This annual report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are, by their nature, subject to significant risks and uncertainties, and include, without limitation, statements relating to:

our businesses and operating strategies;

	•	~~our business and operating strategies;~~

	•	~~our network expansion and capital expenditure plans;~~

	•	~~our operations and business prospects;~~

	•	~~our financial condition and results of operations;~~

	•	~~the industry regulatory environment as well as the industry outlook generally; and~~

our network expansion and capital expenditure plans;

our operations and business prospects;

the expected benefit of any acquisitions or other strategic transactions;

our financial condition and results of operations;

the future prospects of and our ability to integrate the acquired businesses;

the industry regulatory environment as well as the industry outlook generally; and

future developments in the telecommunications industry in China.

The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “will,” “would” and similar expressions, as they relate to us, are intended to identify a number of these forward-looking statements.

These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. We do not intend to update these forward-looking statements. Actual results may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risk factors set forth in “Item 3. Key Information – D. Risk Factors” and the following:

any changes in the regulatory policies of the Ministry of Information Industry and other relevant government authorities relating to, among other matters:


	•	~~any changes in the regulatory policies of the Ministry of Information Industry and other relevant government authorities relating to, among other matters:~~

•-

the granting and approval of licenses;

•-

tariff policies;

•-

interconnection and settlement arrangements;

•-

capital investment priorities;

•-

the provision of telephone services to rural areas in China; and

		•-	numbering resources allocation;

	•	~~the effects of competition on the demand for and price of our services;~~

	•	~~the development of new technologies and applications or services affecting our current and future businesses;~~

the effects of competition on the demand for and price of our services;

the development of new technologies and applications or services affecting our current and future businesses;

~~Back~~

changes in political, economic, legal and social conditions in China, including the Chinese government’s specific policies with respect to ~~Contents~~foreign investment in and entry by foreign companies into China’s telecommunications industry, economic growth, inflation, foreign exchange and the availability of credit; and

	•	changes in political, economic, legal and social conditions in China, including the Chinese government’s specific policies with respect to foreign investment in the telecommunications industry, economic growth, inflation, foreign exchange and the availability of credit; and

	•	~~changes in population growth and gross domestic product, or GDP, growth and the impact of those changes on the demand for our services.~~

changes in population growth and gross domestic product, or GDP, growth and the impact of those changes on the demand for our services.

~~Certain Definitions and Conventions~~CERTAIN DEFINITIONS AND CONVENTIONS

As used in this annual report, references to “us”, “we”, the “Company” and “China Telecom” are to China Telecom Corporation Limited and all of its consolidated subsidiaries except where we make clear that the term means China Telecom Corporation Limited or a particular subsidiary or business group only. References to matters relating to our H shares or ADSs or matters of corporate governance are to the H shares, ADSs and corporate governance of China Telecom Corporation Limited. In respect of any time prior to our incorporation, references to “us”, “we” and “China Telecom” are to the telecommunications businesses in which our predecessors were engaged and which were subsequently assumed by us. All references to “China Telecom Group” are to China Telecommunications Corporation, our controlling shareholder. Unless the context otherwise requires, these references include all of its subsidiaries, including us and our subsidiaries.

On ~~December 31, 2003,~~June 30, 2004, we acquired the entire equity interests in each of ~~Anhui~~Hubei Telecom Company Limited, ~~Fujian~~Hunan Telecom Company Limited, ~~Jiangxi~~Hainan Telecom Company Limited, ~~Guangxi~~Guizhou Telecom Company Limited, ~~Chongqing~~Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and ~~Sichuan~~Xinjiang Telecom Company Limited from China Telecom Group. As we and these acquired companies were under the common control of China Telecom Group, our acquisition of the acquired companies has been treated as a “combination of entities under common control”, which was accounted for in a manner similar to a pooling-of-interests. As presented in this annual report, all data and information relating to our ~~business~~businesses and operations include the data and information relating to the ~~business~~businesses and operations of the acquired companies.

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PART I

~~Item 1.~~

~~Identity of Directors, Senior Management and Advisers.~~

Item 1. Identity of Directors, Senior Management and Advisers.

Not applicable.

~~Item 2.~~

~~Offer Statistics and Expected Timetable.~~

Item 2. Offer Statistics and Expected Timetable.

Not applicable.

~~Item 3.~~

~~Key Information.~~

Item 3. Key Information.

A. Selected Financial Data

The following table presents our selected financial data. The selected balance sheet data as of December 31, ~~2002~~2003 and ~~2003,~~2004, and the selected income statement data and cash flow data for each of the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003,~~2004, are derived from our audited financial statements included elsewhere in this annual report, and should be read in conjunction with our audited financial statements and operating and financial review and prospects included elsewhere in this annual report. The selected balance sheet data as of December 31, ~~1999,~~ 2000, 2001 and ~~2001~~ 2002

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and the selected income statement and cash flow data for each of the years ended December 31, ~~1999~~2000 and ~~2000~~2001 are derived from our audited financial statements, which are not included in this annual report. Our audited financial statements are prepared and presented in accordance with International Financial Reporting Standards, or IFRS, which differ in certain significant respects from accounting principles generally accepted in the United States of America, or US GAAP. Information relating to the nature and effect of significant differences between IFRS and US GAAP, as they relate to us for the periods described therein, is presented in Note 33 to the audited financial statements included elsewhere in this annual report.

The selected financial data reflect the restructuring in 2001, ~~and~~ the ~~acquisition~~acquisitions in 2003 and 2004 described under “Item 4. Information on the Company — A. History and Development of the Company — Our Restructuring and Initial Public Offering” ~~and “ —~~, “— The Acquisition in 2003” and “— The Acquisition in 2004”, respectively, and have been prepared as if our current structure had been in existence throughout the relevant periods.

Since China Telecom Group controlled the telecommunications operations and the related assets transferred to us prior to our restructuring and continues to control us after our restructuring, the financial data of the telecommunications operations in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province transferred to us by China Telecom Group for periods prior to our incorporation have been combined in a manner similar to a pooling-of-interests. The assets and liabilities of the entities being combined are carried forward at their recorded historical amounts, and the book value of the assets and liabilities, as well as the revenue and expenses of each of these entities for the periods prior to our incorporation, are added together to prepare our financial statements.

On December 31, 2003, we acquired the entire equity interests in each of Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited and Sichuan Telecom Company Limited from China Telecom Group. On June 30, 2004, we acquired the entire equity interests in each of Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited from China Telecom Group. As we and these acquired companies were under the common control of China Telecom Group, our ~~acquisition~~acquisitions of ~~the~~these acquired companies ~~has been treated as a “combination of entities under common control”, which was~~are accounted for in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of the acquired companies have been accounted for at historical amounts and our financial statements for periods prior to the ~~acquisition~~respective acquisitions have been restated to include the financial position and results of operations of the acquired companies on a combined basis. Unless otherwise indicated in this section, our financial data for periods prior to the acquisition in 2004 are presented based on those restated amounts.

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In connection with our restructuring in 2001, China Telecom Group retained the ownership of certain assets that were historically associated with our operations and primarily consisted of investments in non-telecommunications industries, inter-provincial optic fibers, international gateway and international transmission equipment, telecommunications equipment for special communications services, and certain office equipment, properties and ~~buildings.~~buildings, and the segregation and separate management of these assets by China Telecom Group took effect on December 31, 2001. In connection with our ~~acquisition~~acquisitions in 2003 and 2004, China Telecom Group retained the ownership of certain assets that were historically associated with our operations and primarily consisted of investments in non-telecommunications industries and certain properties, and ~~buildings. Except~~the segregation and separate management of these assets by China Telecom Group took effect on December 31, 2002 and December 31, 2003, respectively. With respect to the restructuring in 2001, except for the income statement data for the years ended December 31, 2002, 2003 and 2004, the income statement data for the other periods presented below include the results of the assets retained by China Telecom Group. The results of such assets are not reflected in our income statement for periods beginning after December 31, 2001. These assets are not reflected in our balance sheet as of and after December 31, 2001. With respect to the acquisition in 2003, except for the income statement data for the year ended December 31, 2003 and 2004, the income statement data for the other periods presented below include the results of the assets retained by China Telecom Group. The results of such assets are not reflected in our income statement for periods beginning after December 31, 2002. Except for the balance sheet data as of December 31, 2002, 2003 and ~~2003,~~2004, the balance sheet data as of other dates presented below include data related to the assets retained by China Telecom ~~Group.~~Group in relation to the acquisition in 2003. These assets are not reflected in our balance sheet as of and after December 31, 2002.

As of or for the year ended December 31,
1999 2000 2001 2002 2003 2003
RMB RMB RMB RMB RMB US$

(in millions, except share numbers and per share and per ADS data)
Income Statement Data:
IFRS
Operating revenue 92,107 101,433 100,497 109,564 118,451 14,311
Operating expenses (60,046 ) (72,170 ) (77,881 ) (83,567 ) (86,003 ) (10,391 )
Operating income 32,061 29,263 22,616 25,997 32,448 3,920
Income before income tax and minority interests⁽²⁾ 31,167 29,015 10,133 9,263 30,675 3,706
Income tax (6,409 ) (5,596 ) (161 ) 582 (5,933 ) (717 )
Net income 24,657 23,344 9,986 9,773 24,686 2,983
Basic earnings per share⁽¹⁾ 0.36 0.34 0.15 0.14 0.33 0.04
Basic earnings per ADS⁽¹⁾ 36.09 34.17 14.62 14.11 32.65 3.95
U.S. GAAP
Net income 24,657 23,344 17,888 18,545 22,006 2,659
Basic earnings per share⁽¹⁾ 0.36 0.34 0.26 0.27 0.29 0.04
Basic earnings per ADS⁽¹⁾ 36.09 34.17 26.18 26.78 29.10 3.52
Balance Sheet Data:
IFRS
Cash and cash equivalents 22,055 18,358 7,697 18,685 10,119 1,222
Accounts receivable, net 10,673 10,890 8,536 9,058 10,187 1,231
Property, plant and equipment, net⁽²⁾ 180,807 202,659 221,333 220,761 235,211 28,418
Total assets⁽²⁾ 276,544 301,250 299,088 303,611 305,605 36,923
Short-term debt⁽³⁾ 19,600 23,454 33,914 40,336 40,097 4,845
Accounts payable 16,424 22,218 24,071 21,728 20,129 2,432
Long-term obligations 25,366 22,814 22,160 17,676 49,684 6,003
Deferred revenues (excluding current portion) 46,771 43,879 38,465 31,735 25,389 3,068
Total liabilities 156,494 166,101 162,944 149,577 173,064 20,910
Shareholders’ equity⁽²⁾ 119,128 134,158 135,156 152,848 131,272 15,860
U.S. GAAP
Property, plant and equipment, net 180,807 202,659 229,109 240,870 251,320 30,365
Total assets 276,544 301,250 306,864 323,720 321,714 38,870
Shareholders’ equity 119,128 134,158 140,274 166,229 141,973 17,153
Cash Flow Data:
IFRS
Cash flows from operating activities 50,483 49,641 46,648 52,158 46,884 5,665
Net cash used in investing activities⁽⁴⁾ (41,505 ) (49,832 ) (55,844 ) (47,060 ) (40,781 ) (4,927 )
Capital expenditures⁽⁴⁾ (41,999 ) (48,507 ) (54,625 ) (45,807 ) (41,825 ) (5,053 )
Net cash (used in) / from financing activities (4,298 ) (3,506 ) (1,465 ) 5,890 (14,669 ) (1,773 )

~~Back~~ With respect to ~~Contents~~the acquisition in 2004, except for the income statement data for the year ended December 31, 2004, the income statement data for the other periods presented below include the results of the assets retained by China Telecom Group. The results of such

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assets are not reflected in our income statement for periods beginning after December 31, 2003. Except for the balance sheet data as of December 31, 2003 and 2004, the balance sheet data as of other dates presented below include data related to the assets retained by China Telecom Group in relation to the acquisition in 2004. These assets are not reflected in our balance sheet as of and after December 31, 2003.


	As of or for the year ended December 31,
	2000 RMB		2001 RMB		2002 RMB		2003 RMB		2004 RMB		2004 US$
	(in millions, except share numbers and per share and per ADS data)
Income Statement Data:
IFRS
Operating revenue	129,665		130,081		140,906		151,553		161,212		19,478
Operating expenses	(101,085	)	(109,367	)	(115,798	)	(118,701	)	(121,382	)	(14,665	)
Operating income	28,580		20,714		25,108		32,852		39,830		4,813
Income before income tax and minority interests⁽²⁾	27,432		6,839		6,435		14,407		33,263		4,019
Income tax	(4,556	)	1,499		1,856		(469	)	(5,187	)	(627	)
Net income	22,801		8,352		8,219		13,882		28,023		3,386
Basic earnings per share⁽¹⁾	0.33		0.12		0.12		0.18		0.36		0.04
Basic earnings per ADS⁽¹⁾	33.38		12.23		11.87		18.36		35.54		4.29
U.S. GAAP
Net income	22,801		16,254		16,991		21,452		25,715		3,107
Basic earnings per share⁽¹⁾	0.33		0.24		0.25		0.28		0.33		0.04
Basic earnings per ADS⁽¹⁾	33.38		23.79		24.54		28.37		32.62		3.94
Balance Sheet Data:
IFRS
Cash and cash equivalents	25,159		15,274		22,743		12,721		13,465		1,627
Accounts receivable, net	14,324		11,074		11,605		12,951		13,921		1,682
Property, plant and equipment, net⁽²⁾	285,587		312,326		311,241		309,896		320,179		38,685
Total assets⁽²⁾	420,199		423,434		423,701		403,942		412,570		49,848
Short-term debt⁽³⁾	31,376		44,897		53,196		56,243		65,976		7,971
Accounts payable	37,283		38,756		34,859		35,629		33,658		4,067
Long-term obligations	45,924		46,469		39,052		68,675		72,523		8,762
Deferred revenues (excluding current portion)	55,990		49,308		40,894		32,744		25,182		3,043
Total liabilities	253,223		252,974		235,490		251,879		251,951		30,441
Shareholders’ equity⁽²⁾	165,985		169,472		187,025		150,794		159,206		19,236
U.S. GAAP
Property, plant and equipment, net	285,587		320,102		331,350		339,300		342,718		41,409
Total assets	420,199		431,210		443,810		433,346		435,109		52,572
Shareholders’ equity	165,985		174,590		200,406		170,641		176,134		21,281
Cash Flow Data:
IFRS
Cash flows from operating activities	59,341		57,083		62,357		58,392		66,078		7,984
Net cash used in investing activities⁽⁴⁾	(71,030	)	(75,073	)	(62,578	)	(57,094	)	(56,353	)	(6,809	)
Capital expenditures⁽⁴⁾	(68,901	)	(73,976	)	(61,437	)	(57,692	)	(56,446	)	(6,820	)
Net cash from / (used in) financing activities	7,634		8,105		7,690		(11,320	)	(8,981	)	(1,085	)


(1)	The basic earnings per share ~~has~~have been calculated based on the net income of ~~RMB24,657~~RMB22,801 million, ~~RMB23,344~~RMB8,352 million, ~~RMB9,986~~RMB8,219 million, ~~RMB9,773~~RMB13,882 million and ~~RMB24,686~~RMB28,023 million, respectively, for the years ended December 31, ~~1999,~~ 2000, 2001, 2002, 2003 and ~~2003,~~2004, and the weighted average number of shares in issue during the relevant year of 68,317,270,803, 68,317,270,803, ~~68,317,270,803,~~ 69,241,674,942, 75,614,186,503 and ~~75,614,186,503~~78,839,968,917 shares, respectively, as if the 68,317,270,803 shares issued and outstanding upon our formation on September 10, 2002 had been outstanding for all periods presented. Basic earnings per ADS ~~has~~have been computed as if all of our issued and outstanding shares, including domestic shares and H shares, are represented by ADSs during each of the years presented. Each ADS represents 100 H shares.

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(2)

Includes the effect of the revaluation of property, plant and equipment as of December 31, 2001 in connection with our restructuring and as of December 31, 2002 and as of December 31, 2003 in connection with our ~~acquisition.~~acquisitions. It also includes the effect of the Company’s revaluation of property, plant and equipment as of December 31, 2004 which was carried out in accordance with the Company’s accounting policies under IFRS. See Note 7 to our audited financial statements.

(3)	Excludes current portion of long-term debt.

(4)	Capital expenditures are part of and not an addition to net cash used in investing activities.

~~We declared dividends for~~

Pursuant to the shareholders’ approval at the annual general meeting held on May 3, 2004, a final dividend of RMB0.069083 equivalent to HK$0.065 per share totaling RMB5,224 million in respect of the year ended December 31, ~~2002~~2003 was declared and was paid on ~~the basis of HK$0.065 per share, pro-rated based on the number of days that our shares had been listed during 2002.~~May 20, 2004. Holders of our ADRs received a dividend of ~~USD0.008~~USD$0.8333 per share in ~~2002, pro-rated based on the number of days that our shares had been listed during 2002,~~2004 based on the exchange rate of HK$~~7.8010=~~7.80=US$1.00.

Pursuant to a resolution passed at the directors’ meeting on March 31, 2005, a final dividend of equivalent to HK$0.065 per share totaling approximately RMB5,576 million for the year ended December 31, 2004 was proposed for shareholders’ approval at the annual general meeting. The dividend has not been provided for in the consolidated financial statements for the year ended December 31, 2004.

Exchange Rate Information

Our financial statements are expressed in Renminbi. Solely for the convenience of the reader, this annual report contains translations of certain Renminbi and Hong Kong dollar amounts into U.S. dollars and vice versa at ~~RMB8.2767~~RMB8.2765 = US$1.00 and HK$~~7.7640~~7.7723 = US$1.00, the noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on December 31, ~~2003.~~2004. These translations should not be construed as representations that the Renminbi or Hong Kong dollar amounts could have been or could be converted into U.S. dollars at such rates or at all.

The noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York were ~~RMB8.2771~~RMB8.2765 = US$1.00 and HK$~~7.7963~~7.7861 = US$1.00, respectively, on ~~March 30, 2004.~~May 23, 2005. The following table sets forth the high and low noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each month during the previous six months:

Noon Buying Rate

RMB per US$1.00 HK$ per US$1.00

High Low High Low

September 2003 8.2775 8.2768 September 2003 7.7999 7.7444
October 2003 8.2776 8.2765 October 2003 7.7684 7.7085
November 2003 8.2772 8.2766 November 2003 7.7692 7.7475
December 2003 8.2772 8.2765 December 2003 7.7670 7.7628
January 2004 8.2772 8.2767 January 2004 7.7775 7.7632
February 2004 8.2773 8.2769 February 2004 7.7845 7.7686
March 2004 (as of March 30) 8.2774 8.2767 March 2004 (as of March 30) 7.7980 7.7842

Noon Buying Rate


	RMB per US$1.00			HK$ per US$1.00
	High	Low		High	Low
November 2004	8.2765	8.2764	November 2004	7.7815	7.7718
December 2004	8.2767	8.2765	December 2004	7.7821	7.7698
January 2005	8.2765	8.2765	January 2005	7.7994	7.7775
February 2005	8.2765	8.2765	February 2005	7.7999	7.7984
March 2005	8.2765	8.2765	March 2005	7.7998	7.7987
April 2005	8.2765	8.2765	April 2005	7.7995	7.7946
May 2005 (as of May 23)	8.2765	8.2765	May 2005 (as of May 23)	7.7995	7.7861

The following table sets forth the average noon buying rates between Renminbi and U.S. dollars and between Hong Kong dollars and U.S. dollars for each of ~~1999,~~ 2000, 2001, 2002, 2003 and ~~2003,~~2004, calculated by averaging the noon buying rates on the last day of each month during each of the relevant years.

Average Noon Buying Rate

RMB per US$ 1.00 HK$ per US$1.00

1999 8.2785 7.7599
2000 8.2784 7.7936
2001 8.2772 7.7996
2002 8.2772 7.7996
2003 8.2771 7.7864

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Average Noon Buying Rate


	RMB per US$1.00	HK$ per US$1.00
2000	8.2784	7.7936
2001	8.2772	7.7997
2002	8.2772	7.7996
2003	8.2771	7.7864
2004	8.2768	7.7899

B. Capitalization and Indebtedness

Not applicable.

~~Back to Contents~~

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Risks Relating to Our ~~Business~~Businesses

We face increasing competition, which may adversely affect our business growth and results of operations.

The telecommunications industry in China is rapidly evolving. Until the mid-1990s, we were the sole provider of wireline telecommunications services in our service regions which included Shanghai Municipality, Guangdong Province, Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality and, ~~Sichuan Province. As~~as a result, we had a dominant market position in our service regions. We began to operate in a competitive market as the Chinese government started to implement a number of measures to restructure the telecommunications industry and encourage ~~fair and orderly~~ competition in the industry in the mid-1990s. We face increasing competition from other telecommunications service providers in China. We expect our competitors to expand further their network coverage and increase their sales and marketing efforts in our service regions. See “Item 4. Information on the Company — B. Business Overview — Competition.” In particular:

we face indirect competition in our local wireline telephone services from China’s two mobile telephone service providers, China Mobile Communications Corporation, or China Mobile, and China United Telecommunications Corporation, or China Unicom, and have begun to face direct competition from China Railway Communication Co., Ltd., or China Railcom, and China Network Communications Group Corporation, or China Netcom Group;

	•	we face indirect competition in our local wireline telephone services from China’s two mobile telephone service providers, China Mobile Communications Corporation, or China Mobile, and China United Telecommunications Corporation, or China Unicom, and have begun to face direct competition from China Railway Communication Co., Ltd., or China Railcom, and China Network Communications Group Corporation, or China Netcom Group;

	•	we face increasingly intense competition in our long distance telephone services from other providers of long distance services using public switched telephone networks, including China Unicom, China Railcom and China Netcom Group, and other providers of long distance services using the voice-over-Internet-protocol, or VoIP, technology, including China Mobile, China Unicom, China Netcom Group and China Railcom;

	•	~~we face increasing competition in our Internet and managed data services from many competitors, including, primarily, China Unicom, China Netcom Group, China Mobile and China Railcom; and~~

	•	~~we may face additional competition from new entrants or providers of new telecommunications services, such as telephone and Internet services offered over cable TV networks.~~

we face increasingly intense competition in our long distance telephone services from other providers of long distance services using public switched telephone networks, including China Unicom, China Railcom and China Netcom Group, and other providers of long distance services using the voice-over-Internet-protocol, or VoIP, technology, including China Mobile, China Unicom, China Netcom Group and China Railcom;

we face increasing competition in our Internet and managed data services from many competitors, including, primarily, China Unicom, China Netcom Group, China Mobile and China Railcom; and

we may face additional competition from new entrants or providers of new telecommunications services, such as telephone and Internet services offered over cable TV networks.

Moreover, as a result of China’s accession to the World Trade Organization, or the WTO, and the adoption of the Regulations on the Administration of Foreign-Invested Telecommunications Enterprises in January 2002, which implement China’s ~~commitment under its~~commitments to the WTO, ~~Accession Protocol,~~ the Chinese government ~~will~~has agreed to gradually ~~open up~~liberalize the various segments and regions of the telecommunications market in China to foreign operators. See “Item 4. Information on the Company — B. Business Overview — Regulatory and Related Matters — Licensing.” ~~Foreign operators may have greater financial, managerial~~Both the percentage of ownership of Sino-foreign joint ventures offering telecommunications services in China and ~~technical resources~~the regions where those

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joint ventures are permitted to offer telecommunications services might be increased over the next several years. These and ~~more expertise in network management and sales and marketing. Furthermore, advances in technology, as well as changes in~~other potential new entrants into the ~~regulatory environment,~~Chinese telecommunications market may further ~~intensify competition.~~increase the competitive pressure we face.

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Our ability to compete effectively may be constrained by a number of factors. For example, under the Chinese government’s policy of promoting ~~fair and orderly~~ competition in the telecommunications industry, certain competitors of ours, such as China Unicom and China Railcom, continue to enjoy certain preferential treatment from the Chinese government in tariff setting. They may set their respective tariffs for long distance services using public switched telephone networks and leased line services at levels below the tariffs of our company with the annual approval of the regulatory authorities. This preferential treatment is not available to us. As a result, our competitors who enjoy this preferential treatment may be able to provide their services at prices that are more competitive than ours.

In addition, we are not yet permitted to provide mobile communications services. We, through China Telecom Group, are, however, actively seeking the issuance of a license for mobile communications services in the PRC. We can provide no assurances, however, as to whether or when we may be able to receive any benefit of any license for mobile communications in China. Moreover, if we receive the necessary license and commence providing mobile communications services, we will compete with other telecommunications providers not only in our traditional wireline services, but also in mobile telecommunications services.

As a result, our customers may choose to use other providers’ services. Increased competition from those providers may force us to lower our tariffs to the extent permitted under relevant laws and regulations, may reduce or reverse the growth of our customer base and may reduce usage of our networks. Any of these developments could materially adversely affect our business growth and results of operations.

We will continue to be controlled by China Telecom Group, which could cause us to take actions that may conflict with the best interests of our other shareholders.

China Telecom Group, a wholly state-owned enterprise, currently owns approximately ~~77.78%~~72.09% of our outstanding shares. Accordingly, subject to our articles of association and applicable laws and regulations, China Telecom Group, as our controlling shareholder, will continue to be able to exercise significant influence over our management and policies by:

controlling the election of our directors and, in turn, indirectly controlling the selection of our senior management;


	•	~~determining the timing and amount of our dividend payments;~~


	•	~~approving our annual budgets;~~


	•	~~deciding on increases or decreases in our share capital;~~


	•	~~determining issuance of new securities;~~


	•	~~approving mergers and acquisitions; and~~


	•	~~amending our articles of association.~~

determining the timing and amount of our dividend payments;

approving our annual budgets;

deciding on increases or decreases in our share capital;

determining issuance of new securities;

approving mergers and acquisitions; and

amending our articles of association.

The interests of China Telecom Group as our controlling shareholder could conflict with our interests or the interests of our other shareholders. As a result, China Telecom Group may take actions with respect to our ~~business~~businesses that may not be in our or our other shareholders’ best interests.

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The letter of undertakings provided to us by China Telecom Group contains vague terms that may not be implemented as we expect.

~~Back to Contents~~

China Telecom Group has provided us a letter of undertakings, under which it has undertaken to support us in our existing operations and future development in the following specific areas:

to treat us equally with any other operators of wireline telephone, Internet and managed data, leased line and other related telecommunications services that are controlled by China Telecom Group;

	•	~~to treat us equally with any other operators of wireline telephone, Internet and managed data, leased line and other related telecommunications services that are controlled by China Telecom Group;~~

	•	~~to give us the right to provide additional telecommunications services in our service regions that fall within the business scope of China Telecom Group; and~~

	•	~~to give us the preferential right to acquire China Telecom Group’s interest in companies or other entities that provide telecommunications services.~~

to give us the right to provide additional telecommunications services in our service regions that fall within the business scope of China Telecom Group; and

to give us the preferential right to acquire China Telecom Group’s interest in companies or other entities that provide telecommunications services.

The current terms of the letter of undertakings do not obligate China Telecom Group to provide any financial support to us. The letter of undertakings may not be implemented as we expect due to the vagueness of its terms. Other than the letter of undertakings, we have not entered into any agreement with China Telecom Group to provide for potential allocation of business opportunities between China Telecom Group and us outside our service regions.

We face uncertainties associated with the process to implement our strategy to transform from a traditional wireline network operator into a modern integrated information services provider.

Our business strategy will focus on transforming from a traditional wireline network operator into a modern integrated information services provider. As part of the strategy, we plan to continue pursuing the operation of mobile business proactively and seek to work with IT service providers to offer differentiated total solutions to enterprise customers. We will exploit the development potential of rural telephony, value-added services, leased line and other services.

However, we cannot assure you that the implementation of this new business strategy will not be delayed, or that the strategy will ever be successfully implemented. We cannot assure you that we will be able to obtain the necessary consents, licenses and approvals from national and local governments to conduct new services. We cannot assure you that we can develop sufficient technology to support our new businesses. Even if our initiatives of transformation can be implemented, we cannot assure you that these initiatives will allow us to increase revenues from our existing service offerings or from new communications services. The success of new service development depends on many factors, including, but not limited to, receipt of necessary government approval, proper identification of customer needs, successful development of technology, the ability to manage cost and expenses, timely completion and introduction of new services, differentiation from offerings of competitors and market acceptance. The uncertainties associated with these factors could materially adversely affect our future business and operation.

We depend on China Telecom Group and its other subsidiaries to provide certain services and facilities for which we currently have limited alternative sources of supply.

In addition to being our controlling shareholder, China Telecom Group, by itself and through its other subsidiaries, also provides us with services and facilities necessary for our business activities, including, but not limited to:

use of international gateway facilities;

	•	~~use of international gateway facilities;~~

	•	~~provision of services in areas outside our service regions necessary to enable us to provide end-to-end services to our customers;~~

	•	~~use of nationwide inter-provincial optic fibers; and~~

	•	~~lease of properties.~~

provision of services in areas outside our service regions necessary to enable us to provide end-to-end services to our customers;

use of nationwide inter-provincial optic fibers; and

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lease of properties.

The interests of China Telecom Group and its other subsidiaries as providers of these services and facilities may conflict with our interests. We currently have limited alternative sources of supply for these services. Therefore, we have limited leverage in negotiating with China Telecom Group and its other subsidiaries over the terms for the provision of these services. See “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions” for a detailed description of the services provided by China Telecom Group and its other subsidiaries.

Since our services require interconnection with networks of other operators, disruption in interconnections with those networks could have a material adverse effect on our business and results of operations.

Under the relevant telecommunications regulations, telecommunications operators are required to interconnect with networks of other operators. We have entered into interconnection arrangements with other telecommunications operators. Any disruption of our interconnection with the networks of those operators could have a material adverse effect on our business and results of operations. In particular, as a result of the restructuring of China’s wireline telecommunications sector, most wireline telecommunications assets except for the nationwide inter-provincial optic fibers, including the last-mile access network, formerly owned by China Telecom Group in ten northern provinces in China were allocated to China Netcom Group. As we and China Telecom Group have limited local access facilities in those ten provinces, we will need to interconnect, indirectly through China Telecom Group, with China Netcom Group in order to provide end-to-end services to our customers with operations in the ten northern provinces. Any interruption in our interconnection with China Netcom Group could have a material adverse effect on our business and results of operations.

~~Back~~

We may be unable to ~~Contents~~obtain sufficient financing to fund our capital requirements, which could limit our growth potential and future prospects.

We believe that cash from operations, together with any necessary borrowings, will provide sufficient financial resources to meet our projected capital and other expenditure requirements. We may require additional funds to the extent we have underestimated our capital requirements or overestimated our future cash from operations. In addition, a significant feature of our business strategy is to explore opportunities to transform from a traditional network operator into a modern integrated information services provider, which may require additional capital resources. The cost of implementing new technologies, upgrading our networks or expanding capacity may also be significant. In particular, in order for us to effectively respond to technological changes and more intensive competition, we may be required to make substantial capital expenditures in the future.

Financing may not be available to us on acceptable terms or at all. In addition, any future issuance of equity securities, including securities convertible or exchangeable into or that represent the right to receive equity securities, may require approval from the relevant government authorities. Our ability to obtain additional financing will depend on a number of factors, including:

our future financial condition, results of operations and cash flows;

general market conditions for financing activities by telecommunications companies; and

economic, political and other conditions in the markets where we operate.

We cannot assure you that we can obtain sufficient financing at commercially reasonable terms or at all. If adequate capital is not available, our growth potential and future prospects could be adversely affected.

If we are not able to respond successfully to technological or industry developments, our business may be adversely affected.

This section describes the material United States federal income tax consequences of the acquisition, ownership and disposition of H shares or ADSs. It applies to you only if you are a U.S. holder, as described below, and you hold your H shares or ADSs as capital assets for United States federal income tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:

a bank;

	•	~~a bank;~~

	•	~~a dealer in securities or currencies;~~

	•	~~a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;~~

	•	~~a tax-exempt organization;~~

	•	~~an insurance company;~~

	•	~~a person liable for alternative minimum tax;~~

	•	~~a person that actually or constructively owns 10% or more of our voting stock;~~

	•	~~a person that holds H shares or ADSs that are a hedge or that are hedged against currency risks or as part of a straddle or a conversion transaction; or~~

a dealer in securities or currencies;

a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;

a tax-exempt organization;

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an insurance company;

a person liable for alternative minimum tax;

a person that actually or constructively owns 10% or more of our voting stock;

a person that holds H shares or ADSs that are a hedge or that are hedged against currency risks or as part of a straddle or a conversion transaction; or

a U.S. holder (as defined below) whose functional currency is not the U.S. dollar.

This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.

You are a U.S. holder if you are a beneficial owner of H shares or ADSs and you are:

a citizen or resident of the United States;

	•	~~a citizen or resident of the United States;~~

	•	~~a domestic corporation;~~

	•	~~an estate whose income is subject to United States federal income tax regardless of its source; or~~

a domestic corporation;

an estate whose income is subject to United States federal income tax regardless of its source; or

a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.

~~Back to Contents~~

~~You are a “non-U.S. holder” if you are beneficial owner of H shares or ADSs and are, for United States federal income tax purposes:~~

	•	~~a nonresident alien individual;~~

	•	~~a foreign corporation; or~~

~~a foreign partnership.~~

You should consult your own tax advisor regarding the United States federal, state and local tax consequences of owning and disposing of H shares and ADSs in your particular circumstances.

This discussion addresses only United States federal income taxation.

In general, and taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of H shares represented by those ADSs. Exchanges of H shares for ADSs, and ADSs for H shares, generally will not be subject to United States federal income tax.

Taxation of Dividends

~~U.S. Holders.~~

Under the United States federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below, if you are a U.S. holder, you must include in your gross income the gross amount of any dividend paid by us out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes). If you are a noncorporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2009 that constitute qualified dividend income will be taxable to you at a maximum rate of 15% provided that you hold H shares or ADSs for more than 60 days during the ~~120-day~~121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. On February 19, 2004, the IRS announced that it will permit taxpayers to apply a proposed legislative change to the holding period requirement described in the preceding sentence as if such change were already effective. This legislative “technical correction” would change the minimum required holding period, retroactive to January 1, 2003, to more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Dividends we pay with respect to H shares or ADSs generally will be qualified dividend income. You must include any Chinese tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. You must include the dividend in income when you, in the case of H shares, or the depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations.

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The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Hong Kong Dollar payments made, determined at the Hong Kong dollar/U.S. dollar spot rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss. The gain or loss generally will be income from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the H shares or ADSs and thereafter as capital gain.

Dividends will be income from sources outside the United States, but dividends paid in taxable years beginning before January 1, 2007 generally will be passive income or financial services income, and dividends paid in taxable years beginning after December 31, 2006, will, depending on your circumstances, be passive income or general income, which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.

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The rules relating to foreign tax credits are extremely complex and the availability of a foreign tax credit depends on numerous factors. You should consult with your own tax advisor concerning the application of the U.S. foreign tax credit rules to your particular situation.

~~Non-U.S. Holders.~~ If you are a non-U.S. holder, dividends paid to you in respect of H shares or ADSs will not be subject to United States federal income tax unless the dividends are “effectively connected” with your conduct of a trade or business within the United States and the dividends are attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis. In such cases you generally will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. holder, “effectively connected” dividends may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

Taxation of Capital Gains

~~U.S. Holders.~~

Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your H shares or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your H shares or ADSs. Capital gain of a noncorporate U.S. holder that is ~~generally eligible for~~recognized before January 1, 2009 is generlly taxed at a ~~reduced~~maximum rate of ~~taxation.~~15% where the holder has a holding period greater than one year.. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Your ability to deduct capital losses is subject to limitations.

Hong Kong Stamp Duty

Any Hong Kong stamp duty that you pay will not be a creditable tax for United States federal income tax purposes, but you may be able to deduct such stamp duty subject to limitations under the Code.

