemintegration services, software development
services, operational maintenance
services, consultancy services, equipment leasing-related services and
product sales and distribution related services.
  (ii) China Netcom System Integration will
also subcontract services
ancillary totheprovision ofinformation andcommunicationstechnologyservices, namely thesysteminstallation andconfigurationservices, to the subsidiaries and
branches of China Netcom Group in China Netcom Group’s southern service regions in the PRC.
  The charges payable for the services
provided under the Information and Communications TechnologyAgreementare determined with reference to the
following pricing principles and limits:
  (i)   thegovernment fixed price;
  (ii)  wherethere is no government fixed price but
a government guidance price exists,thegovernment guidance price;
or
  (iii)  wherethere is neither agovernmentprice nor a government guidance price,
the market price.
  Inrelation to the charges payable for the
services provided under the Information and Communications Technology Agreement
that are to be determined with reference to the market
price:
  (a)If the value of any single item ofsysteminstallation andconfigurationservicesprovided by China Netcom Group (and its
subsidiaries) to China Netcom System Integration (and its subsidiaries) exceeds
RMB0.3 million, the award of such services will be subject to tender;
or
  (b)If the value of any single item
of systemintegration,software development, operational
maintenance, consultancy and equipment leasing-related services exceeds RMB0.5
million, or where the value of any single item of product sales and distribution
related services exceeds RMB2 million, the award of such services will be subject to
tender.
  This agreement was renewed on 6 November
2007. The renewal agreement iseffectivefrom 1 January 2008 for a term of 3
years.
  Interests of experts and
counsel
  Not applicable.
  87
 
  ITEM
      8.
              FINANCIAL
      INFORMATION
  Our audited consolidated financial statements are set forth
beginning on page F-1. 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 involved in legal proceedings
in the ordinary course of
our business. We are not involved in any litigation, arbitration or
administrative proceedings that could have a material adverse effect on our
financial condition or results of operations, taken as a whole. So far as we are
aware,no such material litigation,
arbitration or administrative proceedings are threatened.
  Dividend Policy
  The payment and the amount of any
dividends will depend on our results of operations, cash flows, financial
condition, statutory and regulatory restrictions on the payment of dividends by us,
future prospects and other factors, that our directors may consider relevant. In
addition, our controlling shareholder, China Netcom Group, is able to influence
our dividend policy.
  Dividends may be paid only out ofour distributable profits
as permitted under Hong Kong law, which does not restrict the payment of
dividends to non-resident holders of our securities. To the extent profits are
distributed as dividends, such portion of profits will not be available to
bereinvested in our
operations.
  Holders of our ADSs will be entitled to
receive dividends, subject to the terms of the deposit agreement, to the same
extent as holders of our shares, less the fees and expenses payable under the
deposit agreement and any withholding taxes.
  Our ability to pay dividends depends
substantially on the payment of dividends to us by CNC China. CNC China must
follow the laws and regulations of the PRC and its articles of association in
declaring and paying dividends to us. As a whollyforeign-owned enterprise in China, CNC
China is required to provide for a reserve fund and a staff and
workers’bonus and welfare fund, each of which
is appropriated from net profit after taxation but before dividend distribution
according to the prevailing accounting rules and regulations in
the PRC. CNC China is required to allocate at least 10% of its net profit to the
reserve fund until the balance of this fund has reached 50% of its registered
capital. Appropriations to the staff and workers’bonus and welfare fund, which are determined at
the discretion of CNC China’s directors, are charged to expense as
incurred in the consolidated financial statements. None of CNC China’s contributions to these statutory funds
may be used for dividend purposes.
  ITEM
      9.
              THEOFFER AND
      LISTING
  In connection with our initial public
offering, our American depositary shares, or ADSs, each representing 20 ordinary
shares, were listed and commenced trading on the New York Stock Exchange on
November 16, 2004 under the symbol “CN.”Our ordinary shares were listed and
commenced trading on the Hong Kong Stock Exchange on November 17, 2004. Prior to
these listings, there was no public market for our equity securities. 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.
  As of December 31, 2007and April 30, 2008, there were respectively6,674,328,400and 6,684,883,000ordinary shares issued and outstanding. As of December 31,
2007and April 30, 2008, there were, respectively 1 and 1
registered holders of American depositary receipts evidencing 6,580,520 and
6,260,027 ADSs. Since certain of the ADSs are held by nominees, the above number
maynot be representative
of the actual number of U.S. beneficial holders of ADSs or the number of ADSs
beneficially held by U.S. persons. The depositary for the ADSs is Citibank,
N.A.
  The high and low closing sale prices of
the shares on the Hong Kong StockExchange and of the ADSs on the NYSE for
the periods indicated are as follows.
  88
  Price per Share
      (HK$)
              
              Price per ADS
      (US$)High
              
              Low
              
              High
              
              LowAnnual2004 (from listing
      date)
              10.60
              
              9.10
              
              26.90
              
              23.102005
              13.95
              
              9.95
              
              35.99
              
              25.452006
              25.45
              
              11.98
              
              61.15
              
              30.822007
              25.95
              
              16.64
              
              67.17
              
              41.34QuarterlyFirst Quarter,
      2006
              13.96
              
              11.98
              
              35.66
              
              31.64Second Quarter,
      2006
              15.45
              
              12.10
              
              40.28
              
              30.82Third Quarter,
      2006
              14.55
              
              12.92
              
              38.00
              
              33.50Fourth Quarter,
      2006
              25.45
              
              13.52
              
              61.15
              
              34.99FirstQuarter,2007
              21.30
              
              16.64
              
              55.23
              
              41.43Second Quarter,
      2007
              23.05
              
              18.66
              
              58.46
              
              46.58Third Quarter,
      2007
              21.80
              
              17.60
              
              56.75
              
              44.51Fourth Quarter,
      2007
              25.95
              
              19.96
              
              67.17
              
              52.15MonthlyNovember 2007
              24.9
              
              19.96
              
              64.07
              
              52.15December 2007
              25.1
              
              23.1
              
              65.9
              
              59.12January 2008
              25.7
              
              19.96
              
              65.01
              
              56.75February 2008
              25.8
              
              21.9
              
              66.59
              
              57.76March 2008
              24.45
              
              19.9
              
              64.33
              
              52.41April 2008
              24.75
              
              21.45
              
              62.48
              
              54.88
 
 ITEM
      10.
              ADDITIONAL
      INFORMATION
  SHARE CAPITAL
  Not applicable.
  MEMORANDUM AND ARTICLES OF
ASSOCIATION
  Ouramended Memorandum and Articles of
Association became effective on December 6, 2007 (“Amended M&A”). The Amended M&A amends and
restates our Memorandum and Articles of Association dated October 22, 1999
(“Original
M&A”). A summary of the
Original M&A is contained in the section entitled
“Description of Share
Capital”in our
registration statement on Form F-1 (File No. 333-119786)filed with the Security and ExchangeCommissionandis hereby incorporated by
reference.The following is
a summary of the amendments.
  1.
              The minimum number of Directors
      was changed from two to
three.
  2.
              It is now required that two-third
      or more of the Directors present at a Board meeting may appoint or remove
      a Chief Executive Officer or Joint Chief Executive Officer of the
      Company.  Inaddition, the terms and
      remuneration of the Chief Executive Officer or Joint Chief Executive
      Officer shall be those as the Directors think
  fit.
  3.
              The Chief executive Officer or a
      Joint Chief Executive Officer may now nominate one or more persons to hold
      theoffice of Senior
      Vice-Presidents or Chief Financial Officer of the Company to be appointed
      by the Directors.
  4.
              The number of Directors that shall
      constitute a quorum was changed from two to
  three.
  5.
              Notice of a meeting of Directors
      can now be given by any electronic
    means.
  6.
              It is now required that board
      meetings shall be chaired by the Chairman of the
    Board.
  Our Amended M&A is filed herewith as
Exhibit 1.2.
  89
  MATERIAL CONTRACTS
  See “Item 7. Major Shareholders and Related
Party Transactions - Related Party Transactions”for certain arrangements we have
entered into with China Netcom Group.
  EXCHANGE CONTROLS
  We receive substantially all of our
revenues in Renminbi, which is not a freely convertible currency. Although
central government’s policies were introduced in
1996 to reduce restrictions
on the convertibility of Renminbi into foreign currency for current account
items, conversion of Renminbi into foreign exchange for capital items, such as
foreign direct investment, loans or security, requires the approval of
theState Administration of Foreign
Exchange and other relevant authorities.
  The People’s Bank of China, or PBOC, sets and
publishes daily a base exchange rate with reference primarily to the supply and
demand of Renminbi against a basket of currencies in themarket during the prior day. The PBOC
also takes into account other factors, such as the general conditions existing
in the international foreign exchange markets. Since 1994, the conversion of
Renminbi into foreign currencies, including Hong Kong dollarsand U.S. dollars, has been based on
rates set by the PBOC, which are set daily based on the previous day’s interbank foreign exchange market
rates and current exchange rates in the world financial markets. From 1994 to
July 20, 2005, the official exchangerate for the conversion of Renminbi to
U.S. dollars was generally stable. Although Chinese governmental policies were
introduced in 1996 to reduce restrictions on the convertibility of Renminbi into
foreign currency for current account items, conversionof Renminbi into foreign exchange for
capital items, such as foreign direct investment, loans or securities, requires
the approval of the State Administration for Foreign Exchange and other relevant
authorities. On July 21, 2005, the PRC government introduced a managed floating exchange rate
system to allow the value of the Renminbi to fluctuate within a regulated band
based on market supply and demand and by reference to a basket of currencies. On
the same day, the value of the Renminbi appreciated by 2% against the U.S. dollar. The PRC
government has since made and in the future may make further adjustments to the
exchange rate system. The PBOC announces the closing price of a foreign currency
traded against the Renminbi in the inter-bank foreign exchangemarket after the closing of the market on
each working day, and makes it the central parity for the trading against the
Renminbi on the following working day.
  TAXATION
  The taxation of income and capital gains
of holders of ordinary shares or ADSs is subjectto 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. There
is no reciprocal tax treaty in effect between Hong Kong and theUnited States.
  Hong Kong
  Tax on dividends
  No tax is payable in Hong Kong in
respect of dividends paid by us.
  Profits
  No tax is imposed in Hong Kong in
respect of capital gains from the sale of property such as the shares. Trading
gains from the sale of property 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 profits tax, which is currently imposed at the rate of17.5% on corporations and at a standard
rate of 16.0% on individuals. In the 2008-09 Budget, the Financial Secretary of
Hong Kong proposed to lower the
  90
  corporation profit tax rate from 17.5%
to 16.5% and the standard rate for individuals from 16% to 15%.Such revision of tax rate will be
effective after the passing of the relevant legislation by the Legislative
Council.Gains from the sale 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 profits tax would thus arise in respect of trading gains from the sale
of shares realized by persons carrying on a business of trading or dealing in
securities in Hong Kong.
  Stamp duty
  Hong Kong stamp duty will be payable by
the purchaseron every
purchase and by the seller on every sale of the shares. The duty is charged at
the current rate of 0.2% of the consideration or, if higher, the fair value of
the shares being sold or transferred (the buyer and seller each paying half of
such stamp duty). 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 charged on the instrument of transfer (if any) (in
addition to the stamp duty otherwise chargeable thereon), and the transferee
will be liable for payment of such duty.
  Estate duty
  The Revenue (Abolition of Estate Duty)
Ordinance 2005 came into effect on 11 February 2006 inHong 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 holders of shares whose death occurs on or
after February 11, 2006.
  Prior to its abolition,
estateduty was charged,
according to a progressive scale of rates which vary with the date of the
deceased's death, on the principal value of the property situate in Hong Kong
which passes on the death of the deceased, or at the amount of HK$100 (for
transitional estates). The shares are Hong Kong
property for the purpose of the Estate Duty Ordinance (Chapter 111 of the Laws
of Hong Kong). Accordingly, the shares may be subject to Hong Kong estate duty
on the death of the beneficial owner of the shares, regardless of the place of the owner’s residence, citizenship or
domicile.
  In respect of estates of a deceased
whose death occurred on or after April 1, 1998 and before July 15, 2005, estate
duty was chargeable on the principal value of the deceased’s estate at aprogressive rates from 5% to 15% and no
estate duty was payable where the principal value of the dutiable estate did not
exceed HK$7.5 million. The maximum rate of 15% was applied where the principal
value exceeded HK$10.5 million. The estate duty chargeable in respect of estates of a deceased
whose death occurred on or after July 15, 2005 and before February 11, 2006 with
the principal value exceeding HK$7.5 million (the “transitional estates”) was reduced to a nominal amount of
HK$100. No Hong Kong estateduty is payable for death occurring on
or after February 11, 2006.
  United States of
America
  The following is a summary of certain
United States federal income tax consequences relating to the purchase,
ownership and disposition of shares or ADSs by investors who are “U.S. Persons”(as defined below) that hold the shares
or ADSs as a capital asset. This discussion is based on United States federal
income tax law, as in effect on the date hereof and which is subject to
differing interpretations or change, possibly with retroactive effect. This
discussion is for general information only and does not address all of the tax
considerations that may be relevant to specific holders in light of their
particular circumstances or to holders subject to special treatment under United States federal income tax
law (such as banks, insurance companies, partnerships and their partners,
tax-exempt entities, financial institutions, broker-dealers, persons who have
acquired our shares or ADSs as part of a straddle, hedge, conversion, or other integrated investment,
persons who own, directly or by attribution, 10% or more of the combined voting
power of all classes of stock of the Company, or persons that have a
“functional
currency”other than the
United States dollar), and non-U.S. Holders. This summary does not
address any United States state, local or foreign tax considerations or any
United States federal estate, gift or alternative minimum tax considerations of
a holder of shares or ADSs.
  91
  As used in this summary, the term
“U.S. Person”means (i) an individual who is a
citizen or resident of the United States, (ii) a corporation, or other entity
treated as a corporation, created or organized under the laws of the United
States or any political subdivision thereof, (iii) an estate the income of which is subject to
United States federal income tax regardless of the source thereof, or (iv) a
trust (A) if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States persons have the authority
to control all substantial decisions of the trust or (B) that otherwise elected
to be treated as a United States person under the Code.
  If a partnership (including any entity
treated as a partnership for United Statesfederal income tax purposes) holds
shares or ADSs, the tax treatment of a partner in such partnership will depend
upon the status of the partner and the activities of the partnership. Partners
in such a partnership are urged to consult their tax advisersas to the particular United States
federal income tax consequences applicable to them.
  Prospective investors are urged to
consult their tax advisers regarding the United States federal, state, local and
foreign income and other tax considerations of the purchase, ownership and disposition of
shares or ADSs.
  General
  Holders of ADSs evidencing shares will
be treated as the owners of the shares represented by those ADSs. Accordingly,
no gain or loss will be recognized upon the exchange of ADSs for the
holder’sproportionate interest in the shares, a
holder’s tax basis in the withdrawn shares will
be the same as its tax basis in the ADSs surrendered in exchange therefor, and
the holding period in the withdrawn shares will include the period during which
the holder held the surrendered
ADSs.
  Taxation of
dividends
  Subject to the discussion below under
“--Passive Foreign
Investment Company”, the
gross amount of cash distributions with respect to the shares or ADSs will, upon
receipt, be includible in the gross income of a holder as dividend income to the
extent of our current and accumulated earnings and profits, as determined under
United States federal income tax principles. A non-corporate recipient of
dividend income will generally be subject to tax on dividendincome from a “qualified foreign
corporation”at a maximum
United States federal tax rate of 15% rather than the marginal tax rates
generally applicable to ordinary income so long as certain holding period
requirements are met. A non-United States corporation (other than a passive foreign
investment company) generally will be considered to be a qualified foreign
corporation (i) if it is eligible for the benefits of a comprehensive tax treaty
with the United States which the Secretary of Treasury of the United States determines is satisfactory for
purposes of this provision and which includes an exchange of information program
or (ii) with respect to any dividend it pays on stock (or ADSs backed by such
stock) which is readily tradable on an established securities market in the United States. There
is currently no tax treaty in effect between the United States and Hong Kong.
Because the ADSs are listed on the New York Stock Exchange (see ITEM 9) they are
considered readily tradable on an established securitiesmarket in the United States.
Distributions, if any, in excess of current and accumulated earnings and profits
will constitute a return of capital and will be applied against and reduce the
holder’s tax basis in such ADSs or shares. To
the extent that distributions are in excess of such basis,
the distributions will constitute capital gain as discussed below. United States
corporate holders will generally not be eligible for the dividends received
deduction for distributions to domestic corporations in respect of distributions on our ADSs or
shares.
  The United States dollar value of any
distribution made by us in Hong Kong dollars will be determined by reference to
the exchange rate in effect on the date the distribution is actually or
constructively receivedby
the depositary or the holder of such shares, respectively, regardless of whether
the payment is in fact converted into United States dollars on that date. Any
subsequent gain or loss in respect of such Hong Kong dollars arising from
exchange rate fluctuations will be ordinary income or loss.
This gain or loss will generally be treated as United States source gain or loss
for United States foreign tax credit limitation purposes. If the depositary
converts the Hong Kong dollars to United States dollars onthe date it receives such Hong Kong
dollars, holders should not recognize any such gain or loss.
  Dividends generally will be treated as
income from foreign sources for United States foreign tax credit limitation
purposes. Subject to the limitations and conditions set forth in the Code, holders
may elect to claim a
  92
  credit against their United States
federal income tax liability in the event that any Hong Kong tax is withheld
from dividends received in respect of the ADSs or shares. The rules relating to
thedetermination of the foreign tax credit
are complex and prospective purchasers are urged to consult their tax advisors
to determine whether and to what extent they would be entitled to such credit.
Holders that do not elect or are not permitted to claimforeign tax credits may instead claim a
deduction for any Hong Kong tax withheld.
  Sale or other disposition of shares or
ADSs
  Subject to the discussion below under
“-- Passive Foreign
Investment Company”, a
holder generally will recognize gain or loss for United States federal income tax purposes
upon a sale or other disposition of our shares or ADSs in an amount equal to the
difference between the amount realized from the sale or disposition and the
holder’s adjusted tax basis in the shares or
ADSs. Such gain or loss generally will be long-term
gain or loss if, on the date of sale or disposition, the shares or ADSs were
held by the holder for more than one year and will generally be treated as
United States source gain or loss for United States foreign taxcredit limitation purposes. The
deductibility of a capital loss may be subject to
limitations.
  Passive foreign investment
company
  A foreign corporation will be treated as
a “passive foreign
investment company”(a
“PFIC”), for United States federal income
tax purposes, if 75% or
more of its gross income consists of certain types of passive income or 50% or
more of its assets are passive. If a corporation owns at least 25% by value of
the equity shares of another corporation, it is treated for purposes of
these tests as owning a proportionate share
of the assets of the other corporation and as receiving directly a proportionate
share of the other corporation’s income. We presently do not believe
that we are a PFIC and do not anticipate becoming a PFIC. This is,however, a factual determination made
on an annual basis and is subject to change. If we were to be classified as a
PFIC in any taxable year, holders (i) would generally be required to treat any
gain on sales of our shares held by them as ordinary incomeand pay an interest charge on the value
of the deferral of their United States federal income tax attributable to such
gain and (ii) could also be subject to an interest charge on distributions paid
by us. In addition, we would not provide information toour holders that would enable them to
make a “qualified electing
fund”election under which,
generally, in lieu of the foregoing treatment, our earnings would be currently
included in their gross income.
  The above results may be eliminated if a
“mark-to-market”election is available and a holder
validly makes such an election. If the election is made, such holder generally
will be required to take into account the difference, if any, between the fair
market value and its adjusted tax basis in shares or ADSsat the end of each taxable year as
ordinary income or ordinary loss (to the extent of any net mark-to-market gain
previously included in income). In addition, any gain from a sale or other
disposition of shares or ADSs will be treated as ordinary income,and any loss will be treated as ordinary
loss (to the extent of any net mark-to-market gain previously included in
income).
  DIVIDENDS AND PAYING
AGENTS
  Not applicable.
  STATEMENT BY EXPERTS
  Not applicable.
  DOCUMENTS ON DISPLAY
  You can read and copy
documentsreferred to in
this annual report that have been filed with the SEC at the SEC’s public reference room located at 450
Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms andtheir copy charges. The SEC also
maintains a website at http://www.sec.gov that contains reports and other
information that we have filed electronically with the SEC.
  93
  SUBSIDIARY
INFORMATION
  Not applicable.
  ITEM
      11.
              QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
  RISK
  See “Item 5. Operating and Financial Review
and Prospects--Market Risk and Risk Management.”
  ITEM
      12.
              DESCRIPTION OF SECURITIES OTHER
      THAN EQUITY SECURITIES
  Not applicable.
  PART II
  ITEM
      13.
              DEFAULTS, DIVIDEND ARREARAGES AND
      DELINQUENCIES
  None.
  ITEM
      14.
              MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
      HOLDERS AND USE OF PROCEEDS
  MATERIAL MODIFICATIONS TO THE RIGHTS OF
SECURITIES HOLDERS.
  None.
  USE OF PROCEEDS
  The following use of proceeds
information relates to our registration statement on Form F-1 (File No.
333-119786), filed by us in
connection with our initial public offering of ordinary shares in the United
States. In connection with the registration of the ordinary shares, a
registration statement on Form F-6 (File No.333-119970) was also filed for ADSs
representing such ordinary shares. Each of these two
registration statements was declared effective by the SEC on November 10, 2004.
Our ordinary shares commenced trading on the Hong Kong Stock Exchange on
November 17, 2004 and the ADSs on the New York Stock Exchange onNovember 16, 2004.
  The global offering, which consisted of
our initial public offering in the United States, an international offering
outside the United States and an initial public offering in the Hong Kong, was
completed and all of the securities offered in connection therewith were sold. A
portion of the securities registered under our registration statement on Form
F-1 were sold in Hong Kong public offering and the international offering. China
International Capital Corporation Limited, Citigroup Global Markets Inc., and Goldman Sachs (Asia)
L.L.C. acted as U.S. representatives for the U.S. underwriters; and China
International Capital Corporation Limited, Citigroup Global Markets Limited, and
Goldman Sachs (Asia) L.L.C. acted as international representatives for the international
underwriters.
  The following table sets forth for CNC
Hong Kong as the issuer and each selling shareholder information regarding our
ordinary shares registered and sold in our November 2004 global offering,
including the exercise of
the over-allotment option:
  Amount Registered and
      Sold(1)
              
              
              Aggregate Price of the Amount
      Registered
                  and Sold to Date (US$)(2)CNC Hong
      Kong
              
              
              1,093,529,000
              
              
              
              1,193,040,139China Netcom
      Group
              
              
              102,768,985
              
              
              
              112,120,963Chinese Academy of
      Sciences
              
              
              818,266
              
              
              
              892,728Information and Network Center of
      State Administration of Radio, Film and Television
              
              
              818,266
              
              
              
              892,728
  94
  China Railways Telecommunications
      Center
              
              
              818,266
              
              
              
              892,728Shanghai Alliance Investment
      Limited
              
              
              818,266
              
              
              
              892,728Shandong Provincial
      State-owned Assets
      Supervision and Administration Commission
              
              
              3,309,951
              
              
              
              3,611,157Total
              
              
              1,202,881,000
              
              
              
              1,312,266,801
 
 (1)
              The amount of shares registered
      includes any shares initially offered or sold outside the U.S. that were
      thereafter sold or resold in the U.S. Offers and sales of shares
      outside the U.S. were made pursuant to Regulation S under the Securities
      Act of 1933 and were not covered by the Registration
      Statement.
 (2)
              The initial public offering price
      per ADS in the U.S. and international offeringswas US$21.82. The initial public
      offering price per ordinary share in the Hong Kong public offering was
      HK$8.40, and when increased by a 1.0% brokerage fee, a 0.005% Hong Kong
      Securities and Futures Commission transaction levy, a 0.002% investor
      compensation levy and a 0.005% Hong Kong
      Stock Exchange trading fee payable by purchasers, was effectively
      equivalent to the initial public offering price per ADS in the U.S. and
      international offerings, based on an exchange rate of HK$7.8000 to
      US$1.00, the noon buying rate on June 30, 2004, and
      adjusted for the ratio of 20 ordinary shares per
    ADS.
  The amount of expenses incurred by us in
connection with the issuance and distribution of the registered securities
totaled RMB 689 million, including RMB 353 million forunderwriting discounts and commissions,
and approximately RMB 336 million for other expenses. None of the payments were
direct or indirect payments to our directors, officers, general partners of our
associates, persons owning 10% or more of any class ofour shares, or any of our
affiliates.
  The aggregate net proceeds from the
initial public of our shares, after deduction of fees and expenses, amounted to
RMB 8,944 million and were held in either H.K. dollars or U.S. dollars. The cash
proceeds from our initial
public offering were used as follows: (i) the expansion and upgrading of our
telecommunications network infrastructure; (ii) the repayment of a term loan
facility; (iii) the development of new applications and services; and (iv)
general corporate purposes.
  ITEM
      15.
              CONTROLS AND
      PROCEDURES
  EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES
  Our principal executive officers and
principal financial officer,haveevaluated the effectiveness of our
disclosure controls and procedures, as that term is defined in Rules
13a-15(e) and 15d-15(e) of
the U.S. Securities Exchange Act of 1934, as of the end of the fiscal year
covered by this annual report. Based on this evaluation, our principal executive
officers and principal financial officer, have concluded that our
disclosure controls and procedures were effective
as of the end of the fiscal year covered by this annual
report.
  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 Rules 13a-15(f) and 15d-15(f) of the U.S. Securities Exchange Act of
1934.
  The Company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability offinancial
reporting and the preparation of financial statements for external purposes in
accordance with the applicable generally accepted accounting principles. The
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 the applicable generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors
  95
  of theCompany; 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,
orthat the degree of compliance with the
policies or procedures may deteriorate.
  Our management conducted an evaluation
of the effectiveness of our internal control over financial reporting as of the
end of the fiscal year covered by this annual report basedupon the framework in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on this evaluation, our
management has concluded that our internal control over financial
reportingwas effective as of December 31,
2007.
  The effectiveness of the
Company’s internal control over financial
reporting as ofDecember31, 2007 has been audited by
PricewaterhouseCoopers, an independent registered public accounting firm, as
stated in their report
which appears herein.
  CHANGES IN INTERNAL CONTROL OVER
FINANCIAL REPORTING
  During the year ended December 31,
2007, there was no change to our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially
affect, our internal control over financial reporting.
   ITEM 16A
                AUDIT COMMITTEE FINANCIAL
      EXPERT
 Our board of directors has determined
that Mr. Timpson Chung Shui Ming qualifies as an audit committee financial
expert in accordance withthe terms of Item 16.A of Form 20-F. For Mr. Chung’s biographical information, see
“Item 6. Directors, Senior
Management and Employees--Directors and Senior Management.”
   ITEM 16B
                  CODE OF
    ETHICS
 We
have adopted a code of ethics that applies to our Chief Executive Officer,
Chief Financial Officer, and other designated members of senior management of
the Company. We have filed this code of ethics as an exhibit to this annual
report.
   ITEM 16C
                  PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
 The following table sets forth the aggregate audit fees, audit-related fees, tax
fees of our principal accountants and all other fees billed for products and
services provided by our principal accountants other than the audit fees,
audit-related fees and tax
fees for such of the two years ended December 31, 2007:
  Audit
      Fees
              
              
              Audit-Related
      Fees
              
              
              Tax Fees and Transfer Pricing
      Reports
              
              
              Other
      Fees(in millions of
      RMB)2006
              
              
              61
              
              
              
              31
              
              
              
              1.2
              
              
              
              0.62007
              
              
              54
              
              
              
              5
              
              
              
              0.5
              
              
              
              0.4
    ITEM 16D
                  EXEMPTIONS FROMTHE LISTING STANDARDS FOR AUDIT
  COMMITTEES
 Not applicable.
   96
  ITEM 16E
                    PURCHASES OF EQUITY SECURITIES BY
      THE ISSUER AND AFFILIATED
PURCHASERS.
 None.
  ITEM
      17.
                    FINANCIAL
      STATEMENTS
 We have elected to provide
the financial statements and related information specified in Item 18 in lieu of
Item 17.
   ITEM 18.
                  FINANCIAL
      STATEMENTS
 See Index to Financial Statements for a list of all financial statements filed
as part of this annual report.
   ITEM 19.
                  EXHIBITS
  
 Exhibit
                No.
              
              Description of
      Exhibit1.1
              
              Memorandum and Articles of
      Association of the Registrant(1)1.2
              
              Memorandum and Articles of
      Association of the Registrant as amended on December 6,
      20072.1
              
              Form of share
      certificate(1)2.2
              
              Form of deposit agreement,
      includingform of
      American Depositary Receipt(2)3.1
              
              Declaration of Trust, dated
      October 5, 2004, from CNC BVI to the Academy of
      Sciences(1)3.2
              
              Declaration of Trust, dated
      October 5, 2004, from CNC BVI to INC-SARFT(1)3.3
              
              Declaration of Trust, dated
      October 5, 2004, from
      CNC BVI to CRTC(1)3.4
              
              Declaration of Trust, dated
      October 5, 2004, from CNC BVI to Shanghai
    Alliance(1)3.5
              
              Declaration of Trust, dated
      October 5, 2004, from CNC BVI to Shandong
  SASAC(1)3.6
              
              Trust Arrangement, dated October
      5, 2004, entered into
      between CNC BVI, China Netcom Group and the Academy of Sciences (English
      Translation)(1)3.7
              
              Trust Arrangement, dated October
      5, 2004, entered into between CNC BVI, China Netcom Group and INC-SARFT
      (English Translation)(1)3.8
              
              Trust Arrangement, dated October 5, 2004,
      entered into between CNC BVI, China Netcom Group and CRTC (English
      Translation)(1)3.9
              
              Trust Arrangement, dated October
      5, 2004, entered into between CNC BVI, China Netcom Group and Shanghai
      Alliance (English Translation)(1)3.10
              
              Trust Arrangement, dated October
      5, 2004, entered into between CNC BVI, China Netcom Group and Shandong
      SASAC (English Translation)(1)4.1
              
              Asset Injection Agreement, dated
      June 29, 2004, among China Netcom Group, CNC BVI, CNC China and us
      (English
      Translation)(1)4.2
              
              Letter of Undertakings by China
      Netcom Group (English Translation)(1)4.3
              
              Trademark Licensing Agreement,
      dated October 8, 2004 among CNC China, China Netcom Group and us (English
      Translation)(1)4.4
              
              Restructuring Agreement, dated
      September 6, 2004 among CNC China, China Netcom Group and us (English
      Translation)(1)4.5
              
              Non-Competition Agreement, dated
      September 6, 2004
      among CNC China, China Netcom Group and us (English
      Translation)(1)4.6
              
              Assets and Liabilities Transfer
      Agreement, dated June 23, 2004 entered into between CNC China and China
      Netcom Group (English translation)(1)4.7
              
              Interconnection Settlement Agreement, dated October
      8, 2004 between CNC China and China Netcom Group (English
      Translation)(1)4.8
              
              Property Leasing Agreement, dated
      October 8, 2004 between CNC China and China Netcom Group (English
      Translation)(1)4.9
              
              Property Sub-leasing Agreement, dated October 8, 2004
      between CNC China and China Netcom Group (English
      Translation)(1)4.10
              
              Master Services Sharing Agreement,
      dated October 8, 2004 between CNC China and China Netcom Group (English
      Translation)(1)
  97
  Exhibit
                No.
              
