Telefónica, the Spanish parent company of O2, will spend about €802 million (£650 million) to boost its share of China Netcom in a move that will give it a leading stake in the imminent merger of China Netcom and China Unicom and improve its foothold in the fast-growing Chinese telecoms industry.

Europe's second-largest operator already owns about 5 per cent of China Netcom, but has long wanted to increase this and bolster its position in the world's biggest mobile market.

Telefónica has set its sights on China as the new frontier of its emerging markets strategy, after aggressive expansion in Latin America. Spain, its home market, is undergoing a sharp economic downturn.

In a statement to the Madrid stock exchange yesterday, Telefónica said that it would buy two tranches of shares in China Netcom, totalling 5.7 per cent of the company, from AllianceBernstein, the US fund manager.

The acquisition, giving it the equivalent of 13 per cent of China Netcom, will leave it with a leading 5.5 per cent share in the merged group. China Unicom, the smaller of the country's two mobile operators, is buying China Netcom, a fixed-line enterprise, under a government-mandated revamp to boost competition in the sector.

Vodafone, the only other international operator in the Chinese market, bought an initial 3 per cent stake in the rival China Mobile, the country's biggest mobile operator, for $2.5 billion in 2000, and increased it to 3.3 per cent in 2002.

The Newbury-based company has said that it hopes to increase its holdings in the group, which is scheduled to take control of China TieTong Telecommunications, a smaller fixed-line operator, as part of the same telecoms sector shake-up.

Gonzalo Lardies, a fund manager for LCF Rothschild Group in Madrid, said: “They want to repeat in China the success achieved in Latin America. Telefónica's bet on emerging markets is more attractive than what some of its main rivals have to offer.”

Others were more sceptical because Chinese law prohibits foreign operators from exerting any control in local companies. Javier Borrachero, an analyst with ING Financial Markets in Madrid, said: “The Chinese market has a great potential for growth, but Telefónica will merely hold a stake in the company with no control in the foreseeable future.”

Since 1990 Telefónica has invested more than €83 billion in Latin America, where it has 150 million customers and which generates 60 per cent of its revenue growth. The group aims to grow in China, where the number of mobile phone users exceeds the combined populations of North America, Japan and the UK.

Telefónica said that it would first buy 2.71 per cent of China Netcom from AllianceBernstein for about €368 million. It will then acquire China Unicom shares after the two companies merge, representing 3.03 per cent of China Netcom, for a price that is expected to range between €392 million and €434 million.

Telefónica said it expected to be given regulatory clearance soon for a 2.2 per cent stake in China Netcom that it bought in January for €309 million.

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