~~Non-U.S. Holders.~~ ~~If you are a non-U.S. holder, you will not be subject to United States federal income tax on gain recognized on the sale or other disposition of your H shares or ADSs unless:~~

	•	the gain is “effectively connected” with your conduct of a trade or business in the United States and the gain is attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis, or

	•	~~you are an individual, you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist.~~

If you are a corporate non-U.S. holder, “effectively connected” gains that you recognize may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

PFIC Rules. We believe that weH shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change.

In If we were to be treated as a PFIC, unless a U.S. holder elects to be taxed annually on a mark-to-market basis with respect to the H shares or ADSs, gain realized on the sale or other disposition of your H shares or ADSs would in general not be treated as capital gain. Instead, if you are a U.S. holder, ~~we will~~you would be ~~a PFIC with respect to you if for any taxable year in which you held your H shares or ADSs:~~

	•	~~at least 75% of our gross income for the taxable year is passive income; or~~

	•	~~at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.~~

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Passive income generally includes dividends, interest, royalties, and rents (not including certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns directly or indirectly at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

~~If we are~~ treated as ~~a PFIC,~~if you had realized such gain and ~~you are a U.S. holder that does not make a mark-to-market election, as described below, you will be subject to special rules with respect to:~~

	•	~~any gain you realize on the sale or other disposition of your H shares or ADSs; and~~

	•	any excess distribution that we make to you (generally, any distribution to you during a single taxable year that is greater than 125% of the average annual distributions received by you in respect of the H shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the H shares or ADSs).

~~Under these rules:~~

	•	~~the gain or excess distribution will be allocated~~certain “excess distributions” ratably over your holding period for the ~~H shares or ADSs;~~

	•	~~the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income;~~

	•	~~the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and~~

	•	~~the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.~~

~~Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.~~

~~If you own~~ H shares or ADSs and would be taxed at the highest tax rate in ~~a PFIC that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject~~effect for each such year to which the ~~PFIC rules described above. Instead,~~gain was allocated, together with an interest charge in ~~general, you will include as ordinary income each year the excess, if any,~~respect of the ~~fair market value of~~tax attributable to each such year. With certain exceptions, your H shares or ADSs will be treated as stock in a PFIC if we were a PFIC at ~~the end of the taxable year over~~any time during your ~~adjusted basis~~holding period in your H shares or ADSs. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your H shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the H shares or ADSs will be adjusted to reflect any such income or loss amounts. In addition, notwithstanding any election you make with regard to H shares or ADSs, dividendsDividends that you receive from us will not ~~constitute~~be eligible for the special tax rates applicable to qualified dividend income ~~to you~~ if we are treated as a PFIC with respect to you either in the taxable year of the distribution or the preceding taxable year. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for United States federal income tax purposes) in your gross income, and ityear, but instead will be ~~subject to tax~~taxable at rates applicable to ordinary income.

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~~If you own H shares or ADSs during any year that we are a PFIC, you must file Internal Revenue Service Form 8621.~~

F. Dividends and Paying Agents.

Not applicable.

G. Statement by Experts.

Not applicable.

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H. Documents on Display

You may read and copy documents referred to in this annual report on Form 20-F that have been filed with the U.S. Securities and Exchange Commission 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 and their copy charges. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC.

The SEC allows us to “incorporate by reference” the information we file with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report on Form 20-F.

I. Subsidiary Information

Not applicable.

J. Summary of Significant Differences between the Corporate Governance Practices of the Company and Those Followed by Domestic Companies under NYSE Listing Standards

As a company incorporated in the PRC and listed on the Stock Exchange of Hong Kong Limited, or the HKSE, and the New York Stock Exchange, or the NYSE, our company, as a foreign private issuer, is not required to comply with all of the corporate governance rules of Section 303A of the NYSE Listed Company Manual, but should disclose the significant ways in which our corporate governance practices differ from those followed by domestic companies under NYSE listing standards.

Under the NYSE corporate governance rule 303A.01, a listed company must have a majority of independent directors on its board of directors. A company of which more than 50% of the voting power is held by an individual, a group or another company is not required to comply with this requirement. Because approximately 72% of our voting power is controlled by China Telecom Group, we, as a controlled company, would not be required to comply with the majority of independent directors requirement.

In addition, under currently applicable PRC or Hong Kong laws and regulations, we are not required to have a board with a majority of independent directors. As a company listed on the HKSE, we are subject to the requirement of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, or the Hong Kong Listing Rules, that at least three members of our board of directors be independent as determined thereunder. We currently have three independent directors out of a total of fifteen directors, who satisfy both the requirements regarding “independence” of the Hong Kong Listing Rules and Section 303A.02 of the NYSE Listed Company Manual.

Currently, we do not have a nomination/corporate governance committee and are not required to do so under currently applicable PRC or Hong Kong laws and regulations.

All members of our audit committee have extensive management experience. However, they do not possess direct experience or expertise in respect of the reconciliation of financial statements with U.S. GAAP and the evaluation of reports filed with the U.S. Securities and Exchange Commission, or the SEC, by SEC-reporting issuers. Our audit committee is in the process of considering appointing, from time to time, an external financial expert as a consultant.

We have not adopted a separate set of corporate governance guidelines and are not required to do so under currently applicable PRC or Hong Kong laws and regulations. However, we are in compliance with the Code on Corporate Governance Practices promulgated by the HKSE.

Item 11. Quantitative and Qualitative Disclosures about Market Risk.

Our primary market risk exposures are fluctuations in exchange rates and interest rates.

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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. Although the Renminbi to United States dollar exchange rate has been relatively stable since 1994, we cannot predict nor give any assurance of its future stability. Fluctuations in exchange rates may adversely affect the value, translated or converted into United States dollars or Hong Kong dollars, of our net assets, earnings and any declared dividends. We cannot give any assurance that any future movements in the exchange rate of the Renminbi against the United States dollar or other foreign currencies will not adversely affect our results of operations and financial condition. See “Item 3. Key Information — D. Risk Factors — Risks Relating to the People’s Republic of China — Government control of currency conversion may adversely affect our operations and financial results; — Fluctuation of the Renminbi could materially affect our financial condition and results of operations.”

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The following tables provide information regarding our financial instruments that are sensitive to foreign exchange rates as of December 31, ~~2002~~2003 and ~~2003,~~2004, respectively. For debt obligations, the tables present principal cash flows and related weighted average interest rates by expected maturity dates.

As of December 31, 2004:


	Expected Maturity
	2005		2006		2007		2008		2009		Thereafter		Total	Fair Value
	(RMB equivalent in millions, except interest rates)
Assets:
Cash and cash equivalents
United States dollars	105		—		—		—		—		—		105	105
Japanese yen	1		—		—		—		—		—		1	1
Time deposits			—		—		—		—		—
United States dollars	221		—		—		—		—		—		221	221
Liabilities:
Debts in Japanese yen
Fixed rate	333		552		674		355		104		1,164		3,182	3,318
Average interest rate	1.2	%	1.2	%	1.7	%	1.2	%	2.8	%	2.7	%
Debts in United States dollars
Fixed rate	584		363		121		70		67		999		2,204	2,133
Average interest rate	3.6	%	2.8	%	2.3	%	2.1	%	2.0	%	1.5	%
Variable rate	152		368		130		29		—		—		679	655
Average interest rate⁽¹⁾	1.2	%	2.7	%	1.4	%	0.5	%	—		—
Debts in Euro
Fixed rate	66		42		42		42		42		819		1,053	1,006
Average interest rate	4.5	%	2.6	%	2.6	%	2.6	%	2.6	%	1.9	%
Debts in other currencies
Variable rate	3		6		6		6		5		44		70	68
Average interest rate⁽¹⁾	2.1	%	2.1	%	2.1	%	2.1	%	2.1	%	3.0	%

(1)	The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2004.

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As of December 31, 2003:

Expected Maturity
2004 2005 2006 2007 2008 Thereafter Total Fair Value
(RMB equivalent in millions, except interest rates)
Assets:
Cash and cash equivalents
United States dollars 223 — — — — — 223 223
Hong Kong dollars 1 — — — — — 1 1
Time deposits
United States dollars 227 — — — — — 227 227
Hong Kong dollars 21 — — — — — 21 21

Liabilities:
Debts in Japanese yen
Fixed rate 340 343 343 343 343 1,120 2,832 2,955
Average interest rate 1.2 % 1.2 % 1.2 % 1.2 % 1.2 % 2.7 %
Debts in United States dollars
Fixed rate 431 281 216 39 25 607 1,599 1,615
Average interest rate 4.2 % 4.2 % 3.5 % 3.6 % 3.1 % 2.1 %
Variable rate 63 153 151 58 29 — 454 462
Average interest rate⁽¹⁾ 1.9 % 2.9 % 2.9 % 1.8 % 1.8 % —
Debts in Euro
Fixed rate 34 24 23 19 19 385 504 501
Average interest rate 3.2 % 3.4 % 3.6 % 2.7 % 2.4 % 1.0 %
Debts in other currencies
Variable rate 1 1 1 1 1 — 5 5
Average interest rate⁽¹⁾ 2.1 % 2.1 % 2.1 % 2.1 % 2.1 % —


	Expected Maturity
	2004		2005		2006		2007		2008		Thereafter		Total	Fair Value
	(RMB equivalent in millions, except interest rates)
Assets:
Cash and cash equivalents
United States dollars	266		—		—		—		—		—		266	266
Hong Kong dollars	1		—		—		—		—		—		1	1
Time deposits
United States dollars	227		—		—		—		—		—		227	227
Hong Kong dollars	21		—		—		—		—		—		21	21
Liabilities:
Debts in Japanese yen
Fixed rate	429		432		418		384		386		2,131		4,180	4,413
Average interest rate	1.2	%	1.2	%	1.3	%	1.3	%	1.4	%	2.5	%
Debts in United States dollars
Fixed rate	855		694		442		130		63		1,102		3,286	3,320
Average interest rate	3.9	%	4.1	%	3.5	%	3.6	%	3.5	%	2.7	%
Variable rate	63		162		347		58		29		—		659	660
Average interest rate⁽¹⁾	1.9	%	3.0	%	2.6	%	1.8	%	1.8	%	—
Debts in Euro
Fixed rate	59		135		43		40		40		722		1,039	1,040
Average interest rate	3.9	%	3.9	%	3.6	%	3.2	%	3.1	%	2.3	%
Debts in other currencies
Variable rate	1		7		7		7		5		46		73	74
Average interest rate⁽¹⁾	2.1	%	3.2	%	2.9	%	3.2	%	2.8	%	3.0	%


(1)	The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2003.

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~~As of December 31, 2002:~~

Expected Maturity
2003 2004 2005 2006 2007 Thereafter Total Fair Value
(RMB equivalent in millions, except interest rates)
Assets:
Cash and cash equivalents
United States dollars 3,869 — — — — — 3,869 3,869
Hong Kong dollars 1,043 — — — — — 1,043 1,043
Time deposits
United States dollars 215 — — — — — 215 215

Liabilities:
Debts in Japanese yen
Fixed rate 170 170 170 170 170 1,988 2,838 3,049
Average interest rate 2.8 % 2.8 % 2.8 % 2.8 % 2.8 % 2.8 %
Debts in United States dollars
Fixed rate 902 605 457 183 84 649 2,880 2,981
Average interest rate 4.3 % 4.6 % 4.5 % 4.4 % 4.1 % 3.6 %
Variable rate 50 48 25 25 28 265 441 460
Average interest rate⁽¹⁾ 3.7 % 3.9 % 4.7 % 4.7 % 4.7 % 4.7 %
Debts in Euro
Fixed rate 20 20 21 20 16 339 436 455
Average interest rate 4.1 % 4.1 % 3.8 % 3.6 % 2.6 % 1.2 %
Debts in other currencies
Variable rate 11 1 1 1 1 2 17 17
Average interest rate⁽¹⁾ 2.1 % 2.2 % 2.3 % 2.3 % 2.3 % 1.2 %


~~(1)~~	~~The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2002.~~

Interest Rate Risk

The People’s Bank of China has the sole authority in China to establish the official interest rates for Renminbi-denominated loans. Financial institutions in China set their effective interest rates within the range established by the People’s Bank of China. Interest rates and payment methods on loans denominated in foreign currencies are set by financial institutions based on interest rate changes in the international financial market, cost of funds, risk levels and other factors.

We are exposed to interest rate risk resulting from fluctuations in interest rates on our short-term and long-term debts. Increases in interest rates will increase the cost of new borrowing and the interest expense with respect to outstanding floating rate debt. As of December 31, ~~2002~~2003 and ~~2003,~~2004, our debt consisted of fixed and variable rate debt obligations with maturities from ~~2003~~2005 to ~~2038~~2040 and from 2004 to ~~2038,~~2040, respectively.

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The following tables present cash flows and related weighted average interest rates by expected maturity dates of our interest rate sensitive financial instruments as of December 31, ~~2002~~2003 and ~~2003,~~2004, respectively:

As of December 31, 2004:


	Expected Maturity
	2005		2006		2007		2008		2009		Thereafter		Total	Fair Value
	(RMB equivalent in millions, except interest rates)
Liabilities:
Debts in Renminbi
Fixed rate	8,604		6,591		6,350		—		—		5		21,550	21,410
Average interest rate	5.3	%	5.0	%	5.0	%	—		—		5.3	%
Variable rate	68,076		2,100		1,200		50		50		50,150		121,446	120,236
Average interest rate⁽¹⁾	4.4	%	5.1	%	5.0	%	5.2	%	5.2	%	5.2	%
Debts in Japanese yen
Fixed rate	333		552		674		355		104		1,164		3,182	3,318
Average interest rate	1.2	%	1.2	%	1.7	%	1.2	%	2.8	%	2.7	%
Debts in United States dollars
Fixed rate	584		363		121		70		67		999		2,204	2,133
Average interest rate	3.6	%	2.8	%	2.3	%	2.1	%	2.0	%	1.5	%
Variable rate	152		368		130		29		—		—		679	655
Average interest rate⁽¹⁾	1.2	%	2.7	%	1.4	%	0.5	%	—		—
Debts in Euro
Fixed rate	66		42		42		42		42		819		1,053	1,006
Average interest rate	4.5	%	2.6	%	2.6	%	2.6	%	2.6	%	1.9	%
Debts in other currencies
Variable rate	3		6		6		6		5		44		70	68
Average interest rate⁽¹⁾	2.1	%	2.1	%	2.1	%	2.1	%	2.1	%	3.0	%

(1)	The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2004.

As of December 31, 2003:

Expected Maturity
2004 2005 2006 2007 2008 Thereafter Total Fair Value

(RMB equivalent in millions, except interest rates)
Liabilities:
Debts in renminbi
Fixed rate 385 750 1,534 — — — 2,669 2,671
Average interest rate 5.3 % 4.4 % 5.1 % — — —
Variable rate 45,277 3,834 3,322 600 50 35,050 88,133 88,184
Average interest rate⁽¹⁾ 4.7 % 5.1 % 5.1 % 5.1 % 5.2 % 5.2 %
Debts in Japanese yen
Fixed rate 340 343 343 343 343 1,120 2,832 2,955
Average interest rate 1.2 % 1.2 % 1.2 % 1.2 % 1.2 % 2.7 %
Debts in United States dollars
Fixed rate 431 281 216 39 25 607 1,599 1,615
Average interest rate 4.2 % 4.2 % 3.5 % 3.6 % 3.1 % 2.1 %
Variable rate 63 153 151 58 29 — 454 462
Average interest rate⁽¹⁾ 1.9 % 2.9 % 2.9 % 1.8 % 1.8 % —
Debts in Euro
Fixed rate 34 24 23 19 19 385 504 501
Average interest rate 3.2 % 3.4 % 3.6 % 2.7 % 2.4 % 1.0 %
Debts in other currencies
Variable rate 1 1 1 1 1 — 5 5
Average interest rate⁽¹⁾ 2.1 % 2.1 % 2.1 % 2.1 % 2.1 % —


	Expected Maturity
	2004		2005		2006		2007		2008		Thereafter		Total	Fair Value
	(RMB equivalent in millions, except interest rates)
Liabilities:
Debts in Renminbi
Fixed rate	5,812		9,356		5,696		1,645		150		4		22,663	22,792
Average interest rate	5.4	%	5.2	%	5.1	%	5.3	%	5.2	%	5.9	%
Variable rate	62,981		4,672		3,578		600		50		35,051		106,932	107,014
Average interest rate⁽¹⁾	4.7	%	5.2	%	5.1	%	5.2	%	5.2	%	5.2	%

- 91 -


	Expected Maturity
	2004		2005		2006		2007		2008		Thereafter		Total	Fair Value
	(RMB equivalent in millions, except interest rates)
Debts in Japanese yen
Fixed rate	429		432		418		384		386		2,131		4,180	4,413
Average interest rate	1.2	%	1.2	%	1.3	%	1.3	%	1.4	%	2.5	%
Debts in United States dollars
Fixed rate	855		694		442		130		63		1,102		3,286	3,320
Average interest rate	3.9	%	4.1	%	3.5	%	3.6	%	3.5	%	2.7	%
Variable rate	63		162		347		58		29		—		659	660
Average interest rate⁽¹⁾	1.9	%	3.0	%	2.6	%	1.8	%	1.8	%	—
Debts in Euro
Fixed rate	59		135		43		40		40		722		1,039	1,040
Average interest rate	3.9	%	3.9	%	3.6	%	3.2	%	3.1	%	2.3	%
Debts in other currencies
Variable rate	1		7		7		7		5		46		73	74
Average interest rate⁽¹⁾	2.1	%	3.2	%	2.9	%	3.2	%	2.8	%	3.0	%


(1)	The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2003.