              Description of
      Exhibit
 4.11
              
              Engineering and Information Technology Services
      Agreement, dated October 8, 2004 between CNC China and China Netcom Group
      (English Translation)(1)4.12
              
              Materials Procurement Agreement,
      dated October 8, 2004 between CNC China and China Netcom Group (English
      Translation)(1)4.13
              
              Ancillary Telecommunications
      Services Agreement, dated October 8, 2004 between CNC China and China
      Netcom Group (English Translation)(1)4.14
              
              Support Services Agreement, dated
      October 8, 2004 between CNC China and China Netcom Group (English
      Translation)(1)4.15
              
              Telecommunication Facilities
      Leasing Agreement, dated October 8, 2004 between CNC China and China
      Netcom Group (English Translation)(1)4.16
              
              Capacity Purchase Agreement, dated
      June 30, 2004 between Asia Netcom and East Asia Netcom Limited(1)4.17
              
              Capacity Lease Agreement, dated
      June 30, 2004 between Asia Netcom and East Asia Netcom Limited and
      Amendment No. 1 dated October 6, 2004(1)4.18
              
              Management Services Agreement,
      dated June 30, 2004 between Asia Netcom and East Asia Netcom
      Limited and Amendment
      No. 1 dated October 6, 2004(1)4.19
              
              Share Option Plan (English
      Translation)(1)4.20
              
              Share Purchase and Exchange
      Agreement, dated June 11, 2004 and amendment dated July 20, 2004 among
      China Netcom Holdings (BVI) Limited, CNC Fund L.P.and
  us(1)4.21
              
              Form of Senior Management
      Employment Agreement (English Translation)(1)4.22
              
              Form of Director's Employment
      Agreement (English Translation)(1)4.23
              
              Share Purchase and Sale Agreement
      dated June 30, 2004 entered into between Asia Netcomand CNC Network Corporation
      Limited(1)4.24
              
              Assignment and Novation Agreement
      dated June 30, 2004 entered into among Asia Netcom, CNC Network
      Corporation Limited and us(1)4.25
              
              Share Purchase Agreement dated
      December 2, 2003 entered into among SBAIF Asia Netcom (Cayman) Holdings, China
      Netcom Corporation International Limited, Asia Netcom and
      us(1)4.26
              
              Shareholders Agreement dated March
      12, 2003 entered into among China Netcom Corporation International
      Limited, SB Asia Infrastructure Fund L.P., Newbridge Asia Netcom (Cayman)
      Holdings, Asia Netcom and us(1)4.27
              
              Share and Asset Purchase Agreement
      dated November 17, 2002 entered into between Asia Netcom and
      AGC(1)4.28
              
              Share Purchase Agreement, dated
      December 2, 2003 entered into among Newbridge Asia Netcom (Cayman) Holdings, China
      Netcom Corporation International Limited, Asia Netcom and
      us(1)4.29
              
              Share Transfer Agreement, dated
      June 10, 2004, entered into between China Netcom Group and China Netcom
      Holdings (English Translation)(1)4.30
              
              ShareTransfer Agreement, dated April
      20, 2004, entered into between China Netcom Group and the Academy of
      Sciences, INC-SARFT, CRTC and Shanghai Alliance (English
      Translation)(1)4.31
              
              Asset Transfer Agreement, dated
      April 26, 2004, entered into between ChinaNetcom Group and Shandong SASAC
      (English Translation)(1)4.32
              
              Telecommunications Assets Transfer
      Agreement, dated June 10, 2004, entered into between China Netcom Group
      and Jitong Communications Company Limited (English
      Translation)(1)4.33
              
              Telecommunications Assets Transfer Agreement,
      dated June 10, 2004, entered into between China Netcom Group and Guangdong
      Telecommunications Company Limited (English
      Translation)(1)4.34
              
              Debenture, dated July 29, 2004
      entered into among Asia Netcom Asia Pacific Limited, Asia Netcom Asia Pacific
      Commercial Limited, Asia Netcom Hong Kong Limited and Industrial and
      Commercial Bank of China (Asia) Limit(1)4.35
              
              Deed of Mortgage of Shares, dated
      July 29, 2004 entered into between Asia Netcom and Industrial and
      Commercial Bank of
      China (Asia) Limited(1)4.36
              
              Debenture, dated July 29, 2004
      entered into among Asia Netcom Services (S) Pte. Ltd., Asia Netcom
      Corporation (Singapore) Pte. Limited, Asia Netcom Singapore Pte. Ltd.,
      Southeast Asia Netcom (Singapore) Pte. Ltd. and Industrial and Commercial Bank
      of China (Asia) Limited(1)4.37
              
              Group Share Mortgage, dated July
      29, 2004 entered into among Asia Netcom Corporation (Singapore) Pte.
      Limited, Asia Netcom Services (S) Pte. Ltd., Southeast Asia Netcom
      (Singapore) Pte. Ltd., Asia Netcom Singapore Pte. Ltd.
      and Industrial and Commercial Bank of China (Asia)
      Limited(1)
  98
  Exhibit
                No.
              
              Description of
      Exhibit
 4.38
              
              Assignment of Building Agreement,
      dated July 29, 2004 entered into between Asia Netcom Singapore Pte. Ltd.
      and Industrial and Commercial Bank of China (Asia)
      Limited(1)4.39
              
              Share Pledge Agreement, dated July
      28, 2004 entered into among Asia Netcom Corporation (Singapore) Pte. Ltd.,
      the seven financial institutions listed in the Share Pledge Agreement and
      Industrial and Commercial Bank of China (Asia) Limited(1)4.40
              
              Amended and Restated Facility
      Agreement, dated July 27, 2004 entered into among Asia Netcom, the seven
      banks named in the Amended and Restated Facility Agreement, Industrial and
      Commercial Bank of China (Asia) Limited(1)4.41
              
              Group Subordination Deed, dated July 27, 2004
      entered into between Asia Netcom and Industrial and Commercial Bank of
      China (Asia) Limited(1)4.42
              
              Group Subordination Deed, dated
      July 27, 2004 entered into among our Company and China Netcom Corporation
      InternationalLimited, Asia Netcom and Industrial and Commercial Bank of China (Asia)
      Limited(1)4.43
              
              Debenture, dated July 27, 2004
      entered into between Asia Netcom and Industrial and Commercial Bank of
      China (Asia) Limited(1)4.44
              
              Group Assignment of Insurances,dated July 27, 2004
      entered into among Asia Netcom, EANL and Industrial and Commercial Bank of
      China (Asia) Limited(1)4.45
              
              Security Assignment, dated July
      27, 2004 entered into between Asia Netcom and Industrial and Commercial
      Bank of China (Asia) Limited(1)4.46
              
              Charge Over Deposit Account, dated
      July 27, 2004 entered into between Asia Netcom and Industrial and
      Commercial Bank of China (Asia) Limited(1)4.47
              
              Charge Over Accounts, dated July
      27, 2004 entered into between Asia Netcom and Industrial and Commercial Bank of China (Asia)
      Limited(1)4.48
              
              Deed of Mortgage of Shares in Asia
      Netcom, dated July 27, 2004 entered into between China Netcom Corporation
      International Limited and Industrial and Commercial Bank of China (Asia)
      Limited(1)4.49
              
              Asset Transfer Agreement dated January
      15, 2007 entered into between China Netcom (Group) Company Limited and
      China Netcom Group (4)4.50
              
              Renewal of Continuing Connected
      Transactions Amendments to the Articles of Associationdated on November 6, 2007
      enteredinto between
      CNC China and China Netcom Group (5)4.51
              
              Equity Interest Transfer Agreement
      dated on December 5, 2007 entered into between CNCChinaand China Netcom Group Beijing
      Communications (6)8.1
              
              List of subsidiaries of the
      Registrant11.1
              
              Codeof Ethics
    (3)12.1
              
              PEO
      Certification12.2
              
              PFO
      Certification13.1
              
              Section 1350
      Certification
 
 
 (1)
              Incorporated
      by reference to our Registration Statement on Form F-1 (File No.
      333-119786) filed with the SEC in connection with our global offeringin
      November 2004.
 (2)
              Incorporated
      by reference to our Registration Statement on Form F-6 (File No.
      333-119970) filed with the SEC with
      respect to American Depositary Shares representing our ordinary
      shares.
 (3)
              Incorporated
      by reference to our Form 20-F filed with the SEC on June 23,
      2005.
 (4)
              Incorporated
      by reference to our Form 20-F filed withtheSEC
      on May 31, 2007.
 (5)
              Incorporated
      by reference to our Form6-K
      furnished with the SEC on November 9,
  2007.
 (6)
              Incorporated
      by reference to our Form6-K
      furnished with the SEC onDecember
      6,
      2007.
  99
  SIGNATURE
  
 The registrant hereby certifies that it
meets all of the requirements forfiling on Form 20-F and that it has duly
caused and authorized the undersigned to sign this annual report on its
behalf.
  China
      Netcom Group Corporation (Hong Kong) Limited/s/
      Zuo XunshengName:
              Zuo
      XunshengTitle:
              Chief
      Executive Officer
 
 
 Date: May 22, 2008
 
 100
  
 Appendix A
  
  CHINA NETCOM GROUP CORPORATION (HONG
KONG) LIMITED
  INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
 
  
  Page No.
  _____________________
  
  Report of Independent Registered
      Public Accounting Firm
              F-1–F-2Consolidated income statement for each of the three
      yearsended
      December 31, 2005, 2006and 2007
              F-3–F-4Consolidated balance sheets as of
      December 31, 2006and 2007
              F-5 - F-7Consolidated statements of changes
      in equity for each of thethree
      years ended December
      31, 2005, 2006and 2007
              F-8
      - F-10Consolidated statements of cash
      flows for each of thethree
      years ended December 31, 2005, 2006and 2007
              F-11–F-12Notes to consolidated financial
      statements
              F-13
      - F-110
  F-1
  Report of Independent Registered Public
Accounting Firm
  To the Board of Directors and
Shareholders of China Netcom Group Corporation (Hong Kong)
Limited:
 
 In our opinion, the accompanying
consolidated balance sheets
and the related consolidated statements of income, shareholders’equity and cash flows listed in the
accompanying page F-3 to page F-12 present fairly, in all material respects, the
financial position of China Netcom Group Corporation (Hong Kong) Limited and its subsidiaries'
("the Group") at December 31, 2007 and December 31, 2006, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2007 in conformity with accounting principles generally accepted in Hong
Kong.  Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Group's management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management's Report On Internal Control over
Financial Reporting in Item 15 appearing on page 95 of the 2007 Annual Report.
Our responsibility is to express opinions on these financial statements and on the Group's
internal control over financial reporting based on our audits (which were
integrated audits in 2007 and 2006). We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States).  Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintainedin all material respects.  Our
audits of the financial statements included 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.  Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed
risk.  Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our
opinions.
 
 Accounting principles generally accepted
in Hong Kong vary in certain significant respects from accounting principles
generally accepted in the United States of America.  Information
relating to the nature and effect of such differences is presented in
Note 41 to the consolidated financial statements.
 
 A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and thepreparation 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.
 /s/
PricewaterhouseCoopers
 Certified Public
Accountants
  Hong Kong
 May 22, 2008
  F-2
  CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
  CONSOLIDATED
INCOME STATEMENT
 FOR
THE YEAR ENDED DECEMBER 31, 2007
  Year
      ended December 31Note
              
              
              2005
              
              
              2006
              
              
              2007
              
              
              2007RMB
              
              
              RMB
              
              
              RMB
              
              
              USDmillion
              
              
              million
              
              
              million
              
              
              millionRestated
              
              
              RestatedNote
      2
              
              
              Note
      2Continuing
      operations:Revenues
              
              
              7
              
              
              
              83,927
              
              
              
              84,194
              
              
              
              84,005
              
              
              
              11,500Operating
      expensesDepreciation
      and amortization
              
              
              
              
              
              
              (24,328
              )
              
              
              (24,913
              )
              
              
              (25,495
              )
              
              
              (3,490
              )Networks,
      operations and support
              
              
              
              
              
              
              (12,610
              )
              
              
              (13,344
              )
              
              
              (14,145
              )
              
              
              (1,936
              )Staff
      costs
              
              
              15
              
              
              
              (11,830
              )
              
              
              (11,849
              )
              
              
              (12,223
              )
              
              
              (1,673
              )Selling,
      general and administrative
              
              
              
              
              
              
              (12,726
              )
              
              
              (12,607
              )
              
              
              (10,615
              )
              
              
              (1,453
              )Other
      operating expenses
              
              
              
              
              
              
              (1,374
              )
              
              
              (1,930
              )
              
              
              (4,261
              )
              
              
              (583
              )-Total
      of operating expenses
              
              
              8
              
              
              
              (62,868
              )
              
              
              (64,643
              )
              
              
              (66,739
              )
              
              
              (9,135
              )-Other
      income
              
              
              9
              
              
              
              -
              
              
              
              621
              
              
              
              1,221
              
              
              
              167Interest
      income
              
              
              
              
              
              
              134
              
              
              
              135
              
              
              
              113
              
              
              
              15Dividend
      income
              
              
              
              
              
              
              29
              
              
              
              -
              
              
              
              -
              
              
              
              -Deficit
      on revaluation of fixed assets
              
              
              20(c)
              
              
              
              -
              
              
              
              (1,335
              )
              
              
              -
              
              
              
              --Profit
      from operations
              
              
              
              
              
              
              21,222
              
              
              
              18,972
              
              
              
              18,600
              
              
              
              2,547Finance
      costs
              
              
              10
              
              
              
              (3,346
              )
              
              
              (3,767
              )
              
              
              (3,333
              )
              
              
              (456
              )-Profit
      before taxation
              
              
              
              
              
              
              17,876
              
              
              
              15,205
              
              
              
              15,267
              
              
              
              2,091Taxation
              
              
              11
              
              
              
              (3,526
              )
              
              
              (3,727
              )
              
              
              (3,796
              )
              
              
              (520
              )Profit
      for the year from continuing operations
              
              
              
              
              
              
              14,350
              
              
              
              11,478
              
              
              
              11,471
              
              
              
              1,571Discontinued
      operations:(Loss)/profit
      for the year from discontinued operations
              
              
              25
              
              
              
              (400
              )
              
              
              1,487
              
              
              
              624
              
              
              
              85Profit
      for the year
              
              
              
              
              
              
              13,950
              
              
              
              12,965
              
              
              
              12,095
              
              
              
              1,656Dividends
      proposed after the balance sheet date
              
              
              13
              
              
              
              3,196
              
              
              
              3,695
              
              
              
              3,700
              
              
              
              507
  F-3
  CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
  CONSOLIDATED
INCOME STATEMENT (CONTINUED)
 FOR
THE YEAR ENDED DECEMBER 31, 2007
 
 Year
      ended December 31Note
              
              2005
              
              2006
              
              2007
              
              2007RMB
              
              RMB
              
              RMB
              
              USDmillion
              
              million
              
              million
              
              millionRestated
              
              RestatedNote
      2
              
              Note
      2Earnings
      per share for profit from continuing operations attributable to
      shareholders of the Company for the yearBasic
      earnings per share
              14
              
              RMB2.18
              
              RMB1.74
              
              RMB1.72
              
              USD0.24Diluted
      earnings per share
              14
              
              RMB2.17
              
              RMB1.72
              
              RMB1.70
              
              USD0.23(Losses)/earnings
      per share for (loss)/profit from discontinued operations attributable to
      shareholders of the Company for the yearBasic
      (losses)/earnings per share
              14
              
              RMB(0.06)
              
              RMB0.22
              
              RMB0.09
              
              USD0.01Diluted
      (losses)/earnings per share
              14
              
              RMB(0.06)
              
              RMB0.22
              
              RMB0.09
              
              USD0.01Earnings
      per share from operations attributable to shareholders of the Company for
      the yearBasic
      earnings per share
              14
              
              RMB2.12
              
              RMB1.96
              
              RMB1.81
              
              USD0.25Diluted
      earnings per share
              14
              
              RMB2.11
              
              RMB1.94
              
              RMB1.79
              
              USD0.24
 
 The
notes on pages F-13 to F-110 are an integral part of these consolidated
financial statements.
  F-4
 CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
  CONSOLIDATED
BALANCE SHEET
 AS
AT DECEMBER 31, 2007
 As
      at December 31Note
              
              2006
              
              2007
              
              2007RMB
              
              RMB
              
              USDmillion
              
              million
              
              millionRestatedNote
      2AssetsCurrent
      assetsCash
      and bank deposits
              16
              
              7,728
              
              5,395
              
              739Accounts
      receivable
              17
              
              8,283
              
              8,458
              
              1158Inventories
      and consumables
              18
              
              416
              
              287
              
              39Prepayments,
      other receivables and other current assets
              19
              
              1,441
              
              1,021
              
              140Due
      from holding companies and fellow subsidiaries
              29
              
              358
              
              347
              
              48Total
      current assets
              
              
              18,226
              
              15,508
              
              2,124Non-current
      assetsFixed
      assets
              20
              
              168,141
              
              156,948
              
              21,486Construction
      in progress
              21
              
              6,335
              
              3,990
              
              546Lease
      prepayments
              22
              
              2,364
              
              2,494
              
              341Intangible
      assets
              23
              
              1,591
              
              1,552
              
              212Deferred
      tax assets
              32
              
              3,459
              
              2,693
              
              369Other
      non-current assets
              24
              
              3,966
              
              3,243
              
              444Total
      non-current assets
              
              
              185,856
              
              170,920
              
              23,398Total
      assets
              
              
              204,082
              
              186,428
              
              25,522
 
 F-5
  CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
  CONSOLIDATED
BALANCE SHEET (CONTINUED)
 AS
AT DECEMBER 31, 2007
 As
      at December 31Note
              
              2006
              
              2007
              
              2007RMB
              
              RMB
              
              USDmillion
              
              million
              
              millionRestatedNote
      2Liabilities
      and equityCurrent
      liabilitiesAccounts
      payable
              26
              
              17,661
              
              15,639
              
              2,141Accruals
      and other payables
              27
              
              3,074
              
              2,950
              
              404Short
      term commercial papers
              28(a)(i)
              
              9,811
              
              20,000
              
              2,738Short
      term bank loans
              28(a)(ii)
              
              30,980
              
              11,850
              
              1,622Current
      portion of long term bank and other loans
              28(b)
              
              7,304
              
              5,322
              
              729Due
      to ultimate holding company and fellow subsidiaries
              29
              
              7,505
              
              4,598
              
              629Current
      portion of deferred revenues
              30
              
              7,733
              
              7,103
              
              972Current
      portion of provisions
              31
              
              3,736
              
              3,381
              
              463Taxation
      payable
              
              
              3,029
              
              3,750
              
              512Total
      current liabilities
              
              
              90,833
              
              74,593
              
              10,210Net
      current liabilities
              
              
              (72,607)
              
              (59,085)
              
              (8,086)Total
      assets less current liabilities
              
              
              113,249
              
              111,835
              
              15,312
  F-6
  CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
  CONSOLIDATED
BALANCE SHEET (CONTINUED)
 AS
AT DECEMBER 31, 2007
 As
      at December 31Note
              
              
              2006
              
              
              2007
              
              
              2007RMB
              
              
              RMB
              
              
              USDmillion
              
              
              million
              
              
              millionRestatedNote
      2Non-current
      liabilitiesLong
      term bank and other loans
              
              
              28(b)
              
              
              
              23,219
              
              
              
              14,425
              
              
              
              1,975Corporate
      bonds
              
              
              28(c)
              
              
              
              -
              
              
              
              2,000
              
              
              
              274Due
      to ultimate holding company and fellow subsidiaries
              
              
              29
              
              
              
              5,880
              
              
              
              6,169
              
              
              
              845Deferred
      revenues
              
              
              30
              
              
              
              6,198
              
              
              
              4,314
              
              
              
              591Provisions
              
              
              31
              
              
              
              2,586
              
              
              
              2,007
              
              
              
              275Deferred
      tax liabilities
              
              
              32
              
              
              
              1,156
              
              
              
              856
              
              
              
              117Other
      non-current liabilities
              
              
              
              
              
              
              16
              
              
              
              12
              
              
              
              2Total
      non-current liabilities
              
              
              
              
              
              
              39,055
              
              
              
              29,783
              
              
              
              4,079Total
      liabilities
              
              
              
              
              
              
              129,888
              
              
              
              104,376
              
              
              
              14,289Financed
      by:Share
      capital
              
              
              33
              
              
              
              2,199
              
              
              
              2,206
              
              
              
              302Reserves
              
              
              
              
              
              
              71,995
              
              
              
              79,846
              
              
              
              10,931Shareholders’
      equity
              
              
              
              
              
              
              74,194
              
              
              
              82,052
              
              
              
              11,233Total
      liabilities & equity
              
              
              
              
              
              
              204,082
              
              
              
              186,428
              
              
              
              25,522
 
 The
notes on pages F-13 to F-110 are an integral part of these consolidated
financial statements
  F-7
 
 CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
  CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
 FOR
THE YEAR ENDED DECEMBER 31, 2007
   Attributable
      to equity holders of the CompanyShare
                capital
              Share
                premium
              Capital
                reserve
              Statutory
                reserve
              Revaluation
                reserve
              Other
                reserve
              Retained
                earnings
              Total
                EquityRMB
              RMB
              RMB
              RMB
              RMB
              RMB
              RMB
              RMBmillion
              million
              million
              million
              million
              million
              million
              million(Note
      33)Balance
      at January 1, 2005
              2,181
              42,750
              283
              723
              4,735
              5,866
              8,224
              64,762Adjustements
      for the acquisition (Note 2)
              -
              -
              -
              -
              -
              231
              -
              231Balance
      at January 1, 2005, as restated
              2,181
              42,750
              283
              723
              4,735
              6,097
              8,224
              64,993Transfer
      to statutory reserve (Note 12)
              -
              -
              -
              6,783
              -
              -
              (6,783)
              -Appropriation
      to statutory reserve (Note 12)
              -
              -
              -
              1,044
              -
              -
              (1,044)
              -Transfers
      to retained earnings in respect of depreciation differences on revalued
      assets
              -
              -
              -
              -
              (1,731)
              (96)
              1,827
              -Currency
      translation differences
              -
              -
              -
              -
              -
              (56)
              -
              (56)Movement
      of deferred tax recognised in equity(Note 32)
              -
              -
              -
              -
              1,097
              843
              (2,174)
              (234)Transfer
      from retained earnings to other reserve due to the Acquisition of New
      Horizon
              -
              
              
              
              
              1,040
              (1,040)
              -Net
      income/(expense) recognised directly in equity
              -
              -
              -
              7,827
              (634)
              1,731
              (9,214)
              (290)Profit
      for the year from continuing operations
              -
              -
              -
              -
              -
              -
              14,350
              14,350Profit
      for the year from discontinued operations
              -
              -
              -
              -
              -
              -
              (400)
              (400)Total
      income recognised for 2005
              -
              -
              -
              7,827
              (634)
              1,731
              4,736
              13,660Contributions
      from owner
              -
              -
              -
              -
              -
              7
              68
              75Distributions  to
      owners
              -
              -
              -
              -
              -
              -
              (953)
              (953)Dividends
      for 2004 distributed during the year(Note13)
              -
              -
              -
              -
              -
              -
              (259)
              (259)Net
      assets distributed to owner in accordance with reorganization for the
      Acquisition of New Horizon
              -
              -
              -
              -
              -
              -
              (1,533)
              (1,533)Consideration
      for the Acquisition of New Horizon
              -
              -
              -
              -
              -
              (12,800)
              -
              (12,800)Share-based
      payments
              -
              -
              104
              -
              -
              -
              -
              104Balance
      as at December 31, 2005
              2,181
              42,750
              387
              8,550
              4,101
              (4,965)
              10,283
              63,287
  F-8
 CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
  CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY (CONTINUED)
 FOR
THE YEAR ENDED DECEMBER 31, 2007
 Attributable
      to equity holders of the CompanyShare
                capital
              Share
                premium
              Capital
                reserve
              Statutory
                reserve
              Revaluation
                reserve
              Other
                reserve
              Retained
                earnings
              Total
      equityRMB
              RMB
              RMB
              RMB
              RMB
              RMB
              RMB
              RMBmillion
              million
              million
              million
              million
              million
              million
              million(Note
      33)Balance
      at January 1, 2006
              2,181
              42,750
              387
              8,550
              4,101
              (5,203)
              10,244
              63,010Adjustments
      for the Acquisition (Note 2)
              -
              -
              -
              -
              -
              238
              39
              277Balance
      at January 1, 2006, as restated
              2,181
              42,750
              387
              8,550
              4,101
              (4,965)
              10,283
              63,287Transfer
      to statutory reserve (Note 12)
              -
              -
              -
              2,406
              -
              -
              (2,406)
              -Appropriation
      to statutory reserve (Note 12)
              -
              -
              -
              855
              -
              -
              (855)
              -Transfers
      to retained earnings in respect of depreciation differences on revalued
      assets
              -
              -
              -
              -
              (1,933)
              (51)
              1,984
              -Revaluation surplus
      (Note 20)
              -
              -
              -
              -
              1,071
              -
              -
              1,071Currency
      translation differences (i)
              -
              -
              -
              -
              -
              (79)
              -
              (79)Movement of deferred
      tax recognised in equity(Note
      32)
              -
              -
              -
              -
              (353)
              -
              -
              (353)Net
      income/(expense) recognised directly in equity
              -
              -
              -
              3,261
              (1,215)
              (130)
              (1,277)
              639Profit
      for the year from continuing operations
              -
              -
              -
              -
              -
              -
              11,478
              11,478Profit
      for the year from discontinued operations
              -
              -
              -
              -
              -
              -
              1,487
              1,487Total
      income recognised for 2006
              -
              -
              -
              3,261
              (1,215)
              (130)
              11,688
              13,604Dividends for 2005
      distributed during the year(Note13)
              -
              -
              -
              -
              -
              -
              (3,196)
              (3,196)Exercise of share
      options (Note 33)
              18
              545
              (73)
              -
              -
              -
              -
              490Distributions
      to owners
              -
              -
              -
              -
              -
              -
              (66)
              (66)Share-based
      payments
              -
              -
              75
              -
              -
              -
              -
              75Balance
      as at December 31, 2006
              2,199
              43,295
              389
              11,811
              2,886
              (5,095)
              18,709
              74,194
 
 (i)
Including accumulated currency translation differences realized upon disposal of
ANC Group amounting to RMB29 million.
 
 The
notes on pages F-13 to F-109 are an integral part of these consolidated
financial statements
 
 F-9
 
 CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
  CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY (CONTINUED)
 FOR
THE YEAR ENDED DECEMBER 31, 2007
  Attributable
      to equity holders of the CompanyShare
                  capital
                
                
                Share
                  premium
                
                
                Capital
                  reserve
                
                
                Statutory
                  reserve
                
                
                Revaluation
                  reserve
                
                
                Other
                  reserve
                
                
                Retained
                  earnings
                
                
                Total
      equityRMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMBmillion
                
                
                million
                
                
                million
                
                
                million
                
                
                million
                
                
                million
                
                
                million
                
                
                million(Note
      33)Balance
      as at January 1, 2007
                
                
                2,199
                
                
                
                43,295
                
                
                
                389
                
                
                
                11,811
                
                
                
                2,886
                
                
                
                (5,095
                )
                
                
                18,709
                
                
                
                74,194Transfer
      to statutory reserve (Note 12)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,517
                
                
                
                -
                
                
                
                -
                
                
                
                (1,517
                )
                
                
                -Appropriation
      to statutory reserve (Note 12)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                868
                
                
                
                -
                
                
                
                -
                
                
                
                (868
                )
                
                
                -Transfers
      to retained earnings in respect of depreciation differences on revalued
      assets
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,031
                )
                
                
                (104
                )
                
                
                2,135
                
                
                
                -Transfers
      to retained earnings in respect of revaluation reserve relating to
      disposal of Guangdong and Shanghai Branches
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (69
                )
                
                
                20
                
                
                
                49
                
                
                
                -Currency
      translation differences
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (15
                )
                
                
                -
                
                
                
                (15
                )Movement
      of deferred tax recognised in equity (Note 32)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                111
                
                
                
                (664
                )
                
                
                -
                
                
                
                (553
                )Net
      income/(expense) recognised directly in equity
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,385
                
                
                
                (1,989
                )
                
                
                (763
                )
                
                
                (201
                )
                
                
                (568
                )Profit
      for the year from continuing operations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11,471
                
                
                
                11,471Profit
      for the year from discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                624
                
                
                
                624Total
      income recognised for 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,385
                
                
                
                (1,989
                )
                
                
                (763
                )
                
                
                11,894
                
                
                
                11,527Dividend
      related to 2006 distributed during the year
                  (Note
      13)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (3,600
                )
                
                
                (3,600
                )Distributions
      to owners
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (48
                )
                
                
                (48
                )Exercise
      of share options (Note 33)
                
                
                7
                
                
                
                243
                
                
                
                (31
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                219Consideration
      for the acquisition(Note
      1)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (299
                )
                
                
                -
                
                
                
                (299
                )Share-based
      payments
                
                
                -
                
                
                
                -
                
                
                
                59
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                59Balance
      as at December 31, 2007
                
                
                2,206
                
                
                
                43,538
                
                
                
                417
                
                
                
                14,196
                
                
                
                897
                
                
                
                (6,157
                )
                
                
                26,955
                
                
                
                82,052
  The
notes on pages F-13 to F-109 are an integral part of these consolidated
financial statement
    F-10
  CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
  CONSOLIDATED
STATEMENT OF CASH FLOW
 FOR
THE YEAR ENDED DECEMBER 31, 2007
 Year
      ended December 31Note
                  2005
                  
                  2006
                  
                  2007
                  
                  2007RMB
                    million
                  
                  RMB
                    million
                  
                  RMB
                    million
                  
                  USD
                    millionRestated
                  
                  RestatedNote
      2
                  
                  Note
      2Cash
      flows from operating activitiesNet
      cash inflows from operations
                  35(a)
                  39,303
                  
                  39,156
                  
                  39,309
                  
                  5,381Interest
      received
                  
                  131
                  
                  136
                  
                  113
                  
                  15Dividends
      received
                  
                  29
                  
                  -
                  
                  -
                  
                  -Interest
      paid
                  
                  (3,244)
                  
                  (3,564)
                  
                  (2,856)
                  
                  (391)Profits
      tax paid
                  
                  (4,028)
                  
                  (3,678)
                  
                  (4,107)
                  
                  (562)Cash
      inflow from operating activities of
                    continuing  operation
                  
                  32,191
                  
                  32,050
                  
                  32,459
                  
                  4,443Cash
      inflow from operating activities of
                    discontinued
      operation
                  25
                  1,344
                  
                  2,085
                  
                  388
                  
                  53Net
      cash inflow from operating activities
                  
                  33,535
                  
                  34,135
                  
                  32,847
                  
                  4,496Cash
      flows from investing activitiesPurchase
      of fixed assets and construction in
                    progress
                  
                  (25,684)
                  
                  (24,064)
                  
                  (20,488)
                  
                  (2,805)Prepayments
      for leased network capacity
                  
                  -
                  
                  (318)
                  
