China Netcom has announced that it has entered into a Strategic Alliance Agreement with Telefonica Internacional.

The Strategic Alliance Agreement (SAA) will become effective after the completion of the acquisition of the additional shares by Telefonica, representing the difference between the existing stake of 5% of the outstanding issued Shares held by Telefonica and 9.9% of the entire issued share capital of the company outstanding from time to time and the obtaining of all necessary China governmental, regulatory or similar consents and board approvals required by each party to perform its obligations under the SAA having been obtained.

Pursuant to the terms of the SAA, China Netcom and Telefonica will use reasonable efforts to negotiate in good faith a strategic relationship for cooperation in the following areas within 6 months:

- International business area (including voice and IP Peering and IP MPLS);

- The existing overseas business of the Company and its parent company, subject to due diligence, agreeing on valuation and obtaining necessary approvals;

- Subject to due diligence, agreeing on valuation and obtaining necessary approvals, the provision of telecommunication businesses and services in the southern provinces in the PRC;

- Call center business, including worldwide call center services for the Beijing Olympics 2008 and joint call center for outsourcing services;

- Co-operation and sharing in the areas of business development, network operations, customers, customer acquisition and management, technology implementation, sales, marketing and branding in the PRC;

- Management exchange involving senior managers from each of Telefonica and the Company for every six months;

- Co-operation in the purchasing of technology, end-user equipment, infrastructure, distribution or usage rights and other components required to provide both fixed-line, broadband and wireless communications services;

- Technological assistance and knowledge transfer provided by Telefonica in the areas of value-added services, business solutions for small-and-medium-sized enterprises, IPTV solutions and other related areas; and

- The provision of mobile service when any mobile service licence has been issued to the Company or its parent company;

The SAA does not affect any existing agreements, arrangements or memoranda of understandings currently under discussion between the Company, its parent company and/or any of their respective Affiliates with any third parties, including but not limited to PCCW Limited.

When Telefonica becomes the beneficial owner of not less that 9.9% in the entire issued share capital of the China Netcom, it will be entitled to nominate a second director to the board of China Netcom.

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