~~As of December 31, 2002:~~

    Expected Maturity
2003 2004 2005 2006 2007 Thereafter Total    Fair Value
(RMB equivalent in millions, except interest rates)
Liabilities:
Debts in renminbi
Fixed rate 4,116 6,258 3,801 1,387 90 5 15,657 15,883
Average interest rate 5.7 % 5.7 % 5.2 % 5.3 % 5.0 % 4.9 %
Variable rate 40,741 394 200 — — — 41,335 41,345
Average interest rate⁽¹⁾ 5.0 % 5.6 % 5.5 % — — —
Debts in Japanese yen
Fixed rate 170 170 170 170 170 1,988 2,838 3,049
Average interest rate 2.8 % 2.8 % 2.8 % 2.8 % 2.8 % 2.8 %
Debts in United States dollars
Fixed rate 902 605 457 183 84 649 2,880 2,981
Average interest rate 4.3 % 4.6 % 4.5 % 4.4 % 4.1 % 3.6 %
Variable rate 50 48 25 25 28 265 441 460
Average interest rate⁽¹⁾ 3.7 % 3.9 % 4.7 % 4.7 % 4.7 % 4.7 %
Debts in Euro
Fixed rate 20 20 21 20 16 339 436 455
Average interest rate 4.1 % 4.1 % 3.8 % 3.6 % 2.6 % 1.2 %
Debts in other currencies
Variable rate 11 1 1 1 1 2 17 17
Average interest rate⁽¹⁾ 2.1 % 2.2 % 2.3 % 2.3 % 2.3 % 1.2 %


~~(1)~~	~~The average interest rates for variable rate debts are calculated based on the rates reported as of December 31, 2002.~~


~~Item 12.~~	~~Description of Securities Other than Equity Securities.~~

Item 12. Description of Securities Other than Equity Securities.

Not applicable.

~~Back to Contents~~

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 Security Holders

None.

Use of Proceeds

The following use of proceeds information relates to our registration statement on Form F-1 (File No. 333-100042), filed by us in connection with our initial public offering. Our H shares commenced trading on the Hong Kong Stock Exchange on November 15, 2002. China International Capital Corporation Limited, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated acted as U.S. representatives for the U.S. underwriters and China International Capital Corporation Limited, Merrill Lynch International and Morgan Stanley & Co. International Limited acted as international representatives for the international underwriters.

- 92 -

The following table sets forth for China Telecom as the issuer and each selling shareholder information regarding our H shares registered and sold in our initial public offering, including the exercise of the over-allotment option:

Amount Registered
and Sold Aggregate
Price of the
Amount Registered
and Sold to Date (US$)

China Telecom 7,296,915,700 1,383,854,526.34
China Telecom Group 635,623,200 120,588,923.33
Guangdong Rising Assets Management Co., Ltd. 61,159,700 11,603,072.98
Jiangsu Guoxin Investment Group Co., Ltd. 10,425,800 1,977,958.01
Zhejiang Financial Development Company 23,285,600 4,417,688.71

Total 8,027,410,000 1,522,442,169.37


	Amount Registered and Sold	Aggregate Price of the Amount Registered and Sold to Date (US$)
China Telecom	7,296,915,700	1,383,854,526.34
China Telecom Group	635,623,200	120,588,923.33
Guangdong Rising Assets Management Co., Ltd.	61,159,700	11,603,072.98
Jiangsu Guoxin Investment Group Co., Ltd.	10,425,800	1,977,958.01
Zhejiang Financial Development Company	23,285,600	4,417,688.71

Total	8,027,410,000	1,522,442,169.37

The amount of expenses incurred by us in connection with the issuance and distribution of the registered securities totaled USD96,100,213.3, including USD42,539,632.8 for underwriting discounts and commissions, and approximately USD53,560,580.5 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 of our shares, or any of our affiliates.

The net proceeds from the initial public offering of our shares, after deduction of fees and expenses, amounted to RMB10,659 million. ~~As of December 31,~~In 2003, ~~RMB3,197.7~~RMB3197.7 million (equivalent to USD386.3 million) was used for the acquisition of telecommunications assets from China Telecom ~~Group.~~Group in 2003. The remaining proceeds ~~have been deposited into interest-bearing accounts as short-term deposits and will be~~were used for the expansion and upgrading of our telecommunications network infrastructure, the improvement of our business operation supporting systems, the development of telecommunications applications and technologies, ~~and potential acquisitions from China Telecom Group and strategic investments in the telecommunications industry in China that are consistent with our business strategies~~ and for general corporate purposes. No application of our net offering proceeds represented direct or indirect payments to our directors, officers, general partners of our associates, persons owning 10% or more of any class of our shares, or any of our affiliates.

~~Back to Contents~~

Item 15. Controls and Procedures.

~~Evaluation of~~ Disclosure Controls and Procedures

Our ~~chief executive officer~~management, with the participation of our Chief Executive Officer and ~~chief financial officer have~~Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) ~~and 15d-15(e)~~ of the Securities Exchange Act of 1934) as of the end of the ~~period~~fiscal year covered by ~~the~~this annual report. ~~They~~Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the ~~date~~end of ~~evaluation,~~the fiscal year covered by this annual report, our disclosure controls and procedures were adequate and effective to ensure that material information relating to ~~us and~~our company, including our consolidated subsidiaries, was made known to them by others within our company and our consolidated subsidiaries.

~~Item 16A.~~ Item16A. Audit Committee Financial Expert.

All members of our audit committee have extensive management experience. However, members of our audit committee do not possess direct experience or expertise in respect of the reconciliation of financial statements with U.S. GAAP and the evaluation of reports filed with the U.S. Securities and Exchange Commission by SEC-reporting issuers. Our board of directors has determined that ~~our company does~~we do not currently have an audit committee financial expert, as defined in Item 16A(b) of Form 20-F, serving on our audit committee. ~~We are~~Our audit committee is in the process of ~~discussing with potential candidates for the audit committee position who will be qualified as~~considering appointing, from time to time, an external financial expert ~~pursuant to the instruction to paragraph (a) of Item 16A of Form 20-F. We have not been able to conclude our discussions based on commercially reasonable terms to us~~ as ~~of the date of this annual report.~~a consultant.

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~~Item 16B.~~Item16B. Code of ~~Ethics~~Ethics.

We have adopted a code of ethics that applies to our chief executive officer, chief financial officer, controller and other senior officers of our company. We have filed this code of ethics as an exhibit to our annual report for the fiscal year ended December 31, 2003 and we hereby incorporate that exhibit into this annual report.

~~Item 16C.~~Item16C. Principal Accountant Fees and ~~Services~~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 each of the fiscal years ~~2002~~2003 and ~~2003:~~2004:


		Audit Fees		Audit-Related Fees		Tax Fees		Other Fees

~~2002~~ 2003	~~RMB 19~~	RMB107 million		—		—		—RMB2 million
~~2003~~	~~RMB 107 million~~		~~RMB 2 million~~		—		—		—
2004		RMB129 million		RMB14 million		—		—

Before our principal accountants ~~was~~were engaged by our company or our subsidiaries to render audit or non-audit services, the engagement has been approved by our audit committee.

~~Item 16D.~~ Item16D. Exemptions ~~From~~from the Listing Standards for Audit ~~Committees~~Committees.

Not applicable.

~~Item 16E.~~Item16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

None.

~~Back to Contents~~

PART III

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.

~~(a)~~

~~See Item 18 for a list of the financial statements filed as part of this annual report.~~

~~(b)~~

(a) See Item 18 for a list of the financial statements filed as part of this annual report.

(b) Exhibits ~~to this annual report:~~

~~Back~~ to ~~Contents~~this annual report:

Exhibit Index


Exhibits		~~Description~~
		Description
1.1		Articles of Association (as amended) (English translation).⁽¹⁾

2.1		Form of H Share Certificate.⁽²⁾⁽¹⁾

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Exhibits		Description
2.2		Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and Owners and Beneficial Owners from time to time of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt.⁽³⁾⁽²⁾

4.1		~~Restructuring~~Supplemental Trademark License Agreement, dated ~~September 10, 2002,~~October 26, 2003, between the Registrant and China ~~Telecommunications Corporation (together with English~~Telecom Group (English translation).⁽²⁾⁽³⁾

4.2		~~Non-Competition Agreement, dated September 10, 2002, given to the Registrant by China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.3~~		~~Interconnection Agreement, dated September 10, 2002, between the Registrant and China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.4~~		~~Trademark License Agreement, dated September 10, 2002, between the Registrant and China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.5~~		~~Centralized Services Agreement, dated September 10, 2002, between the Registrant and China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.6~~		~~Optic Fiber Leasing Agreement, dated September 10, 2002, between the Registrant and China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.7~~		~~Letter of Undertaking, dated September 10, 2002, from China Telecommunications Corporation to the Registrant (together with English translation).~~⁽²⁾

~~4.8~~		Sale and Purchase Agreement, dated October 26, 2003, between the Registrant and China ~~Telecommunications Corporation~~Telecom Group (English translation). ⁽³⁾

4.3
~~4.9~~		Supplemental Connected Transactions Agreement, dated October 26, 2003, between the Registrant and China ~~Telecommunications Corporation~~Telecom Group (English translation). ⁽³⁾

4.4		Form of Underwriting Agreement.⁽⁴⁾
~~4.10~~
4.5		Supplemental Trademark License Agreement, dated ~~October 26, 2003,~~April 13, 2004, between the Registrant and China ~~Telecommunications Corporation~~Telecom Group (English translation). ⁽⁵⁾

4.6		Supplemental Connected Transactions Agreement, dated April 13, 2004, between the Registrant and China Telecom Group (English translation).⁽⁶⁾

4.7		Comprehensive Services Agreement, dated April 13, 2004, between the Registrant and China Telecom Group (English translation).⁽⁷⁾

4.8		Conditional Sale and Purchase Agreement, dated April 13, 2004, between the Registrant and China Telecom Group (English translation).⁽⁸⁾

4.9		Supplemental Conditional Sale and Purchase Agreement, dated June 9, 2005, between the Registrant and China Telecom Group (English summary)

8.1		List of subsidiaries of the Registrant.

11.1
~~11.1~~		Code of Ethics (English translation). ⁽³⁾

12.1
~~12.1~~		Certification of CEO pursuant to Rule 13a-14(a).

12.2
~~12.2~~		Certification of CFO pursuant to Rule 13a-14(a).

13.1
~~13.1~~		Certification of CEO pursuant to Rule 13a-14(b).

13.2
~~13.2~~		Certification of CFO pursuant to Rule 13a-14(b).

14.1		Consent of KPMG.



(1)	~~Incorporated by reference to our Registration Statement on Form F-3 (File No. 333-131181), filed with the Securities and Exchange Commission on March 1, 2004.~~

~~(2)~~	Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-100042), filed with the Securities and Exchange Commission on November 5, 2002.


~~(3)~~(2)	Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-100617), filed with the Securities and Exchange Commission with respect to American Depositary Shares representing our H shares.

(3)	Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (File No. 001-31517), filed with the Securities and Exchange Commission.

(4)	Incorporated by reference to Exhibit 1.1 to our Form 6-K filed on April 29, 2004

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- 95 -

(5)	Incorporated by reference to Exhibit 1.2 to our Form 6-K filed on April 29, 2004.

(6)	Incorporated by reference to Exhibit 1.3 to our Form 6-K filed on April 29, 2004.

(7)	Incorporated by reference to Exhibit 1.4 to our Form 6-K filed on April 29, 2004.

(8)	Incorporated by reference to Exhibit 1.5 to our Form 6-K filed on April 29, 2004.

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


CHINA TELECOM CORPORATION LIMITED

By:		/s/ Wang Xiaochu
Name:		Wang Xiaochu
Title:		Chairman and Chief Executive Officer

Date: May24, 2005

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	~~By:~~	~~/s/ Zhou Deqiang~~

		~~Name: Zhou Deqiang~~Page ~~Title: Chairman and Chief Executive Officer~~


~~Date: March 31, 2004~~

~~Back to Contents~~

~~Exhibit Index~~

~~Exhibits~~		~~Description~~

~~1.1~~ Report of independent registered public accounting firm		~~Articles of Association (English translation).~~⁽¹⁾

~~2.1~~		~~Form of H Share Certificate.~~⁽²⁾

~~2.2~~		Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and Owners and Beneficial Owners from time to time of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt.⁽³⁾

~~4.1~~		~~Restructuring Agreement, dated September 10, 2002, between the Registrant and China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.2~~		~~Non-Competition Agreement, dated September 10, 2002, given to the Registrant by China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.3~~		~~Interconnection Agreement, dated September 10, 2002, between the Registrant and China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.4~~		~~Trademark License Agreement, dated September 10, 2002, between the Registrant and China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.5~~		~~Centralized Services Agreement, dated September 10, 2002, between the Registrant and China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.6~~		~~Optic Fiber Leasing Agreement, dated September 10, 2002, between the Registrant and China Telecommunications Corporation (together with English translation).~~⁽²⁾

~~4.7~~		~~Letter of Undertaking, dated September 10, 2002, from China Telecommunications Corporation to the Registrant (together with English translation).~~⁽²⁾

~~4.8~~		~~Sale and Purchase Agreement, dated October 26, 2003, between the Registrant and China Telecommunications Corporation (English translation).~~

~~4.9~~		~~Supplemental Connected Transactions Agreement, dated October 26, 2003, between the Registrant and China Telecommunications Corporation (English translation).~~

~~4.10~~		~~Supplemental Trademark License Agreement, dated October 26, 2003, between the Registrant and China Telecommunications Corporation (English translation).~~

~~8.1~~		~~List of subsidiaries of the Registrant.~~

~~11.1~~		~~Code of Ethics (English translation).~~

~~12.1~~		~~Certification of CEO pursuant to Rule 13a-14(a).~~

~~12.2~~		~~Certification of CFO pursuant to Rule 13a-14(a).~~

~~13.1~~		~~Certification of CEO pursuant to Rule 13a-14(b).~~

~~13.2~~		~~Certification of CFO pursuant to Rule 13a-14(b).~~

~~14.1~~		~~Consent of KPMG.~~



~~(1)~~	~~Incorporated by reference to our Registration Statement on Form F-3 (File No. 333-131181), filed with the Securities and Exchange Commission on March 1, 2004.~~

~~(2)~~	~~Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-100042), filed with the Securities and Exchange Commission on November 5, 2002.~~

~~(3)~~	Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-100617), filed with the Securities and Exchange Commission with respect to American Depositary Shares representing our H shares.

~~Back to Contents~~

~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~INDEX TO CONSOLIDATED FINANCIAL STATEMENTS~~

	~~Page~~

~~Independent auditors’ report~~	F-2

Consolidated balance sheets as of December 31, ~~2002~~2003 and ~~2003~~2004		F-3

Consolidated statements of income for the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004		F-4

Consolidated statements of shareholders’ equity for the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004		F-5

Consolidated statements of cash flows for the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004	~~F-6~~	F-7

Notes to the consolidated financial statements	~~F-8~~	F-9

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

~~Back to Contents~~

~~INDEPENDENT AUDITORS’ REPORT~~

The Board of Directors and Shareholders of

China Telecom Corporation Limited:

We have audited the accompanying consolidated balance sheets of China Telecom Corporation Limited and subsidiaries (the “Group”) as of December 31, ~~2002~~2003 and ~~2003,~~2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2003,~~2004, all expressed in Renminbi. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and auditing standards generally accepted in ~~the United States of America and~~ Hong Kong. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by ~~the~~ management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ~~China Telecom Corporation Limited and subsidiaries~~the Group as of December 31, ~~2002~~2003 and ~~2003~~2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, ~~2003,~~2004, in conformity with International Financial Reporting Standards promulgated by the International Accounting Standards Board.

International Financial Reporting Standards 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 33 to the consolidated financial statements.

The accompanying consolidated financial statements as of and for the year ended December 31, ~~2003~~2004 have been translated into United States dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in Renminbi have been translated into United States dollars on the basis set forth in Note 2(a) to the consolidated financial statements.

KPMG

Hong Kong, China

March ~~17, 2004~~31, 2005

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F - 2

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, ~~2002~~2003 AND ~~2003~~
2004

(Amounts in millions)

					December 31,

				Note	2002	2003	2003		December 31,
								Note	2003	2004	2004
					RMB	RMB	US$		RMB	RMB	US$
ASSETS	ASSETS
Current assets	Current assets
Cash and cash equivalents								3	12,721	13,465	1,627
Time deposits with maturity over three months									473	315	38
Accounts receivable, net								4	12,951	13,921	1,682
Inventories								5	3,253	2,767	334
Prepayments and other current assets								6	3,695	3,064	370
	Cash and cash equivalents			3	18,685	10,119	1,222
Total current assets									33,093	33,532	4,051
Non-current assets
Property, plant and equipment, net								7	309,896	320,179	38,685
Construction in progress								8	31,617	29,450	3,558
Lease prepayments									4,485	4,830	584
Interests in associates								9	513	511	62
Investments								10	206	200	24
Deferred tax assets								11	10,523	10,805	1,306
Other assets								16	13,609	13,063	1,578
	Time deposits with maturity over three months				1,352	428	52
Total non-current assets									370,849	379,038	45,797
	Accounts receivable, net			4	9,058	10,187	1,231
	Inventories			5	1,753	2,330	281
	Prepayments and other current assets			6	2,852	2,440	295

		Total current assets			33,700	25,504	3,081
Non-current assets
	Property, plant and equipment, net			7	220,761	235,211	28,418
	Construction in progress			8	27,969	22,790	2,753
	Lease prepayments				3,261	3,234	391
	Interests in associates			9	464	513	62
	Investments			10	271	205	25
	Deferred tax assets			11	7,526	8,314	1,005
	Other assets			16	9,659	9,834	1,188

		Total non-current assets			269,911	280,101	33,842

			Total assets		303,611	305,605	36,923

Total assets									403,942	412,570	49,848

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities	Current liabilities
Short-term debt								12	56,243	65,976	7,971
Current portion of long-term debt								12	13,957	11,842	1,431
Accounts payable								13	35,629	33,658	4,067
Accrued expenses and other payables								14	26,004	27,531	3,326
Income tax payable									3,395	1,192	144
Current portion of finance lease obligations								15	50	156	19
Current portion of deferred revenues								16	13,857	11,589	1,400
	Short-term debt			12	40,336	40,097	4,845
Total current liabilities									149,135	151,944	18,358
Non-current liabilities
Long-term debt								12	68,632	72,366	8,743
Finance lease obligations								15	43	157	19
Deferred revenues								16	32,744	25,182	3,043
Deferred tax liabilities								11	1,325	2,302	278
	Current portion of long-term debt			12	5,674	6,434	777
Total non-current liabilities									102,744	100,007	12,083
	Accounts payable			13	21,728	20,129	2,432
	Accrued expenses and other payables			14	16,297	15,989	1,932
	Income tax payable				3,842	3,395	410
	Current portion of finance lease obligations			15	67	19	2
	Current portion of deferred revenues			16	11,604	10,603	1,281

		Total current liabilities			99,548	96,666	11,679
Non-current liabilities
	Long-term debt			12	17,594	49,665	6,001
	Finance lease obligations			15	82	19	2
	Deferred revenues			16	31,735	25,389	3,068
	Deferred tax liabilities			11	618	1,325	160

		Total non-current liabilities			50,029	76,398	9,231

			Total liabilities		149,577	173,064	20,910
Total liabilities									251,879	251,951	30,441
Minority interests	Minority interests				1,186	1,269	153		1,269	1,413	171
Shareholders’ equity	Shareholders’ equity
Share capital								17	75,614	80,932	9,779
Reserves								18	75,180	78,274	9,457
	Share capital			17	75,614	75,614	9,136
Total shareholders’ equity									150,794	159,206	19,236
	Reserves			18	77,234	55,658	6,724
Total liabilities and shareholders’ equity									403,942	412,570	49,848

		Total shareholders’ equity			152,848	131,272	15,860

			Total liabilities and shareholders’ equity		303,611	305,605	36,923

See accompanying notes to consolidated financial statements.