                  -
                  
                  -Prepayments
      for leased land
                  
                  (280)
                  
                  (178)
                  
                  (196)
                  
                  (27)Sale
      of fixed assets
                  
                  46
                  
                  127
                  
                  65
                  
                  9Sale
      of other investment
                  
                  2,874
                  
                  -
                  
                  -
                  
                  -Net
      decrease in time deposits with maturity
                    over
      three months
                  
                  51
                  
                  7
                  
                  14
                  
                  2Other
      income
                  
                  -
                  
                  375
                  
                  1,467
                  
                  201Cash
      outflow from investing activities of
                    continuing
      operations
                  
                  (22,993)
                  
                  (24,051)
                  
                  (19,138)
                  
                  (2,620)Cash
      (outflow)/inflow from investing activities
                    ofdiscontinued
      operations
                  25
                  (1,584)
                  
                  (921)
                  
                  3,103
                  
                  425Net
      cash outflow from investing activities
                  
                  (24,577)
                  
                  (24,972)
                  
                  (16,035)
                  
                  (2,195)
    F-11
   CHINA
NETCOM GROUP CORPORATION (HONG KONG) LIMITED
 
 CONSOLIDATED
STATEMENT OF CASH FLOW (CONTINUED)
 FOR
THE YEAR ENDED DECEMBER 31, 2007
 
 Year
      ended December 31Note
                      2005
                      
                      2006
                      
                      2007
                      
                      2007RMB
                        million
                      
                      RMB
                        million
                      
                      RMB
                        million
                      
                      USD
                        millionRestated
                      
                      RestatedNote
      2
                      
                      Note
      2Cash
      flows from financing
      activitiesNew
      bank loans and other loans
                      
                      77,573
                      
                      89,002
                      
                      66,396
                      
                      9,090Issuance
      of short-term commercial papers
                      
                      -
                      
                      9,676
                      
                      20,000
                      
                      2,738Issue
      of corporate bonds
                      
                      -
                      
                      -
                      
                      2,000
                      
                      274Repayment
      of commercial paper
                      
                      -
                      
                      -
                      
                      (9,676)
                      
                      (1,325)Repayment
      of bank loans
                      
                      (85,289)
                      
                      (98,512)
                      
                      (92,390)
                      
                      (12,648)Capital
      element of finance lease payments
                      
                      (909)
                      
                      (1,347)
                      
                      (890)
                      
                      (122)Payment
      of prior year distributions to owner
                      
                      (1,543)
                      
                      (630)
                      
                      (1,180)
                      
                      (162)Payment
      to ultimate holding company for the
                        acquisition
      of Beijing P&D Institute
                      
                      -
                      
                      -
                      
                      (299)
                      
                      (41)Payment
      to ultimate holding company for the
                        Acquisition
      of New Horizon
                      
                      (3,000)
                      
                      (1,960)
                      
                      (1,960)
                      
                      (268)Dividends
      payment
                      
                      (259)
                      
                      (3,196)
                      
                      (3,600)
                      
                      (493)Repayment
      to fellow subsidiaries and related
                        parties
      for loans
                      
                      (1,319)
                      
                      -
                      
                      -
                      
                      -Loans
      from fellow subsidiaries and related
                        parties
                      
                      -
                      
                      -
                      
                      2,249
                      
                      308Issuance
      of shares upon exercise of share
                        options
                      
                      -
                      
                      490
                      
                      219
                      
                      30Cash
      outflow from financing activities of
                        continuing
      operations
                      
                      (14,746)
                      
                      (6,477)
                      
                      (19,131)
                      
                      (2,619)Cash
      inflow from financing activities of
                        discontinued
      operations
                      25
                      108
                      
                      -
                      
                      -
                      
                      -Net
      cash outflow from financing activities
                      
                      (14,638)
                      
                      (6,477)
                      
                      (19,131)
                      
                      (2,619)Cash
      flows from continuing operations
                      
                      (5,548)
                      
                      1,522
                      
                      (5,810)
                      
                      (796)Cash
      flows from discontinued
      operations
                      
                      (132)
                      
                      1,164
                      
                      3,491
                      
                      478Increase/(decrease)
      in cash and cash
                        equivalents
                      
                      (5,680)
                      
                      2,686
                      
                      (2,319)
                      
                      (318)Cash
      and cash equivalents at beginning of year
                      
                      10,645
                      
                      4,937
                      
                      7,623
                      
                      1,044Cash
      and cash equivalents at end of year
                      16
                      4,965
                      
                      7,623
                      
                      5,304
                      
                      726
     F-12
  CHINA
NETCOM GROUP CORPORATION (HONGKONG)
LIMITED
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  1  The
Group and its principal activities
 
 Background
of the Group
 
 China
Netcom Group Corporation (Hong Kong) Limited (the “Company”) was incorporated in
the Hong Kong Special Administrative Region (“Hong Kong”) of the People’s
Republic of China (“PRC”) as a limited liability company under the Hong Kong
Companies Ordinance, the shares of the Company were listed on The Stock Exchange
of Hong Kong Limited on November 17, 2004 and the ADSs were listed on New York
Stock Exchange Inc. on November 16, 2004.
 
 The
Company, China Netcom (Holding) Company Limited (“China Netcom Holding”) and
China Network Communications Group Corporation (the “China Netcom Group”)
underwent reorganization on June 30, 2004 (“Listing Reorganization”).
Immediately after the Listing Reorganization, China Netcom Group became the
ultimate holding company of the Company.
 
 Pursuant
to a resolution passed at the extraordinary general meeting of the shareholders
on October 25, 2005, the Company acquired the principal telecommunications
operations, assets and liabilities in the four Northern provinces/autonomous
region, namely Shanxi Province, Neimenggu Autonomous Region, Jilin Province and
Heilongjiang Province from China Netcom Group (the "Acquisition of New
Horizon”). The consideration for the Acquisition of New Horizon was determined
at RMB12,800 million. The consideration consists of an initial cash payment of
RMB3,000 million and deferred payments of RMB9,800 million. The deferred
payments will be settled in half-yearly installments over five years. The
interest charged on the deferred payments is to be calculated at 5.265% per
annum.
 
 Following
the Listing Reorganization and the Acquisition of New Horizon, the Company and
its subsidiaries (the “Group”) is the dominant provider of fixed line voice and
value-added services, broadband and other internet-related services, information
communications technology services, business and data communications services
and advertising and media services in ten northern provinces, municipalities and
autonomous region in PRC, namely Beijing Municipality, Tianjin Municipality,
Hebei Province, Liaoning Province, Shandong Province, Henan Province, Shanxi
Province, Neimenggu Autonomous Region, Jilin Province, and Heilongjiang
Province. The Group also provided telecommunications services to selected
business and residential customers in two southern municipality and province,
namely Shanghai Municipality and Guangdong Province in the PRC.
 
 On
June 2, 2006, the Group entered into an agreement with third party buyers to
dispose of its entire interest in the Asia Netcom Corporation Limited (“ANC
Group”) for an aggregate cash consideration of US$168.84 million, at fair value
determined by both parties. The transaction was completed on August 22, 2006.
For detailed information, please refer to note 25.
   F-13
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  1  The
Group and its principal activities (Continued)
 
 Background
of the Group (Continued)
 
 On
January 15, 2007, the Company’s wholly owned subsidiary, China Netcom (Group)
Company Limited (“CNC China”), entered into an assets transfer agreement with
its ultimate holding Company, China Netcom Group. Pursuant to the agreement, CNC
China agreed to dispose of its assets and liabilities in relation to its
telecommunications operations in Guangdong Province and Shanghai Municipality
branches (“Guangdong and Shanghai Branches”) in the PRC for consideration of
RMB3.5 billion. On February 14, 2007, the independent shareholders passed an
ordinary resolution to approve the disposal. The disposal was completed on
February 28, 2007 upon the approval granted from the Ministry of Information
Industry (“MII”). After the disposal of the Guangdong and Shanghai Branches, the
Group only provides telecommunications operations in the ten northern provinces,
municipalities and autonomous region. For detailed information, please refer to
note 25.
 
 On
December 5, 2007, China Netcom Group System Integration Limited Corporation
(“System Integration Corporation”), a wholly-owned subsidiary of CNC China,
entered into an Equity Interest Transfer Agreement with China Netcom Group
Beijing Communications Corporation, pursuant to which System Integration
Corporation agreed to acquire the entire equity interest of Beijing
Telecommunications Planning and Designing Institute Corporation Limited
(“Beijing Telecom P&D Institute”) from China Netcom Group Beijing
Communications Corporation for a total consideration of RMB298.9 million. The
consideration was paid through a one-off cash payment. The acquisition was
registered with Beijing Property Transaction Administrative House and the
ownership was transferred on December 31, 2007. Prior to the acquisition,
Beijing Telecom P&D Institute was a wholly owned subsidiary of China Netcom
Group Beijing Communications Corporation, which is a wholly owned subsidiary of
China Netcom Group. For detailed information, please refer to note
2.
   F-14
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 1  The
Group and its principal activities (continued)
 
 Background
of the Group (continued)
 
 Currently,
the Group’s principal services consist of:
 
 ·
              Fixed
      line voice and value-added services,
comprising:
  (a)
                Local,
      domestic long distance and international long distance
      services;(b)
                Value-added
      services, including caller identity, personalized ring, etc;
      and(c)
                Interconnection
      services provided to other domestic telecommunications service providers
      including the fellow subsidiaries owned by China Netcom Group operating
      outside the ten service
regions;
  ·
              Broadband
      services and other Internet-related
services;
 
 ·
              Information
      Communications Technology Services, including system integration, software
      services, outsourcing services, professional consulting services,
      professional services related with network information and disaster
      recovery, and other integrated solutions to client based on information
      and communications industry;
 
 ·
              Business
      and data communications services, including managed data services and
      leased line services; and
 
 ·
              Advertising
      and media services.
 
 2  Basis
of presentation
 
 A
significant percentage of the Group’s funding requirements is achieved through
short term borrowings. Consequently, the balance sheet indicates a significant
working capital deficit. In the past, a substantial portion of the Group’s short
term borrowings have been rolled over upon maturity. In addition, on April 30,
2007 and September 18, 2007, the Group issued commercial paper to raise
additional funding of total RMB20 billion. On June 8, 2007, the Group issued
corporate bonds to raise additional funding of RMB2 billion. Based on the
Group’s history of obtaining financing, its relationship with its bankers and
its operating performance, the board of directors considers that the Group will
continue to be able to roll over such short term financing, or will be able to
obtain sufficient alternative sources of financing to enable it to operate and
meet its liabilities as and when they fall due.
 
 On
June 2, 2006, the Group entered into an agreement with third party buyers to
dispose of the entire interests in the ANC Group and the disposal was completed
on August 22, 2006. On January 15, 2007, CNC China entered into an assets
transfer agreement with China Netcom Group to dispose of its assets and
liabilities in relation to its telecommunications operations in Guangdong and
Shanghai Branches in the PRC and the disposal was completed on February 28,
2007. In accordance with HKFRS 5 “Non-current assets held for sale and
discontinued operations” issued by the HKICPA, the results and cash flows of the
operations of the ANC Group and the Guangdong and Shanghai Branches have been
presented as discontinued operations. The 2006 and 2005 comparative figures in
the income statement and statement of cash flow were restated to reflect the
disposal of Guangdong and Shanghai Branches accordingly. For detailed
information, please refer to note 25.
 
 On
December 5, 2007, System Integration Corporation entered into an Equity Interest
Transfer Agreement with China Netcom Beijing Communications Corporation,
pursuant to which System Integration Corporation agreed to acquire the entire
equity interest of Beijing Telecom P&D Institute from China Netcom Group
Beijing Communications Corporation.
  2  Basis
of presentation (continued)
 
 Before
the acquisition, Beijing Telecom P&D Institute was a wholly owned subsidiary
of China Netcom Group Beijing Communications Corporation, which is a wholly
owned subsidiary of China Netcom Group.  Since
   F-15
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
   China
Netcom Group is the ultimate holding company of the Group, the acquisition is a
business combination under common control. Therefore, the Group accounted for
this acquisition using the pooling of interest method according to Accounting
Guideline No. 5 - Merger Accounting for Common Control Transactions ("AG 5").
The acquired businesses and assets are recorded at book value under HKFRS as if
the businesses and assets of Beijing Telecom P&D Institute have been owned
by the Group from the earliest comparative period presented. Accordingly, the
financial information for 2006 and 2005 has been restated.
 
 The
impact of the restatement is summarized as below.
   
 F-16
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 2  Basis
of presentation (continued)
 
 
 Year
      ended December 31, 2005RMB
                million
              
              
              RMB
                million
              
              
              RMB
                million
              
              
              RMB
                million
              
              
              RMB
                millionOriginally
                stated
              
              
              Disposal
      of
                Guangdong
      and
                Shanghai
      Branches
              
              
              Acquisition
      of
                Beijing
                Telecom
                P&D
      Institute
              
              
              Elimination
      of
                intercompany
                transactions
              
              
              RestatedContinuing
      operations:Revenues
              
              
              85,861
              
              
              
              (2,120
              )
              
              
              186
              
              
              
              -
              
              
              
              83,927Profit
      for the year from
                continuing
      operation
              
              
              14,114
              
              
              
              174
              
              
              
              62
              
              
              
              -
              
              
              
              14,350Discontinued
      operations :Profit/(loss)
      from
                discontinued
      operations
              
              
              (226
              )
              
              
              (174
              )
              
              
              -
              
              
              
              -
              
              
              
              (400
              )Profit
      for the year
              
              
              13,888
              
              
              
              -
              
              
              
              62
              
              
              
              -
              
              
              
              13,950Net
      cash inflow from
                operating
      activities
              
              
              33,557
              
              
              
              -
              
              
              
              (22
              )
              
              
              -
              
              
              
              33,535Net
      cash outflow from
                investing
      activities
              
              
              (24,608
              )
              
              
              -
              
              
              
              31
              
              
              
              -
              
              
              
              (24,577
              )Net
      cash outflow from
                financing
      activities
              
              
              (14,656
              )
              
              
              -
              
              
              
              18
              
              
              
              -
              
              
              
              (14,638
              )Total
      current assets at
                December
      31, 2005
              
              
              14,499
              
              
              
              -
              
              
              
              176
              
              
              
              -
              
              
              
              14,675Total
      assets at December 31,
                2005
              
              
              202,840
              
              
              
              -
              
              
              
              282
              
              
              
              -
              
              
              
              203,122Total
      current liabilities at
                December31,
      2005
              
              
              98,399
              
              
              
              -
              
              
              
              5
              
              
              
              -
              
              
              
              98,404Total
      liabilities at December
                31,
      2005
              
              
              139,830
              
              
              
              -
              
              
              
              5
              
              
              
              -
              
              
              
              139,835Shareholders’
      equity at
                December
      31, 2005
              
              
              63,010
              
              
              
              -
              
              
              
              277
              
              
              
              -
              
              
              
              63,287
  
 F-17
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 Year
      ended December 31, 2006RMB
                million
              
              
              RMB
                million
              
              
              RMB
                million
              
              
              RMB
                million
              
              
              RMB
                millionOriginally
                stated
              
              
              Disposal
      of
                Guangdong
      and
                Shanghai
      Branches
              
              
              Acquisition
      of
                Beijing
                Telecom
                P&D
      Institute
              
              
              Elimination
      of
                intercompany
                transactions
              
              
              RestatedContinuing
      operations:Revenues
              
              
              86,921
              
              
              
              (3,222
              )
              
              
              165
              
              
              
              330
              
              
              
              84,194Profit
      for the year from
                continuing
      operation
              
              
              11,141
              
              
              
              332
              
              
              
              27
              
              
              
              (22
              )
              
              
              11,478Discontinued
      operations :Profit/(loss)
      from discontinued operations
              
              
              1,819
              
              
              
              (332
              )
              
              
              -
              
              
              
              -
              
              
              
              1,487Profit
      for the year
              
              
              12,960
              
              
              
              -
              
              
              
              27
              
              
              
              (22
              )
              
              
              12,965Net
      cash inflow from operating activities
              
              
              34,133
              
              
              
              -
              
              
              
              20
              
              
              
              (18
              )
              
              
              34,135Net
      cash outflow from investing activities
              
              
              (24,991
              )
              
              
              -
              
              
              
              (2
              )
              
              
              21
              
              
              
              (24,972
              )Net
      cash outflow from financing activities
              
              
              (6,447
              )
              
              
              -
              
              
              
              (30
              )
              
              
              -
              
              
              
              (6,477
              )Total
      current assets at December 31, 2006
              
              
              18,059
              
              
              
              -
              
              
              
              218
              
              
              
              (51
              )
              
              
              18,226Total
      assets at December 31, 2006
              
              
              203,835
              
              
              
              -
              
              
              
              318
              
              
              
              (71
              )
              
              
              204,082Total
      current liabilities at December 31, 2006
              
              
              90,802
              
              
              
              -
              
              
              
              80
              
              
              
              (49
              )
              
              
              90,833Total
      liabilities at December 31, 2006
              
              
              129,857
              
              
              
              -
              
              
              
              80
              
              
              
              (49
              )
              
              
              129,888Shareholders’
      equity at December 31, 2006
              
              
              73,978
              
              
              
              -
              
              
              
              238
              
              
              
              (22
              )
              
              
              74,194
 
   F-18
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  3  Changes
in accounting policies
 
 (a)  Changes
in accounting policies in 2007
 
 (i)
              Standards,
      amendment and interpretations effective in
2007
 
 HKFRS
7, 'Financial instruments: Disclosures', and the complementary amendment to HKAS
1, 'Presentation of financial statements – Capital disclosures', introduces new
disclosures relating to financial instruments and does not have a material
impact on the classification and valuation of the Group’s financial
instruments.
 
 HK(IFRIC)
- Int 8, 'Scope of HKFRS 2', requires consideration of transactions involving
the issue of equity instruments, where the identifiable consideration received
is less than the fair value of the equity instruments issued in order to
establish whether or not they fall within the scope of HKFRS 2. This standard
does not have any impact on the Group’s financial statements.
 
 HK(IFRIC)
- Int 10, 'Interim financial reporting and impairment', prohibits the impairment
losses recognised in an interim period on goodwill and investments in equity
instruments and in financial assets carried at cost to be reversed at a
subsequent balance sheet date. This standard does not have any impact on the
Group’s financial statements.
 
 (ii)
              Interpretation
      early adopted by the Group
 
 HK(IFRIC)
- Int 13, 'Customer loyalty programmes' (effective from July 1, 2008) was early
adopted. HK(IFRIC) - Int 13 clarifies that where goods or services are sold
together with a customer loyalty incentive (for example, loyalty points or free
products), the arrangement is a multiple-element arrangement and the
consideration receivable from the customer is allocated between the components
of the arrangement using fair values. The Group only carried out a limited
customer loyalty program in 2007 and thus it has no material impact on the
Group’s financial statements.
 
 (iii)
              Standards,
      amendments and interpretations effective in 2007 but not
      relevant
 
 The
following standards, amendments and interpretations to published standards are
mandatory for accounting periods beginning on or after January 1 2007 but they
are not relevant to the Group’s operations:
 
 ·
              HK(IFRIC) - Int 7, 'Applying the restatement approach under HKAS 29,
      Financial reporting in hyper-inflationary
  economies';
 
 ·
              HK(IFRIC) – Int 9, 'Re-assessment of embedded derivatives';
      and
 
 ·
              HKFRS 4 (revised) - ‘Amendment to 'Financial guarantee
      contracts'’.
   F-19
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  3  Changes
in accounting policies (continued)
 
 (iv)
              Standards,
      amendments and interpretations to existing standards that are not yet
      effective and have not been early adopted by the
  Group
 
 The
following standards, amendments and interpretations to existing standards have
been published and are mandatory for the Group’s accounting periods beginning on
or after January 1, 2008 or later periods, but the Group has not early adopted
them:
 
 ·
              HK(IFRIC)
      - Int 11, 'HKFRS 2 – Group and treasury share transactions'. HK(IFRIC) -
      Int 11 provides guidance on whether share-based transactions involving
      treasury shares or involving Group entities (for example, options over a
      parent's shares) should be accounted for as equity-settled or cash-settled
      share-based payment transactions in the stand-alone accounts of the parent
      and Group companies. This interpretation is not expected to have an impact
      on the Group’s financial
statements.
 
 ·
              HK(IFRIC)
      – Int 12, ‘Service concession arrangement’ (effective from January 1,
      2008). IFRIC 12 applies to contractual arrangements whereby a private
      sector operator participates in the development, financing, operation and
      maintenance of infrastructure for public sector services.  IFRIC
      12, is not expected to have an impact on the Group’ financial
      statements.
 
 ·
              HKAS
      23 (Amendment), 'Borrowing costs' (effective from January 1,
      2009).  The amendment requires an entity to capitalise borrowing
      costs directly attributable to the acquisition, construction or production
      of a qualifying asset (one that takes a substantial period of time to get
      ready for use or sale) as part of the cost of that asset. The option of
      immediately expensing those borrowing costs will be removed. Since the
      Group does not expense those borrowing cost under the current accounting
      policies, HKAS 23 (Amendment) has no impact to the
  Group.
 
 ·
              HKFRS
      8, 'Operating segments ' (effective from January 1 2009). HKFRS 8 replaces
      HKAS 14 and aligns segment reporting with the requirements of the US
      standard SFAS 131, ‘Disclosures about segments of an enterprise and
      related information’. The new standard requires a 'management approach',
      under which segment information is presented on the same basis as that
      used for internal reporting purposes. The financial statements of the
      Group are presented on the same basis as that used for internal reporting
      purpose. Adoption of HKFRS 8 will not have significant impact to the
      Group.
 
 ·
              HK(IFRIC)
      - Int 14, 'HKAS 19 – The limit on a defined benefit asset, minimum funding
      requirements and their interaction' (effective from January 1, 2008).
      HK(IFRIC) - Int 14 provides guidance on assessing the limit in IAS/HKAS 19
      on the amount of the surplus that can be recognised as an asset. It also
      explains how the pension asset or liability may be affected by a statutory
      or contractual minimum funding requirement. The Group will apply HK(IFRIC)
      - Int 14 from January 1 2008, but it is not expected to have any impact on
      the Group’s accounts.
 
 
 
 F-20
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 3  Changes
in accounting policies (continued)
 
 (b)  Changes
in accounting policies in 2006
 
 In
2006, the Group adopted certain revised HKFRSs which are relevant to its
operations as listed below.
 
 ·  HKAS 21 (Amendment) - Net investment in a Foreign Operation
 · HKAS39 (Amendment) - Cash Flow Hedge Accounting for Forecast
Intergroup   Transactions
 ·      HKAS
39 (Amendment) - Fair Value Options
 ·     
HKFRS 39 (Amendment) and HKAS 4 (Amendment) - Financial guarantee
contracts
 
 The
adoption of these new or revised HKFRSs by the Company did not have any
significant impact on its results of operations and financial
position.
 
 
  F-21
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  4    Principal
accounting policies
 
 (a)
              Basis
      of consolidation
 
 Acquisitions
of businesses under common control are accounted for using merger accounting in
accordance with AG 5 issued by HKICPA. The acquired assets are stated at
carrying amounts as if the acquired assets have been held by the Company from
the beginning of the earliest period presented.
 
 When
a subsidiary is disposed, the difference between the proceeds from the disposal
of the subsidiary and its carrying amount as of the date of disposal, including
the cumulative amount of any exchange differences that relates to the subsidiary
recognised in equity is recognised in the income statement as the gain or loss
on the disposal of the subsidiary.
 
 All
significant intercompany transactions and balances within the Group are
eliminated on consolidation.
 
 (b)
              Subsidiaries
 
 Subsidiaries
are those entities in which the Company, directly or indirectly, controls the
composition of the board of directors, controls more than half the voting power
or holds more than half of the issued share capital.
 
 In
the Company’s balance sheet, the investments in subsidiaries are stated at cost
less provision for impairment losses. The results of subsidiaries are accounted
for by the Company on the basis of dividends received and
receivables.
 
 (c)
              Revenue
      recognition
 
 (i)
              The
      Group’s revenues are recognised as
follows:
 
 ·  Revenues
derived from local, domestic long distance (‘‘DLD’’) and international long
distance (‘‘ILD’’) telephone usage, which vary depending on the day, the time of
day, the distance and duration of the call and the tariffs, are recognised when
the services are provided to customers.
 
 ·  Monthly
telephone service fees are recognised in the period during which the telephone
services are provided to customers.
 
 ·  Upfront
connection and installation fees received are deferred and recognised over the
expected customer relationship period of 10 years. With effect from July 1,
2001, no further upfront fees for connection were charged to
customers.
 
 ·  Revenues
from the sale of prepaid calling cards are deferred and recognised as the cards
are consumed by customers.
 
 ·  Revenues
from value-added communication services such as personalized ring and caller
number display are recognised when the services are provided to
customers.
   F-22
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  4    Principal
accounting policies (continued)
 
 (c)
              Revenue
      recognition (continued)
 
 ·
              Revenues
      from the provision of broadband and other Internet-related services and
      managed data services are recognised when the services are provided to
      customers.
 
 ·
              Revenue
      from information communications technology services are recognised when
      goods are delivered to the customer (which generally coincides with the
      time when the customers have accepted the goods and the related risks and
      rewards of ownership have been transferred to the customer) or when
      services are rendered to the
customer
 
 ·
              Interconnection
      fees from domestic and foreign telecommunications operators are recognised
      when the services are rendered as measured by the minutes of traffic
      processed.
 
 ·
              Lease
      income from the leasing of lines and customer-end equipment is recognised
      over the term of the lease. Lease income from other domestic
      telecommunications operators and business customers for the usage of the
      Group’s fixed line telecommunications networks is measured by the number
      of lines leased and the agreed upon rate per line leased. The lease
      arrangements are primarily determined on a year to year
    basis.
 
 ·
              Certain
      PHS bundled service contracts comprise the provision of PHS services and
      handsets to customers, under which customers either prepay a certain
      amount of service fee or commit to spend a minimum monthly service fee for
      a designated period in order to receive a free handset. When all of the
      following criteria are met, PHS handsets and related services are
      separately recognised as revenues arising from local, DLD, or ILD services
      fees and sales of handsets according to their relative fair
      values.  When any one of the following criteria is not met,
      total revenues from PHS bundled service contracts are recognised on a
      systematic basis to match the shorter of the pattern of usage of the PHS
      services by customers and the minimum non-cancellable contractual period.
      See Note 4(u)(ii) for the policy on accounting for the cost of the
      handsets.
 
 i
              PHS
      handsets and relative services have value on a stand-alone
      basis;
 
 ii
              Objective
      and reliable fair value of PHS handsets and relative services
      exists;
 
 iii
              In
      arrangements that include a general right of refund for the delivered
      item, performance of the undelivered item is considered probable and
      substantially in the Group’
control.
 
 (ii)
              Interest
      income
 
 Interest
income is recognised on a time proportion basis, taking into account the
principal amounts outstanding and the interest rates applicable.
 
 (iii)
              Dividend
      income
 
 Dividend
      income is recognised when the right to receive payment is
      established.
 
   F-23
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  4    Principal
accounting policies (continued)
 
 (d)
              Interest
      expenses
 
 Interest
expense 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 or sale are capitalized as part of the cost of that
asset.
 
 All
other interest expenses are charged to the income statement in the year in which
they are incurred.
 
 (e)
              Interconnection
      charges
 
 Interconnection
charges represent amounts incurred for the use of other telecommunications
operators’ networks for facilitating the completion of calls that originate from
the Group’s fixed line telecommunications networks. Interconnection charges are
recognised on an accrual basis. Interconnection charges with domestic operators
and the fellow subsidiaries of the Group are accrued based on actual amounts,
while those with overseas operators are accrued based on the actual amounts, if
known, or the Group’s estimates.
 
 (f)
              Translation
      of foreign currencies
 
 (i)  Functional
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
entity operates (the “functional currency”), which is Renminbi.
 
 (ii)  Transactions
and balances
  Transactions
in foreign currencies are translated at exchange rates ruling at the transaction
dates. Monetary assets and liabilities expressed in foreign currencies at the
balance sheet dates are translated at rates of exchange ruling at the balance
sheet dates. Exchange differences arising in these cases are dealt with in the
income statement.
   F-24
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  4    Principal
accounting policies (continued)
 
 (f)
              Translation
      of foreign currencies (continued)
 
 (iii) The
Group
 
 The
results and financial position of all the Group entities that have a functional
currency different from the presentation currency are translated into the
presentation currency as follows:
 
 · Assets
and liabilities for each balance sheet presented are translated at the closing
rate at the date of that balance sheet;
 
 · Income
and expenses for each income statement are translated at average exchange rates
(unless this average is not a reasonable approximation of the cumulative effect
of the rates prevailing on the transaction dates, in which case income and
expenses are translated at the dates of the transactions); and
  · All
resulting exchange differences are recognised as a separate component of equity. On
consolidation, exchange differences arising from the translation of the net
investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to   shareholders’
equity. When a foreign operation is sold, such exchange differences are
recognised in the income statement as part of the gain or loss on
disposal.
 
 (g)
              Cash
      and cash equivalents
 
 Cash
and cash equivalents, comprising cash on hand, deposits held at call with banks
and cash investments with original maturities of three months or less are
carried at cost.
 
 (h)
              Accounts
      receivable and other receivables
 
 Accounts
and other receivables are recognised initially at fair value and subsequently
measured at amortized cost using the effective interest method, less provision
for impairment. A provision for impairment of accounts 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 receivables. The
amount of the provision is the difference between the asset’s carrying amount
and the present value of estimated future cash flows, discounted at the original
effective interest rate. The amount of the provision is recognised in the income
statement.
 
 (i)
              Inventories
      and consumables
 
 Inventories
comprise mainly telephone handsets and are stated at the lower of cost and net
realizable value on a first-in, first-out basis, after provisions for
obsolescence.  Net realizable value is the estimated selling price in
the ordinary course of business, less applicable variable selling
expenses.
   F-25
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  4    Principal
accounting policies (continued)
 
 (i)
              Inventories
      and consumables (continued)
 
 Consumables
consist of materials and supplies used in maintaining the Group’s
telecommunication networks and are charged to the income statement when brought
into use. Consumables are valued at cost less any provision for
obsolescence.
 
 (j)
              Lease
      prepayments
 
 (i)
              Lease
      prepayments for land
 
 Lease
prepayments for land represent payments for land use rights. Lease prepayments
for land are stated at cost initially and expensed on a straight line basis over
the lease period.
 
 (ii)
              Lease
      prepayments for network capacity
 
 Lease
prepayments for network capacity represent payments for network capacity on an
indefeasible right of use basis for the own use of the Company. Lease
prepayments for network capacity are stated at cost initially and expensed on a
straight line basis over the lease period.
 
 (k)
              Fixed
      assets
 
 (i)
              Construction-in-progress
 
 Construction-in-progress
represents buildings, telecommunications networks plant, transmission and
switching equipment under construction and pending installation, and is stated
at cost less impairment losses. Cost comprises direct costs of construction
including borrowing costs attributable to the construction during the period of
construction. When the asset being constructed becomes available for use, the
construction-in-progress is transferred to the appropriate category of fixed
assets.
 
 (ii)
              Other
      fixed assets
 
 Other
fixed assets are initially stated at cost less accumulated depreciation and
accumulated impairment losses. Historical cost includes expenditure that is
directly attributable to the acquisition of the items. The subsequent costs are
included in the assets’ carrying amount or recognised as a separate asset, as
appropriate, only when it is probable that future economic benefits associated
with the item will flow to the Group and the cost of the item can be measured
reliably. Any other costs incurred in restoring fixed assets are charged to the
income statement as incurred.
 
 Buildings
subsequent to initial recognition are stated at cost less accumulated impairment
losses and depreciated over their expected useful lives.
    F-26
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 4    Principal
accounting policies (continued)
 
 (k)
              Fixed
      assets (continued)
 
 (iii)
              Revaluations
 
 Fixed
assets other than buildings are carried at their revalued amounts. Revalued
assets are stated at fair value as of the revaluation date less accumulated
depreciation. When an item of fixed asset is revalued, any accumulated
depreciation at the date of the revaluation is restated proportionately together
with the change in the gross carrying amount of the asset so that the carrying
amount of the asset after revaluation equals its revalued amount.
 
 Increases
in valuation are credited to the revaluation reserve. Decreases in valuation are
first set off against any revaluation surplus on earlier valuations in respect
of the same item and thereafter are debited to operating profit. Any subsequent
increases are credited to operating profit up to the amount previously debited.
Each year the difference between depreciation based on the revalued carrying
amount of the asset expensed in the income statement and depreciation based on
the asset’s original cost is transferred from the revaluation reserve to
retained earnings.
 
 Revaluations
on fixed assets will be performed with sufficient regularity by independent
valuers and in each of the intervening years, valuations will be undertaken by
executives of the Group.
 
 (iv)
              Depreciation
 
 Fixed
assets are depreciated at rates sufficient to write off their costs or revalued
amounts less accumulated impairment losses and estimated residual values over
their estimated useful lives on a straight-line basis. The principal useful
lives are as follows:
 
 Buildings
              8-30
      years
 Telecommunications
      networks and equipment
              5-10
      years
 Furniture,
      fixture, motor vehicles and other equipment
              5-10
      years
 
 The
useful lives and estimated residual values are reviewed and modified
periodically at every balance sheet date.
 
 (v)
              Gain
      or loss on sale of fixed assets
 
 The
gain or loss on disposal of a fixed asset is the difference between the net
sales proceeds and the carrying amount of the relevant asset, and is recognised
in the income statement, except where the fixed asset is carried at valuation.
The relevant portion of the revaluation reserve realized in respect of previous
valuations is transferred to retained earnings and is shown as a movement in
reserves.
   F-27
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 4    Principal
accounting policies (continued)
 
 (l)
              Impairment
      of assets
 
 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 recognised 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 purpose of assessing impairment, assets are grouped at the lowest levels for
which there are separately identifiable cash flows (cash-generating
units).
 
 (m)
              Assets
      held under leases
 
 (i)
              Finance
      leases
 
 Leases
of assets where the Group has substantially all the risks and rewards of
ownership are classified as finance leases. Finance leases are capitalized upon
commencement of the lease at the lower of the fair value of the leased assets
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 on the finance balance outstanding. The corresponding rental obligations,
net of finance charges, are included in current and non-current borrowings. The
interest element of the finance cost is recognised in the income statement over
the lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.
 
 (ii)
              Operating
      leases
 
 Leases
in which a significant portion of the risks and rewards of ownership are
retained by the lesser are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lesser) are expensed
in the income statement on straight-line basis over the period of the
lease.
 
 (n)
              Intangible
      assets
 
 (i)
              Purchased
      software
 
 Expenditure
on purchased software is capitalized and amortized using the straight-line
method over the expected useful lives of the software, which vary from two to
five years.
 
 (ii)
              Sponsorship
      fee
 
 The
sponsorship fee for the 2008 Beijing Olympic Games has been capitalized and
amortized on a straight-line basis over 4 years, being the estimated beneficial
period under the sponsorship program. The cost of the intangible asset is
calculated based on the expected cash payment and the fair value of the services
to be provided.
   F-28
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  4    Principal
accounting policies (continued)
 
 (o)
              Accounts
      payable
 
 Accounts
payable are recognised initially at fair value and subsequently measured at
amortized cost using the effective interest method.
 
 (p)
              Borrowings
 
 Borrowings
are recognised initially at fair value, net of transaction costs
incurred.  Borrowings are subsequently stated at amortized cost; any
difference between the proceeds (net of transaction costs) and the redemption
value is recognised in the income statement over the period of the borrowings
using the effective interest method.
 
 Borrowings
are classified as current liabilities unless the Group has an unconditional
right to defer settlement of the liability for at least 12 months after the
balance sheet date.
 
 (q)
              Provisions
 
 Provisions
are recognised when the Group has a present legal or constructive obligation as
a result of past events, it is probable that an outflow of resources will be
required to settle the obligation, and a reliable estimate of the amount can be
made.  Provisions are not recognised for operating losses arising in
future periods.
 
 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 recognised 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 expenditures expected to be required to
settle the obligation using a pre-tax rate 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
recognised in the income statement.
 
 (r)
              Share
      capital
 
 Ordinary
shares are classified as equity.
 
 Where
shares are issued, any consideration received (net of related income tax
effects) is included in equity attributable to the Company’s equity
holders.
   F-29
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  4    Principal
accounting policies (continued)
 
 (s)
              Employee
      benefits
 
 (i)
              Pension
      obligations
 
 (a)  Employees
      in the PRC are entitled to retirement benefits equal to a fixed proportion
      of their salary at their normal retirement age which is paid by the PRC
      government. As stipulated by the regulations of the PRC, the subsidiaries
      in the PRC make contributions to the basic defined contribution pension
      plans organized by their respective municipal governments under which they
      are governed. The Group is required to make such contributions to these
      plans at a rate of 20% of the salaries, bonuses and certain allowances of
      the employees. The Group has no other material obligation for
      post-retirement benefits beyond these payments as they fall
      due.  Payments made under these plans are expensed as
      incurred.
 
 (b)  The
      Group also operates a mandatory provident fund scheme (“the MPF scheme”)
      under the Hong Kong Mandatory Provident Fund Schemes Ordinance for
      employees employed under the jurisdiction of the Hong Kong Employment
      Ordinance. The MPF scheme is a defined contribution retirement scheme
      administered by independent trustees. Under the MPF scheme, the employer
      and its employees are each required to make contributions to the scheme at
      5% of the employees’ relevant income, subject to a cap of monthly relevant
      income of HK$20,000. Payments are expensed as
  incurred.
 
 (ii)
              Early
      retirement benefits
  Early
retirement benefits are recognised as expenses when the Group reaches agreement
with the relevant employees for early retirement.
 
 (iii)
              Employee
      housing benefits
 
 One-off
cash housing subsidies paid to PRC employees are charged to the income statement
in the year in which it is determined that the payment of such subsidies is
probable and the amounts can be reasonably estimated (see Note 33).
 
 PRC
full-time employees of the Group participate in various government-sponsored
housing funds. The Group contributes on a monthly basis to these funds based on
certain percentages of the salaries of the employees. The Group’s liability in
respect of these funds is limited to the contributions payable in each period.
Contributions to these housing funds are expensed as incurred.
   F-30
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 4    Principal
accounting policies (continued)
 
 (s)
              Employee
      benefits (continued)
 
 (iv)
              Share
      option scheme
 
 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 options is
recognised as an expense. Fair values of the options with different vesting
periods are determined separately. The total amount to be expensed over the
vesting period is determined by reference to the fair value of the options
granted, excluding the impact of any non-market vesting conditions (for example,
profitability and sales growth targets). Non-market vesting conditions are
included in assumptions about the number of options that are expected to become
exercisable. At each balance sheet date, the entity revises its estimates of the
number of options that are expected to become exercisable. It recognizes the
impact of the revision of original estimates, if any, in the income statement,
and a corresponding adjustment to equity over the remaining vesting
period.
 
 When
the share option is exercised, the consideration received after deduction of
transaction cost directly attributed to the exercise is recorded in share
capital (nominal value) and share premium.
 
 (t)
              Deferred
      taxation
 
 Deferred
taxation 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 financial statements. Tax rates enacted or substantially
enacted at the balance sheet date are used to determine deferred taxation.
Deferred tax assets are recognised to the extent that it is probable that future
taxable profit will be available against which the temporary differences can be
utilized.
   F-31
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 4    Principal
accounting policies (continued)
 
 (u)
              Other
      non-current assets
 
 (i)
              Deferred
      installation costs
 
 The
direct incremental costs associated with the installation of fixed line services
are deferred and expensed to the income statement over the expected customer
relationship period of 10 years except when the direct incremental costs exceed
the corresponding upfront installation fees. In such cases, the excess of the
direct incremental costs over the installation fees are recorded immediately as
expenses in the income statement.
 
 (ii)
              Subscriber
      acquisition costs
 
 As shown in note 4(c)(i), when certain
bifurcation conditions are met, revenue attributable to handsets given to
customers under bundled service contracts is recognised separately in the income
statement of the period the contracts are entered into.  The cost of
these handsets is expensed immediately to the income statement in the same
period. When any one of the aforementioned conditions is not met, the costs of handsets
given to customers under bundled service contracts are deferred as subscriber
acquisition costs and expensed to the income statement on a systematic basis to
match with the pattern of the customer service income overthe contract period.
 
 (iii)
              Prepaid
      network capacities
 
 Prepayments
for the network capacities purchased on an indefeasible rights to use (‘‘IRU’’) basis for resale are
capitalized and expensed over the corresponding lease period.
 
 (v)
              Discontinued
      operations
 
 A discontinued operation is a component of
the Group that may be a major line of business or geographical area of
operations that has been disposed or is held for sale. The result of that
component is separately reported as “discontinued operations”in the incomestatement. The comparative income statement and
cash flow statement are restated as if the operation had been discontinued from
the start of the comparative period. The assets and liabilitiesof such component classified as
“discontinued
operations”or “held for sale”is presented separately in the assets
andliabilities, respectively, of the
consolidatedbalancesheet, from the date it is first determined
to be discontinued or held for sale.
   F-32
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 4    Principal
accounting policies (continued)
 
 (w)
              Contingent
      liabilities
 
 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 recognised 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
recognised but is disclosed
in the notes to the financial statements when an outflow of economic benefits is
less than probable but not remote. When a change in the probability of an
outflow occurs such that the outflow is probable, the contingent liability will
then be recognised 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 events not wholly within
the control of the Group.A
contingent asset is disclosed when an inflow of economic benefits is probable
but only recognised in income statement when realized.
 
 (x)
              Segmental
      reporting
 
 Business
segments provide services that are subject to risks and returns that are
different from other business segments.
Geographical segments provide services within a particular economic environment
that is subject to risks and returns that differ from those of components
operating in other economic environments. Currently the Group has one business
segment, the provision of fixed line telecommunications services. Less than 10%
of the Group’s assets and operations are located outside the PRC. Accordingly,
no business and geographical segment information is presented.
 
 (y)
              Earnings
      per share (“EPS”) and per American Depository Shares
    (“ADS”)
 
 Basic
EPS is computed by dividing net profit attributable to ordinary shareholders by
the weighted average number of ordinary shares outstanding during the
year.
 
 Diluted
EPS is computed by dividing net profit attributable to shareholders by the
weighted average number of ordinary and dilutive ordinary equivalent shares
outstanding during the year. Ordinary equivalent shares consist of ordinary
shares issuable upon the exercise of outstanding stock options using the
treasury stock method.
 
 Earnings
per ADS is computed by multiplying the EPS by 20, which is the number of shares
represented by each ADS.
   F-33
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 5   Critical
accounting estimates and judgments
 
 Estimates
      and judgments are continually evaluated and are based on historical
      experience and other factors, including expectations of future events that
      are believed to be reasonable under
  circumstances.
 
 (a)
              Critical
      accounting estimates and
assumptions
 
 The
Group makes estimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, seldom equal 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:
 
 (i)
              Depreciation
      of property, plant and equipment
 
 The
property, plant and equipment of the Group are depreciated at rates sufficient
to write off their costs or revalued amounts less accumulated impairment losses
and estimated residual values over their estimated useful lives on a
straight-line basis. The Group reviews the estimated useful lives and estimated
residual values periodically to ensure that the method and rates of depreciation
are consistent with the expected pattern of economic benefits from property,
plant and equipment. The Group estimates the useful lives of the property, plant
and equipment as set out in Note 4(k)(iv) based on the historical experience
with similar assets, taking into account anticipated technological changes. The
depreciation expenses in the future periods will change if there are significant
changes from previous estimates.
 
 As
of December 31, 2007, the Group did not change the estimate of useful
lives.
 
 (ii)
              Revaluation
      of property, plant and equipment
 
 Apart
from lease prepayments for land and buildings, which are carried at cost, other
property, plant and equipment are carried at revalued amounts, being the fair
value at the date of revaluation, less subsequent accumulated depreciation and
impairment. Property, plant and equipment of the Group was revalued as of
December 31, 2006 on a depreciated replacement cost basis by an independent
valuer. If the revalued amounts differ significantly from the carrying amounts
of the property, plant and equipment in the future, the carrying amounts will be
adjusted to the revalued amounts. The key assumptions made to determine the
revalued amounts include the estimated replacement costs and the estimated
useful lives of the property, plant and equipment.  This will have an
impact on the Group’s future results, since any subsequent decreases in
valuation are set off first against increases on earlier valuations in respect
of the same item and thereafter are charged as an expense to the income
statement and any subsequent increases are credited as income to the income
statement up to the amount previously charged then to equity. In addition, the
depreciation expenses in future periods will change as the carrying amounts of
such property, plant and equipment change as a result of the
revaluation.
  
 F-34
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 5  Critical
accounting estimates and judgments (continued)
 
 (a)
              Critical
      accounting estimates and assumptions
(continued)
 
 (iii)
              Impairment
      of non-current assets
 
 At
each balance sheet date, the Group considers both internal and external sources
of information to assess whether there is any indication that non-current
assets, including property, plant and equipment, are impaired. If any such
indication exists, the recoverable amount of the assets is estimated and an
impairment loss is recognised to reduce the carrying amount of the assets to its
recoverable amount. The recoverable amount is the higher of value in use or net
selling price.  Estimated values in use are determined based on
estimated discounted future cash flows of the cash generating unit at the lowest
level to which the asset belongs. Key assumptions made to determine the
estimated discounted future cash flows include the estimated future cash flow,
estimated growth rate and the estimated weighted average cost of capital of the
Group. Such impairment losses are recognised in the income statement, except
where the asset is carried at valuation and the impairment loss does not exceed
the revaluation surplus for that same asset, in which case the impairment loss
is treated as a revaluation decrease and charged to the revaluation reserve.
Accordingly, there will be an impact to the future results if there is a
significant change in the recoverable amounts of the non-current
assets.
 
 At
December 31, 2007, the Group did not identify any indication that non-current
assets were impaired.
 
 (iv)
              Revenue
      recognised for upfront connection and installation
  fees
 
 The
Group defers the recognition of upfront customer connection and installation
fees and amortizes them over the expected customer relationship period of 10
years. The related direct incremental installation costs are deferred and
amortized over the same expected customer relationship period of 10 years,
except when the direct incremental costs exceed the corresponding installation
fees, the excess amounts are immediately written off as an expense to the income
statement. The Group estimates the expected customer relationship period based
on the historical customer retention experience and after factoring in the
expected level of future competition, the risk of technological or functional
obsolescence to the Group’s services, technological innovation, and the expected
changes in the regulatory and social environment. If the Group’s estimate of the
expected customer relationship period changes as a result of increased
competition, changes in telecommunications technology or other factors, the
amount and timing of recognition of the deferred revenues may change for future
periods.
 
 As
of December 31, 2007, the Group did not change the estimate of customer
relationship period.
 
 (v)
              Provision
      for doubtful debts
 
 The
Group maintains an allowance for doubtful debts for estimated losses resulting
from the inability of its customers to make the required payments. The Group
makes its estimates based on the aging of its accounts receivable balances,
customer’s creditworthiness, and historical write-off experience. If the
financial condition of its customers were to deteriorate, actual write-offs
might be higher than expected, and the Group would be required to revise the
basis of making the allowance and its future results would be
affected.
   F-35
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  5  Critical
accounting estimates and judgments (continued)
 
 (a)
              Critical
      accounting estimates and assumptions
(continued)
 
 (vi)
              Fair
      value
 
 The
Group estimates the fair value of its financial assets and financial liabilities
including accounts receivable, other receivables and other current assets,
accounts payable, and bank and other loans for disclosure purposes by
discounting its future contractual cash flows at the estimated current market
interest rate that is available to the Group for similar financial instruments.
The future disclosed values will change if there are changes in the estimated
market interest rate.
 
 6  Financial
risk management
 
 (a)
              Financial
      risk factors
 
 The
Group’s major financial assets include bank deposits, accounts receivable, notes
receivable and other receivables. The Group’s major financial liabilities
include accounts payable, notes payable, other payable, bank borrowings,
commercial paper and corporate bonds.
 
 The
Group’s activities expose it to a variety of financial risks: market risk
(including currency risk, fair value interest rate risk and cash flow interest
rate risk), credit risk, and liquidity risk. The board has reviewed and approved
its relative risk management policy as follows:
 
 (i)
              Foreign
      exchange risk
 
 The
Group’s major operational activities are carried out in mainland China and a
majority of the transactions are performed in Renminbi. On December 31, 2007,
the Group had certain bank deposits and borrowings were denominated in foreign
currencies, mainly in US dollar and HK dollar. Any change in the exchange rates
of these currencies to Renminbi will impact the Group’s operating
results.
 
 As
at December 31, 2007 and 2006, the Group had bank balances denominated in
foreign currencies amounting to RMB320 million and RMB1,946 million,
respectively. As at December 31, 2007 and 2006, the Group had bank borrowings
denominated in foreign currencies amounting to RMB1,246 million and RMB1,432
million, respectively.
   F-36
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  6 
  Financial risk management (continued)
 
 (a)
              Financial risk factors
      (continued)
 
 (i)
              Foreign
      exchange risk (continued)
 
 At
December 31 2007, if Renminbi had weakened/strengthened by 5% against the
foreign currencies, the impact of the fluctuation on an annual profit is
presented in the table below. The analysis covers bank deposits and borrowings.
A positive figure means the Renminbi has appreciated against foreign currencies
and lead to an increase of profit.
 
 Increase/(Decrease) inannual
    profitDecember31,2007
              December31,2006RMB million
              RMB
  millionHK Dollar exchange rate
      fluctuation5%appreciation
              7
              325%depreciation
              (7)
              (32)US Dollar exchange rate
      fluctuation5%appreciation
              (21)
              305%depreciation
              21
              (30)
 
 (ii)
              Cash
      flow and fair value interest rate
risk
 
 As
the Group has no significant interest-bearing assets, 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 interest bearing borrowings. Borrowings
issued at variable rates expose the Group to cash flow interest-rate risks.
Borrowings issued at fixed rates expose the Group to fair value interest-rate
risks. The Group does not use derivative financial tools to offset the cash flow
interest rate risk. The footnote 30 discloses bank loans with fixed rates and
variable rates.
 
 As
at December 31, 2007, 83.96% of the Group’s loans were with fixed interest rate
(2006: 74.69%). If the market interest had (decreased)/increased by 2% ,the
impact of the fluctuation on an annual profit is presented in the table
below:
 
 Increase/(Decrease) in annual
      profitDecember31,2007
              December31,2006RMB million
              RMB
  millionChange of interest
      rate2%increase
              (476)
              (454)2%decrease
              476
              454
    F-37
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  6  Financial
risk management (Continued)
 
 (a)
              Financial risk factors
      (continued)
 
 (iii)
              Credit
      risk
 
 The
Group provides telecommunication and related services to residential clients and
business clients. The Group will terminate a fixed line service to residential
clients if the accounts receivable are over 90 days. Accounts receivable from
other telecommunications operators and customers are due generally between 30 to
90 days from the billing date. The Group analyses the aging of accounts
receivable and the status of collection on a monthly basis to formulate the
appropriate collection strategy to ensure the risk faced is not
material.
 
 The
carrying amount of accounts receivable included in the balance sheet represents
the Group’s exposure to credit risk in relation to its financial assets. Most of
the Group’s accounts receivable with aging over 30 days are overdue. The Group
evaluated the risk associated with the accounts receivable balances with aging
over 90 days, and made provisions accordingly. The Group believes that adequate
provision for uncollectible account receivable has been made.
 
 The
accounts receivable of the Group are disclosed in Note 17 to the financial
statements.
 
 The
credit risk of the Group’s other financial assets (including cash and cash
equivalents and other receivables) arise from any counter parties’ breach of
contract. Thus, the highest risk the Group will bear is the book value of the
instrument.
 
 The
Group’s cash management policy is to deposit cash and cash equivalents mainly in
state-owned banks and other banks, which are highly rated by an international
credit rating company. The rates are between BBB+ to BBBpi. The management does
not expect any loss to arise from bank nonperformance.
   F-38
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  6  Financial
risk management (Continued)
 
 (a)
              Financial risk factors
      (continued)
 
 (iv)
              Liquidity
      risk
 
 The
Group is financed mainly by short term borrowings. As a result, there is a
significant working capital deficit as highlighted in balance sheet. Please
refer to Note 2 for more details.
 
 The
Group’s aim is to maintain the balance between the availability and liquidity of
the funding by using interest bearing bank loans and other borrowings,
commercial paper, corporate bonds and other suitable financing channels. The
Group’s policy is to regularly monitor operating capital demands and compliance
with current and expected operating capital requirements. The Group reviews cash
flow forecasts of each entity on a regular basis to maintain sufficient cash
reserves and bank pledged funds and to deal with short and long term capital
demands.
 
 The
following table shows the undiscounted balances of the financial liabilities
(including interest expense) categorized by time period from the balance sheet
date to the date of contract expiry.
 
 December31,2007
              Total
              Within
                1year
              1-2
                years
              2-3
                years
              3-4
                years
              4-5
                years
              Over
                5
      yearsRMB
                million
              RMB
                million
              RMB
                million
              RMB
                million
              RMB
                million
              RMB
                million
              RMB
                millionAccounts
      payable
              15,639
              15,639
              -
              -
              -
              -
              -Short-term
      loans
              12,134
              12,134
              -
              -
              -
              -
              -Long-term
      bank and other loans
              21,616
              6,407
              10,272
              1,887
              106
              104
              2,840Commercial
      paper
              20,629
              20,629
              -
              -
              -
              -
              -Corporate
    bonds
              2,900
              90
              90
              90
              90
              90
              2,450Amounts due to holding companies
      and fellow subsidiaries
              8,870
              2,319
              2,214
              4,337
              -
              -
              -Total
              81,788
              57,218
              12,576
              6,314
              196
              194
              5,290
 
 December31,2006
              Total
              Within
                1year
              1-2
                years
              2-3
                years
              3-4
                years
              4-5
                years
              Over
                5
      yearsRMB
                million
              RMB
                million
              RMB
                million
              RMB
                million
              RMB
                million
              RMB
                Million
              RMB
                millionAccounts
      payable
              17,661
              17,661
              -
              -
              -
              -
              -Short-term
      loans
              31,602
              31,602
              -
              -
              -
              -
              -Long-term
      bank and other loans
              36,343
              8,980
              7,814
              10,416
              431
              430
              8,272Commercial
      paper
              10,000
              10,000
              -
              -
              -
              -
              -Amounts due to holding companies
      and fellow subsidiaries
              8,781
              2,352
              2,248
              2,143
              2,038
              -
              -Total
              104,387
              70,595
              10,062
              12,559
              2,469
              430
              8,272
 
 
 F-39
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 6   
Financial risk management (Continued)
 
 (a)
                Financial
      risk factors (continued)
 (iv)   
Liquidity risk (continued)
 
 The
directors have the responsibility to consider the future operational capital
requirements. The Group has a policy to maintain sufficient cash and cash
equivalents and to finance operations through bank lending. For bank facilities,
please refer to Note 36.
 
 
 (b)
              Fair
      value estimation
 
 The
fair value of financial instruments that are actively traded is based on the
market price as of balance sheet date. The market price of the financial assets
that the Group holds is the current bidding price. The market price of financial
liabilities is the offering price. The fair value of the Group’s bank deposits,
accounts receivable, notes receivable, corporate bonds, commercial paper and
short-term borrowings approximate book value.
 
 The
nominal value less estimated credit adjustments of trade receivables and
payables are assumed to approximate 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.
 
 (c)
              Objective
      and policy of financial risk
management
 
 The
Group defines the capital as the shareholders’ equity.  The Group’s
objectives of the management of capital are to maintain the ability to operate
based on going concern, meet the requirements of capital investment for the
business development, bring benefit to shareholders and other stakeholders, and
also to maintain an optimal capital structure to reduce the cost of
capital.
 
 In
order to maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return of capital to shareholders,
issue new shares, sell assets to reduce debt.
    F-40
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 7
              Revenues
 
 
 Revenues
represent the turnover of the Group and are derived from the provision of fixed
line telecommunications and related services, net of the PRC business taxes and
government levies amounting to RMB2,358 million (2006: RMB2,387 million, 2005:
RMB2,378 million). The Group’s revenues by business nature can be summarized as
follows:
 
 Year
      ended December 312005
              
              
              2006
              
              
              2007RMB
      million
              
              
              RMB
      million
              
              
              RMB
      millionRestated
              
              
              RestatedNote
      2
              
              
              Note
      2RevenuesLocal
      usage fees
              
              
              24,440
              
              
              
              22,059
              
              
              
              19,989Monthly
      telephone services
              
              
              18,170
              
              
              
              16,546
              
              
              
              12,387Upfront
      installation fees
              
              
              1,433
              
              
              
              1,364
              
              
              
              1,283DLD
      usage fees
              
              
              9,773
              
              
              
              9,495
              
              
              
              8,769ILD
      usage fees
              
              
              874
              
              
              
              819
              
              
              
              791Value-added
      services
              
              
              3,970
              
              
              
              5,341
              
              
              
              6,114Interconnection
      fees
              
              
              7,664
              
              
              
              8,432
              
              
              
              8,376Upfront
      connection fees
              
              
              3,405
              
              
              
              2,406
              
              
              
              1,517Broadband
      services
              
              
              7,289
              
              
              
              9,916
              
              
              
              13,835Other
      Internet-related services
              
              
              556
              
              
              
              516
              
              
              
              532Managed
      data services
              
              
              1,621
              
              
              
              1,413
              
              
              
              1,284Leased
      line income
              
              
              2,376
              
              
              
              2,540
              
              
              
              2,521Information
      communication technologies service
              
              
              186
              
              
              
              855
              
              
              
              3,990Other
      services
              
              
              2,170
              
              
              
              2,492
              
              
              
              2,617Total
              
              
              83,927
              
              
              
              84,194
              
              
              
              84,005
    F-41
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  8           Operating
expenses by nature
 
 Operating
expenses mainly represent:
 
 Year
      ended December 312005
              
              
              2006
              
              
              2007RMB
      million
              
              
              RMB
      million
              
              
              RMB
      millionRestated
              
              
              RestatedNote
      2
              
              
              Note
      2Staff
      cost
              
              
              11,830
              
              
              
              11,849
              
              
              
              12,223Depreciation
      and amortization
              
              
              24,328
              
              
              
              24,913
              
              
              
              25,495Maintenance
      cost
              
              
              4,562
              
              
              
              4,512
              
              
              
              4,373Miscellaneous
      taxes and fees
              
              
              250
              
              
              
              278
              
              
              
              358Customer
      installation cost
              
              
              1,133
              
              
              
              1,116
              
              
              
              2,036Interconnection
      charges
              
              
              3,033
              
              
              
              3,915
              
              
              
              4,014Advertising
      and promotion expenses
              
              
              900
              
              
              
              884
              
              
              
              821Sales
      channel cost
              
              
              1,922
              
              
              
              2,118
              
              
              
              2,298Subscriber
      acquisition and retention cost
              
              
              4,284
              
              
              
              3,646
              
              
              
              1,582Auditor’s
      remuneration
              
              
              34
              
              
              
              61
              
              
              
              54Bad
      and doubtful debt expenses
              
              
              1,093
              
              
              
              1,003
              
              
              
              868Operating
      leases
              
              
              1,891
              
              
              
              1,969
              
              
              
              1,900Cost
      of hardware sold in relation to information
                communication
      technology service
              
              
              -
              
              
              
              598
              
              
              
              2,830
    F-42
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 9
              Other
      income
 
 Other
income is the subsidy income the Company received arising from the reinvesting
of the profit distributions received from a subsidiary in the PRC to that
subsidiary.
 
 10           Finance
costs
 
 Year
      ended December 312005
              2006
              2007RMB
      million
              RMB
      million
              RMB
      millionRestated
              RestatedNote
      2
              Note
      2Interest
      expenses on:-Bank
      and other loans wholly repayable within five years
              3,589
              3,185
              2,875-Bank
      and other loans wholly repayable after more than five
years
              177
              325
              198-Deferred
      consideration related to Acquisition of New Horizon
              87
              479
              375Total
              3,853
              3,989
              3,448Less:
      Interest expenses capitalized in construction in progress
              (297)
              (233)
              (165)Exchange
      (gain)/loss, net
              (229)
              (8)
              25Bank
      charges
              19
              19
              253,346
              3,767
              3,333Interest
      expenses were capitalized inconstruction
      in progress using the followingannual
      interest rates
              4.17%-4.97%
              4.71%-5.28%
              4.75%-5.82%
 
 
 
 
 F-43
 
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 11           Taxation
 
 Year
      ended December 312005
              
              
              2006
              
              
              2007RMB
      million
              
              
              RMB
      million
              
              
              RMB
      millionRestated
              
              
              RestatedNote
      2
              
              
              Note
      2PRC
      enterprise income tax (“EIT”)
              
              
              3,663
              
              
              
              4,143
              
              
              
              3,901Overseas
      profit tax
              
              
              11
              
              
              
              20
              
              
              
              12Deferred
      taxation- Continuing operations (Note 32)
              
              
              (148
              )
              
              
              (436
              )
              
              
              (66
              )Deferred
      taxation -Change in statutory taxation rate (Note 32)
              
              
              -
              
              
              
              -
              
              
              
              (51
              )Taxation
      charges/(credit)
              
              
              3,526
              
              
              
              3,727
              
              
              
              3,796
  The
provision for PRC EIT is calculated based on the statutory income tax rate of
33% on the assessable profit of each of the entities comprising the Group in the
PRC as determined in accordance with the relevant income tax rules and
regulations in the PRC.
 
 Taxation
on profits derived from certain subsidiaries outside the PRC, including Hong
Kong, has been calculated on the estimated assessable profit at the rates of
taxation ranging from 17.50% to 34.00%, prevailing in the countries in which
those entities operate.
 
 On
March 16, 2007, the National People’s Congress approved the Corporate Income Tax
Law of the People’s Republic of China (the "New CIT Law"). This New CIT Law
reduces the corporate income tax rate for domestic enterprises from 33% to 25%
with effect from January 1, 2008. As a result of the new CIT Law, as at March
16, 2007, the carrying value of deferred tax assets has been written down by
RMB775 million, with RMB111 million recognised in income statement and RMB664
million recognised in equity. The carrying value of deferred tax liabilities has
been written down by RMB273 million, with RMB162 million recognised in the
income statement and RMB111 million recognised in equity. The impact of the
change in deferred taxation recognised in either the current income statement or
equity as a result of the New CIT Law corresponded to whether the related items
were previously recognised in income statement or equity.
 