~~Back to Contents~~

F - 3

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, ~~2001,~~ 2002, 2003 AND ~~2003~~
2004

(Amounts in millions, except per share data)

Year ended December 31,

Note 2001 2002 2003 2003

RMB RMB RMB US$

Operating revenues 19 100,497 109,564 118,451 14,311

Operating expenses
Depreciation and amortization (30,175 ) (33,005 ) (32,921 ) (3,978 )
Network operations and support (31,890 ) (32,228 ) (31,883 ) (3,852 )
Selling, general and administrative (13,951 ) (15,461 ) (18,303 ) (2,211 )
Other operating expenses 20 (1,865 ) (2,873 ) (2,896 ) (350 )

Total operating expenses 21 (77,881 ) (83,567 ) (86,003 ) (10,391 )

Operating income 22,616 25,997 32,448 3,920
Deficit on revaluation of property, plant and equipment 7 (11,930 ) (14,690 ) — —
Net finance costs 22 (876 ) (2,144 ) (1,814 ) (219 )
Investment income 301 63 7 1
Equity in income of associates 22 37 34 4

Income before income tax and minority interests 10,133 9,263 30,675 3,706
Income tax 23 (161 ) 582 (5,933 ) (717 )

Income before minority interests 9,972 9,845 24,742 2,989
Minority interests 14 (72 ) (56 ) (6 )

Net income 9,986 9,773 24,686 2,983

Basic earnings per share 25 0.15 0.14 0.33 0.04

Weighted average number of shares 25 68,317 69,242 75,614 75,614

~~See accompanying notes to consolidated financial statements~~

~~Back to Contents~~

~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY~~
~~FOR THE YEAR ENDED DECEMBER 31, 2001, 2002 AND 2003~~
~~(Amounts in millions)~~

Note

Share
capital

Capital reserve

Share
premium

Revaluation
reserve

Surplus reserves

Statutory common welfare
fund

Other reserves

Retained      earnings

Total
shareholders’
equity


RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
     RMB

Balance as of January 1, 2001, as previously reported — — — — — — — 101,619 101,619
Adjusted for acquisition of the Acquired Group 1 — — — — — — 32,539 — 32,539

Balance as of January 1, 2001, as adjusted — — — — — — 32,539 101,619 134,158
Net income — — — — — — — 9,986 9,986
Contributions from China Telecom — — — — — — — 7,310 7,310
Distributions to China Telecom — — — — — — — (18,113 ) (18,113 )
Assets distributed to China Telecom in connection
   with the Restructuring 1 — — — — — — — (11,285 ) (11,285 )
Revaluation surplus 11 — — — 4,154 — — — — 4,154
Recognition of deferred tax assets 11 — — — — — — 4,059 — 4,059
Elimination of net deferred tax liabilities — — — — — — — 4,887 4,887
Transfer from retained earnings to other reserves — — — — — — 5,132 (5,132 ) —

Balance as of December 31, 2001 — — — 4,154 — — 41,730 89,272 135,156
Capitalization as share capital upon
   incorporation of the Company 68,317 20,955 — — — — — (89,272 ) —
Issue of shares, net of issuing expenses of RMB796 7,297 — 3,362 — — — — — 10,659
Net income — — — — — — — 9,773 9,773
Contributions from China Telecom — — — — — — — 1,482 1,482
Distributions to China Telecom — — — — — — — (2,221 ) (2,221 )
Assets distributed to China Telecom in connection
    with the Acquisition       1 — — — — — — — (5,189 ) (5,189 )
Revaluation surplus 7 — — — 760 — — — — 760
Recognition of deferred tax assets 11 — — — — — — 2,408 — 2,408
Elimination of deferred tax liabilities 11 — — — — — — — 20 20
Transfer from retained earnings to other reserves — — — — — — (12,999 ) 12,999 —
Appropriations 18 — — — — 8,121 1,624 — (9,745 ) —
Revaluation surplus realized — — — (10 ) — — — 10 —
Deferred tax on land use rights realized — — — — — — (75 ) 75 —

Balance as of December 31, 2002 75,614 20,955 3,362 4,904 8,121 1,624 31,064 7,204 152,848
Net income — — — — — — — 24,686 24,686
Contributions from China Telecom — — — — — — — 60 60
Transfer from retained earnings to other reserves — — — — — — 6,589 (6,589 ) —
Consideration for the acquisition of the Acquired Group 1 — — — — — — (45,649 ) — (45,649 )
Transfer from other reserves to capital reserve — (14,388 ) — — — — 14,388 — —
Appropriations 18 — — — — 7,340 1,748 — (9,088 ) —
Dividends 24 — — — — — — — (673 ) (673 )
Revaluation surplus realized — — — (17 ) — — — 17 —
Deferred tax on land use rights realized — — — — — — (131 ) 131 —

Balance as of December 31, 2003 75,614 6,567 3,362 4,887 15,461 3,372 6,261 15,748 131,272

Balance as of December 31, 2003 (in US$) 9,136 793 406 591 1,868 407 756 1,903 15,860


		Year ended December 31,
	Note	2002		2003		2004		2004
		RMB		RMB		RMB		US$
Operating revenues	19	140,906		151,553		161,212		19,478

Operating expenses
Depreciation and amortization		(45,810	)	(46,597	)	(47,170	)	(5,699	)
Network operations and support		(46,215	)	(44,118	)	(43,070	)	(5,204	)
Selling, general and administrative		(20,585	)	(24,810	)	(27,003	)	(3,262	)
Other operating expenses	20	(3,188	)	(3,176	)	(4,139	)	(500	)

Total operating expenses	21	(115,798	)	(118,701	)	(121,382	)	(14,665	)

Operating income		25,108		32,852		39,830		4,813

Deficit on revaluation of property, plant and equipment	7	(14,690	)	(14,832	)	(1,262	)	(153	)

Net finance costs	22	(4,071	)	(3,606	)	(5,340	)	(645	)

Investment income/(loss)		50		(42	)	6		1

Equity in income of associates		38		35		29		3

Income before income tax and minority interests		6,435		14,407		33,263		4,019

Income tax	23	1,856		(469	)	(5,187	)	(627	)

Income before minority interests		8,291		13,938		28,076		3,392

Minority interests		(72	)	(56	)	(53	)	(6	)

Net income		8,219		13,882		28,023		3,386

Basic earnings per share	25	0.12		0.18		0.36		0.04

Weighted average number of shares	25	69,242		75,614		78,840		78,840

See accompanying notes to consolidated financial statements.

F - 4

~~Back to Contents~~

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~
SHAREHOLDERS’ EQUITY

FOR THE ~~YEAR~~YEARS ENDED DECEMBER 31, ~~2001,~~ 2002, 2003 AND ~~2003~~
2004

(Amounts in millions)

Year ended December 31,

Note 2001 2002 2003 2003

RMB RMB RMB US$

Cash flows from operating activities (a) 46,648 52,158 46,884 5,665
Cash flows from investing activities
Capital expenditure (54,625 ) (45,807 ) (41,825 ) (5,053 )
Purchase of investments (617 ) (179 ) (60 ) (7 )
Lease prepayments (582 ) (377 ) (75 ) (9 )
Proceeds from disposal of investments — — 52 6
Proceeds from disposal of property, plant and equipment 151 105 203 24
Purchase of time deposits with maturity over three months (530 ) (1,339 ) (426 ) (51 )
Maturity of time deposits with maturity over three months 359 537 1,350 163
Net cash used in investing activities (55,844 ) (47,060 ) (40,781 ) (4,927 )
Cash flows from financing activities
Proceeds from initial public offering, net of issuing expenses — 10,659 — —
Capital element of finance lease payments (345 ) (525 ) (111 ) (14 )
Proceeds from bank debt 46,912 61,982 59,983 7,247
Repayments of bank debt (37,990 ) (63,078 ) (62,705 ) (7,576 )
Payment of dividend — — (673 ) (81 )
Cash distributions to minority interests — (14 ) (27 ) (3 )
Cash payment for the acquisition of the Acquired Group — — (11,000 ) (1,329 )
Cash contributions from China Telecom 6,760 1,284 60 7
Cash distributions to China Telecom (16,802 ) (4,418 ) (196 ) (24 )
Net cash (used in)/from financing activities (1,465 ) 5,890 (14,669 ) (1,773 )
Net (decrease)/increase in cash and cash equivalents (10,661 ) 10,988 (8,566 ) (1,035 )
Cash and cash equivalents at beginning of year 18,358 7,697 18,685 2,257
Cash and cash equivalents at end of year 7,697 18,685 10,119 1,222


	Note	Share capital	Capital reserve		Share premium	Revaluation reserve		Surplus reserves	Statutory common welfare fund	Other reserves		Retained earnings		Total shareholders’ equity
		RMB	RMB		RMB	RMB		RMB	RMB	RMB		RMB		RMB
Balance as of January 1, 2002, as previously reported		—	—		—	4,154		—	—	41,730		89,272		135,156
Adjusted for the Second Acquisition	1	—	—		—	—		—	—	34,316		—		34,316

Balance as of January 1, 2002, as adjusted		—	—		—	4,154		—	—	76,046		89,272		169,472
Capitalization as share capital upon incorporation of the Company		68,317	20,955		—	—		—	—	—		(89,272	)	—
Issue of shares, net of issuing expenses of RMB796		7,297	—		3,362	—		—	—	—		—		10,659
Net income		—	—		—	—		—	—	—		8,219		8,219
Contributions from China Telecom		—	—		—	—		—	—	—		4,438		4,438
Distributions to China Telecom		—	—		—	—		—	—	—		(3,762	)	(3,762	)
Assets distributed to China Telecom in connection with the First Acquisition	1	—	—		—	—		—	—	—		(5,189	)	(5,189	)
Revaluation surplus	7	—	—		—	760		—	—	—		—		760
Recognition of deferred tax assets	11	—	—		—	—		—	—	2,408		—		2,408
Elimination of deferred tax liabilities	11	—	—		—	—		—	—	—		20		20
Transfer from retained earnings to other reserves		—	—		—	—		—	—	(13,138	)	13,138		—
Appropriations	18	—	—		—	—		8,121	1,624	—		(9,745	)	—
Revaluation surplus realized		—	—		—	(10	)	—	—	—		10		—
Deferred tax on land use rights realized		—	—		—	—		—	—	(75	)	75		—

Balance as of December 31, 2002		75,614	20,955		3,362	4,904		8,121	1,624	65,241		7,204		187,025

Net income		—	—		—	—		—	—	—		13,882		13,882
Contributions from China Telecom		—	—		—	—		—	—	—		4,309		4,309
Distributions to China Telecom		—	—		—	—		—	—	—		(1,234	)	(1,234	)
Assets distributed to China Telecom in connection with the Second Acquisition	1	—	—		—	—		—	—	—		(10,762	)	(10,762	)
Revaluation surplus	7	—	—		—	1,537		—	—	—		—		1,537
Recognition of deferred tax assets	11	—	—		—	—		—	—	2,209		—		2,209
Elimination of deferred tax liabilities	11	—	—		—	—		—	—	—		150		150
Transfer from retained earnings to other reserves		—	—		—	—		—	—	(11,812	)	11,812		—
Consideration for the acquisition of the First Acquired Group	1	—	—		—	—		—	—	(45,649	)	—		(45,649	)
Transfer from other reserves to capital reserve		—	(14,388	)	—	—		—	—	14,388		—		—
Appropriations	18	—	—		—	—		7,340	1,748	—		(9,088	)	—
Dividends		—	—		—	—		—	—	—		(673	)	(673	)
Revaluation surplus realized		—	—		—	(17	)	—	—	—		17		—
Deferred tax on land use rights realized		—	—		—	—		—	—	(131	)	131		—

Balance as of December 31, 2003		75,614	6,567		3,362	6,424		15,461	3,372	24,246		15,748		150,794

See accompanying notes to consolidated financial statements.

~~Back to Contents~~

F - 5

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

~~NOTES TO~~ CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED)~~CASH FLOWS~~

FOR THE ~~YEAR~~YEARS ENDED DECEMBER 31, ~~2001,~~ 2002, 2003 AND ~~2003~~
2004

(Amounts in millions)

~~(a)~~

~~Reconciliation of income before income tax and minority interests to cash flows from operating activities~~

Year ended December 31,

2001 2002 2003 2003

RMB RMB RMB US$

Income before income tax and minority interests 10,133 9,263 30,675 3,706
Adjustments for:
Depreciation and amortization 30,175 33,005 32,921 3,978
Deficit on revaluation of property, plant and equipment 11,930 14,690 — —
Provision for doubtful accounts 420 625 670 81
Investment income (301 ) (63 ) (7 ) (1 )
Equity in income of associates (22 ) (37 ) (34 ) (4 )
Interest income (313 ) (174 ) (276 ) (33 )
Interest expense 3,257 3,201 2,890 349
Unrealized foreign exchange (gains)/losses (352 ) 288 314 38
Loss on retirement and disposal of property, plant and equipment 2,726 1,662 424 51
Decrease/(increase) in accounts receivable 1,934 (1,147 ) (1,799 ) (217 )
(Increase)/decrease in inventories (102 ) 484 (577 ) (70 )
Decrease in prepayments and other current assets 156 1,887 131 16
Increase in other non-current assets (1,617 ) (903 ) (38 ) (4 )
Increase/(decrease) in accounts payable. 1,293 271 (695 ) (84 )
Decrease in accrued expenses and other payables (1,613 ) (9 ) (1,304 ) (158 )
Decrease in deferred revenues (4,771 ) (7,251 ) (7,347 ) (888 )

Cash generated from operations 52,933 55,792 55,948 6,760
Interest received 313 174 276 33
Interest paid (3,214 ) (3,234 ) (2,896 ) (350 )
Investment income received 255 92 17 2
Income tax paid (3,639 ) (666 ) (6,461 ) (780 )

Cash flows from operating activities 46,648 52,158 46,884 5,665


	Note	Share capital	Capital reserve		Share premium	Revaluation reserve		Surplus reserves	Statutory common welfare fund	Other reserves		Retained earnings		Total shareholders’ equity
		RMB	RMB		RMB	RMB		RMB	RMB	RMB		RMB		RMB
Balance as of December 31, 2003		75,614	6,567		3,362	6,424		15,461	3,372	24,246		15,748		150,794
Issue of shares, net of issuing expenses of RMB294		5,318	—		7,384	—		—	—	—		—		12,702
Net income		—	—		—	—		—	—	—		28,023		28,023
Contributions from China Telecom		—	—		—	—		—	—	—		100		100
Transfer from retained earnings to other reserves		—	—		—	—		—	—	2,653		(2,653	)	—
Consideration for the acquisition of the Second Acquired Group	1	—	—		—	—		—	—	(27,800	)	—		(27,800	)
Transfer from other reserves to capital reserve		—	(9,371	)	—	—		—	—	9,371		—		—
Revaluation surplus	7	—	—		—	1,233		—	—	—		—		1,233
Deferred tax on revaluation surplus of property, plant and equipment	11	—	—		—	—		—	—	(378	)	—		(378	)
Appropriations	18	—	—		—	—		10,168	2,421	—		(12,589	)	—
Dividends	24	—	—		—	—		—	—	—		(5,224	)	(5,224	)
Effect of change in tax rate	11	—	—		—	—		—	—	(244	)	—		(244	)
Revaluation surplus realized		—	—		—	(72	)	—	—	—		72		—
Deferred tax on land use rights realized		—	—		—	—		—	—	(165	)	165		—

Balance as of December 31, 2004		80,932	(2,804	)	10,746	7,585		25,629	5,793	7,683		23,642		159,206

Balance as of December 31, 2004 (in US$)		9,779	(339	)	1,298	916		3,097	700	928		2,857		19,236

See accompanying notes to consolidated financial ~~statements~~statements.