 On
November 28, 2007, the National People’s Congress approved the Implementation
guide on the Corporate Income Tax Law of the People’s Republic of China (the
“New CIT Implementation guide”), with effect from January 1, 2008. Per a
bilateral tax affairs agreement, enterprises incorporated in Hong Kong is
required to pay a 5 percent corporate income tax on profits distributed from its
subsidiaries incorporated in the PRC. On February 22, 2008, the Ministry of
Finance and the State Administration of Taxation jointly issued CaiShui 2008,
Circular No. 1 (“Circular No. 1”). In accordance with the Circular No. 1,
accumulated retained earnings of foreign investment enterprises generated before
January 1, 2008 and distributed to foreign investors after 2008 are exempt of
income tax. Earnings of foreign investment enterprises generated in or after
2008 and distributed to foreign investors should pay the withholding tax. As a
result, the Group may accrue deferred tax liability for the undistributed
earnings generated by CNC China during or after 2008 according to actual
situation.
 
 On
December 26, 2007, the State Council promulgated ‘Notice Regarding Preferential
Policy of Implementing EIT in Intervening Period’. The Group has evaluated the
regulation and considered that it will not have material impact on the financial
statements.
    F-44
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  11           Taxation
(continued)
 
 The
reconciliation between the Group’s actual tax charge and the amount which is
calculated based on the weighted average statutory tax rate is as
follows:
 
 Year
      ended December 312005
              
              
              2006
              
              
              2007RMB
                million
              
              
              RMB
                million
              
              
              RMB
                millionRestated
              
              
              RestatedNote
      2
              
              
              Note
      2Profit
      before taxation
              
              
              17,876
              
              
              
              15,205
              
              
              
              15,267Weighted
      average statutory tax rate
              
              
              33
              %
              
              
              33
              %
              
              
              33
              %Tax
      calculated at the weighted average
                statutory
      tax rate
              
              
              5,899
              
              
              
              5,018
              
              
              
              5,038Non-taxable
      income (Note i)
              
              
              (1,499
              )
              
              
              (1,216
              )
              
              
              (1,184
              )Utilization
      of tax losses not recognized in
                previous
      years (Note ii)
              
              
              (837
              )
              
              
              -
              
              
              
              -Expenses
      not deductible for tax purposes
              
              
              69
              
              
              
              64
              
              
              
              68Change
      in statutory taxation rate (Note
                32)
              
              
              -
              
              
              
              -
              
              
              
              (51
              )Others
              
              
              (106
              )
              
              
              (139
              )
              
              
              (75
              )Tax
      charge
              
              
              3,526
              
              
              
              3,727
              
              
              
              3,796
 
 Note:
 (i)
              Non-taxable income comprises
      primarily of upfront connection fees charged to customerswhichareamortized over the customer relationship and
      thesubsidy
      incomeobtained (Note
      9).
 
 (ii)
              Prior to 2005, a deferred tax
      asset arising from certain tax losses was not recognized as it was
      uncertain at that time, following the change of a subsidiary’s tax registration district, that the taxable loss could
      be utilized at the previous period end
  date.
   
 F-45
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 12           
Profit attributable to shareholders
 
 (a)
              For
      the year ended December 31, 2007, profit attributable to shareholders
      includes current year profit of RMB8,714million (2006: RMB17,475million,
      2005: RMB126million), which has been recognised in the financial
      statements of the Company.
 
 (b)
              The
      Company’s subsidiary, CNC China is registered as a foreign investment
      enterprise in the PRC. In accordance with the Articles of Association of
      CNC China, it is required to provide for certain statutory reserves,
      namely, general reserve and staff bonus and welfare fund, which are
      appropriated from profits after tax but before any dividend
      distribution.
 
 CNC
China is required to allocate at least 10% of their profit after tax 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 obtaining approval from the relevant authority, to offset accumulated
losses or increase capital.
 
 Accordingly,
CNC China appropriated approximately RMB 868 million to the general reserve fund
for the year ended December 31, 2007 (2006: RMB855million, 2005:
RMB1,044million).
    F-46
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  12           Profit
attributable to shareholders (continued)
 
 (c)
              According
      to a PRC tax approval document issued by the Ministry of Finance and State
      Administration of Taxation to the Group, the Group’s upfront connection
      fees are not subject to EIT and an amount equal to the upfront connection
      fees recognised in the retained earnings should be transferred from
      retained earnings to a statutory reserve.  Up to December 31,
      2007, the Company has made accumulated appropriation of RMB10,706 million
      to the statutory reserve (Up to December 31, 2006 : RMB9,189 million, up
      to December 31, 2005 : RMB
6,783million).
 
 13           
Profit distributions
 
 
 Year
      ended December 312005
              
              2006
              
              2007HK$
              
              RMB
              
              HK$
              
              RMB
              
              HK$
              
              RMBmillion
              
              million
              
              million
              
              million
              
              million
              
              millionFinal
      dividend proposed after
                balance
      sheet date of HK$ 0.592
                per
      share (2006 : HK$0.553 per
                share,
      2005:HK$0.466per share)
              3,073
              
              3,196
              
              3,678
              
              3,695
              
              3,951
              
              3,700Dividend
      distributed during the
                year
              245
              
              259
              
              3,073
              
              3,196
              
              3,678
              
              3,600
 
 In
the meeting of the board of directors held on March 25, 2008, the directors
proposed a final dividend of HK$ 0.592 per ordinary share for the year ended
December 31, 2007.  Dividends proposed after the balance sheet date
have not been reflected as a dividend payable and will be reflected as an
appropriation in the 2008 financial statements.
    F-47
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 14           
Earnings per share
 
 Basic
earnings per share is computed using the weighted average number of ordinary
shares outstanding during the year. Diluted earnings per share is computed using
the weighted average number of ordinary shares and potential ordinary shares
outstanding during the year.
 
 The
following table sets forth the computation of basic and diluted earnings per
share:
 
 Year
      ended December 312005
              
              
              2006
              
              
              2007(in
      RMB millions, except share and per share data)Restated
              
              
              RestatedNote
      2
              
              
              Note
      2Numerator:Profit/
      (loss) for the year-
      Continuing operations
              
              
              14,350
              
              
              
              11,478
              
              
              
              11,471-
      Discontinued operations
              
              
              (400
              )
              
              
              1,487
              
              
              
              62413,950
              
              
              
              12,965
              
              
              
              12,095DenominatorWeighted
      average number of ordinary shares outstanding and shares used in computing
      basic earnings per share
              
              
              6,593,529,000
              
              
              
              6,615,520,381
              
              
              
              6,657,045,212Diluted
      equivalent shares arising from share options
              
              
              34,112,723
              
              
              
              51,955,496
              
              
              
              80,583,956Shares
      used in computing diluted earnings per share
              
              
              6,627,641,723
              
              
              
              6,667,475,877
              
              
              
              6,737,629,168Basic
      earnings/(loss) per share (RMB)-
      Continuing operations
              
              
              2.18
              
              
              
              1.74
              
              
              
              1.72-
      Discontinued operations
              
              
              (0.06
              )
              
              
              0.22
              
              
              
              0.09-
      Profit for the year
              
              
              2.12
              
              
              
              1.96
              
              
              
              1.81Diluted
      earnings/(loss) per share (RMB)-
      Continuing operations
              
              
              2.17
              
              
              
              1.72
              
              
              
              1.70-
      Discontinued operations
              
              
              (0.06
              )
              
              
              0.22
              
              
              
              0.09-
      Profit for the year
              
              
              2.11
              
              
              
              1.94
              
              
              
              1.79
    F-48
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 15           Staff
cost including directors’ remuneration
 
 Year
      ended December 312005
              
              
              2006
              
              
              2007RMB
      million
              
              
              RMB
      million
              
              
              RMB
      millionRestated
              
              
              RestatedNote
      2
              
              
              Note
      2Wages,
      salaries and welfare
              
              
              10,554
              
              
              
              10,504
              
              
              
              10,778Contributions
      to pensions
              
              
              1,274
              
              
              
              1,345
              
              
              
              1,445Early
      retirement benefits
              
              
              2
              
              
              
              -
              
              
              
              -Total
              
              
              11,830
              
              
              
              11,849
              
              
              
              12,223
 
 
 16             
Cash and bank deposits
 
 GroupAs
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionRestatedNote
      2Cash
      and cash equivalents
              
              
              7,623
              
              
              
              5,304Time
      deposits with original maturities over three months
              
              
              105
              
              
              
              91Total
      cash and bank deposits
              
              
              7,728
              
              
              
              5,395Effective
      interest rate of time deposits with original maturities over three months
      (% per annum)
              
              
              0.72
              
              
              
              0.72
 
 Included
in cash and bank deposits as of December 31, 2007 and 2006 are RMB denominated
balances kept in the PRC amounting to RMB5,054 million and RMB5,782 million
respectively. The conversion of RMB denominated balances into foreign currencies
and the remittance of bank balances and cash out of the PRC are subject to the
rules and regulation of foreign exchange control promulgated by the PRC
government.
 
 Included
in the bank deposits were deposits in state-owned banks amounting to RMB4,958
million at December 31, 2007 (2006: RMB7,577 million). For the year ended
December 31, 2007, interest income earned from these state-owned banks deposits
amounted to RMB106 million (2006: RMB121 million; 2005: RMB124
million).
 
 
 
 F-49
 
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 17  Accounts
receivable
 
 Amounts
due from the provision of fixed line telecommunications services to residential
and business customers are due within 30 days from the date of billing.
Residential customers who have accounts overdue by more than 90 days will in
normal circumstances have their services disconnected. Accounts receivable from
other telecommunications operators and customers are due generally between 30 to
90 days from the billing date.
 
 The
aging analysis of accounts receivable based on the billing date is as
follows:
 
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionRestatedNote
      20-30
      days
              
              
              5,744
              
              
              
              5,68231-90
      days
              
              
              1,557
              
              
              
              1,866Over
      90 days
              
              
              2,326
              
              
              
              2,308Total
              
              
              9,627
              
              
              
              9,856Less:
      Allowance for doubtful debts
              
              
              (1,344
              )
              
              
              (1,398
              )Net
      carrying amounts
              
              
              8,283
              
              
              
              8,458
 
 The
movement of allowance for doubtful debts is as follows:
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionRestatedNote
      2Balance
      at beginning of year
              
              
              1,654
              
              
              
              1,344Additional
      provisions
              
              
              1,002
              
              
              
              844Less:
      Write-offs
              
              
              (1,246
              )
              
              
              (750
              )Disposal
      of ANC Group
              
              
              (66
              )
              
              
              -Disposal
      of Guangdong and Shanghai Branches
              
              
              -
              
              
              
              (40
              )Balance
      at end of year
              
              
              1,344
              
              
              
              1,398
  The
carrying value of accounts receivable approximates their fair values based on
cash flows discounted using market rate of 7.47% (December 31, 2006:
6.12%).
 
 Included
in the accounts receivable are amounts due from other state-owned
telecommunication operators amounting to RMB833 million on December 31, 2007.
(December 31, 2006: RMB1,079 million).
   F-50
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
   18           Inventories
and consumables
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionRestatedNote
      2Telephone
      handsets and other customer end-products held for
                resale,
      at cost
              
              
              155
              
              
              
              125Consumables,
      at cost
              
              
              261
              
              
              
              162Total
              
              
              416
              
              
              
              287
 
 19           Prepayments,
other receivables and other current assets
 
 As
      at December 312006
              
              
              2007RMB
              
              
              RMBmillion
              
              
              millionRestatedNote
      2Prepaid
      expenses, deposits and other current assets
              
              
              812
              
              
              
              605Other
      receivables
              
              
              629
              
              
              
              416Total
              
              
              1,441
              
              
              
              1,021
 
 The
carrying value of other receivables approximates their fair values based on cash
flows discounted using market rate of 7.47% (2006: 6.12%).
   F-51
 
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 20           Fixed
assets
 Buildings
              
              
              Telecommunications
      networks and equipment
              
              
              Furniture,
      fixture, motor vehicles and other equipment
              
              
              TotalRMB
              
              
              RMB
              
              
              RMB
              
              
              RMBmillion
              
              
              million
              
              
              million
              
              
              millionCost /valuation:Balance
      at January 1, 2006, as restated
                (Note
      2)
              
              
              27,149
              
              
              
              280,301
              
              
              
              19,796
              
              
              
              327,246Additions
              
              
              52
              
              
              
              755
              
              
              
              639
              
              
              
              1,446Transferredfrom construction
      in
                progress
              
              
              688
              
              
              
              21,449
              
              
              
              2,621
              
              
              
              24,758Disposals/write
      off
              
              
              (6
              )
              
              
              (1,947
              )
              
              
              (524
              )
              
              
              (2,477
              )Disposal of ANC
      Group
              
              
              (172
              )
              
              
              (636
              )
              
              
              (45
              )
              
              
              (853
              )Fixed
      assets revaluation deficit,
                net
              
              
              -
              
              
              
              (10,659
              )
              
              
              (3,588
              )
              
              
              (14,247
              )Balance
      at December 31, 2006
              
              
              27,711
              
              
              
              289,263
              
              
              
              18,899
              
              
              
              335,873Accumulated
      depreciation:Balance
      at January 1, 2006, as restated
                (Note
      2)
              
              
              (6,215
              )
              
              
              (142,639
              )
              
              
              (9,628
              )
              
              
              (158,482
              )Depreciation charge for the
      year
              
              
              (999
              )
              
              
              (21,842
              )
              
              
              (2,286
              )
              
              
              (25,127
              )Disposals/write
      off
              
              
              4
              
              
              
              1,315
              
              
              
              424
              
              
              
              1,743Disposal of ANC
      Group
              
              
              51
              
              
              
              261
              
              
              
              28
              
              
              
              340Fixed assets revaluation deficit,
      net
              
              
              -
              
              
              
              11,778
              
              
              
              2,016
              
              
              
              13,794Balance
      at December 31, 2006
              
              
              (7,159
              )
              
              
              (151,127
              )
              
              
              (9,446
              )
              
              
              (167,732
              )Net book value at December 31,2006
              
              
              20,552
              
              
              
              138,136
              
              
              
              9,453
              
              
              
              168,141Net
      book value at January 1, 2006, as
                restated
      (Note 2)
              
              
              20,934
              
              
              
              137,662
              
              
              
              10,168
              
              
              
              168,764
 
   F-52
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 20           Fixed
assets (continued)
 
 Buildings
              
              
              Telecommunications
                networks
      and
                equipment
              
              
              Furniture,
      fixture, motor vehicles and other equipment
              
              
              TotalRMB
              
              
              RMB
              
              
              RMB
              
              
              RMBmillion
              
              
              million
              
              
              million
              
              
              millionCost / valuation:Balance at January 1,
      2007
              
              
              27,711
              
              
              
              289,263
              
              
              
              18,899
              
              
              
              335,873Additions
              
              
              56
              
              
              
              797
              
              
              
              725
              
              
              
              1,578Transferred from construction
      inprogress
              
              
              971
              
              
              
              15,540
              
              
              
              2,595
              
              
              
              19,106Disposals/write
      off
              
              
              (33
              )
              
              
              (1,749
              )
              
              
              (441
              )
              
              
              (2,223
              )Disposal of Guangdong andShanghai
                Branches
              
              
              (550
              )
              
              
              (7,635
              )
              
              
              (344
              )
              
              
              (8,529
              )Balance
      at December 31, 2007
              
              
              28,155
              
              
              
              296,216
              
              
              
              21,434
              
              
              
              345,805Accumulated
      depreciation:Balance at January 1,
      2007
              
              
              (7,159
              )
              
              
              (151,127
              )
              
              
              (9,446
              )
              
              
              (167,732
              )Depreciation chargefor the
year
              
              
              (1,030
              )
              
              
              (21,977
              )
              
              
              (2,004
              )
              
              
              (25,011
              )Disposals/write
      off
              
              
              16
              
              
              
              1,337
              
              
              
              395
              
              
              
              1,748Disposalof Guangdong and
      Shanghai
                Branches
              
              
              134
              
              
              
              1,867
              
              
              
              137
              
              
              
              2,138Balance
      at December 31, 2007
              
              
              (8,039
              )
              
              
              (169,900
              )
              
              
              (10,918
              )
              
              
              (188,857
              )Netbook value at December 31,
      2007
              
              
              20,116
              
              
              
              126,316
              
              
              
              10,516
              
              
              
              156,948Net book value at January 1,
      2007
              
              
              20,552
              
              
              
              138,136
              
              
              
              9,453
              
              
              
              168,141
   F-53
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 20     Fixed
assets (continued)
 
 (a)     The
net book value of assets held under finance lease is as follows:
 
 Buildings
              
              
              Telecommunications
      networks and equipment
              
              
              Furniture,
      fixture, motor vehicles and other equipment
              
              
              TotalRMB
              
              
              RMB
              
              
              RMB
              
              
              RMBmillion
              
              
              million
              
              
              million
              
              
              millionAs
      at December 31, 2007
              
              
              -
              
              
              
              217
              
              
              
              2
              
              
              
              219As
      at December 31, 2006
              
              
              -
              
              
              
              2,000
              
              
              
              62
              
              
              
              2,062
 
 The
depreciation charge on assets held under finance lease amounted to RMB100
million in the year ended December 31, 2007 (2006: RMB351 million; 2005: RMB367
million).
 
 
 (b)     The
analysis of the cost or revaluation of the fixed assets of the Group is as
follows:
 
 Buildings
              
              
              Telecommunications
      networks and equipment
              
              
              Furniture,
      fixture, motor vehicles and other equipment
              
              
              TotalRMB
              
              
              RMB
              
              
              RMB
              
              
              RMBmillion
              
              
              million
              
              
              million
              
              
              millionDecember
      31, 2007Cost
              
              
              28,155
              
              
              
              -
              
              
              
              -
              
              
              
              28,155Valuation
              
              
              -
              
              
              
              296,216
              
              
              
              21,434
              
              
              
              317,65028,155
              
              
              
              296,216
              
              
              
              21,434
              
              
              
              345,805December
      31, 2006Cost
              
              
              27,711
              
              
              
              -
              
              
              
              -
              
              
              
              27,711Valuation
              
              
              -
              
              
              
              289,263
              
              
              
              18,899
              
              
              
              308,16227,711
              
              
              
              289,263
              
              
              
              18,899
              
              
              
              335,873
 
   F-54
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 20           Fixed
assets (continued)
 
 (c)
              As
      required by the PRC rules and regulations relevant to the Listing
      Reorganisation, each class of fixed assets other than lease prepayments
      for land and buildings as at December 31, 2003 was valued by Beijing China
      Enterprise Appraisal Co. Ltd. (the ‘‘PRC valuer’’), an independent valuer
      registered in the PRC, on a depreciated replacement cost basis. The value
      of such assets in the PRC injected into the Group was determined at
      RMB122,456 million. Such revalued amounts served as the tax base of the
      assets with immediate effect. The surplus on revaluation of certain fixed
      assets of RMB2,982 million was credited to the revaluation reserve while
      the deficit arising from the revaluation of certain fixed assets of
      RMB25,778 million was recognised as an expense for the year ended December
      31, 2003.
 
 For
the Listing Reorganisation, valuations of the lease prepayments for land and
buildings of the Group were also performed.  The surplus value of such
assets was determined at RMB6,967 million. Such amounts served as the tax base
for such assets with immediate effect. Details have been set out in Note
32(iii).
 
 As
required by the PRC rules and regulations relevant to the Acquisition of New
Horizon, each class of fixed assets, other than lease prepayments for land and
buildings in the PRC, acquired as at December 31, 2004, was valued by the PRC
valuer, on a depreciated replacement cost basis. The value of such acquired
assets in the PRC was determined at RMB42,879 million. Such amounts served as
the tax base for such assets with immediate effect. The surplus on revaluation
of certain fixed assets of RMB3,863 million was credited to the revaluation
reserve while the deficit arising from the revaluation of certain fixed assets
of RMB11,318 million was recognised as an expense for the year ended December
31, 2004.
 
 For
the Acquisition of New Horizon, valuations of the lease prepayments for land and
buildings were also performed.  The surplus value of such assets was
determined at RMB2,553 million. Such amounts served as the tax base for such
assets with immediate effect. Details have been set out in Note
32(iii).
 
 According
to the Group’s accounting policies, each class of fixed assets of the Group
other than buildings as at December 31, 2006 has been revalued by the PRC valuer
on a depreciated replacement cost basis. The value of such fixed assets was
determined at RMB147,573 million. The net deficit arising on the revaluation was
RMB453 million, the net deficit was split between a credit to the revaluation
reserve amounting to RMB1,071 million and an expense to the income statement of
RMB1,524 million for that year.
 
 The
respective carrying amounts of the telecommunication networks and equipment and
furniture, fixtures, motor vehicles and other equipment would have been
RMB137,414 million and RMB12,382 million as at December 31, 2007 and RMB153,368
million and RMB11,651 million as at December 31, 2006 had they been stated at
cost less accumulated depreciation.
    
 F-55
 
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 21    Construction
in progress
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionRestatedNote
      2Balance
      at beginning of year
              
              
              6,822
              
              
              
              6,335Additions
              
              
              24,843
              
              
              
              18,294Transferred
      to fixed assets
              
              
              (24,758
              )
              
              
              (19,106
              )Transferred
      to intangible assets
              
              
              (572
              )
              
              
              (399
              )Disposal
      of Guangdong and Shanghai Branches
              
              
              -
              
              
              
              (1,134
              )Balance
      at end of year
              
              
              6,335
              
              
              
              3,990
 
    F-56
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  22 
  Lease prepayment
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionLease
      prepayments for land (i)
              
              
              2,046
              
              
              
              2,183Lease
      prepayments for network capacity (ii)
              
              
              318
              
              
              
              3112,364
              
              
              
              2,494
 
 (i)  Lease
prepayments for land
 
 This
      represents land use rights held in the PRC and their net book value is
      analyzed as follows:
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionHeld
      forLease
      of between 10 to 50 years
              
              
              2,024
              
              
              
              2,162Lease
      of less than 10 years
              
              
              22
              
              
              
              212,046
              
              
              
              2,183
 
 The
movement of the lease prepayments for land is as follows:
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionBalance
      at beginning of year
              
              
              1,949
              
              
              
              2,046Additions
              
              
              165
              
              
              
              232Amortization
      for the year
              
              
              (68
              )
              
              
              (87
              )Disposal
      of Guangdong and Shanghai Branches
              
              
              -
              
              
              
              (8
              )Balance
      at end of year
              
              
              2,046
              
              
              
              2,183
 
 
 
 F-57
 
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 22   Lease
prepayment (continued)
 
 (ii)  Lease
prepayments for network capacity
 
 The
net book value is analyzed as follows:
 
 As
      at December 312006
              
              2007RMB
      million
              
              RMB
      millionHeld
      for Lease of between 10 to 50 years
              318
              
              311Balance
      at end of year
              318
              
              311
 
 The
movement of the lease prepayments for network capacity is as
follows:
 
 As
      at December 312006
              
              2007RMB
      million
              
              RMB
      millionBalance
      at beginning of year
              -
              
              318Additions
              318
              
              -Amortization
      for the year
              -
              
              (7)Balance
      at end of year
              318
              
              311
 
 
 
 
 
 F-58
 
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  23    Intangible
assets
  Purchased
                software
              
              
              Sponsorship
      fees
              
              
              Others
              
              
              TotalRMB
              
              
              RMB
              
              
              RMB
              
              
              RMBmillion
              
              
              million
              
              
              million
              
              
              millionCost:Balance
      at January 1, 2006, as restated (Note 2)
              
              
              1,919
              
              
              
              540
              
              
              
              3
              
              
              
              2,462Additions
              
              
              95
              
              
              
              -
              
              
              
              -
              
              
              
              95Transferred from construction in
      progress
              
              
              572
              
              
              
              -
              
              
              
              -
              
              
              
              572Disposals/write
      off
              
              
              (692
              )
              
              
              -
              
              
              
              (3
              )
              
              
              (695
              )Balance
      at December 31, 2006
              
              
              1,894
              
              
              
              540
              
              
              
              -
              
              
              
              2,434Accumulated
      amortisation:Balance
      at January 1, 2006, as restated (Note 2)
              
              
              (927
              )
              
              
              (135
              )
              
              
              (3
              )
              
              
              (1,065
              )Amortisation
      for the year
              
              
              (338
              )
              
              
              (135
              )
              
              
              -
              
              
              
              (473
              )Disposals/write
      off
              
              
              692
              
              
              
              -
              
              
              
              3
              
              
              
              695Balance
      at December 31, 2006
              
              
              (573
              )
              
              
              (270
              )
              
              
              -
              
              
              
              (843
              )Net
      book value at January 1, 2006, as restated (Note 2)
              
              
              992
              
              
              
              405
              
              
              
              -
              
              
              
              1,397Net
      book value at December 31, 2006
              
              
              1,321
              
              
              
              270
              
              
              
              -
              
              
              
              1,591Cost:Balance at January 1,2007
              
              
              1,894
              
              
              
              540
              
              
              
              -
              
              
              
              2,434Additions
              
              
              150
              
              
              
              -
              
              
              
              -
              
              
              
              150Transferred from construction in
      progress
              
              
              399
              
              
              
              -
              
              
              
              -
              
              
              
              399Disposals/write
      off
              
              
              (73
              )
              
              
              -
              
              
              
              -
              
              
              
              (73
              )Disposal
      of Guangdong and Shanghai Branches
              
              
              (75
              )
              
              
              -
              
              
              
              -
              
              
              
              (75
              )Balance at December 31,
      2007
              
              
              2,295
              
              
              
              540
              
              
              
              -
              
              
              
              2,835Accumulated
      amortisation:Balance at January 1,2007
              
              
              (573
              )
              
              
              (270
              )
              
              
              -
              
              
              
              (843
              )Amortisation for the
      year
              
              
              (394
              )
              
              
              (135
              )
              
              
              -
              
              
              
              (529
              )Disposals/write
      off
              
              
              69
              
              
              
              -
              
              
              
              -
              
              
              
              69Disposal of Guangdong and Shanghai
      Branches
              
              
              20
              
              
              
              -
              
              
              
              -
              
              
              
              20Balance at December 31,
      2007
              
              
              (878
              )
              
              
              (405
              )
              
              
              -
              
              
              
              (1,283
              )Net book value at January
      1,2007
              
              
              1,321
              
              
              
              270
              
              
              
              -
              
              
              
              1,591Net book value at December 31,
      2007
              
              
              1,417
              
              
              
              135
              
              
              
              -
              
              
              
              1,552
 
 
 F-59
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 24    Other
non-current assets
  As
      at December 312006
              
              
              
              2007RMB
      million
              
              
              
              RMB
      millionInstallation
      costs
              
              
              3,525
              
              
              
              
              2,847Others
              
              
              441
              
              
              
              
              3963,966
              
              
              
              
              3,243
 
 25   
Discontinued operations
  On
      January 15, 2007, CNC China, entered into an assets transfer agreement
      with it’s ultimate holding Company, China Netcom Group. Pursuant to the
      agreement, CNC China agreed to dispose of its assets and liabilities in
      relation to its telecommunications operations in Guangdong Province and
      Shanghai Municipality branches. The disposal was completed on February 28,
      2007. The gain on disposal amounted to RMB626million. The results and cash
      flows of Guangdong and Shanghai Branches for the year ended December 31,
      2007, 2006 and 2005 are presented as discontinued
    operations.
 
 On
      June, 2, 2006, the Group entered into an agreement with third party buyers
      to dispose of its entire interest in the ANC Group for an aggregate cash
      consideration of US$168.84 million, or equivalent of RMB1,343.71 million.
      The disposal was completed on August 22, 2006. The gain on disposal
      amounted to RMB1,878 million. The results and cash flows of the ANC Group
      for the year ended December 31, 2006 and 2005 are presented as
      discontinued operations.The
      income statements and cash flow statements related to discontinued
      operations are as follows:
 
  F-60
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  25  Discontinued
operations (continued)
  Disposal
      of Guangdong & Shanghai Branches
              
              
              Disposal
      of ANC Group
              
              
              TotalFor
      the year ended December 31, 2005
              
              
              For
      the year ended December 31, 2006
              
              
              For
      the period from January 1, 2007 to February 28, 2007
              
              
              For
      the year ended December 31, 2005
              
              
              For
      the period from January 1, 2006 to August 22, 2006
              
              
              For
      the year ended December 31, 2007
              
              
              For
      the year ended December 31, 2005
              
              
              For
      the year ended December 31, 2006
              
              
              For
      the year ended December 31, 2007RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMBmillion
              
              
              million
              
              
              million
              
              
              million
              
              
              million
              
              
              million
              
              
              million
              
              
              million
              
              
              millionDiscontinued
      operationsRevenues
              
              
              2,120
              
              
              
              3,222
              
              
              
              615
              
              
              
              1,371
              
              
              
              980
              
              
              
              -
              
              
              
              3,491
              
              
              
              4,202
              
              
              
              615Expenses
              
              
              (2,379
              )
              
              
              (3,717
              )
              
              
              (618
              )
              
              
              (1,598
              )
              
              
              (1,038
              )
              
              
              -
              
              
              
              (3,977
              )
              
              
              (4,755
              )
              
              
              (618
              )-Loss
      before taxation of discontinued operations
              
              
              (259
              )
              
              
              (495
              )
              
              
              (3
              )
              
              
              (227
              )
              
              
              (58
              )
              
              
              -
              
              
              
              (486
              )
              
              
              (553
              )
              
              
              (3
              )-Taxation
              
              
              85
              
              
              
              163
              
              
              
              1
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              86
              
              
              
              162
              
              
              
              1-Loss
      for the period of discontinued operations
              
              
              (174
              )
              
              
              (332
              )
              
              
              (2
              )
              
              
              (226
              )
              
              
              (59
              )
              
              
              -
              
              
              
              (400
              )
              
              
              (391
              )
              
              
              (2
              )-Gain
      on disposal of discontinued operations before taxation
              
              
              -
              
              
              
              -
              
              
              
              927
              
              
              
              -
              
              
              
              1,878
              
              
              
              -
              
              
              
              -
              
              
              
              1,878
              
              
              
              927Taxation
              
              
              -
              
              
              
              -
              
              
              
              (301
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (301
              )Gain
      on discontinued operations after taxation
              
              
              -
              
              
              
              -
              
              
              
              626
              
              
              
              -
              
              
              
              1,878
              
              
              
              -
              
              
              
              -
              
              
              
              1,878
              
              
              
              626Profit/(loss)for
      the period/year  from discontinued operations
              
              
              (174
              )
              
              
              (332
              )
              
              
              624
              
              
              
              (226
              )
              
              
              1,819
              
              
              
              -
              
              
              
              (400
              )
              
              
              1,487
              
              
              
              624
 
 
 
 F-61
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  25  Discontinued
operations (continued)
 
 Disposal
      of Guangdong & Shanghai Branches
              
              
              Disposal
      of ANC Group
              
              
              TotalFor
      the year ended December 31, 2005
              
              
              For
      the year ended December 31, 2006
              
              
              For
      the period from January 1, 2007 to February 28, 2007
              
              
              For
      the year ended December 31, 2005
              
              
              For
      the period from January 1, 2006 to August 22, 2006
              
              
              For
      the year ended December 31, 2007
              
              
              For
      the year ended December 31, 2005
              
              
              For
      the year ended December 31, 2006
              
              
              For
      the year ended December 31, 2007RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMB
              
              
              RMBmillion
              
              
              million
              
              
              million
              
              
              million
              
              
              million
              
              
              million
              
              
              million
              
              
              million
              
              
              millionDiscontinued
      operationsNet
      cash inflow from operating activities
              
              
              1,270
              
              
              
              1,902
              
              
              
              388
              
              
              
              74
              
              
              
              183
              
              
              
              -
              
              
              
              1,344
              
              
              
              2,085
              
              
              
              388Cash
      outflow from investing activities
              
              
              (1,272
              )
              
              
              (1,903
              )
              
              
              (374
              )
              
              
              (312
              )
              
              
              (182
              )
              
              
              -
              
              
              
              (1,584
              )
              
              
              (2,085
              )
              
              
              (374
              )Cash
      inflow from disposal of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              3,477
              
              
              
              -
              
              
              
              1,164
              
              
              
              -
              
              
              
              -
              
              
              
              1,164
              
              
              
              3,477Net
      cash inflow/(outflow) from investing activities
              
              
              (1,272
              )
              
              
              (1,903
              )
              
              
              3,103
              
              
              
              (312
              )
              
              
              982
              
              
              
              -
              
              
              
              (1,584
              )
              
              
              (921
              )
              
              
              3,103Net
      cash inflow from financing activities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              108
              
              
              
              -
              
              
              
              -
              
              
              
              108
              
              
              
              -
              
              
              
              -Cash
      flow from discontinued operations
              
              
              (2
              )
              
              
              (1
              )
              
              
              3,491
              
              
              
              (130
              )
              
              
              1,165
              
              
              
              -
              
              
              
              (132
              )
              
              
              1,164
              
              
              
              3,491
    F-62
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 26    Accounts
payable
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionRestatedNote
      20-30
      days
              
              
              5,763
              
              
              
              6,21431-60
      days
              
              
              2,236
              
              
              
              1,46261-90
      days
              
              
              1,449
              
              
              
              1,26691-180
      days
              
              
              2,990
              
              
              
              2,251Over
      180 days
              
              
              5,223
              
              
              
              4,446Total
              
              
              17,661
              
              
              
              15,639
 
 Included
in accounts payable are amounts due to other state-owned telecommunications
operators amounting to RMB23 million on December 31, 2007 (2006: RMB97
million).
 
 27    Accruals
and other payables
 
 GroupAs
      at December 312006
              
              
              2007RMB
                million
              
              
              RMB
                millionRestatedNote
      2Interest
      payable
              
              
              106
              
              
              
              441Payroll
      payable
              
              
              588
              
              
              
              493Accruals
      and other payables
              
              
              2,380
              
              
              
              2,016Total
              
              
              3,074
              
              
              
              2,950
 
  F-63
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 28           Bank
and other loans
    (a)
              (i)
              CNC China issued two
      lots of RMB10 billion unsecured commercial paper with  repayment
      periods of 1 year and 270 days on April 30, 2007 and September 18, 2007 in
      the PRC capital market respectively. The effective interest rates are
      3.34% and 3.93% respectively. The aggregated net cash proceeds raised in
      these exercises is RMB20 billion.The book value
      of above said commercial paper approximates fair value which derives from
      discounted cash flow at 3.93%.On July 20, 2006,
      the Group issued RMB10 billion one-year non-interest bearing unsecured
      commercial paper in the PRC capital market and raised net cash proceeds of
      RMB9,676 million from this exercise. The commercial paper is interest
      bearing at effective rate of 3.35%. The commercial paper was fully repaid
      on July 24, 2007.(ii)
              The short term bank
      loans on December 31, 2007 were unsecured and comprise:
   As
      at December 31Currency
              
              Interest
      rate and final maturity
              
              2006
              
              2007RMB
      million
              
              RMB
      millionRMB
      denominated
              
              Interest
      rates ranging from 4.86% to 6.72% per annum with
      maturity through December 11, 2008
              
              30,980
              
              11,850
 
 The
carrying values of short term bank loans approximate their fair values which are
based on cash flows discounted using market rate of 4.86%-6.72% (December 31,
2006: 4.86%-5.51%).
 
 Included
in the short-term bank loans were loans from state-owned banks amounting to
RMB11,140 million as at December 31, 2007 (December 31, 2006: RMB29,700
million).
 
 F-64
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 28    Bank
and other loans (continued)
 
 (b)                 The
Group’s long term bank and other loans comprise:
 
 As
      at December 31Note
              
              2006
              
              
              2007RMB
      million
              
              
              RMB
      millionLong
      term bank loans
              (i)
              
              
              29,560
              
              
              
              19,645Finance
      lease obligations
              (ii)
              
              
              963
              
              
              
              10230,523
              
              
              
              19,747Less:
      Current portion
              
              
              
              (7,304
              )
              
              
              (5,322
              )23,219
              
              
              
              14,425
 
 The
carrying values of the current portion of long term bank loans approximate their
fair values which are based on cash flows discounted using market rate of 7.47%
(December 31, 2006: 6.12%).
 
 Included
in the long term bank loans were loans from state-owned banks amounting to
RMB19,645 million as at December 31, 2007 (2006: RMB29,560
million).
  (i)         Long term bank
loans
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionLoansUnsecured
              
              
              29,220
              
              
              
              19,433Secured
              
              
              340
              
              
              
              212Total
              
              
              29,560
              
              
              
              19,645Less:
      Current portion
              
              
              (6,446
              )
              
              
              (5,220
              )Long
      term loans
              
              
              23,114
              
              
              
              14,425
   
 F-65
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 28    Bank
and other loans (continued)
  (b)               
The Group’s long term bank and other loans comprise (continued):
 
 (i)
              Long
      term bank loans (continued)
  The
Group’s long term bank loans were repayable as follows:
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionWithin
      one year
              
              
              6,446
              
              
              
              5,220In
      the second year
              
              
              6,491
              
              
              
              9,671In the third to fifth year, inclusive
              
              
              9,723
              
              
              
              1,952After
      the fifth year
              
              
              6,900
              
              
              
              2,80229,560
              
              
              
              19,645
 
 As
      at December 31Currency
              
              Interest
      rate and
                final
      maturity
              
              2006
              
              2007RMB
      million
              
              RMB
      millionBank
      loanRenminbi
      denominated
              
              Interest
      rates ranging from 2.40%  to 10.08% per annum with maturity
      through December 20, 2019
              
              28,128
              
              18,399US
      Dollar denominated
              
              Interest
      rates ranging from 1.25% to 6.44% per annum with maturity through October
      31, 2039
              
              721
              
              588Japanese
      Yen denominated
              
              Interest
      rate is 2.12% per annum with maturity through January 7,
    2014
              
              276
              
              234Euro
      denominated
              
              Interest
      rates ranging from 0.50%  to 7.35% per annum with maturity
      through March 15, 2034
              
              435
              
              415Hong
      Kong Dollar
                denominated
              
              Interest
      rates is 3.75% per annum with maturity through December 31,
      2010
              
              -
              
              929,560
              
              19,645
   F-66
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 28   
Bank and other loans (continued)
 
 (b)  The
Group’s long term bank and other loans comprise (continued):
 
 (i)
              Long
      term bank loans (continued)
  As
at December 31, 2007, bank loans of RMB212 million (December 31, 2006: RMB340
million) were secured by the following:
 
 ·
              Corporate
      guarantees granted by China Netcom Group to the extent of RMB49 million
      (December 31, 2006: RMB65 million);
and
 
 ·
              Corporate
      guarantees granted by third parties to the extent of RMB163 million
      (December 31, 2006: RMB275
million).
  (ii)
                Finance
      lease obligations
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionObligation
      under finance leases
              
              
              963
              
              
              
              102Less:
      current portion
              
              
              (858
              )
              
              
              (102
              )105
              
              
              
              -
 
 The
accumulated finance lease obligation payable to the related parties as at
December 31, 2007 amounted to RMB102 million. (2006: RMB963
million).
 
 The
interest rates charged on finance lease are ranging from 5.18% to 5.7% with
maturity through December 8, 2008 (2006: 2.68% to 6.83% with maturity through
December 8, 2008)
 
 The
Group’s liabilities under finance leases are analysed as follows:
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionWithin
      one year
              
              
              888
              
              
              
              105In
      the second year
              
              
              106
              
              
              
              -994
              
              
              
              105Less:
      future finance charges on finance leases
              
              
              (31
              )
              
              
              (3
              )Present
      value of finance lease liabilities
              
              
              963
              
              
              
              102The
      present value of finance lease liabilities is as follows:Within
      one year
              
              
              858
              
              
              
              102In
      the second year
              
              
              105
              
              
              
              -963
              
              
              
              102
   F-67
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 28           Bank
and other loans (continued)
 
 (c)
              Corporate
      bondsOn
      June 8, 2007, the Group issued RMB2 billion ten-year corporate bonds,
      bearing interest at 4.5% per annum. The corporate bonds are secured by a
      corporate guarantee granted by Bank of China
Limited.
 
 (d)
              The
      fair value of the Group’s non-current portion of long term bank and other
      loans at December 31, 2007 and 2006 were as
  follows:
 
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionLong
      term bank loans
              
              
              21,209
              
              
              
              12,320Finance
      lease obligations
              
              
              85
              
              
              
              -21,294
              
              
              
              12,320
 
 The
fair value is based on cash flows discounted using rates based on the market
rates ranging from 3.25% to 7.05% (December 31, 2006: 3.75% to
8.33%).
 
  F-68
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 29           Amount
due from/(to) holding companies and fellow subsidiaries
 
 As
      at December 31Note
              
              2006
              
              2007RMB
      million
              
              RMB
      millionRestatedNote
      2Current:Due
      from ultimate holding company
              (a)
              
              174
              
              245Due
      from intermediate holding companies
              (a)
              
              3
              
              6Due
      from fellow subsidiaries
              (a)
              
              181
              
              96Total
              
              
              358
              
              347Due
      to ultimate holding company-Deferred
      consideration
              (b)
              
              1,960
              
              1,960-Others
              (a)
              
              3,282
              
              1,371Due
      to fellow subsidiaries
              (a)
              
              2,263
              
              1,267Total
              
              
              7,505
              
              4,598Non-current:Due
      to ultimate holding company-Deferred
      consideration
              (b)
              
              5,880
              
              3,920Due
      to intermediate holding companies
              (c)
              
              -
              
              78Due
      to fellow subsidiaries
              (c)
              
              -
              
              2,171Total
              
              
              5,880
              
              6,169
 
   Note:(a)
              These
      are interest free, unsecured and have no fixed terms of
      repayment.(b)
              Balance
      represents the deferred payments arising from the Acquisition of New
      Horizon outstanding at year end. The balance is charged at interest rate
      of 5.265 % per annum with final maturity through June 30, 2010. The
      deferred payment is analysed as
follows:
   F-69
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 29           Amount
due from/(to) holding companies and fellow subsidiaries (continued)
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionWithin
      one year
              
              
              1,960
              
              
              
              1,960In
      the second year
              
              
              1,960
              
              
              
              1,960In
      the third to fifth year, inclusive
              
              
              3,920
              
              
              
              1,960Total
              
              
              7,840
              
              
              
              5,880
 
 
 (c)
              The
      balances bear interest rates ranged from 3.0% to 3.8% per annum, unsecured
      and have repayment terms of 3 years. The fair value of the balances is
      RMB1,918 million
 
 F-70
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 30  Deferred
revenues
 
 As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionBalance
      at beginning of year:-upfront
      connection fees
              
              
              5,505
              
              
              
              3,099-upfront
      installation fees
              
              
              6,769
              
              
              
              5,767-advances
      from network capacity sales
              
              
              2,354
              
              
              
              --prepaid
      telephony services
              
              
              4,272
              
              
              
              5,065-others
              
              
              -
              
              
              
              -18,900
              
              
              
              13,931Additions
      for the year:-upfront
      connection fees
              
              
              -
              
              
              
              --upfront
      installation fees
              
              
              357
              
              
              
              226-advances
      from network capacity sales
              
              
              236
              
              
              
              --prepaid
      telephony services
              
              
              30,360
              
              
              
              31,749-others
              
              
              -
              
              
              
              8630,953
              
              
              
              32,061Reductions
      for the year:-upfront
      connection fees
              
              
              (2,406
              )
              
              
              (1,517
              )-upfront
      installation fees
              
              
              (1,359
              )
              
              
              (1,279
              )-advances
      from network capacity sales
              
              
              (2,590
              )
              
              
              --prepaid
      telephony services
              
              
              (29,567
              )
              
              
              (31,777
              )-others
              
              
              -
              
              
              
              (2
              )(35,922
              )
              
              
              (34,575
              )Included:
      Disposal of discontinued operations-advances
      from network capacity sales
              
              
              (2,450
              )
              
              
              --prepaid
      telephony services
              
              
              (144
              )
              
              
              (183
              )(2,594
              )
              
              
              (183
              )Balance
      at end of year:-
      upfront connection fees
              
              
              3,099
              
              
              
              1,582-
      upfront installation fees
              
              
              5,767
              
              
              
              4,714-
      advances from network capacity sales
              
              
              -
              
              
              
              --
      prepaid telephony services
              
              
              5,065
              
              
              
              5,037-others
              
              
              -
              
              
              
              8413,931
              
              
              
              11,417Representing:-
      Current portion
              
              
              7,733
              
              
              
              7,103-
      Non-current portion
              
              
              6,198
              
              
              
              4,31413,931
              
              
              
              11,417
   F-71
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 31           Provisions
 
 Early
      retirement benefits
              
              
              One-off
      cash housing subsidies
              
              
              TotalRMB
                million
              
              
              RMB
                million
              
              
              RMB
                millionNote
      b
              
              
              Note
      a & bAs
      at January 1, 2007
              
              
              3,137
              
              
              
              3,185
              
              
              
              6,322Additional
      provisions
              
              
              -
              
              
              
              -
              
              
              
              -Payments
      during the year
              
              
              (605
              )
              
              
              (329
              )
              
              
              (934
              )As
      at December 31, 2007
              
              
              2,532
              
              
              
              2,856
              
              
              
              5,388Analysis
      of total provisions:-Current
      portion
              
              
              525
              
              
              
              2,856
              
              
              
              3,381-Non-current
      portion
              
              
              2,007
              
              
              
              -
              
              
              
              2,0072,532
              
              
              
              2,856
              
              
              
              5,388As
      at January 1, 2006
              
              
              3,763
              
              
              
              3,440
              
              
              
              7,203Payments
      during the year
              
              
              (626
              )
              
              
              (255
              )
              
              
              (881
              )At
      December 31, 2006
              
              
              3,137
              
              
              
              3,185
              
              
              
              6,322Analysis
      of total provisions:-Current
      portion
              
              
              551
              
              
              
              3,185
              
              
              
              3,736-Non-current
      portion
              
              
              2,586
              
              
              
              -
              
              
              
              2,5863,137
              
              
              
              3,185
              
              
              
              6,322
 
 (a)
              Certain
      staff quarters, prior to 1998, have been sold to the Group’s employees at
      preferential prices, subject to a number of eligibility requirements. In
      1998, the State Council issued a circular which stipulated that the sale
      of quarters to employees at preferential prices should be terminated. In
      2000, the State Council issued a further circular stating that cash
      subsidies should be made to certain eligible employees following the
      withdrawal of the allocation of staff quarters. However, the specific
      timetable and procedures for the implementation of these policies were to
      be determined by individual provincial or municipal government based on
      the particular situation of the provinces or
  municipality.Based
      on the relevant detailed local government regulations promulgated, certain
      entities within the Group have adopted cash housing subsidy plans. In
      accordance with these plans, for those eligible employees who had not been
      allocated with quarters or who had not been allocated with quarters up to
      the prescribed standards before the discounted sales of quarters were
      terminated, the Group is required to pay them one-off cash housing
      subsidies based on their years of service, positions and other criteria.
      Based on the available information, the Group estimated the required
      provision for these cash housing subsidies amounting to RMB4,142 million,
      which was charged to the income statement in the year ended December 31,
      2000 (the year in which the Council circular in respect of cash subsidies
      was issued).
 
  F-72
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 31           Provisions
(continued)
 
 (b)
              Pursuant
      to the Listing Reorganization and the Acquisition of New Horizon, if the
      actual payments required for these subsidies and early retirement benefits
      differ from the amount provided as at June 30, 2004 and June 30, 2005,
      China Netcom Group will bear any additional payments required or will be
      paid the difference if the actual payments are lower than the amount
      provided.
 
 
 
 F-73
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 32           Deferred
taxation
 
 Movements
of the deferred tax assets and liabilities are as follows:
 
 Recognised
      in income statementBalance
      at
                    December
      31 2006
                  
                  
                  Discontinued
      operations
                    -Disposed
      Guangdong & Shanghai Branches
                  
                  
                  Continuing
      operations
                    Note
      11
                  
                  
                  Change
      in
                    statutory
                    tax
      rate
                    Note
      11
                  
                  
                  Change
      in statutory
                    Tax
      rate
                    and
                    recognised
      in equity
                    Note11
                  
                  
                  Disposal
      of Guangdong and Shanghai Branches
                  
                  
                  Balance
      at December 31 2007RMB
      million
                  
                  
                  RMB
      million
                  
                  
                  RMB
      million
                  
                  
                  RMB
      million
                  
                  
                  RMB
      million
                  
                  
                  RMB
      million
                  
                  
                  RMB
      millionRestatedNote
      2Deferred
      tax assets:Deferred
      revenue, primarily advances from customers
                  
                  
                  127
                  
                  
                  
                  -
                  
                  
                  
                  (11
                  )
                  
                  
                  (24
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  92Temporary
      differences from allowance for doubtful debts
                  
                  
                  314
                  
                  
                  
                  (5
                  )
                  
                  
                  73
                  
                  
                  
                  (38
                  )
                  
                  
                  -
                  
                  
                  
                  (13
                  )
                  
                  
                  331Unrecognised
      revaluation surplus/(deficit)
                  
                  
                  2,810
                  
                  
                  
                  -
                  
                  
                  
                  (104
                  )
                  
                  
                  -
                  
                  
                  
                  (664
                  )
                  
                  
                  20
                  
                  
                  
                  2,062Others
                  
                  
                  208
                  
                  
                  
                  -
                  
                  
                  
                  53
                  
                  
                  
                  (49
                  )
                  
                  
                  -
                  
                  
                  
                  (4
                  )
                  
                  
                  208Balance
      at end of year
                  
                  
                  3,459
                  
                  
                  
                  (5
                  )
                  
                  
                  11
                  
                  
                  
                  (111
                  )
                  
                  
                  (664
                  )
                  
                  
                  3
                  
                  
                  
                  2,693Deferred
      tax liabilities:Interest
      capitalized
                  
                  
                  (789
                  )
                  
                  
                  -
                  
                  
                  
                  109
                  
                  
                  
                  168
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (512
                  )Fixed
      assets depreciation
                  
                  
                  (301
                  )
                  
                  
                  -
                  
                  
                  
                  (55
                  )
                  
                  
                  (15
                  )
                  
                  
                  111
                  
                  
                  
                  (28
                  )
                  
                  
                  (288
                  )Others
                  
                  
                  (66
                  )
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  9
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (56
                  )Balance
      at end of year
                  
                  
                  (1,156
                  )
                  
                  
                  -
                  
                  
                  
                  55
                  
                  
                  
                  162
                  
                  
                  
                  111
                  
                  
                  
                  (28
                  )
                  
                  
                  (856
                  )The
      amounts in the consolidated balance sheet are as follows:Deferred
      tax assets to be recovered after more than 12 months
                  
                  
                  2,860
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,038Deferred
      tax liabilities to be settled after more than 12 months
                  
                  
                  (1,014
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (740
                  )
   F-74
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Recognised
      in Income StatementBalance
      at
                December
      31 2005
              
              
              
              Discontinued
                operations
              
              
              Continuing
                operations
              
              
              
              Balance
                Recognised
      in
                Equity
              
              
              
              Balance
      at December 31 2006RMB
      million
              
              
              
              RMB
      million
              
              
              RMB
      million
              
              
              
              RMB
      million
              
              
              
              RMB
      millionRestated
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              RestatedNote
      2
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              Note
      2Deferred
      tax assets:Deferred
      revenue, primarily advances from customers
              
              
              
              170
              
              
              
              
              -
              
              
              
              (43
              )
              
              
              
              -
              
              
              
              
              127Temporary
      differences from allowance for doubtful debts
              
              
              
              350
              
              
              
              
              (4
              )
              
              
              (32
              )
              
              
              
              -
              
              
              
              
              314Unrecognised
      revaluation surplus and deficit (Note iii)
              
              
              
              2,861
              
              
              
              
              2
              
              
              
              (53
              )
              
              
              
              -
              
              
              
              
              2,810Others
              
              
              
              99
              
              
              
              
              4
              
              
              
              105
              
              
              
              
              -
              
              
              
              
              208Balance
      at end of year
              
              
              
              3,480
              
              
              
              
              2
              
              
              
              (23
              )
              
              
              
              -
              
              
              
              
              3,459Deferred
      tax liabilities:Interest
      capitalized
              
              
              
              (1,261
              )
              
              
              
              -
              
              
              
              472
              
              
              
              
              -
              
              
              
              
              (789
              )Revaluation
      surplus/deficit of fixed assets (Note i)
              
              
              
              -
              
              
              
              
              62
              
              
              
              (10
              )
              
              
              
              (353
              )
              
              
              
              (301
              )Others
              
              
              
              (63
              )
              
              
              
              -
              
              
              
              (3
              )
              
              
              
              -
              
              
              
              
              (66
              )Balance
      at end of year
              
              
              
              (1,324
              )
              
              
              
              62
              
              
              
              459
              
              
              
              
              (353
              )
              
              
              
              (1,156
              )The
      amounts in the consolidated balance sheet are as follows:Deferred
      tax assets to be recovered after more than 12 months
              
              
              
              2,906
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,860Deferred
      tax liabilities to be settled after more than 12 months
              
              
              
              (1,190
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,014
              )
   F-75
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  32   Deferred
taxation (continued)
 
 Notes:
 
 (i)
              According
      to the Group’s accounting policy as set out in note 4(k), the fixed assets
      other than the lease prepayments for land and buildings of the Group were
      revalued by the PRC valuer on a depreciated replacement cost basis on
      December 31, 2006, as disclosed in note 20. The revalued amounts are not
      used to determine the tax bases of these assets in the future years.
      Accordingly, the Group’s deferred tax liabilities on the balance sheet as
      at December 31, 2006,  decreased by RMB150million. The net
      reduction comprised RMB353 million, being the deferred tax liabilities
      originated from the revaluation surplus of fixed assets which was debited
      to revaluation reserves, offset by RMB503 million, being the deferred tax
      assets originated from the revaluation deficit of fixed assets which was
      credited to the income statement for the year ended December 31,
      2006.
 
 (ii)
              In
      connection with the Listing Reorganisation and the Acquisition of New
      Horizon, certain of the Group’s telecommunication networks and equipment
      and furniture, fixtures, motor vehicles and other equipment were revalued
      as at December 31, 2003 and 2004. Such revalued amounts determine the tax
      bases for these assets for future years. In addition, except for the item
      described in Note (iii) below, the tax bases of certain assets and
      liabilities have been adjusted to the revalued amounts incorporated as the
      carrying values in the balance sheet.In
      connection with the Acquisition of New Horizon, the Group’s net deferred
      tax assets were subsequently reduced by RMB1,077 million, and this
      decrease was recorded as a debit to owners’ equity upon the date of the
      Reorganisation on June 30, 2005. The RMB1,077 million deduction comprises
      RMB1,097 million, being deferred tax liabilities originating from the
      revaluation surplus of fixed assets recorded and credited to revaluation
      reserves offset by RMB2,174 million deferred tax assets debited to
      retained earnings.
 
  F-76
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 32   Deferred
taxation (continued)
 
 Notes:
 
 (iii)
              In
      addition, in order to determine the tax bases used for future years after
      the Listing Reorganisation and the Acquisition of New Horizon, the Group’s
      prepayments for the leasehold land and buildings were revalued for PRC tax
      purposes as at December 31, 2003 and 2004. However, the resulting
      revaluations of the prepayments for the leasehold land and buildings were
      not incorporated into the consolidated financial statements. As a result,
      deferred tax assets were subsequently recorded with corresponding
      increases in owners’ equity upon the Listing Reorganisation on June 30,
      2004 and the Acquisition of New Horizon on June 30, 2005. In the opinion
      of the directors, it is more likely than not that the Group will realize
      the benefits of the deferred tax asset after making reference to the
      historical taxable income of the Group. The amount is to be transferred to
      retained earnings upon the corresponding realization of the underlying
      deferred tax assets.During
      the Listing Reorganisation, the leasehold land and buildings had a net
      surplus on revaluation of RMB6,967 million as at December 31, 2003. As
      explained in the preceding paragraph, a deferred tax asset of RMB2,355
      million was subsequently recorded with a corresponding increase in owner’s
      equity upon the Listing Reorganisation on June 30, 2004.During
      the Acquisition of New Horizon, the leasehold land and buildings had a net
      surplus on revaluation of RMB2,553 million as at December 31, 2005. As
      explained above, a deferred tax asset of RMB843 million was subsequently
      recorded with a corresponding increase in owner’s equity upon the
      Acquisition on June 30, 2005.The
      amount of transfer to retained earnings from unrecognised revaluation
      surplus and deficit for the year ended December 31, 2007 was RMB104
      million. (2006: RMB51 million; 2005: RMB96
million).
 
  F-77
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 33           Share
capital
 
 AuthorizedOrdinary
      shares of US$0.04 each
              
              Convertible
      preference shares of
                US$0.04
      each
              
              TotalNo
      of shares
              
              US$
              
              RMB
      Million
              
              No
      of shares
              
              US$
              
              RMB
      Million
              
              US$
              
              RMB
      MillionAs
      at January 1, 2006, 2007 and December 31, 2007
              25,000,000,000
              
              1,000,000,000
              
              8,277
              
              7,741,782
              
              309,671
              
              3
              
              1,000,309,671
              
              8,280IssuedOrdinary
      shares of US$0.04 each
              
              Convertible
      preference shares of
                US$0.04
      each
              
              TotalNo
      of shares
              
              US$
              
              RMB
      million
              
              No
      of shares
              
              US$
              
              RMB
      Million
              
              US$
              
              RMB
      MillionAs
      at January 1, 2006
              6,593,529,000
              
              263,741,160
              
              2,181
              
              -
              
              -
              
              -
              
              263,741,160
              
              2,181Exercise
      of share options(Note)
              57,114,500
              
              2,284,580
              
              18
              
              -
              
              -
              
              -
              
              2,284,580
              
              18As
      at December 31, 2006
              6,650,643,500
              
              266,025,740
              
              2,199
              
              -
              
              -
              
              -
              
              266,025,740
              
              2,199As
      at January 1, 2007
              6,650,643,500
              
              266,025,740
              
              2,199
              
              -
              
              -
              
              -
              
              266,025,740
              
              2,199Exercise
      of share options(Note)
              23,684,900
              
              947,396
              
              7
              
              -
              
              -
              
              -
              
              947,396
              
              7As
      at December 31, 2007
              6,674,328,400
              
              266,973,136
              
              2,206
              
              -
              
              -
              
              -
              
              266,973,136
              
              2,206
   F-78
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 33           Share
capital (continued)
 
 Note:
 
 The
Group issued new shares for the options exercised during this period. During the
year ended December 31, 2007, the Company issued 16,231,400 shares (2006:
57,114,500 shares) upon exercise of options by participants in the First Grant
Share Option Scheme, and issued 7,453,500 shares (2006: 0 shares) upon exercise
of options by participants in the Second Grant Share Option Scheme. The total
consideration received amounted to RMB 219 million and the portion that exceeds
the nominal value of the shares issued was recorded as share premium of the
Company.
 
 
 
 34           Share
option scheme
 
 A
share option scheme was approved pursuant to a shareholders’ resolution on
September 30, 2004 (“Share Option Scheme”). Share options are granted to
directors of the Company and to certain employees of the Group at the directors’
discretion. Share options can be exercised at least 18 months from the later of
the date of grant or the date of the listing of the shares of the Company on the
Hong Kong Stock Exchange and subject to certain vesting restrictions on
timing.
 
 On
October 22, 2004, 158,640,000 share options with an exercise price of HK$8.40
each were granted to the directors of the Company and certain employees of the
Group (the “First Grant”).
 
 Pursuant to the Company’s share option
plan, the Company granted 158,640,000 options to certain of its directors and
employees, immediately prior to the closing of its global offering, to subscribe
for its ordinary shares at the initial public offering price under the Hong Kong
public offering, excluding brokerage and trading fees, and transaction and
investor compensation levies. The First Grant has an exercise period of six
years from the date of grant.The grantees can exercise 40 percent of the
options granted from May 17, 2006, and a further 20 percent of the options
granted from May 17, 2007. All unexercised share options will expire on November
16, 2010.
 
 
 F-79
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  34           Share
option scheme (continued)
 
 On
December 6, 2005, the board of directors approved the grant of 79,320,000 shares
of share options to certain management personnel and other professional
personnel designated by the Compensation Committee of the newly acquired four
northern provinces/autonomous region (“Second Grant”). The grantees can exercise
40% of the option granted from December 6, 2007, and all unexercised share
options will be expired on December 5, 2011.
 
 The
grant date fair value of the share options granted in the First Grant is
determined by the Black-Scholes model based on the following assumptions:
expected dividend pay-out ratio of 35%, expected vesting period of 5 years,
expected volatility rate of 23.6% and risk-free interest rate of 4.3%. The
weighted average fair value of the share options on grant date was determined as
HK$ 1.22 per share (RMB1.28 per share). The grant date fair value of the share
options granted in the Second Grant is determined by the Black-Scholes model
based on the following assumptions: expected dividend pay-out ratio of 35%,
expected vesting period of 4 years, expected volatility rate of 21.46% and
risk-free interest rate of 4.3%. The weighted average fair value of the share
option on grant date was determined as HK$1.28 per share (RMB1.34 per share).
The model that decided the weighted average fair value of the share options and
the assumptions mentioned above are subjective, and the changes of these
subjective assumptions could affect the weighted average fair value of the share
option. Therefore, Black-Scholes model may not reliably calculate the weighted
average fair value of the share options.
 
 Modifications
to certain clauses of the share options schemes already granted were approved on
May 16, 2006, pursuant to a resolution of the Extraordinary General Meeting. The
modifications were mainly related to eligibility of the participants, number of
options and exercise vesting schedules, rights upon cessation of employment,
death and loss of capacity, performance targets, and cancellation of options.
The modifications did not have significant impact to the financial
statements.
 