F - 6

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

~~Back~~CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

(Amounts in millions)


		Year ended December 31,
	Note	2002		2003		2004		2004
		RMB		RMB		RMB		US$
Cash flows from operating activities	(a)	62,357		58,392		66,078		7,984


Cash flows from investing activities
Capital expenditure		(61,437	)	(57,692	)	(56,446	)	(6,820	)
Purchase of investments		(332	)	(485	)	(42	)	(5	)
Lease prepayments		(500	)	(355	)	(444	)	(53	)
Proceeds from disposal of investments		—		52		42		5
Proceeds from disposal of property, plant and equipment		483		348		379		45
Purchase of time deposits with maturity over three months		(1,489	)	(466	)	(325	)	(39	)
Maturity of time deposits with maturity over three months		697		1,504		483		58

Net cash used in investing activities		(62,578	)	(57,094	)	(56,353	)	(6,809	)

Cash flows from financing activities
Proceeds from initial public offering, net of issuing expenses		10,659		—		—		—
Proceeds from issue of shares, net of issuing expenses		—		—		12,702		1,535
Capital element of finance lease payments		(715	)	(210	)	(50	)	(6	)
Proceeds from bank and other debt		86,975		83,472		77,120		9,318
Repayments of bank and other debt		(89,023	)	(86,147	)	(81,070	)	(9,795	)
Payment of dividends		—		(673	)	(5,224	)	(631	)
Cash (distributions to) / contributions from minority interests		(14	)	(27	)	91		11
Cash payment for the acquisition of the First Acquired Group		—		(11,000	)	—		—
Cash payment for the acquisition of the Second Acquired Group		—		—		(12,650	)	(1,529	)
Cash contributions from China Telecom		4,226		3,461		100		12
Cash distributions to China Telecom		(4,418	)	(196	)	—		—

Net cash from/(used in) financing activities		7,690		(11,320	)	(8,981	)	(1,085	)

Net increase/(decrease) in cash and cash equivalents		7,469		(10,022	)	744		90
Cash and cash equivalents at beginning of year		15,274		22,743		12,721		1,537

Cash and cash equivalents at end of year		22,743		12,721		13,465		1,627

See accompanying notes to ~~Contents~~consolidated financial statements.

F - 7

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

(Amounts in millions)

(a) Reconciliation of income before income tax and minority interests to cash flows from operating activities

   Year ended December 31,

   2002
2003
2004
2004

   RMB RMB RMB US$
Income before income tax and minority interests
   6,435 14,407 33,263 4,019
Adjustments for:

Depreciation and amortization
   45,810 46,597 47,170 5,699
Deficit on revaluation of property, plant and equipment
   14,690 14,832 1,262 153
Provision for doubtful accounts
   1,004 1,037 1,121 136
Investment (income)/loss
   (50 ) 42 (6 ) (1 )
Equity in income of associates
   (38 ) (35 ) (29 ) (3 )
Interest income
   (248 ) (331 ) (231 ) (28 )
Interest expense
   3,826 3,340 5,367 648
Unrealized foreign exchange losses
   449 495 152 18
Loss on retirement and disposal of property, plant and equipment and impairment loss
   3,753 1,628 961 116
Increase in accounts receivable
   (1,535 ) (2,383 ) (2,091 ) (253 )
Decrease/(increase) in inventories
   742 (687 ) 486 59
Decrease in prepayments and other current assets
   2,311 116 481 58
(Increase)/decrease in other non-current assets
   (1,104 ) 12 297 36
Increase/(decrease) in accounts payable
   235 (335 ) 55 7
Increase in accrued expenses and other payables
   786 34 1,517 183
Decrease in deferred revenues
   (8,850 ) (9,320 ) (9,830 ) (1,188 )


Cash generated from operations
   68,216 69,449 79,945 9,659
Interest received
   248 331 231 28
Interest paid
   (5,533 ) (4,944 ) (6,824 ) (824 )
Investment income received
   92 17 43 5
Income tax paid
   (666 ) (6,461 ) (7,317 ) (884 )


Cash flows from operating activities
   62,357 58,392 66,078 7,984


See accompanying notes to consolidated financial statements.
F - 8
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
1. PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION
Principal activities
China Telecom Corporation Limited (the “Company”) and its subsidiaries (hereinafter, collectively referred to as the “Group”) are engaged in the provision of wireline telecommunications and related services in Shanghai Municipality, Guangdong Province, Jiangsu Province, Zhejiang Province, Anhui Province, Fujian Province, Jiangxi Province, Guangxi Zhuang Autonomous Region, Chongqing Municipality, ~~and~~ Sichuan Province, Hubei Province, Hunan Province, Hainan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region of the People’s Republic of China (the “PRC”). The Group offers a comprehensive range of wireline telecommunications services to residential and business customers, including local, domestic long distance (“DLD”) and international long distance (“ILD”) telephone services, Internet and managed data, leased line, and other related services.
The operations of the Group are subject to the supervision and regulation by the PRC government. The Ministry of Information Industry, pursuant to the authority delegated to it by the PRC’s State Council, is responsible for formulating the telecommunications industry policies and regulations, including the regulation and setting of tariff levels for basic telecommunications services, such as local and long distance telephone services, managed data services, leased line and interconnection arrangements.
Organization
The Company was incorporated in the PRC on September 10, 2002 as part of the reorganization (the “Restructuring”) of China Telecommunications Corporation (“China Telecom” and together with its subsidiaries other than the ~~Group~~Company are referred to as “China Telecom Group”), a state-owned enterprise which is under the supervision and regulation of the Ministry of Information Industry. ~~China Telecom was initially established in May 2000 to operate the PRC’s nationwide wireline telecommunications network as part of the restructuring of the PRC’s telecommunications industry.~~ In November 2001, pursuant to a further industry restructuring plan approved by the State Council, China Telecom’s wireline telecommunications networks and related operations in 10 northern provinces, municipalities and autonomous regions of the PRC were transferred to China Netcom Group. China Telecom retained the wireline telecommunications networks and related operations of 21 provinces, municipalities and autonomous regions of the PRC, including those of the Company’s subsidiaries. In accordance with this industry restructuring plan, China Telecom and China Netcom Group own 70% and 30%, respectively, of the nationwide inter-provincial optic fibers.
In connection with the Restructuring, China Telecom transferred to the Company the wireline telecommunications business and related operations in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province together with the related assets and liabilities (the “Predecessor Operations”) in consideration for 68,317 million ordinary domestic shares of the Company. The shares issued to China Telecom have a par value of RMB1.00 each and represented the entire registered and issued share capital of the Company atof that date. In connection with the Restructuring, certain assets historically associated with the Predecessor Operations were not transferred to the Company and were retained by China Telecom. These assets, which amounted to RMB11,285 as of December 31, 2001, primarily related to investments in non-telecommunications industries, inter-provincial transmission optic ~~fibers~~fibres and properties. As a result of the segregation and separate management of these assets by China Telecom beginning December 31, 2001, the assets retained by China Telecom ~~have been~~were reflected as a distribution to China Telecom in the consolidated statement of shareholders’ equity as of December 31, 2001.
Pursuant to the resolution passed by the Company’s independent shareholders at an Extraordinary General Meeting held on December 15, 2003, the Company acquired the entire equity interests in Anhui Telecom Company Limited, Fujian Telecom Company Limited, Jiangxi Telecom Company Limited, Guangxi Telecom Company Limited, Chongqing Telecom Company Limited and Sichuan Telecom Company Limited ~~(the “Acquired Group”~~(collectively the “First Acquired Group��) and certain network management and research and development facilities from China Telecom for a total purchase price of RMB46,000 on December 31, 2003 (hereinafter, referred to as the ~~“Acquisition”~~“First Acquisition”) ~~on December 31, 2003.~~. The purchase price consisted of a cash payment of RMB11,000 and a long-term payable of RMB35,000 (see Note 12). Prior to the First Acquisition and effective December 31, 2002, China Telecom transferred the wireline telecommunications business and related operations in Anhui Province, Fujian Province, Jiangxi Province, Guangxi
F - 9
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
1. PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION (continued)
Organization (continued)
Zhuang Autonomous Region, Chongqing Municipality and Sichuan Province together with the related assets and liabilities in consideration for the entire ~~respective~~ equity interests in each of the entities of the First Acquired Group. Certain assets historically associated with these operations were retained by China Telecom, and as of December 31, 2002, these assets amounted to RMB5,189 and consisted primarily of investments in non-telecommunications industries and properties.

~~Back~~
Pursuant to ~~Contents~~the resolution passed by the Company’s independent shareholders at an Extraordinary General Meeting held on June 9, 2004, the Company acquired the entire equity interests in Hubei Telecom Company Limited, Hunan Telecom Company Limited, Hainan Telecom Company Limited, Guizhou Telecom Company Limited, Yunnan Telecom Company Limited, Shaanxi Telecom Company Limited, Gansu Telecom Company Limited, Qinghai Telecom Company Limited, Ningxia Telecom Company Limited and Xinjiang Telecom Company Limited (collectively the “Second Acquired Group”) from China Telecom for a total purchase price of RMB27,800 on June 30, 2004 (hereinafter, referred to as the “Second Acquisition”). The purchase price consisted of a cash payment of RMB8,340 and a long-term payable of RMB19,460. On June 30, 2004, the Company repaid RMB4,310 of this payable amount using the net proceeds from issue of new H shares in May 2004 (see Note 12). Prior to the Second Acquisition and effective December 31, 2003, China Telecom transferred the wireline telecommunications business and related operations in Hubei Province, Hunan Province, Hainan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region together with the related assets and liabilities in consideration for the entire equity interests in each of the entities of the Second Acquired Group. Certain assets historically associated with these operations were retained by China Telecom, and as of December 31, 2003, these assets amounted to RMB10,762 and consisted primarily of investments in non-telecommunications industries and properties.
~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~
1.     ~~PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION~~ ~~(Continued)~~
Basis of presentation
Since China Telecom controlled the Predecessor Operations transferred to the Company and continues to control the Company, the accompanying consolidated financial statements for the periods prior to the legal formation of the Company have been prepared as a reorganization of entities under common control in a manner similar to a pooling-of-interests (“as-if-pooling-of-interests accounting”). Accordingly, under as-if-pooling-of-interests accounting, the assets and liabilities of the Predecessor Operations transferred to the Company in connection with the Restructuring have been accounted for at historical ~~amounts and as if the Predecessor Operations were transferred to the Company as of the earliest date presented.~~amounts.
In addition, as the First Acquired Group ~~was~~and the Second Acquired Group (“the Acquired Groups”) were under the common control of China Telecom, the First Acquisition ~~has~~and the Second Acquisition (“the Acquisitions”) have been reflected in the accompanying consolidated financial statements as a combination of entities under common control in a manner similar to a pooling-of-interests. Accordingly, the assets and liabilities of the Acquired ~~Group~~Groups have been accounted for at historical amounts and the consolidated financial statements of the Company prior to the ~~Acquisition~~Acquisitions have been restated to include the results of operations and assets and liabilities of the Acquired ~~Group~~Groups on a combined basis. The assets retained by China Telecom ~~prior to~~in respect of the ~~Acquisition have been~~Acquisitions were reflected as ~~a distribution~~distributions to China Telecom in the consolidated statement of shareholders’ equity as of December 31, ~~2002.~~2002 and December 31, 2003 respectively. The ~~consideration~~considerations paid by the Company for the acquisition of the Acquired ~~Group has~~Groups have been accounted for as an equity ~~transaction~~transactions in the consolidated statement of shareholders’ ~~equity as~~equity.
F - 10
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
1. PRINCIPAL ACTIVITIES, ORGANIZATION AND BASIS OF PRESENTATION (continued)
Basis of ~~December 31, 2003.~~presentation (continued)
The results of operations for the years ended December 31, ~~2001~~2002 and ~~2002~~2003 and the financial condition and shareholders’ equity as of December 31, ~~2002,~~2003, January 1, ~~2002~~2003 and January 1, ~~2001~~2002 previously reported by the Group and the Second Acquired Group and the combined amounts presented in the accompanying consolidated financial statements are set out below:
The Group without the Acquired
Group The
Acquired
Group Combined
RMB RMB RMB
Results of operations:
2001:
Operating revenue 68,546 31,951 100,497
Operating income 18,098 4,518 22,616
Net income. 6,883 3,103 9,986
Basic earnings per share (RMB). 0.10 0.05 0.15
2002:
Operating revenue 75,496 34,068 109,564
Operating income 21,378 4,619 25,997
Net income / (loss). 16,864 (7,091 ) 9,773
Basic earnings / (loss) per share (RMB) 0.24 (0.10 ) 0.14

Financial condition:
Current assets as of December 31, 2002 26,502 7,198 33,700
Total assets as of December 31, 2002 210,852 92,759 303,611
Current liabilities as of December 31, 2002 57,627 41,921 99,548
Total liabilities as of December 31, 2002 84,710 64,867 149,577
Shareholders’ equity as of December 31, 2002. 125,008 27,840 152,848
Shareholders’ equity as of January 1, 2002 97,485 37,671 135,156
Shareholders’ equity as of January 1, 2001 101,619 32,539 134,158

The Group
(as previously
reported)

The Second
Acquired
Group
Combined
   RMB    RMB RMB
Results of operations:

2002:

Operating revenues
   109,564    31,342 140,906
Operating income/(loss)
   25,997    (889 ) 25,108
Net income/(loss)
   9,773    (1,554 ) 8,219
Basic earnings/(loss) per share (RMB)
   0.14    (0.02 ) 0.12
2003:

Operating revenue
   118,451    33,102 151,553
Operating income
   32,448    404 32,852
Net income/(loss)
   24,686    (10,804 ) 13,882
Basic earnings/(loss) per share (RMB)
   0.33    (0.15 ) 0.18
Financial condition:

Current assets as of December 31, 2003
   25,504    7,589 33,093
Total assets as of December 31, 2003
   305,605    98,337 403,942
Current liabilities as of December 31, 2003
   96,666    52,469 149,135
Total liabilities as of December 31, 2003
   173,064    78,815 251,879
Shareholders’ equity as of December 31, 2003
   131,272    19,522 150,794
Shareholders’ equity as of January 1, 2003
   152,848    34,177 187,025
Shareholders’ equity as of January 1, 2002
   135,156    34,316 169,472
For the periods presented, all significant balances and transactions between the Group and the Acquired ~~Group~~Groups prior to the ~~Acquisition~~Acquisitions have been eliminated.

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F - 11
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of preparation
The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) promulgated by the International Accounting Standards Board (“IASB”). IFRS includes International Accounting Standards (“IAS”) and interpretations.
The consolidated financial statements are prepared on the historical cost basis as modified by the revaluation of certain property, plant and equipment (Note 7). Information relating to the nature of significant differences between IFRS and accounting principles generally accepted in the United States of America (“US GAAP”) and their effect on net income for the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004 and on shareholders’ equity as of December 31, ~~2002~~2003 and ~~2003~~2004 are set forth in Note 33.
The preparation of the consolidated financial statements in accordance with IFRS and US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounting policies described below have been consistently applied by the Group.
The IASB has issued a number of new and revised International Financial Reporting Standards and International Accounting Standards (collectively new “IFRSs”) which are effective for accounting periods beginning on or after January 1, 2005.
The Group has not early adopted these new IFRSs in the financial statements for the year ended December 31, 2004. The Group has already commenced an assessment of the impact of these new IFRSs but is not yet in a position to state whether these new IFRSs would have significant impact on its results of operations and financial position.
The consolidated financial statements are expressed in Renminbi (“RMB”), the national currency of the PRC. Solely for the convenience of the reader, the December 31, ~~2003~~2004 consolidated financial statements have been translated into United States dollars at the noon buying rate in New York on December 31, ~~2003~~2004 for cable transfers in RMB as certified for customs purposes by the Federal Reserve Bank of New York of US$1.00 = ~~RMB8.2767.~~RMB8.2765. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at that rate or at any other certain rate on December 31, ~~2003,~~2004, or at any other certain date.
(b) Basis of consolidation
A subsidiary is an enterprise controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.
The financial results of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases, and the share attributable to minority interests is deducted from or added to income before minority interests. All significant intercompany balances and transactions and any unrealized gains/losses arising from intercompany transactions are eliminated on consolidation.
An associate is a company, not being a subsidiary, in which the Group exercises significant influence over its management. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control over those policies.
The consolidated statement of income ~~include~~includes the Group’s share of the results of its associates for the period. In the consolidated balance sheet, interests in associates are stated at the Group’s attributable share of net assets.
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CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(c)Translation of foreign currencies
The functional and reporting currency of the Group is RMB. Foreign currency transactions during the year are translated into RMB at the applicable rates of exchange quoted by the People’s Bank of China (“PBOC rates”) prevailing on the transaction dates. Foreign currency monetary assets and liabilities are translated into RMB at the applicable PBOC rates at the balance sheet date.
Exchange differences, other than those capitalized as construction in progress, are recognized as income or expense in the consolidated statement of income. For the periods presented, no exchange differences were capitalized.

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~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~(d) Cash and cash equivalents
2. ~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
~~(d)~~ ~~Cash and cash equivalents~~
Cash and cash equivalents comprise cash at bank and in hand and time deposits with original maturities of three months or less when purchased. Cash equivalents are stated at cost, which approximates fair value. None of the Group’s cash and cash equivalents is restricted as to withdrawal.
~~(e)~~ ~~Accounts receivable~~
(e) Accounts receivable
Accounts receivable are stated at cost less allowance for doubtful accounts. An allowance for doubtful accounts is provided based upon the evaluation of the recoverability of these accounts at the balance sheet date.
~~(f)~~ ~~Inventories~~
(f) Inventories
Inventories consist of materials and supplies used in maintaining the ~~Group’s~~ wireline telecommunications network and goods for resale. Materials and supplies are valued at cost less a provision for obsolescence.
Inventories that are held for resale are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
~~(g)~~ ~~Property, plant and equipment~~
F - 13
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Property, plant and equipment
Property, plant and equipment are initially recorded at cost, less subsequent accumulated depreciation and impairment losses (Note 2(k)). The cost of an asset comprises its purchase price, any directly attributable costs of bringing the asset to working condition and location for its intended use and the cost of borrowed funds used during the periods of construction. Expenditure incurred after the asset has been put into operation is capitalized only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure, including the cost of repairs and maintenance, is expensed as it is incurred.
Subsequent to the revaluations (Note 7) which were based on depreciated replacement costs, ~~(Note 7),~~ property, plant and equipment are carried at revalued amount, being the fair value at the date of the revaluation, less subsequent accumulated depreciation and impairment losses. When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the revaluation is restated proportionately 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. The separate classes into which the Company groups assets for the revaluation are buildings and improvements; telecommunications network plant and transmission and switching equipment; and furniture, fixture, motor vehicles and other equipment. When an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs is revalued simultaneously. When an asset’s carrying amount is increased as a result of a revaluation, the increase is credited directly to shareholders’ equity under the component of revaluation reserve. However, a revaluation increase is recognized as income to the extent that it reverses a revaluation decrease of the same asset previously recognized as an expense. When an asset’s carrying amount is decreased as a result of a revaluation, the decrease is recognized as an expense in the consolidated statement of income. However, a revaluation decrease is charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation reserve in respect of that same asset. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date. Revaluations are performed annually on items which experience significant and volatile movements in fair value while items which experience insignificant movements in fair value are revalued every three years.
Assets acquired under leasing agreements which effectively transfer substantially all the risks and benefits incidental to ownership from the lessor to the lessee are classified as assets under finance leases. Assets under finance leases are initially recorded at amounts equivalent to the present value of the minimum lease payments (computed using the rate of interest implicit in the lease) which approximate the fair value at the inception of the lease. The net present value of the future minimum lease payments is recorded correspondingly as a finance lease obligation. Assets under finance leases are amortized over their estimated useful lives. The carrying amount of the Group’s assets under finance leases as of December 31, ~~2002~~2003 and ~~2003~~2004 were ~~RMB187~~RMB239 and ~~RMB50,~~RMB314, respectively.
Gains or losses arising from retirement or disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized as income or expense in the consolidated statement of income on the date of disposal. On disposal of a revalued asset, the related revaluation surplus is transferred from the revaluation reserve to retained earnings.

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~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~
2. ~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
~~(g)~~ ~~Property, plant and equipment (Continued)~~
Depreciation is provided to write off the cost/revalued amount of each asset over its estimated useful life on a straight-line basis, after taking into account its estimated residual value, as follows:
~~Depreciable life~~

Depreciable lives
primarily range from
Buildings and improvements
8 to 30 years
Telecommunications network plant, transmission and switching equipment
6 to 10 years
Furniture, fixture, motor vehicles and other equipment
4 to 10 years
F - 14
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(h) Lease prepayments
Lease prepayments represent land use rights paid to the PRC’s land bureau. Land use rights are carried at cost and are written off on a straight-line basis over the respective periods of the rights which range from 20 years to 70 years.
~~(i)~~ ~~Construction in progress~~
(i) Construction in progress
Construction in progress represents buildings, telecommunications network plant, transmission and switching equipment and other equipment under construction and pending installation, and is stated at cost less impairment losses (Note 2(k)). Cost comprises direct costs of construction as well as interest charges, and foreign exchange differences on related borrowed funds to the extent that they are regarded as an adjustment to interest charges, during the periods of construction. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when the asset is substantially ready for its intended use.
No depreciation is provided in respect of construction in progress.
~~(j)~~ ~~Investments~~
(j) Investments
Investments in non-marketable equity securities are stated at cost less provision for impairment losses (Note 2(k)). A provision is made where, in the opinion of management, the carrying amount of the investments exceeds its recoverable amount.
~~(k)~~ ~~Impairment~~
(k) Impairment
The carrying amounts of the Group’s long-lived assets, including property, plant and equipment, are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to the recoverable amount. The amount of the reduction is recognized as an expense in the consolidated statement of income. The recoverable amount is the greater of the net selling price and the value in use. In determining the value in use, expected future cash flows generated by the assets are discounted to their present value. For the ~~periods presented, no~~year ended December 31, 2004, a provision for impairment ~~losses were recognized in~~loss of RMB88 was made to fully impair the ~~consolidated statement~~carrying value of ~~income.~~

~~Back to Contents~~certain equipment for outdated telecommunications services.
~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~(l) Revenue recognition
2. ~~SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~
~~(l)~~ ~~Revenue recognition~~
The Group’s revenues are principally derived from the provision of local, domestic long distance (“DLD”) and international long distance (“ILD”) telephone services which consist of (i) usage charges for telephone services, which vary depending on the day, the time of day, distance and duration of the telephone call, (ii) a monthly telephone service fee, (iii) service activation and installation fees, and (iv) charges for value-added telecommunications services, such as call waiting, call diverting and caller number display. The Group records wireline service revenues over the periods they are earned as follows:
(i) Revenues derived from local, DLD and ILD telephone usage are recognized as the services are provided.

(ii) Upfront fees received for activation of wireline services and wireline installation charges are deferred and recognized over the expected customer relationship period. The related direct incremental customer acquisition costs are deferred to the extent of the upfront fees and are amortized over the same expected customer relationship period.
F - 15
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(l) Revenue recognition (continued)

(iii) Monthly telephone service fees are recognized in the month during which the telephone services are provided to customers.

(iv) Revenues from sale of prepaid calling cards are recognized as the cards are used by customers.

(v) Revenues derived from value-added telecommunications services are recognized when the services are provided to customers.
Other related wireline telecommunications service revenues are recognized as follows:

~~Other related wireline telecommunications service revenues are recognized as follows:~~
(i) Revenues from the provision of Internet and managed data services are recognized when the services are provided to customers.

(ii) Interconnection fees from domestic and foreign telecommunications operators are recognized when the services are rendered as measured by the minutes of traffic processed.

(iii) Lease income from operating leases is recognized over the term of the lease.

(iv) Sale of customer-end equipment is recognized on delivery of the equipment to customers and when the significant risks and rewards of ownership and title have been transferred to the customers.
~~(m)~~ ~~Advertising and promotion expense~~
(m) Advertising and promotion expense
The costs for advertising and promoting the Group’s wireline telecommunications services are expensed as incurred. Advertising and promotion expense, which is included in selling, general and administrative expenses, were ~~RMB1,487, RMB1,837~~RMB2,505, RMB5,758 and ~~RMB4,172~~RMB8,701 for the ~~year~~years ended December 31, ~~2001,~~ 2002, 2003, and ~~2003~~2004 respectively.
~~(n)~~ ~~Net financing costs~~
(n) Net financing costs
Net financing costs comprise interest income on bank deposits, interest expense on borrowings, and foreign exchange gains and losses. Interest income from bank deposits is recognized on a time proportion basis that takes into account the effective yield on the asset.
Interest costs incurred in connection with borrowings are expensed as incurred, except to the extent that they are capitalized as being directly attributable to the construction of an asset which necessarily takes a substantial period of time to get ready for its intended use.

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~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~(o) Research and development expense
2. ~~SIGNIFICANT ACCOUNTING POLICIES (Continued)~~
~~(o)~~ ~~Research and development expense~~
Research and development expenditure is expensed as incurred. For the years ended December 31, ~~2001,~~ 2002, 2003 and 2004, research and development expense were ~~RMB140, RMB188~~RMB237, RMB166 and ~~RMB126~~RMB172 respectively.
~~(p)~~ ~~Employee benefits~~
(p) Employee benefits
The Group’s contributions to defined contribution retirement plans administered by the PRC government are recognized as an expense in the consolidated statement of income. Further information is set out in Note 29.
~~(q)~~ ~~Provisions~~
(q) Provisions
A provision is recognized in the consolidated balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation.
~~(r)~~ ~~Income tax~~
F - 16
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(r) Income tax
Income tax comprises current and deferred tax. Current tax is calculated on the taxable income for the year by applying the applicable tax rates. Deferred tax is provided using the balance sheet liability method, providing for all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax is calculated on the basis of the enacted tax rates that are expected to apply in the period when the asset is realized or the liability is settled. The effect on deferred tax of any changes in tax rates is charged or credited to the consolidated statement of ~~income.~~income, except for the effect of a change in tax rate that results in a change in the carrying amount of deferred tax assets and liabilities is charged or credited directly to shareholders’ equity, to the extent that such deferred tax assets and liabilities are previously charged or credited to equity. A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
~~(s)~~ ~~Dividends~~
(s) Dividends
Dividends are recognized as a liability in the period in which they are declared.
~~(t)~~ ~~Segmental reporting~~
(t) Segmental reporting
A business segment is a distinguishable component of the Group that is engaged in providing products or services and is subject to risks and rewards that are different from those of other segments. For the periods presented, the Group has one operating segment which is the provision of wireline telecommunications services. All of the ~~Group's~~Group’s operating activities are carried out in the PRC.
3. ~~CASH AND CASH EQUIVALENTS~~

December 31,
2002     2003
RMB RMB
Cash at bank and in hand 13,828 9,851
Time deposits with maturity within three months 4,857 268

18,685 10,119

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~~CHINA TELECOM CORPORATION LIMITED~~3. CASH AND ~~SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~CASH EQUIVALENTS
4. ~~ACCOUNTS RECEIVABLE, NET~~
   December 31,
   2003
   2004
   RMB    RMB
Cash at bank and in hand
   12,451    10,512
Time deposits with maturity within three months
   270    2,953


   12,721    13,465


4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, are analyzed as follows:
December 31,
2002     2003
RMB RMB
Accounts receivable 10,105 11,278
Less: Allowance for doubtful accounts (1,047 ) (1,091 )

9,058 10,187

   December 31,

   2003
2004

   RMB RMB
Accounts receivable
   14,769 15,603
Less: Allowance for doubtful accounts
   (1,818 ) (1,682 )


   12,951 13,921


Amounts due from the provision of wireline telecommunications services to residential and business customers are due within 30 days from the date of billing. Customers who have accounts overdue by more than 90 days will have their services disconnected.
F - 17
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
4. ACCOUNTS RECEIVABLE, NET (continued)
The following table summarizes the changes in the allowance for doubtful accounts for each of the years in the three-year period ended December 31, ~~2003:~~2004:
Year ended December 31,
2001     2002     2003
RMB RMB RMB
At beginning of year 1,210 1,123 1,047
Provision for doubtful accounts 420 625 670
Accounts receivable written off (507 ) (701 ) (626 )

At end of year 1,123 1,047 1,091

5. ~~INVENTORIES~~
   Year ended December 31,

   2002
2003
2004

   RMB RMB RMB
At beginning of year
   1,853 1,859 1,818
Provision for doubtful accounts
   1,004 1,037 1,121
Accounts receivable written off
   (998 ) (1,078 ) (1,257 )


At end of year
   1,859 1,818 1,682


5. INVENTORIES
Inventories represent:
December 31,
2002 2003
RMB RMB
Materials and supplies 1,435 1,530
Goods for resale 318 800

1,753 2,330

6. ~~PREPAYMENTS AND OTHER CURRENT ASSETS~~
   December 31,
   2003
   2004
   RMB    RMB
Materials and supplies
   2,104    1,907
Goods for resale
   1,149    860


   3,253    2,767


6. PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets represent:
December 31,

2002     2003

RMB RMB
Amounts due from China Telecom Group 480 479
Prepayments in connection with construction work and equipment purchases 675 394
Prepaid expenses and deposits 456 412
Other receivables 1,241 1,155

2,852 2,440

~~Back to Contents~~
   December 31,
   2003
   2004
   RMB    RMB
Amounts due from China Telecom Group
   844    640
Prepayments in connection with construction work and equipment purchases
   609    854
Prepaid expenses and deposits
   609    607
Other receivables
   1,633    963


   3,695    3,064


F - 18
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
7. PROPERTY, PLANT AND EQUIPMENT, NET
7. ~~PROPERTY, PLANT AND EQUIPMENT, NET~~
Buildings
and improve-
ments Telecomm-
unications
network
plant and
equipment Furniture,
fixture,
motor
vehicles and
other
equipment Total

RMB RMB RMB RMB

Cost/valuation:
Balance as of January 1, 2003 43,405 281,689 13,377 338,471
Additions 286 2,289 536 3,111
Transferred from construction in progress 3,591 39,726 1,570 44,887
Disposals (204 ) (2,687 ) (370 ) (3,261 )

Balance as of December 31, 2003 47,078 321,017 15,113 383,208

Accumulated depreciation:
Balance as of January 1, 2003      (4,806 ) (107,912 ) (4,992 ) (117,710 )
Depreciation charge for the year (1,751 ) (29,233 ) (1,937 ) (32,921 )
Written back on disposals 28 2,289 317 2,634

Balance as of December 31, 2003 (6,529 ) (134,856 ) (6,612 ) (147,997 )

Net book value as of December 31, 2003 40,549 186,161 8,501 235,211

Net book value as of December 31, 2002 38,599 173,777 8,385 220,761

   Buildings and
improvements
Telecommunications
network plant and
equipment
Furniture,
fixture,
motor
vehicles and
other
equipment
Total

   RMB RMB RMB RMB
Cost/valuation:

Balance as of January 1, 2004
   60,939 421,014 19,264 501,217
Additions
   178 1,469 696 2,343
Transferred from construction in progress
   4,380 49,775 1,976 56,131
Disposals
   (119 ) (14,195 ) (1,259 ) (15,573 )
Reclassification
   22 17 (39 ) —
Revaluations
   944 (8,776 ) —   (7,832 )


Balance as of December 31, 2004
   66,344 449,304 20,638 536,286


Accumulated depreciation:

Balance as of January 1, 2004
   (8,331 ) (174,961 ) (8,029 ) (191,321 )
Depreciation charge for the year
   (2,646 ) (41,246 ) (2,930 ) (46,822 )
Provision for impairment
   —   (88 ) —   (88 )
Written back on disposals
   37 13,214 1,070 14,321
Reclassification
   (11 ) (5 ) 16 —
Revaluations
   (67 ) 7,870 —   7,803


Balance as of December 31, 2004
   (11,018 ) (195,216 ) (9,873 ) (216,107 )


Net book value as of December 31, 2004
   55,326 254,088 10,765 320,179


Net book value as of December 31, 2003
   52,608 246,053 11,235 309,896


In connection with the Restructuring, the property, plant and equipment of the Predecessor Operations as of December 31, 2001 were revalued as required by the relevant PRC rules and regulations for each asset class by Beijing China Enterprise Appraisal Co., Ltd. (the “PRC valuers”), independent valuers registered in the PRC, on a depreciated replacement cost basis. The value of the property, plant and equipment was determined at RMB138,623. The ~~tax base of such assets has been adjusted to the revalued amount (Note 11). The~~ surplus on revaluation of certain property, plant and equipment totaling RMB4,154 was credited to the revaluation reserve while the deficit arising from the revaluation of certain property, plant and equipment totaling RMB11,930 was recognized as an expense for the year ended December 31, 2001.
~~The following is a summary of~~
In connection with the ~~historical carrying amounts of~~First Acquisition, the property, plant and equipment of the ~~Predecessor Operations and the revalued amounts of these assets:~~
Historical
carrying Revaluation Revaluation Revalued
amounts surplus deficit amounts
RMB RMB RMB RMB

Buildings and improvements 21,664 2,361 (238 ) 23,787
Telecommunications network plant and equipment 118,579 1,653 (10,950 ) 109,282
Furniture, fixture, motor vehicles and other equipment 6,156 140 (742 ) 5,554

146,399 4,154 (11,930 ) 138,623

~~In addition, in connection with the Acquisition, the property, plant and equipment of the~~First Acquired Group as of December 31, 2002 were revalued as required by the relevant PRC rules and regulations for each asset class by the PRC valuers on a depreciated replacement cost basis. The value of the property, plant and equipment was determined at RMB71,596. The ~~tax base of such assets has been adjusted to the revalued amount (Note 11). The~~ surplus on revaluation of certain property, plant and equipment totaling RMB760 was credited to the revaluation reserve while the deficit arising from the revaluation of certain property, plant and equipment totaling RMB14,690 was recognized as an expense for the year ended December 31, 2002.

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F - 19
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
7. PROPERTY, PLANT AND EQUIPMENT, NET (continued)
7. ~~PROPERTY, PLANT AND EQUIPMENT, NET (Continued)~~
In connection with the Second Acquisition, the property, plant and equipment of the Second Acquired Group as of December 31, 2003 were revalued as required by the relevant PRC rules and regulations for each asset class by the PRC valuers on a depreciated replacement cost basis. The value of the property, plant and equipment was determined at RMB74,685. The surplus on revaluation of certain property, plant and equipment totaling RMB1,537 was credited to the revaluation reserve while the deficit arising from the revaluation of certain property, plant and equipment totaling RMB14,832 was recognized as an expense for the year ended December 31, 2003.
In accordance with the Group’s accounting policy (Note 2(g)), the property, plant and equipment of the Group as of December 31, 2004 were revalued for each asset class by the directors of the Company on a depreciated replacement cost basis. The value of the property, plant and equipment was determined at RMB320,179. The surplus on revaluation of certain property, plant and equipment totaling RMB1,233 was credited to the revaluation reserve while the deficit arising from the revaluation of certain property, plant and equipment totaling RMB1,262 was recognized as an expense for the year ended December 31, 2004.
The following is a summary of the ~~historical~~ carrying ~~amounts~~value of the ~~Acquired~~ Group’s property, plant and equipment prior to the revaluation and the revalued amounts of these ~~assets:~~
Historical
carrying Revaluation Revaluation Revalued
amounts surplus deficit amounts

RMB RMB RMB RMB

Buildings and improvements 10,091 704 (65 ) 10,730
Telecommunications network plant and equipment 72,572 — (14,119 ) 58,453
Furniture, fixture, motor vehicles and other equipment 2,863 56 (506 ) 2,413

85,526 760 (14,690 ) 71,596

The reduction in the carrying amounts was primarily the result of the-then market decline in the replacement cost of certain network switching equipment during the years prior to 2002. The net deficit on the revaluation of the Predecessor Operations’ property, plant and equipment of RMB7,776 and net deficit on the revaluation of the Acquired Group’s property, plant and equipment of RMB13,930 were reflected in the consolidated balance sheet of the Groupassets as of December 31, ~~2001 and December 31, 2002, respectively.~~2004:

Carrying
value
prior to
revaluation
   Revaluation
surplus
   Revaluation
deficit

Revalued
amounts
   RMB    RMB    RMB RMB
Building and improvements
   54,449    877    —   55,326
Telecommunications network plant and equipment
   254,994    356    (1,262 ) 254,088
Furniture, fixture, motor vehicles and other equipment
   10,765    —      —   10,765




   320,208    1,233    (1,262 ) 320,179




8. CONSTRUCTION IN PROGRESS
8. ~~CONSTRUCTION IN PROGRESS~~
   RMB
Balance as of January 1, 2004
31,617
Additions
53,964
Transferred to property, plant and equipment
(56,131 )
Balance as of December 31, 2004
29,450

~~Balance as of January 1, 2003~~ ~~27,969~~
~~Additions~~ ~~39,708~~
~~Transferred to property, plant and equipment~~ ~~(44,887~~ )
~~Balance as of December 31, 2003~~ ~~22,790~~
9. ~~INTERESTS IN ASSOCIATES~~
December 31,
2002 2003

RMB RMB

Share of net assets 464 513
F - 20
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
9. INTERESTS IN ASSOCIATES
   December 31,
   2003
   2004
   RMB    RMB
Share of net assets
   513    511


The Group’s interests in associates are accounted for under the equity method and are individually and in aggregate not material to the Group’s financial conditions or results of operations for all periods presented. Details of the Group’s principal associates are as follows:
Name of company
Attributable
equity interest

Principal activities
Shenzhen Shekou Telecommunications
Company Limited
50% Provision of telecommunications services
Shanghai Information Investment
Incorporation
24% Provision of information technology consultancy services
The above associates are established in the PRC and are not traded on any stock exchange.