 
 
 F-80
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 34
              Share
      option scheme (continued)
 
 The
movement of the share options granted during the year is summarized as
follows:
 
 No.
      of share optionsAs
      at
                January
      1
                2006
              Granted
              Exercised
              Lapsed
      and forfeited
              As
      at
                December
      31, 2006
              Exercise
      price
                HK$
              Weighted
      average closing price per share at respective days immediately before the
      exercises of options HK$
              No.
      of share option exercisable as at December 31 2006First
      Grant
              156,703,000
              -
              57,114,500
              1,975,800
              97,612,700
              8.40
              14.46
              5,670,084Second
      Grant
              79,320,000
              -
              -
              285,800
              79,034,200
              12.45
              -
              -Total
              236,023,000
              -
              57,114,500
              2,261,600
              176,646,900
              
              
              5,670,084No.
      of share optionsAs
      at
                January
      1
                2007
              Granted
              Exercised
              Lapsed
      and forfeited
              As
      at
                December
      31, 2007
              Exercise
      price
                HK$
              Weighted
      average closing price per share at respective days immediately before the
      exercises of options HK$
              No.
      of share option exercisable as at December 31 2007First
      Grant
              97,612,700
              -
              16,231,400
              2,117,440
              79,263,860
              8.40
              22.23
              20,728,290Second
      Grant
              79,034,200
              -
              7,453,500
              -
              71,580,700
              12.45
              23.92
              24,490,320Total
              176,646,900
              
              23,684,900
              2,117,440
              150,844,560
              
              
              45,218,610
 
 
 The
company uses historical data to estimate pre-vesting option forfeitures and
record share-based compensation expense only for those awards that are expected
to vest.
 
 The compensation cost recognised in
staff cost during the year ended December 31, 2007 was RMB 59 million (For year
ended December 31, 2006: RMB 75 million; For year ended December 31, 2005: RMB
104 million). As at December31, 2007, there wasRMB47 million (As at December 31, 2006,
there wasRMB106million) of unrecognised compensation
cost, adjusted for estimated forfeitures, related to non-vested share-based
awards granted to the Company's employees. This cost is expectedto be recognised over a weighted-average
period of 1.31 years. Total unrecognised compensation cost may be adjusted for
future changes in estimated forfeitures.
 
 There were no capitalisedshare-based compensation
costs during the year ended December 31, 2007 and 2006.
 
  F-81
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 34
              Share
      option scheme (continued)
 
 The
intrinsic value for the options exercised amounted to HK$ 656 million and was
calculated as the difference between the market value on the date of exercise
and the exercise price of the shares. The intrinsic value of options outstanding
as of December 31, 2007 amounted to HK$ 1,980 million (December 31, 2006:
HK$1,879 million), which was calculated as the difference between the closing
stock price as of December 31, 2007 and the exercise price of the share
options.
 
 The
weighted average remaining contractual life for outstanding options, vested and
expected to vest or exercisable options as of December 31, 2007 were 3.38 years
and 3.45 years (as of December 31, 2006 was 4.35 years and 3.88 years),
respectively.
 
 
 F-82
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 35           Consolidated
cash flow statements
 
 (a)
              Reconciliation
      of profit before taxation to net cash flows generated from the operating
      activities of continuing operation.
 
 Year
      ended December 31st2005
              
              
              2006
              
              
              2007RMB
      million
              
              
              RMB
      million
              
              
              RMB
      millionRestated
              
              
              RestatedNote
      2
              
              
              Note
      2Profit
      before taxation
              
              
              17,876
              
              
              
              15,205
              
              
              
              15,267Depreciation
      of fixed assets and amortization of intangible assets
              
              
              24,317
              
              
              
              24,845
              
              
              
              25,402Lease
      prepayments for land
              
              
              37
              
              
              
              68
              
              
              
              52Lease
      prepayments for network capacity
              
              
              -
              
              
              
              -
              
              
              
              6Deferred
      costs charged to the income statements
              
              
              2,444
              
              
              
              996
              
              
              
              876Deficit
      on revaluation of fixed assets
              
              
              -
              
              
              
              1,335
              
              
              
              -Bad
      and doubtful debts
              
              
              1,097
              
              
              
              1,003
              
              
              
              868Loss/(gain)
      on disposal of fixed assets
              
              
              364
              
              
              
              432
              
              
              
              (357
              )Share-based
      compensation
              
              
              104
              
              
              
              75
              
              
              
              59Other
      income
              
              
              -
              
              
              
              (621
              )
              
              
              (1,221
              )Dividend
      income
              
              
              (29
              )
              
              
              -
              
              
              
              -Interest
      income
              
              
              (133
              )
              
              
              (136
              )
              
              
              (113
              )Interest expense
              
              
              3,556
              
              
              
              3,757
              
              
              
              3,162Foreign
      exchange net (gain)/loss
              
              
              (229
              )
              
              
              (8
              )
              
              
              25Changes in working capitalIncrease
      in accounts receivable
              
              
              (1,578
              )
              
              
              (1,944
              )
              
              
              (1,357
              )Decrease
      in inventories and consumables
              
              
              743
              
              
              
              56
              
              
              
              120Decrease
      in prepayments, other receivables and other current assets
              
              
              781
              
              
              
              229
              
              
              
              142Increase in other non-current assets
              
              
              (529
              )
              
              
              (339
              )
              
              
              (201
              )(Decrease)/increase
      in accounts payable
              
              
              (3,494
              )
              
              
              1,142
              
              
              
              1,285Decrease
      in accruals and other payables
              
              
              (1,954
              )
              
              
              (4,308
              )
              
              
              (2,384
              )Increase
      in deferred revenues
              
              
              (4,070
              )
              
              
              (2,631
              )
              
              
              (2,322
              )Net
      cash inflow generated from operating activities of continuing
      operation
              
              
              39,303
              
              
              
              39,156
              
              
              
              39,309
 
 
 F-83
 
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS   35  Cosolidated
cash flow statements (continued)
 
 (b)
              Major
      non-cash transactionsDuring
      2005, the Group paid RMB3,000 million as part of the total consideration
      for the Acquisition of the New Horizon. The remaining balance of RMB9,800
      million was recognised as a deferred payment and is included in amounts
      due to the ultimate holding company. During the year ended December 31,
      2007, payments made in respect of the purchase were RMB1,960 million, the
      unpaid balance at December 31, 2007 was RMB5,880
      million.
                
                In
      2007, the Group replaced copper cables in some network infrastructure with
      optical fibers and related equipments. Some of this replacement was done
      through non-monetary assets exchange with suppliers, which it exchanged
      optical fibers and related equipments for the Group’s own copper cables.
      The cost of the assets received was recorded at the fair value of asset
      surrendered. In 2007, the net book value and fair value of copper cables
      surrendered were RMB 182 million and RMB 568 million respectively. A gain
      on the non-monetary assets exchange of RMB 386 million is recognised in
      the current year income statement.(c)
              Net
      investment gain from disposal of Guangdong and Shanghai Branches and ANC
      GroupOn
      January 15, 2007, CNC China entered into an assets transfer agreement with
      its ultimate holding Company, China Netcom Group. Pursuant to the
      agreement, CNC China agreed to dispose of its assets and liabilities in
      relation to its telecommunications operations in Guangdong Province and
      Shanghai Municipality branches. The disposal was completed on February 28,
      2007. The net assets of Guangdong and Shanghai Branches as at the
      completion date are listed below.
                
                On
      June 2, 2006, the Group entered into an agreement to dispose of its entire
      interest in the ANC Group for a consideration of US$168.84 million. The
      disposal was completed on August 22, 2006.   At the
      completion date, the net liabilities of the disposed ANC Group are listed
      below.
 
  F-84
   CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 35  Consolidated
cash flow statements (continued)
 
 Disposal
      of ANC Group
              
              
              Disposal
      of
                Guangdong
      and Shanghai BranchesAs
      at August 22, 2006
              
              
              As
      at February 28, 2007RMB
              
              
              RMBmillion
              
              
              millionNet
      assets/(liabilities) disposed of (excluding the cash and cash equivalents)
      :Accounts
      receivable and other current assets
              
              
              504
              
              
              
              416Fixed
      assets and other non-current assets
              
              
              1,997
              
              
              
              7,630Current
      portion of deferred income
              
              
              (308
              )
              
              
              (183
              )Accounts
      payable and other current liabilities
              
              
              (592
              )
              
              
              (2,046
              )Non-current
      portion of deferred income
              
              
              (2,286
              )
              
              
              -Long-term
      loans
              
              
              -
              
              
              
              (3,000
              )Other
      liabilities
              
              
              -
              
              
              
              (267
              )Exchange
      differences realized
              
              
              (29
              )
              
              
              -(714
              )
              
              
              2,550Gain
      on disposal recognised in the income statement
              
              
              1,878
              
              
              
              927Net
      cash inflow from disposal of ANC Group/Guangdong and Shanghai
      Branches
              
              
              1,164
              
              
              
              3,477Analysis
      of cash inflow from disposal of ANC Group/Guangdong and Shanghai
      BranchesCash
      consideration
              
              
              1,344
              
              
              
              3,500Less
      : Cash and cash equivalents of Disposed ANC Group/Guangdong and Shanghai
      Branches
              
              
              (180
              )
              
              
              (23
              )Net
      cash inflow
              
              
              1,164
              
              
              
              3,477
  36  Banking
facilities
  As
at December 31, 2007 and 2006, the utilized and unutilized banking facilities
are as follows:
  As
      at December 312006
              
              
              2007RMB
      million
              
              
              RMB
      millionAmount
      utilized
              
              
              60,541
              
              
              
              31,495Amount
      unutilized
              
              
              115,588
              
              
              
              106,824Aggregate
      banking facilities
              
              
              176,129
              
              
              
              138,319
   F-85
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
 37           Commitments
 
 (a)
              Capital
      commitments
 
 As
      at December 312006
              
              
              2007RMB
              
              
              RMBmillion
              
              
              millionContracted
      but not provided for-Leasehold
      land and buildings
              
              
              26
              
              
              
              10-Telecommunication
      networks and equipment
              
              
              2,502
              
              
              
              530-Others
              
              
              5
              
              
              
              9Total
              
              
              2,533
              
              
              
              549Authorized
      but not contracted for-Leasehold
      land and buildings
              
              
              -
              
              
              
              21-Telecommunication
      networks and equipment
              
              
              300
              
              
              
              106-Others
              
              
              -
              
              
              
              1300
              
              
              
              128
  (b)
              Operating
      lease commitments
 
 The
Group has future minimum lease payments under non-cancelable operating leases in
respect of premises and equipment as follows:
 
 As
      at December 312006
              
              
              2007RMB
              
              
              RMBmillion
              
              
              millionNot
      later than one year
              
              
              734
              
              
              
              579Later
      than one year and not later than five years
              
              
              1,102
              
              
              
              1,134Later
      than five years
              
              
              517
              
              
              
              291Total
              
              
              2,353
              
              
              
              2,004
   F-86
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  38           
Related party transactions
 
 All
state-controlled enterprises, their subsidiaries, their key management and their
close family, and their employees represent related parties of the Group as
defined by HKAS 24.  China Netcom Group, the Group’s parent company,
is a state-controlled enterprise directly controlled by the PRC government which
controls different state-owned enterprises driving the economy of the PRC. The
Group is the dominant fixed line telecommunications service provider in northern
China by virtue of its historical monopoly over these services. As a result, the
Group has extensive transactions including sales and purchases of services,
goods and fixed assets, leasing of assets and banking transactions with other
state-owned parties in its ordinary course of business. These transactions are
carried out at terms similar to those obtained by other state-owned parties and
have been reflected in the financial statements.
 
 The
Group’s operations are subject to the supervision of and regulation by the PRC
Government.  The Ministry of Information Industry (MII), pursuant to
the authority delegated by the PRC’s State Council, is responsible for
formulating the policies and regulations for the telecommunications industry in
China, including granting licenses, allocating frequency spectrum, formulating
interconnection and settlement arrangements between telecommunications
operators, enforcing industry regulations and reviewing tariffs for domestic
services. Other PRC governmental authorities also regulate tariff policies,
capital investment and foreign investment in the telecommunications
industry.
 
 As
a state-owned telecommunications operator, the Group has extensive transactions
with other state-owned telecommunications operators in its ordinary course of
business.  These transactions are carried out in accordance with the
rules and regulations stipulated by the MII of the PRC Government and disclosed
below.
 
 The
Group has extensive transactions with other members of the China Netcom Group.
It is possible that the terms of the transactions between the Group and other
members of the China Netcom Group are not the same as those that would result
from transactions with other related parties or wholly unrelated
parties.
 
 Management
believes that meaningful information relative to related party disclosures has
been adequately disclosed.
   F-87
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  38   Related
party transactions (continued)
 
 For
      the year ended December 312005
                      
                      
                      2006
                      
                      
                      2007Notes
                      
                      RMB
      million
                      
                      
                      RMB
      million
                      
                      
                      RMB
      millionRestated
                      
                      
                      RestatedNote
      2
                      
                      
                      Note
      2Emolument
      of key management-
      salaries and welfare and contributions to retirement
scheme
                      (i)
                      
                      
                      23
                      
                      
                      
                      13
                      
                      
                      
                      13Interconnection
      fees-
      from fellow subsidiaries
                      (iv)(b)
                      
                      
                      251
                      
                      
                      
                      381
                      
                      
                      
                      602-
      from other state-owned telecommunications operators
                      (iv)(b)
                      
                      
                      6,442
                      
                      
                      
                      6,726
                      
                      
                      
                      6,333Subtotal
                      
                      
                      
                      6,693
                      
                      
                      
                      7,107
                      
                      
                      
                      6,935Interconnection
      charges-
      to fellow subsidiaries
                      (iv)(b)
                      
                      
                      611
                      
                      
                      
                      820
                      
                      
                      
                      687-
      to other state-owned telecommunications operators
                      (iv)(b)
                      
                      
                      1,475
                      
                      
                      
                      1,758
                      
                      
                      
                      1,595Subtotal
                      
                      
                      
                      2,086
                      
                      
                      
                      2,578
                      
                      
                      
                      2,282Rental
      income from properties leased to fellow subsidiaries
                      (iv)(a),(iv)(c)
                      
                      
                      -
                      
                      
                      
                      2
                      
                      
                      
                      1Purchase
      of materials-
      from fellow subsidiaries
                      (iv)(a),(iv)(c)
                      
                      
                      1,298
                      
                      
                      
                      1,170
                      
                      
                      
                      569-
      from other related companies
                      (iv)(a),(iv)(c)
                      
                      
                      231
                      
                      
                      
                      122
                      
                      
                      
                      99Subtotal
                      
                      
                      
                      1,529
                      
                      
                      
                      1,292
                      
                      
                      
                      668Receipt
      of engineering, project planning, design, construction and information
      technology services-
      from fellow subsidiaries
                      (iv)(a),(iv)(b)
                      
                      
                      2,236
                      
                      
                      
                      2,084
                      
                      
                      
                      1,629-
      from other related companies
                      (iv)(a),(iv)(b)
                      
                      
                      413
                      
                      
                      
                      368
                      
                      
                      
                      317Subtotal
                      
                      
                      
                      2,649
                      
                      
                      
                      2,452
                      
                      
                      
                      1,946Provision
      of engineering, project planning, design, construction and information
      technology services-
      from other state-owned telecommunications operators
                      (iv)(a)
                      
                      
                      47
                      
                      
                      
                      45
                      
                      
                      
                      54Ancillary
      telecommunications support services-
      from fellow subsidiaries
                      (v),(iv)(a)
                      
                      
                      435
                      
                      
                      
                      350
                      
                      
                      
                      373-
      from other related companies
                      (v),(iv)(a)
                      
                      
                      51
                      
                      
                      
                      58
                      
                      
                      
                      75Subtotal
                      
                      
                      
                      486
                      
                      
                      
                      408
                      
                      
                      
                      448
   F-88
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 38   Related
party transactions (continued)
  For
      the year ended December 312005
                      
                      
                      2006
                      
                      
                      2007Notes
                      
                      RMB
      million
                      
                      
                      RMB
      million
                      
                      
                      RMB
      millionRestated
                      
                      
                      RestatedNote
      2
                      
                      
                      Note
      2Payment
      of operating lease rentals of premises-
      to fellow subsidiaries
                      (iv)(a),(iv)(c)
                      
                      
                      655
                      
                      
                      
                      680
                      
                      
                      
                      636Property
      sub-lease rentals to fellow subsidiaries
                      (iv)(a),(iv)(c)
                      
                      
                      15
                      
                      
                      
                      15
                      
                      
                      
                      11Common
      corporate services income from ultimate holding company
                      (vi)
                      
                      
                      89
                      
                      
                      
                      121
                      
                      
                      
                      125Common
      corporate services expenditure paid to ultimate holding
      company
                      (vi)
                      
                      
                      279
                      
                      
                      
                      448
                      
                      
                      
                      477Support
      services received-
      from ultimate holding company
                      (vii),(iv)(a)
                      
                      
                      2
                      
                      
                      
                      2
                      
                      
                      
                      --
      from fellow subsidiaries
                      (vii),(iv)(a)
                      
                      
                      888
                      
                      
                      
                      712
                      
                      
                      
                      496-
      from other related companies
                      (vii),(iv)(a)
                      
                      
                      264
                      
                      
                      
                      23
                      
                      
                      
                      40Subtotal
                      
                      
                      
                      1,154
                      
                      
                      
                      737
                      
                      
                      
                      536Telecommunications
      rental income from other state-owned telecommunications
      operators
                      (iv)(b)
                      
                      
                      1,271
                      
                      
                      
                      1,327
                      
                      
                      
                      723Payment
      for lease of Telecommunications facility-
      to ultimate holding company
                      (viii)
                      
                      
                      85
                      
                      
                      
                      75
                      
                      
                      
                      66-
      to fellow subsidiaries
                      (viii)
                      
                      
                      215
                      
                      
                      
                      307
                      
                      
                      
                      243Subtotal
                      
                      
                      
                      300
                      
                      
                      
                      382
                      
                      
                      
                      309Payment
      for purchase of long-term telecommunications capacity to fellow
      subsidiaries
                      (ix),(xii)
                      
                      
                      117
                      
                      
                      
                      36
                      
                      
                      
                      -Payment
      for lease of long-term telecommunications capacity to fellow
      subsidiaries
                      (x),(xii)
                      
                      
                      84
                      
                      
                      
                      65
                      
                      
                      
                      -Management
      fee received from fellow subsidiaries
                      (xi),(xii)
                      
                      
                      39
                      
                      
                      
                      23
                      
                      
                      
                      -Provision
      of information communication technologies services-
      from ultimate holding company
                      (xix),(iv)(a)
                      
                      
                      -
                      
                      
                      
                      2
                      
                      
                      
                      71-
      from fellow subsidiaries
                      (xix),(iv)(a)
                      
                      
                      9
                      
                      
                      
                      60
                      
                      
                      
                      61Subtotal
                      
                      
                      
                      9
                      
                      
                      
                      62
                      
                      
                      
                      132
   F-89
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  38           Related
party transactions (continued)
 
 Notes:
 
 (i)
                      Represents
      the emoluments paid to all of the directors and the top management of the
      Group, who are considered as the related parties of the
    Group.
 
 (ii)
                      The
      Group entered into finance lease arrangements with a related party,
      details have been set out in Note 28
(b)
 
 (iii)
                      Related
      party represents the non-listed investors of the fellow
      subsidiaries.
 
 (iv)
                      Priced
      based on one of the following three
criteria:
 
 (a)  market
price;
 (b)  prices
based on government guidance; or
 (c)   cost
plus basis.
 
 (v)
                      Represents
      provision of ancillary telecommunications support services to the Group by
      the fellow subsidiaries and the related companies.  These
      services include certain telecommunications pre-sale, on-sale and
      after-sale services, certain sales agency services, the printing and
      delivery of invoice services, the maintenance of certain air-conditioning,
      fire alarm equipment and telephone booths and other customer
      services.
 
 (vi)
                      The
      Group entered into a Master Service Sharing agreement with China Netcom
      Group pursuant to which expenses associated with common corporate services
      is allocated between the Group and China Netcom Group based on total
      assets as appropriate.
 
 (vii)
                      Represents
      the support services provided to the Group by the fellow subsidiaries and
      the related companies. These support services include equipment leasing
      services, motor vehicles services, safety and security services,
      conference services, basic construction agency services, equipment
      maintenance services, employee training services, advertising services,
      printing services and other support
services.
 
 (viii)
                      The
      Group entered into a Telecommunications Facilities Leasing Agreement with
      China Netcom Group pursuant to which the Group leases the international
      telecommunications facilities and inter-provincial transmission optic
      fibers from China Netcom Group. The lease payment is based on the
      depreciation charge of the assets.
   F-90
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  38           Related
party transactions (continued)
 
 (ix)
                      The
      Group entered into a Capacity Purchase Agreement with East Asia Netcom
      Limited (“EANL”), a wholly owned subsidiary of China Netcom Croup,
      pursuant to which the Group receives certain amounts of long-term
      telecommunications capacity from China Netcom Group at market prices as
      set out in the Capacity Purchase
Agreement.
 
 (x)
                      The
      Group entered into a Capacity Lease Agreement with EANL, pursuant to which
      the Group leases certain amount of capacity of China Netcom Groiup’s
      telecommunications network at market rates as set out in the Capacity
      lease Agreement.
  (xi)
                      The
      Group entered into a Management Services Agreement with EANL, pursuant to
      which the Group provides certain management services to China Netcom Group
      either on a cost reimbursement basis or on the basis of cost plus
      reasonable profits not exceeding the market price as set out in the
      Management Service Agreement.
  (xii)
                      Due
      to the disposal of ANC Group on August 22, 2006, the Capacity Purchase
      Agreement, the Capacity Lease Agreement and the Management Services
      Agreement between the Group and East Asia Netcom Ltd (a formerly wholly
      owned subsidiary of China Netcom Group) were no longer related party
      transactions to the Group after August 22,
2006.
 
 (xiii)
                      In
      addition, pursuant to the Listing Reorganisation and the Acquisition of
      New Horizon, China Netcom Group have agreed to hold and maintain, for the
      Group’s benefit, all licenses received from the MII in connection with the
      Restructured Businesses transferred to the Group. The licenses maintained
      by China Netcom Group were granted by the MII at nil or nominal costs. To
      the extent that China Netcom Group incurs a cost to maintain or obtain
      licenses in the future, the Company has agreed reimburse China Netcom
      Group for any such expense.
 
 (xiv)
                      China
      Netcom Group has also agreed to indemnify the Group in connection with any
      tax and deferred tax liabilities not recognised in the financial
      statements of the Group arising from transactions prior to the date of
      Listing Reorganisation and the Acquisition in relation to the business of
      the Group prior to Listing and the business of the newly required four
      provinces/autonomous region
respectively.
 
 (xv)
                      As
      at December 31, 2007, China Netcom Group granted corporate guarantees to
      the Group as set out in Note 28(b).
 
 (xvi)
                      China
      Netcom Group, the Group’s ultimate holding company, entered into an
      agreement (the “Sponsorship Agreement”) with Beijing Organization
      Committee (“BOCOG”) which designated China Netcom Group as the exclusive
      fixed-line telecommunications services partner in the People’s Republic of
      China (“PRC”) to sponsor the 2008 Beijing Olympic Games. China Netcom
      Group allocated the sponsorship fee to its members based on the estimated
      future benefits derived from the Sponsorship Agreement to respective
      members and the Group has contributed a portion of the required support
      under the Sponsorship Agreement through cash payment and provision of
      services to BOCOG amounting to RMB0.54 billion. Accordingly, an intangible
      asset and a payable to the ultimate holding company of the said amount
      have been recognised on the Group’s balance
  sheet.
 
 F-91
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 38           Related
party transactions (continued)
 
 (xvii)
                      As
      at December 31, 2007, the Group has balances with other state-owned
      telecommunication service providers, cash deposited in and loans granted
      from state-owned banks as set out in Notes 17, 26, 16 and 28
      respectively.
 
 
 (xviii)
                      Up
      to December 31, 2007, the deferred consideration in respect of the
      Acquisition of New Horizon paid to China Netcom Group amounted to RMB3,920
      million, and the balance of the deferred consideration amounted to
      RMB5,880 million (2006: RMB7,840 million). The accumulated related
      interest charged to income statement up to December 31 2007 amounted to
      RMB942 million (2006: RMB567
million).
 
 (xix)
                      China
      Netcom System Integration, an indirect wholly owned subsidiary of the
      Company, entered into an Information and Communications Technology
      Agreement on November 7, 2006 with China Netcom Group. Pursuant to the
      Information and Communications Technology Agreement, China Netcom System
      Integration (and its subsidiaries) will provide Information Communications
      Technology Services to China Netcom Group.  China Netcom System
      Integration will also subcontract services ancillary to the provision of
      Information Communications Technology Services, namely the System
      Installation and Configuration Services to the subsidiaries and branches
      of China Netcom Group in China Netcom Group’s southern service region in
      PRC.
 
 (xx)
                      On
      December 31, 2006, the Group acquired some assets from China Netcom Group
      at an agreed price of RMB81
million.
 
 (xxi)
                      On
      January 15, 2007, CNC China entered into an assets transfer agreement with
      it’s ultimate holding Company, China Netcom Group. Pursuant to the
      agreement, CNC China agreed to dispose of its assets and liabilities in
      relation to its telecommunications operations in Guangdong Province and
      Shanghai Municipality branches in the PRC for consideration of RMB3.5
      billion. On February 14, 2007, the independent shareholders passed an
      ordinary resolution to approve the disposal. The disposal was completed on
      February 28, 2007 upon the approval granted from the Ministry of
      Information Industry (“MII”).  For details, please refer to Note
      25.
 
 (xxii)
                      On
      December 5, 2007, System Integration Corporation, a directly wholly owned
      subsidiary of CNC China, entered into an equity interest transfer
      agreement and agreed to acquire the entire equity interest of Beijing
      Telecom P&D Institute from China Netcom Group Beijing Communications
      Corporation at a consideration of RMB 298.9 million. The acquisition was
      completed on December 31, 2007.  The difference of the
      consideration paid and the net assets value of the Beijing Telecom P&D
      Institute is RMB61 million and recognised directly in the other reserve.
      For details, please refer to Note
2.
 
 (xxiii)
                      In
      2007, the Group borrowed loans from fellow subsidiaries and other holding
      companies. For the related terms, please refer to Note
    29(c).
 
 
 F-92
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 39  Condensed
financial statements of the Company
 
 INCOME
STATEMENT-THE COMPANY
 Year
      ended December 312005
                      
                      
                      2006
                      
                      
                      
                      2,007RMB
                      
                      
                      RMB
                      
                      
                      RMBMillion
                      
                      
                      Million
                      
                      
                      MillionNet
      revenue
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Cost
      of revenues
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Gross
      profit
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Operating
      expenses:Staff
      cost
                      
                      
                      (112
                      )
                      
                      
                      (83
                      )
                      
                      
                      (68
                      )Selling,
      general and administrative expenses
                      
                      
                      (89
                      )
                      
                      
                      (114
                      )
                      
                      
                      (33
                      )Other
      operating expenses
                      
                      
                      -
                      
                      
                      
                      22
                      
                      
                      
                      -Total
      operating expenses
                      
                      
                      (201
                      )
                      
                      
                      (175
                      )
                      
                      
                      (101
                      )Operating
      loss
                      
                      
                      (201
                      )
                      
                      
                      (175
                      )
                      
                      
                      (101
                      )Other
      income
                      
                      
                      -
                      
                      
                      
                      621
                      
                      
                      
                      1221Interest
      income
                      
                      
                      51
                      
                      
                      
                      21
                      
                      
                      
                      (6
                      )Investment
      income
                      
                      
                      276
                      
                      
                      
                      17,008
                      
                      
                      
                      7,600Non-operating
      income
                      
                      
                      3
                      
                      
                      
                      -
                      
                      
                      
                      -Profit
      before tax
                      
                      
                      126
                      
                      
                      
                      17,475
                      
                      
                      
                      8,714Income
      tax expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      profit
                      
                      
                      126
                      
                      
                      
                      17,475
                      
                      
                      
                      8,714
   F-93
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 39  Condensed
financial statements of the Company (Continued)
 
 BALANCE
SHEET-THE COMPANY
 As
      at December 31Note
                      
                      2006
                      
                      
                      2007RMB
                      
                      
                      RMBmillion
                      
                      
                      millionAssetsCurrent
      assetsCash
      and bank deposits
                      (b)
                      
                      
                      1,772
                      
                      
                      
                      113Due
      from subsidiaries
                      (d)
                      
                      
                      9,411
                      
                      
                      
                      10,490Prepayments,
      other receivables and other current assets
                      (c)
                      
                      
                      268
                      
                      
                      
                      16Total
      current assets
                      
                      
                      
                      11,451
                      
                      
                      
                      10,619Non-current
      assetsInvestments
      in subsidiaries
                      (d)
                      
                      
                      62,937
                      
                      
                      
                      71,000Total
      assets
                      
                      
                      
                      74,388
                      
                      
                      
                      81,619Liabilities
      and equityCurrent
      liabilitiesAccrued
      and other payables
                      
                      
                      
                      136
                      
                      
                      
                      46Due
      to subsidiaries
                      (d)
                      
                      
                      12,754
                      
                      
                      
                      14,271Total
      current Liabilities
                      
                      
                      
                      12,890
                      
                      
                      
                      14,317Net
      current liabilities
                      
                      
                      
                      (1,439
                      )
                      
                      
                      (3,698
                      )Total
      assets less current liabilities
                      
                      
                      
                      61,498
                      
                      
                      
                      67,302Non-current
      liabilitiesLong
      term bank and other loans
                      
                      
                      
                      -
                      
                      
                      
                      9Due
      to holding company and fellow subsidiaries
                      (e)
                      
                      
                      -
                      
                      
                      
                      403Total
      non-current liabilities
                      
                      
                      
                      -
                      
                      
                      
                      412Total
      liabilities
                      
                      
                      
                      12,890
                      
                      
                      
                      14,729Financed
      by:Share
      capital
                      
                      
                      
                      2,199
                      
                      
                      
                      2,206Reserves
                      (f)
                      
                      
                      59,299
                      
                      
                      
                      64,684Shareholders’
      equity
                      
                      
                      
                      61,498
                      
                      
                      
                      66,890Total
      liabilities & equity
                      
                      
                      
                      74,388
                      
                      
                      
                      81,619
   F-94
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  39  Condensed
financial statements of the Company (Continued)
 
 CONDENSED
STATEMENT OF CASH FLOWS-THE COMPANY
 Year
      ended December 312005
                      
                      
                      2006
                      
                      
                      2007RMB
                      
                      
                      RMB
                      
                      
                      RMBMillion
                      
                      
                      Million
                      
                      
                      MillionNet
      cash used in operating activities
                      
                      
                      (144
                      )
                      
                      
                      (242
                      )
                      
                      
                      (192
                      )Net
      cash used in investing activities
                      
                      
                      (6,648
                      )
                      
                      
                      4,180
                      
                      
                      
                      (1,175
                      )Net
      cash provided by financing activities
                      
                      
                      (457
                      )
                      
                      
                      (2,706
                      )
                      
                      
                      (292
                      )Net  (decrease)
      / increase in cash
                      
                      
                      (7,249
                      )
                      
                      
                      1,232
                      
                      
                      
                      (1,659
                      )Cash
      and cash equivalent, at beginning of the year
                      
                      
                      7,789
                      
                      
                      
                      540
                      
                      
                      
                      1,772Cash
      and cash equivalent, at end of the year
                      
                      
                      540
                      
                      
                      
                      1,772
                      
                      
                      
                      113
 
 
 (a)
                      The
      condensed financial statements of the Company have been prepared in
      accordance with HKFRS issued by
HKICPA.
 
 The
subsidiaries declared RMB 7,600 million dividend to the Company in 2007 (2006:
17,008 million, 2005: 260 million)
 
 Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted. The footnote disclosures contain
supplemental information relating to the operations of the Company and, as such,
these statements should be read in conjunction with the notes to the
consolidated financial statements of the Company.
 
 The
Company did not have any significant commitment as at December 31, 2005, 2006
and 2007.
 
 
 F-95
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 39  Condensed
financial statements of the Company (Continued)
 
 (b)         Cash
and bank deposits
 
 CompanyAs
      at December 312006
                      
                      
                      2007RMB
      million
                      
                      
                      RMB
      millionCash
      and cash equivalents with original maturities less than three
      months
                      
                      
                      1,772
                      
                      
                      
                      113Effective
      interest rate of time deposits with original maturities over three months
      (%)
                      
                      
                      -
                      
                      
                      
                      -
   (c)         Prepayments,
other receivables and other current assets
 
 CompanyAs
      at December 31,2006
                      
                      
                      2007RMB
      million
                      
                      
                      RMB
      millionPrepaid
      expenses, deposits and other current assets
                      
                      
                      15
                      
                      
                      
                      8Other
      receivables
                      
                      
                      253
                      
                      
                      
                      8Total
                      
                      
                      268
                      
                      
                      
                      16
 
 
 (d)  Investments
in subsidiaries and due from/(to) subsidiaries
 
 CompanyAs
      at December 312006
                      
                      
                      2007RMB
      million
                      
                      
                      RMB
      millionInvestment
      cost in subsidiaries
                      
                      
                      62,937
                      
                      
                      
                      71,000Due
      from subsidiaries (Note (b))
                      
                      
                      9,411
                      
                      
                      
                      10,490Due
      to subsidiaries (Note (c))
                      
                      
                      (12,754
                      )
                      
                      
                      (14,271
                      )59,594
                      
                      
                      
                      67,219
   F-96
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
 39  Condensed
financial statements of the Company (Continued)
 
 (d)  Investments
in subsidiaries and due from/(to) subsidiaries (continued)
 
 Notes:
 
 (a)   As
      at December 31, 2007, the Company has direct interests in the following
      subsidiaries, which are private
companies:
 
 Company
      name
                      
                      Place
      and date
                        Of
      incorporation/
                        establishment
                      
                      Registered
                        capital
                      
                      Percentage
      of equity interest
                        attributable
      to the
                        Company
                      
                      Principal
      activities
                        and
      place of operationDirectly
      held:China
      Netcom (Group)
                        Company
      Limited
                        (Note
      (i))
                      
                      PRC,
                        August
      6, 1999
                      
                      RMB
                        73,371
      million
                      
                      100%
                      
                      Provision
      of
                        network
                        communication
                        services
      in the PRCChina
      Netcom Corporation International Limited
                      
                      Bermuda
                        October
      15, 2002
                      
                      USD
      12,000
                      
                      100%
                      
                      Provision
      of Investing Service in BermudaIndirect
      held:China
      Netcom Group System Integration Limited Corporation
                        (Note (ii))
                      
                      PRC
                        April
      30, 2006
                      
                      RMB
                        50
      million
                      
                      100%
                      
                      Provision
      of Information
                        Communications
      Technology Services in PRCChina
      Netcom Broadband Online Limited Corporation
                        (Note (ii))
                      
                      PRC
                        March
      29, 2006
                      
                      RMB
                        30
      million
                      
                      100%
                      
                      Provision
      of Internet Information services and value-added telecommunications
      services in PRCBeijing
      Telecommunications Planning and Designing Institute Corporation
      Limited
                        (Note
      (iii))
                      
                      PRC
                        June
      1, 2007
                      
                      RMB
                        264,227,115
                      
                      100%
                      
                      Provision
      of telecommunications network construction,  planning and
      technical consulting services in
PRC
 .
 (i)
                      The
      company is a wholly owned foreign enterprise established in the PRC. The
      accounts of the company for the years ended December 31, 2006 and 2007
      were audited by PricewaterhouseCoopers Zhong Tian CPAs Limited
      Company.
 (ii)
                      These
      companies are wholly owned domestic enterprises established in the PRC.
      The accounts of these companies for the years ended December 31, 2006 and
      2007 were audited by PricewaterhouseCoopers Zhong Tian CPAs Limited
      Company, respectively.
 (iii)
                      The
      company is a wholly owned domestic enterprise established in the PRC. The
      accounts of the company for the year ended December 31, 2007 were audited
      by PricewaterhouseCoopers Zhong Tian CPAs Limited
  Company.
 
 (b)
                      The
      balances are unsecured, non-interest bearing and have no fixed
      repayment   terms.
 
 (c)
                      The
      balances mainly represent deferred payments arising from the Acquisition
      of New Horizon which have been transferred to CNC China at the carrying
      amount. The balances are unsecured, non-interest bearing and have no fixed
      repayment terms.
   F-97
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
  39  Condensed
financial statements of the Company (Continued)
 
 (e)           Amount due to holding company and
fellow subsidiaries
 
 CompanyAs
      at December 312006
                      
                      
                      2007RMB
      million
                      
                      
                      RMB
      millionDue
      to intermediate holding companies
                      
                      
                      -
                      
                      
                      
                      78Due
      to fellow subsidiaries
                      
                      
                      -
                      
                      
                      
                      325-
                      
                      
                      
                      403
   (f)           Reserves –
Company
 
 Share
      premium
                      
                      
                      Capital
      reserve
                      
                      
                      Retained
      earnings
                      
                      
                      TotalRMB
                        million
                      
                      
                      RMB
                        million
                      
                      
                      RMB
                        million
                      
                      
                      RMB
                        millionAs
      at January 1, 2006
                      
                      
                      42,750
                      
                      
                      
                      3,104
                      
                      
                      
                      (1,381
                      )
                      
                      
                      44,473Profit
      for the year
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      17,475
                      
                      
                      
                      17,475Dividends
      distributed during the year (Note 13)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,196
                      )
                      
                      
                      (3,196
                      )Share
      based payments
                      
                      
                      545
                      
                      
                      
                      (73
                      )
                      
                      
                      -
                      
                      
                      
                      472Exercise
      of share options
                      
                      
                      -
                      
                      
                      
                      75
                      
                      
                      
                      -
                      
                      
                      
                      75As
      at December 31,2006
                      
                      
                      43,295
                      
                      
                      
                      3,106
                      
                      
                      
                      12,898
                      
                      
                      
                      59,299Profit
      for the year
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,714
                      
                      
                      
                      8,714Dividends
      distributed during the year (Note 13)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,600
                      )
                      
                      
                      (3,600
                      )Share
      based payments
                      
                      
                      243
                      
                      
                      
                      (31
                      )
                      
                      
                      -
                      
                      
                      
                      212Exercise
      of share options
                      
                      
                      -
                      
                      
                      
                      59
                      
                      
                      
                      -
                      
                      
                      
                      59As
      at December 31, 2007
                      
                      
                      43,538
                      
                      
                      
                      3,134
                      
                      
                      
                      18,012
                      
                      
                      
                      64,684
 
 
 F-98
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 40   Significant
subsequent events
 
 (i)
                      After
      the balance sheet date the directors proposed a final dividend. Further
      details are disclosed in Note 13.
 
 (ii)
                      The
      Group borrowed two foreign currency loans of HK$ 1 billion each from a
      bank in Hong Kong on February 1 and February 4, 2008 respectively. Both of
      the loans will mature on December 31, 2008. The actual annual interest
      rates charged are 2.53% and 2.557%.
 
 
 F-99
 
 
 41  Reconciliation
of HKFRS and Accounting Principal Generally Accepted in the United
 States
(“U.S. GAAP”)
 
 (A)  Reconciliation
of HKFRS and U.S. GAAP at the Group level
 The
consolidated financial statements of the Group have been prepared in accordance
with HKFRS, which differs in certain material respects from those prepared under
generally accepted accounting principles in the United States (“U.S.GAAP”).
Differences between HKFRS and U.S.GAAP, which may have significant impacts on
the consolidated net income/(loss) and the consolidated shareholders’ equity are
described below.
 
 The
effect on net profit/ (loss) of significant differences between HKFRS and
U.S.GAAP for the years ended December 31, 2005, 2006 and 2007 is as
follows:
 
 Years
      ended December 31Note
                      
                      2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2007RMB
      million except per share data
                      
                      
                      US$
      millionRestated
                        Note
      2
                      
                      
                      Restated
                        Note
      2
                      
                      
                      
                      
                      
                      Except
      per share dataProfit
      from continuing operations under HKFRS
                      
                      
                      
                      14,350
                      
                      
                      
                      11,478
                      
                      
                      
                      11,471
                      
                      
                      
                      1,570U.S.GAAP
      adjustments:Revaluation
      of fixed assets
                      (a)
                      
                      
                      -
                      
                      
                      
                      1,335
                      
                      
                      
                      -
                      
                      
                      
                      -Depreciation
      of revalued fixed assets
                      (a)
                      
                      
                      (5,056
                      )
                      
                      
                      (4,571
                      )
                      
                      
                      (4,472
                      )
                      
                      
                      (612
                      )Tax
      effect on the above adjustments
                      (b)
                      
                      
                      1,668
                      
                      
                      
                      1,068
                      
                      
                      
                      1,476
                      
                      
                      
                      202Change
      in statutory taxation rate
                      (b)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      484
                      
                      
                      
                      66Profit
      from continuing operations under U.S.GAAP
                      
                      
                      
                      10,962
                      
                      
                      
                      9,310
                      
                      
                      
                      8,959
                      
                      
                      
                      1,226(Loss)/profit
      from discontinued operations under HKFRS
                      
                      
                      
                      (400
                      )
                      
                      
                      1,487
                      
                      
                      
                      624
                      
                      
                      
                      85U.S.GAAP
      adjustments:
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Revaluation
      of fixed assets
                      (a)
                      
                      
                      -
                      
                      
                      
                      189
                      
                      
                      
                      -
                      
                      
                      
                      -Depreciation
      of revalued fixed assets
                      (a)
                      
                      
                      (54
                      )
                      
                      
                      (48
                      )
                      
                      
                      (10
                      )
                      
                      
                      (1
                      )Tax
      effect on the above adjustments
                      (b)
                      
                      
                      18
                      
                      
                      
                      (47
                      )
                      
                      
                      3
                      
                      
                      
                      -Gain
      on disposal of Guangdong and Shanghai Branches
                      (e)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (626
                      )
                      
                      
                      (85
                      )(Loss)/profit
      from discontinued operations under US GAAP
                      
                      
                      
                      (436
                      )
                      
                      
                      1,581
                      
                      
                      
                      (9
                      )
                      
                      
                      (1
                      )Consolidated
      profit for the period under  HKFRS
                      
                      
                      
                      13,950
                      
                      
                      
                      12,965
                      
                      
                      
                      12,095
                      
                      
                      
                      1,655Consolidated
      profit for the period under U.S.GAAP
                      
                      
                      
                      10,526
                      
                      
                      
                      10,891
                      
                      
                      
                      8,950
                      
                      
                      
                      1,225
 
 
 F-100
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
  41  Reconciliation
of HKFRS and Accounting Principal Generally Accepted in the United
 States
(“U.S. GAAP”)
 
 (A)  Reconciliation
of HKFRS and U.S. GAAP at the Group level (continued)
 
 
 Years
      ended December 31Note
                      
                      2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2007RMB
      million except per share data
                      
                      
                      US$
      millionRestated
                        Note
      2
                      
                      
                      Restated
                        Note
      2
                      
                      
                      
                      
                      
                      Except
      per share dataShares
      used in computing basic earnings per share (in million)
                      
                      
                      
                      
                      6,594
                      
                      
                      
                      6,616
                      
                      
                      
                      6,657
                      
                      
                      
                      6,657Shares
      used in computing diluted earnings per share (in million)
                      
                      
                      
                      
                      6,628
                      
                      
                      
                      6,667
                      
                      
                      
                      6,738
                      
                      
                      
                      6,738Earnings
      per share for profit from continuing operations attributable to
      shareholders of the Company for the year under U.S GAAP-
      Basic earnings per share
                      
                      
                      
                      RMB
      1.66
                      
                      
                      RMB
      1.41
                      
                      
                      RMB
      1.35
                      
                      
                      USD
      0.18-
      Diluted earnings per share
                      
                      
                      
                      RMB
      1.65
                      
                      
                      RMB
      1.40
                      
                      
                      RMB
      1.33
                      
                      
                      USD
      0.18(Loss)/earnings
      per share for (loss)/profit from discontinued operations attributable to
      shareholders of the Company for the year under U.S GAAP-
      Basic (loss) /earnings per share
                      
                      
                      
                      RMB
      (0.07
                      )
                      
                      RMB
      0.24
                      
                      
                      
                      -
                      
                      
                      
                      --
      Diluted (loss) /earnings per share
                      
                      
                      
                      RMB
      (0.07
                      )
                      
                      RMB
      0.24
                      
                      
                      
                      -
                      
                      
                      
                      -Earnings
      per share for profit attributable to shareholders of the Company for the
      year under U.S GAAP-
      Basic earnings per share
                      
                      
                      
                      RMB
      1.59
                      
                      
                      RMB
      1.65
                      
                      
                      RMB
      1.35
                      
                      
                      USD
      0.18-
      Diluted earnings per share
                      
                      
                      
                      RMB
      1.58
                      
                      
                      RMB
      1.64
                      
                      
                      RMB
      1.33
                      
                      
                      USD
      0.18
   F-101
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  41  Reconciliation
of HKFRS and Accounting Principal Generally Accepted in the United
 States
(“U.S. GAAP”) (Continued)
 
 (A)  Reconciliation
of HKFRS and U.S. GAAP at the Group level (Continued)
 
 The
effect on shareholders’ equity of significant differences between HKFRS and
U.S.GAAP as at December 31, 2005, 2006 and 2007 is as follows:
 
 Year
      ended December 31Note
                      
                      2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2007RMB
      million
                      
                      
                      RMB
      million
                      
                      
                      RMB
      million
                      
                      
                      US$
      millionRestated
                        Note
      2
                      
                      
                      Restated
                        Note
      2Consolidated
      shareholders’ equity under HKFRS
                      
                      
                      
                      63,287
                      
                      
                      
                      74,194
                      
                      
                      
                      82,052
                      
                      
                      
                      11,233U.S.GAAP
      adjustments:Revaluation
      of fixed assets
                      (a)
                      
                      
                      30,251
                      
                      
                      
                      30,704
                      
                      
                      
                      30,704
                      
                      
                      
                      4,203Disposal
      and depreciation of revalued fixed assets
                      (a)
                      
                      
                      (8,639
                      )
                      
                      
                      (13,258
                      )
                      
                      
                      (17,740
                      )
                      
                      
                      (2,429
                      )Tax
      effect on the above adjustments
                      (b)
                      
                      
                      (7,132
                      )
                      
                      
                      (5,757
                      )
                      
                      
                      (3,241
                      )
                      
                      
                      (444
                      )Consolidated
      shareholders’ equity under U.S.GAAP
                      
                      
                      
                      77,767
                      
                      
                      
                      85,883
                      
                      
                      
                      91,775
                      
                      
                      
                      12,563
 
 
 On
June 2, 2006, the Group entered into an agreement with third party buyers to
dispose of its 100% interest in the ANC Group and the transaction was completed
on August 22, 2006. On January 15, 2007, the Group entered into an agreement
with China Netcom Group to dispose its telecommunications assets, liabilities
and operations in Guangdong Province and Shanghai Municipal branches and the
transaction was completed on February 28, 2007. In accordance with HKFRS 5
“Non-current assets held for sales and discontinued operations” issued by the
HKICPA, the results and cash flows of the operations of the ANC Group and
Guangdong and Shanghai Branches are presented as discontinued operations.
Accordingly, certain comparative figures of 2005 and 2006 have been
restated.
 
 On
December 5, 2007, System Integration Corporation entered into an Equity Interest
Transfer Agreement with China Netcom Group Beijing Communications Corporation,
pursuant to which System Integration Corporation agreed to acquire the entire
equity interest of Beijing Telecom P&D Institute from China Netcom Group
Beijing Communications Corporation. Before the acquisition, Beijing Telecom
P&D Institute was a wholly owned subsidiary of China Netcom Group Beijing
Communications Corporation, which is a wholly owned subsidiary of China Netcom
Group. Since China Netcom Group is the ultimate holding company of the Group,
the acquisition is a business combination under common control. Therefore, the
Group accounted for this acquisition using the pooling of interest method
according to Accounting Guideline No. 5 - Merger Accounting for Common Control
Transactions "AG 5". The acquired businesses and assets are recorded at book
value as if the businesses and assets of Beijing Telecom P&D Institute have
been owned by the Group from the earliest comparative period presented.
Accordingly, the financial information for 2005 and 2006 has been
restated.
 
 
 F-102
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
  41  Reconciliation
of HKFRS and Accounting Principal Generally Accepted in the United
 States
(“U.S. GAAP”) (Continued)
 
 (A)  Reconciliation
of HKFRS and U.S. GAAP at the Group level (Continued)
 
 (a)         
Revaluation of fixed assets
 
 In
the Listing Reorganisation, certain classes of fixed assets of the Group were
revalued as at December 31, 2003. The revaluation was performed based on the
depreciated replacement costs of the fixed assets and was not based upon the
expected future cash flows of the fixed assets. The revaluation resulted in a
charge of RMB25,778 million to the Group’s income statement for the year ended
December 31, 2003 with respect to the reduction in carrying amounts of certain
fixed assets below their historical cost bases. In addition, a surplus arising
from the revaluation of certain other fixed assets totaling RMB2,982 million has
been credited to the revaluation reserve.
 
 In
2005, the Group acquired telecommunications business and assets of the four
northern provinces/autonomous region from China Netcom Group as set out in Note
1 to the Group’s financial statements. The acquired fixed assets were revalued
as at December 31, 2004. The revaluation was performed based on the depreciated
replacement costs of the fixed assets and was not based upon the expected future
cash flows of the fixed assets. The revaluation resulted in a charge of
RMB11,318 million to the Group’s income statement for the year ended December
31, 2004 with respect to the reduction in carrying amounts of certain fixed
assets below their historical cost bases. In addition, a surplus arising from
the revaluation of certain other fixed assets totaling RMB3,863 million has been
credited to the revaluation reserve.
 
 According
to the Group’s accounting policy under HKFRS as set out in Note4(k)(iii),
certain classes of fixed assets of the Group were revalued at December 31,
2006.The revaluation was performed based on the depreciated replacement costs
for fixed assets and was not based upon the expected future cash flows of the
fixed assets. The revaluation resulted in a charge of RMB1,524 million to the
Group’s income statement for the year ended December 31, 2006 with respect to
the reduction in carrying amounts of certain fixed assets below their historical
cost bases. In addition, a surplus arising from the revaluation of certain other
fixed assets totaling RMB1,071million has been credited to the revaluation
reserve.
  The
effect of the reduction in depreciation of the revalued assets amounted to
RMB4,482 million in the year ended December 31, 2007 (2006: RMB4,619 million,
2005: RMB5,110 million).
 
 Under
U.S.GAAP, the carrying values of fixed assets are stated at their historical
cost less accumulated depreciation and impairment loss without making reference
to their respective depreciated replacement cost. An impairment loss on fixed
assets is recorded under U.S.GAAP if the carrying value of such assets exceeds
its future undiscounted cash flows resulting from the use of the assets and
their eventual disposition. The future undiscounted cash flows of the Group’s
fixed assets, whose carrying amounts were reduced in connection with the
Reorganisation, exceed the historical costs of such fixed assets and, therefore,
no impairment of such assets is recognised under U.S.GAAP. Accordingly, the
deficit on revaluation of fixed assets charged to the Group’s income statement
and the surplus credited to the revaluation reserve recorded under Hong Kong
GAAP and the corresponding effect on the depreciation of the revalued assets in
the subsequent periods are reversed for U.S.GAAP purposes.
 
 
 F-103
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
  41  Reconciliation
of HKFRS and Accounting Principal Generally Accepted in the United
 States
(“U.S. GAAP”) (Continued)
 
 (A)  Reconciliation
of HKFRS and U.S. GAAP at the Group level (Continued)
   (b)         
Deferred income tax
 
 The
amounts included in the reconciliation show the income tax effects of the
differences between HKFRS and U.S.GAAP as described above.
 
 HKFRS
requires recognition of a deferred tax asset only to the extent that recovery of
the deferred tax asset is probable, whereas U.S. GAAP requires full recognition
of deferred tax assets, reduced by an appropriate valuation allowance if the
recovery is less than 50% likely. Recognition of deferred tax asset previously
not recognised under HKFRS is presented as a reversal of the valuation allowance
under U.S. GAAP.
 
 As
set out in note 11 to the financial statements, the enterprise income tax rate
for domestic enterprises will decrease from 33% to 25% with effect from January
1, 2008.
 
 Under
US GAAP, pursuant to the requirement of FAS109, all the adjustments in deferred
tax arising from the change in taxation rate should be recognised in the income
statement.
 
 The
impact as a result of the change of the tax rate to the deferred tax liability
arising from the difference in the recognition of the carrying values of fixed
assets apart from lease prepayments for land and building under HKFRS and U.S.
GAAP is a credit of RMB1,148 million to the income statement for the year ended
31 December 2007.
 
 Besides,
the write-down of net deferred tax assets generated from revaluation of lease
prepayments for land and building of RMB 664 million recognised in equity under
HK GAAP should be recognised in the income statement under U.S.
GAAP.
 
 Therefore,
the net impact on the income statement reconciliation in respect of change in
statutory tax rate is an increase in profit of RMB 484 million.
 
 (c)           
Presentation of depreciation expense
 
 Under
HKFRS, depreciation expense can be excluded from “Network, operations and
support” and separately disclosed on the face of the income
statement.
 
 Under
U.S.GAAP, “Network, operations and support” expenses should include charges for
depreciation of property, plant and equipment and amortisation of intangible
assets. Industry practice adopted by the Chinese telecommunications sector is to
present these costs of operations net of depreciations charges. In such
circumstances, U.S.GAAP requires such facts to be highlighted on the face of the
income statement.
 
 (d)           
Presentation of amortisation of subscriber acquisition costs
 
 Under
HKFRS, amortisation of capitalized subscriber acquisition costs, being RMB1,887
million, RMB739 million and RMB0 million for the years ended December 31, 2005,
2006 and 2007 respectively is classified as selling expenses due to the
marketing and promotional nature of the expenditure.
 
 Under
U.S.GAAP, amortisation of subscriber acquisition costs needs to be included in
the item “Network, operations and support” expense for the Company.
   F-104
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  41  Reconciliation
of HKFRS and Accounting Principal Generally Accepted in the United
 States
(“U.S. GAAP”) (Continued)
 
 (A)  Reconciliation
of HKFRS and U.S. GAAP at the Group level (Continued)
   (e)           
Gain
on disposal of Guangdong and Shanghai Branches
 As
set out in note 2 to the financial statements, the disposal of Guangdong and
Shanghai branches was completed on February 28, 2007. It is a disposal under
common control. Under HKFRS, the gain on disposal was recognised in the income
statement while under U.S. GAAP, the gain was recognised directly in the
shareholders’ equity in accordance with the requirement of FAS 141.
 (f)           
Comprehensive income
 U.S.GAAP
requires that all items that are required to be recognised as components of
comprehensive income (including cumulative translation adjustment) be presented
with the same prominence as other components in the financial statements. There
are no material differences between total recognised gains and losses for the
periods shown in the Consolidated Statements of Changes in Equity presented
under HKFRS and U.S.GAAP comprehensive income, except for the differences
between HKFRS and U.S.GAAP profit attributable to shareholders shown
above.
   (B)  Reconciliation
of HKFRS and U.S. GAAP at the Company level
 The
condensed financial statements of the Company as set out in Note 39 have been
prepared in accordance withy HKFRS, which differs in certain material respects
from U.S. GAAP. Differences between HKFRS and U.S. GAAP, which may have
significant impacts on the Company's net profit/ (loss) and the Company's
shareholders' equity are described below.
 
 The
effect on the net profit of significant differences between HKFRS and U.S. GAAP
at the Company's level for the years ended December 31, 2005, 2006 and 2007 is
as follows:
 
 Year
      ended December 31,Note
                      
                      2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2007RMB
                      
                      
                      RMB
                      
                      
                      RMB
                      
                      
                      USDmillion
                      
                      
                      million
                      
                      
                      million
                      
                      
                      millionRestated
                      
                      
                      RestatedNotes
      2
                      
                      
                      Notes
      2Net
      profit for the year under HKFRS
                      
                      
                      
                      126
                      
                      
                      
                      17,475
                      
                      
                      
                      8,714
                      
                      
                      
                      1,193U.S.
      GAAP adjustments:Equity
      accounting for share of results of its subsidiaries net of tax
      effect
                      (a)
                      
                      
                      10,400
                      
                      
                      
                      (6,584
                      )
                      
                      
                      236
                      
                      
                      
                      32Net
      profit for the year under US GAAP
                      
                      
                      
                      10,526
                      
                      
                      
                      10,891
                      
                      
                      
                      8,950
                      
                      
                      
                      1,225
 
 
 F-105
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
 
 41  Reconciliation
of HKFRS and Accounting Principal Generally Accepted in the United
 States
(“U.S. GAAP”) (Continued)
  (B)  Reconciliation
of HKFRS and U.S. GAAP at the Company level
(Continued)
 The
effect on the shareholders' equity of significant differences between HKFRS and
U.S. GAAP at the Company's level as at December 31, 2005, 2006 and 2007 is as
follows:
 
 As
      at December 31,Note
                      
                      2005
                      
                      
                      2006
                      
                      
                      2007
                      
                      
                      2007RMB
                      
                      
                      RMB
                      
                      
                      RMB
                      
                      
                      USDmillion
                      
                      
                      million
                      
                      
                      million
                      
                      
                      millionRestated
                      
                      
                      RestatedNotes
      2
                      
                      
                      Notes
      2Shareholders'
      equity under HKFRS
                      
                      
                      
                      46,654
                      
                      
                      
                      61,498
                      
                      
                      
                      66,890
                      
                      
                      
                      9,157U.S.
      GAAP adjustments:Equity
      accounting for its subsidiaries net of tax effect
                      (a)
                      
                      
                      31,113
                      
                      
                      
                      24,385
                      
                      
                      
                      24,885
                      
                      
                      
                      3,407Shareholders'
      equity under U.S. GAAP
                      
                      
                      
                      77,767
                      
                      
                      
                      85,883
                      
                      
                      
                      91,775
                      
                      
                      
                      12,564
 
 (a)   Equity
accounting for share of results and net assets of its subsidiaries
 
 Under
HKFRS, the Company records its investment in its subsidiaries under cost method
of accounting. In the Company's balance sheet, the investments in subsidiaries
are stated at cost less provision for impairment losses. The results of the
subsidiaries are accounted for by the Company on the basis of dividend received
and receivable.
 
 Under
U.S. GAAP, the Company restates its financial statements as if the
Reorganization happened at the earliest period presented. It records its
investment in its subsidiaries under the equity method of accounting as
prescribed in APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock". Since the company holds 100% equity interest in
the subsidiaries, the net asset value of the subsidiaries has been fully
reflected as Investment in subsidiaries on the balance sheet and the results of
the subsidiaries have been accounted for under share of results of subsidiaries,
net of tax on the income statement.
 
 As
set out in Note 41(A) (a) above, the accounting treatments on revaluation of
fixed assets are different under HKFRS and US GAAP. Therefore, difference in the
net assets value and results of the subsidiaries are dealt with in this
reconciliation item.
 
 (C)  Recent
HK Accounting Pronouncements
 The
HKICPA has issued a number of new and revised HKFRSs and HKFRS Interpretations
(“HKFRS – Ints”), and HKAS and HKAS Interpretations (“HKAS – Ints”) as set out
in Note 3 to the Group’s financial statements. Except The HK(IFRIC) - Int 13,
'Customer loyalty programmes', the Group did not early adopt any new statement
of new or revised HKFRSs or HKFRS – Ints in the year ended December 31, 2007.
The Group evaluated the impact of these new and revised HKFRSs and HKFRS - Ints
as set out in Note 3.
 
 F-106
 CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL
STATEMENTS
 41  Reconciliation
of HKFRS and Accounting Principal Generally Accepted in the United
 States
(“U.S. GAAP”) (Continued)
 
 (D)           
Recent U.S. Accounting Pronouncements
 
 SFAS
157
 
 In
September 2006, the FASB issued SFAS 157, Fair Value Measurement. SFAS 157
defines fair value, establishes a framework for measuring fair value, and
enhances disclosures about fair value measurements. The adoption of SFAS 157
will be effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Group is evaluating the impact adopting SFAS 157 will have on its financial
statements.
 
 In
February 2008, the FASB issued FASB Stuff Position (“FSP”) 157-2, Effective Date
of FASB Statement No. 157. FSP 157-2 provides a one-year deferral of the
effective date of FASB Statement 157, Fair Value Measurements, for nonfinancial
assets and nonfinancial liabilities, except those that are recognised or
disclosed in financial statements at fair value on a recurring basis. The
deferral is not available, however, to entities that issued interim or annual
financial statements reflecting the measurement and disclosure provisions of
Statement 157 before February 12, 2008.
 
 SFAS
159
 
 In
February, 2007, the FASB issued SFAS 159 “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115”. This statement permits all entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates.
SFAS 159 will be effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. The Group is currently evaluating the
effect that the adoption of this statement will have on its consolidated results
of operations and financial condition but does not expect it to have a material
impact.
 
 SFAS
141(Revised 2007)
 
 In
December 2007, the FASB issued FAS 141(Revised 2007) “Business Combinations”
which replaces FASB Statement No. 141. This statement establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed in
financial statements. This statement is effective as of the beginning of an
entity’s first fiscal year beginning after December 15, 2008.The Group is
currently assessing the impact of adopting SFAS No. 141R on its
consolidated results of operations and financial condition but does not expect
it to have a material impact.
   F-107
  CHINA NETCOM GROUP
CORPORATION (HONGKONG)
LIMITED
  NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  41  Reconciliation
of HKFRS and Accounting Principal Generally Accepted in the United
 States
(“U.S. GAAP”) (Continued)
 
 (D)           
Recent U.S. Accounting Pronouncements (Continued)
 
 SFAS
No. 160
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statement - amendments of ARB No. 51.”
SFAS No. 160 states that accounting and reporting for minority interests
will be re-characterized as non-controlling interests and classified as a
component of equity. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. FAS 160
applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an
outstanding non-controlling interest in one or more subsidiaries or that
deconsolidate a subsidiary. This statement is effective as of the beginning of
an entity’s first fiscal year beginning after December 15, 2008. The Group
is currently assessing the impact of adopting SFAS No. 160.
 
 FAS
142-3
 
 In
April 2008, the FASB issued FASB Stuff Position (“FSP”) FAS 142-3, Determination
of the Useful Life of Intangible Assets.  This statement states that
in developing assumptions about renewal or extension used to determine the
useful life of a recognized intangible asset, an entity shall consider its own
historical experience in renewing or extending similar arrangements; however,
these assumptions should be adjusted for the entity-specific
factors.  This FSP will be effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years.  The Group is currently assessing the impact of
adopting FSP No.142-3.