~~Back to Contents~~
~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~10. INVESTMENTS
~~10.~~ ~~INVESTMENTS~~
December 31,
2002 2003

RMB RMB

Unlisted equity investments 271 205
   December 31,
   2003
   2004
   RMB    RMB
Unlisted equity investments
   206    200


Unlisted equity investments mainly represent the Group’s various interests in PRC private enterprises which are mainly engaged in the provision of information technology services and Internet contents. These investments are accounted for at cost, less provision for any impairment. The Group has no investments in marketable securities.
~~11.~~ ~~DEFERRED TAX ASSETS AND LIABILITIES~~
11. DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and deferred tax liabilities are attributable to the items set out below:
Assets Liabilities Net balance

2002 2003 2002 2003 2002 2003

RMB RMB RMB RMB RMB RMB
Current
Provisions, primarily for receivables 99 198 — — 99 198
Non-Current
Property, plant and equipment — 67 (193 ) (579 ) (193 ) (512 )
Deferred revenues and installation costs 1,035 1,788 (425 ) (746 ) 610 1,042
Land use rights 6,392 6,261 — — 6,392 6,261
Deferred tax assets/(liabilities) 7,526 8,314 (618 ) (1,325 ) 6,908 6,989

   Assets
   Liabilities
Net balance

   2003
   2004
   2003
2004
2003
2004

   RMB    RMB    RMB RMB RMB RMB
Current

Provisions, primarily for receivables
   198    286    —   —   198 286
Non-Current

Property, plant and equipment
   67    516    (579 ) (1,295 ) (512 ) (779 )
Deferred revenues and installation costs
   1,788    1,942    (746 ) (1,007 ) 1,042 935
Land use rights
   8,470    8,061    —   —   8,470 8,061




Deferred tax assets/(liabilities)
   10,523    10,805    (1,325 ) (2,302 ) 9,198 8,503




F - 21
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
11. DEFERRED TAX ASSETS AND LIABILITIES (continued)
A valuation allowance on deferred tax assets is recorded if it is more likely than not that some portion or all of the deferred tax assets will not be realized through recovery of taxes previously paid and/or future taxable income. The allowance is subject to ongoing adjustments based on changes in circumstances that affect the Group’s assessment of the realizability of the deferred tax assets. The Group has reviewed its deferred tax assets as of December 31, ~~2001,~~ 2002, 2003 and ~~2003.~~2004. Based on the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes that it is more likely than not the Group will realize the benefits of these temporary differences. Therefore, no valuation allowances were provided for the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004 in respect of deferred tax assets arising from temporary differences.
Movements in temporary differences for ~~each of the years in~~ the three-year period ended December 31, ~~2003~~2004 are as follows:
Balance as of Recognized Recognized Balance as of
January 1, in statement in shareholders’ December 31,
Note 2001 of income equity 2001
RMB RMB RMB RMB
Current
Provisions, primarily for receivables (ii) 610 (28 ) (220 ) 362
Non-current
Property, plant and equipment (ii) (13,621 ) 2,508 5,923 (5,190 )
Deferred revenues and installation costs (ii) 979 371 (816 ) 534
Tax loss (i) — 307 (307 ) —
Land use rights (iii) — — 4,059 4,059

Net deferred tax liabilities (12,032 ) 3,158 8,639 (235 )

(Note 23 )

Balance as of Recognized Recognized Balance as of
January 1, in statement in shareholders’ December 31,
Note 2002 of income equity 2002
RMB RMB RMB RMB
Current
Provisions, primarily for receivables (ii) 362 106 (369 ) 99
Non-current
Property, plant and equipment (ii) (5,190 ) 4,010 987 (193 )
Deferred revenues and installation costs (ii) 534 674 (598 ) 610
Tax loss (i) — 163 (163 ) —
Land use rights (iii) 4,059 (75 ) 2,408 6,392
Net deferred tax (liabilities)/assets (235 ) 4,878 2,265 6,908
(Note 23 )

~~Back to Contents~~
   Note

Balance as
of January 1,
2002

Recognized
in statement
of income
Recognized in
shareholders’
equity
Balance as of
December 31,
2002

   RMB RMB RMB RMB
Current

Provisions, primarily for receivables
   (ii) 764 160 (369 ) 555
Non-current

Property, plant and equipment
   (ii) (10,294 ) 3,627 987 (5,680 )
Deferred revenues and installation costs
   (ii) 1,123 736 (598 ) 1,261
Tax loss
   (i) —   1,704 (1,704 ) —
Land use rights
   (iii) 4,059 (75 ) 2,408 6,392


Net deferred tax (liabilities)/assets
   (4,348 ) 6,152 724 2,528


   (Note 23 )
   Note

Balance as
of January 1,
2003

Recognized
in statement
of income
Recognized in
shareholders’
equity

Balance as of
December 31,
2003

   RMB RMB RMB RMB
Current

Provisions, primarily for receivables
   (ii) 555 17 (374 ) 198
Non-current

Property, plant and equipment
   (ii) (5,680 ) 4,042 1,126 (512 )
Deferred revenues and installation costs
   (ii) 1,261 383 (602 ) 1,042
Tax loss
   (i) —   1,234 (1,234 ) —
Land use rights
   (iii) 6,392 (131 ) 2,209 8,470


Net deferred tax assets
   2,528 5,545 1,125 9,198


   (Note 23 )
   Note

Balance as
of January 1,
2004

Recognized
in statement
of income
Recognized in
shareholders’
equity
Balance as of
December 31,
2004

   RMB RMB RMB RMB
Current

Provisions, primarily for receivables
   198 88 —   286
Non-current

Property, plant and equipment
   (iv) (512 ) 111 (378 ) (779 )
Deferred revenues and installation costs
   1,042 (107 ) —   935
Land use rights
   (iii) 8,470 (165 ) (244 ) 8,061


Net deferred tax assets
   9,198 (73 ) (622 ) 8,503


   (Note 23 )
F - 22
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
11. DEFERRED TAX ASSETS AND LIABILITIES (continued)
Note:
~~11.~~ ~~DEFERRED TAX ASSETS AND LIABILITIES (Continued)~~
Balance as
of January 1,
2003 Recognized
in statement
of income Recognized in shareholders’
equity Balance as of
December 31,
2003
RMB RMB RMB RMB
Current
Provisions, primarily for receivables. 99 99 — 198
Non-current
Property, plant and equipment. (193 ) (319 ) — (512 )
Deferred revenues and installation costs. 610 432 — 1,042
Land use rights. 6,392 (131 ) — 6,261
Net deferred tax assets. 6,908 81 — 6,989
(Note 23)

~~Note:~~
(i) Represents net tax loss carry forward of the Acquired ~~Group~~Groups for the ~~year.~~years ended December 31, 2002 and 2003. As the tax loss was utilized by China Telecom in the same tax year, the utilization of the deferred tax asset was reflected as a distribution to China Telecom in the statement of shareholders’ equity.
(ii) As described in Note 7, in connection with the Restructuring and the ~~Acquisition,~~Acquisitions, the property, plant and equipment of the Predecessor Operations, the First Acquired Group and the Second Acquired Group were ~~revalued.~~revalued as of December 31, 2001, 2002 and 2003, respectively. The tax bases of these assets ~~have been~~were adjusted to conform to the respective revalued amounts. In addition, in connection with the Restructuring and the ~~Acquisition,~~Acquisitions, the tax bases of the assets and liabilities of the Predecessor Operations and the Acquired ~~Group~~Groups that gave rise to the temporary differences ~~above have been~~were adjusted to conform to the related financial carrying amounts. As a result, the timing differences that gave rise to the net deferred tax liabilities relating to ~~the~~these items ~~above~~ were eliminated. The reductions in net deferred tax liabilities of RMB4,887 as of December 31, 2001, ~~and~~ RMB20 as of December 31, 2002 and RMB150 as of December 31, 2003 were credited to shareholders’ equity.
(iii) In connection with the Restructuring and the ~~Acquisition,~~Acquisitions, the land use rights of the Predecessor ~~Operations’~~Operations, the First Acquired Group and the Second Acquired ~~Group’s land use rights,~~Group, which as of December 31, 2001, 2002 and ~~December 31, 2002~~2003 had a total carrying amount of RMB2,638, RMB617 and ~~RMB617,~~RMB1,251, respectively, were revalued as required by the relevant PRC rules and regulations. The revalued amounts of the Predecessor Operations’ and the Acquired ~~Group’s~~Groups’ land use rights as of December 31, 2001, 2002 and ~~December 31, 2002~~2003 were determined at RMB14,939, RMB7,913 and ~~RMB7,913,~~RMB8,464, respectively. The tax bases of the land use rights ~~have been~~were adjusted to conform to such revalued amounts. The land use rights were not revalued for financial reporting purposes and accordingly, deferred tax assets were created with carrying ~~amount~~amounts of RMB4,059, RMB2,408 and ~~RMB2,408~~RMB2,209 as of December 31, 2001, 2002 and ~~December 31, 2002,~~2003, respectively, with corresponding increases in shareholders’ equity. Based upon the level of historical taxable income and projections of future taxable income, management believes that it is more likely than not the Group will realize the benefits of the deferred tax assets.
In 2004, certain subsidiaries of the Group with operations in the western region of the PRC obtained approval from tax authority to reduce the income tax rate from 33% to 15% for the period from January 1, 2004 to December 31, 2010. In addition, certain subsidiaries of the Group obtained approval from tax authority to reduce income tax rate from 33% to 15% with effect from January 1, 2004. Accordingly, the effect of the change in tax rate on the amount of the deferred tax asset expected to be realized during the relevant periods amounting to RMB244 was charged to shareholders’ equity.
(iv) As described in Note 7, in accordance with the Group’s accounting policy, the property, plant and equipment of the Group were revalued as of December 31, 2004. The tax bases of these assets were not adjusted to conform to such revalued amounts and accordingly, a deferred tax asset and a deferred tax liability in the respective amount of RMB356 and RMB378 in respect of the revaluation deficit and surplus were recognized. The deferred tax asset was credited to the income statement while the deferred tax liability was charged to shareholders’ equity.

~~Back to Contents~~
F - 23
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
12. SHORT-TERM AND LONG-TERM DEBT
~~12.~~ ~~SHORT-TERM AND LONG-TERM DEBT~~
The Group’s short-term debt comprises:
    December 31,
2002 2003
RMB RMB

Bank loans 40,336 40,097
   December 31,
   2003
   2004
   RMB    RMB
Bank loans
   56,243    55,887
Loans from China Telecom Group
   —      10,089


Total short-term debt
   56,243    65,976


Weighted average interest rate of the Group’s short-term debt ~~were 4.7% and 4.6%~~ as of December 31, ~~2002~~2003 and ~~2003,~~2004 was 4.6% and 4.4%, respectively. The loans from China Telecom Group bear interest at fixed rates ranging from 2.0% to 5.0% per annum, are unsecured and are repayable within one year.
The Group’s long-term debt comprises:
   December 31,

Interest rates and final maturity 2002 2003
RMB RMB
Bank loans

Renminbi denominated Interest rates ranging from 2.3% to 6.2% per annum with maturities through 2007 16,648 15,705

US Dollars denominated Interest rates ranging from 0.6% to 7.6% per annum with maturities through 2038 3,321 2,053

Japanese Yen denominated Interest rates ranging from 0.6% to 3.5% per annum with maturities through 2022 2,838 2,832

Euro denominated Interest rates ranging from 0.5% to 8.1% per annum with maturities through 2032 436 504

Other currencies 17 5
23,260 21,099

Other loans

Renminbi denominated 8 —

Amount due to China Telecom

Renminbi denominated Note (i) — 35,000

Total long-term debt 23,268 56,099

Less: current portion (5,674 ) (6,434 )
Non-current portion 17,594 49,665
      December 31,


Interest rates and final maturity
   2003
2004

      RMB RMB
Bank loans
Renminbi denominated    Interest rates ranging from 2.9% to 6.6% per annum with maturities through 2015    38,339 26,859
US Dollars denominated    Interest rates ranging from 0.5% to 9.2% per annum with maturities through 2038    3,922 2,883
Japanese Yen denominated    Interest rates ranging from 0.6% to 3.5% per annum with maturities through 2040    4,180 3,182
Euro denominated    Interest rates ranging from 0.5% to 9.2% per annum with maturities through 2032    1,039 1,053
Other currencies       73 70


      47,553 34,047
Other loans
Renminbi denominated       13 11
US Dollars denominated       23 —
Amount due to China Telecom
In connection with the First Acquisition – Renminbi denominated (Note(i))       35,000 35,000
In connection with the Second Acquisition – Renminbi denominated (Note (ii))       —   15,150


Total long-term debt       82,589 84,208
Less: current portion       (13,957 ) (11,842 )


Non-current portion       68,632 72,366


F - 24
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
12. SHORT-TERM AND LONG-TERM DEBT (continued)
Note (i) This represents the ~~amount~~deferred consideration payable to China Telecom in respect of the First Acquisition (Note 1). ~~For~~The amount is unsecured, and for the first five years after the date of the First Acquisition, the Company ~~will pay~~pays interest on the outstanding balance at the rate of 5.184% per annum. Thereafter the interest rate ~~will be~~is adjusted based on the prevailing market interest rate. This amount is repayable on December 31, ~~2013. However,~~2013 and the Company may, from time to time, repay all or part of the amount at any time until December 31, 2013 without penalty.
        (ii) This represents the remaining balance of the deferred consideration payable to China Telecom in respect of the Second Acquisition (Note 1). The amount is unsecured, and for the first five years after the date of the Second Acquisition, the Company pays interest on the outstanding balance at the rate of 5.184% per annum. Thereafter the interest rate is adjusted based on the prevailing market interest rate. This amount is repayable on June 30, 2014 and the Company may, from time to time, repay all or part of the amount at any time until June 30, 2014 without penalty.
As of December 31, ~~2003,~~2004, no bank loans were secured. As of December 31, ~~2002,~~2003, bank loans of ~~RMB26~~RMB22 were secured by certain of the Group’s property, plant and equipment. The net book value of the property, plant and equipment pledged as security amounted to ~~RMB3~~RMB27 as of December 31, ~~2002.~~

~~Back to Contents~~2003.
~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~
~~12.~~ ~~SHORT-TERM AND LONG-TERM DEBT (Continued)~~
The aggregate maturities of the Group’s long-term debt subsequent to December 31, ~~2003~~2004 are as follows:
RMB

2004 6,434
2005 5,386
2006 5,590
2007 1,060
2008 467
Thereafter 37,162
56,099
   RMB
2004
   11,842
2005
   10,022
2006
   8,343
2007
   552
2008
   268
Thereafter
   53,181

   84,208

The Group’s ~~short-tem~~short-term and long-term debts do not contain any financial covenants. As of December 31, 2003 and 2004, the Group had available credit facilities of ~~RMB17,829~~RMB30,965 and RMB27,855, respectively which it can draw upon.
~~13.~~ ~~ACCOUNTS PAYABLE~~
13. ACCOUNTS PAYABLE
Accounts payable are analyzed as follows:
    December 31,
2002 2003
RMB RMB

Third parties 18,079 17,203
China Telecom Group 3,649 2,926
21,728 20,129
~~Amounts due to China Telecom Group are repayable in accordance with normal commercial terms.~~
   December 31,
   2003
   2004
   RMB    RMB
Third parties
   28,367    26,591
China Telecom Group
   7,262    7,067


   35,629    33,658


Amounts due to China Telecom Group are repayable in accordance with normal commercial terms.
F - 25
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
14.ACCRUED EXPENSES AND OTHER PAYABLES

Accrued expenses and other payables represent:
    December 31,
2002 2003
RMB RMB

Distributions payable to China Telecom 196 —
Amounts due to China Telecom Group 2,360 1,779
Accrued expenses 12,587 11,354
Customer deposits and receipts in advance 1,154 2,856

16,297 15,989

~~15.~~ ~~FINANCE LEASE OBLIGATIONS~~
   December 31,
   2003
   2004
   RMB    RMB
Amounts due to China Telecom Group
   5,165    4,889
Accrued expenses
   17,150    15,923
Customer deposits and receipts in advance
   3,689    6,719


   26,004    27,531


15. FINANCE LEASE OBLIGATIONS
Obligations under finance leases are analyzed as follows:
    December 31,
2002 2003
RMB RMB

Within 1 year 67 20
Between 1 to 2 years 73 20
Between 2 to 3 years 18 —
Total minimum lease payments 158 40
Less: finance charges related to future periods (9 ) (2 )
Present value of minimum lease payments 149 38
Less: current portion (67 ) (19 )
Non-current portion 82 19

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   December 31,

   2003
2004

   RMB RMB
Within 1 year
   52 163
Between 1 to 2 years
   46 110
Between 2 to 3 years
   —   51


Total minimum lease payments
   98 324
Less: finance charges related to future periods
   (5 ) (11 )


Present value of minimum lease payments
   93 313
Less: current portion
   (50 ) (156 )


Non-current portion
   43 157


F - 26
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
16. DEFERRED REVENUES
~~16.~~ ~~DEFERRED REVENUES~~
Deferred revenues represent the unearned portion of upfront connection fees and installation fees received from customers and the unused portion of calling cards. Connection fees and installation fees are amortized over the expected customer relationship period of 10 years. Beginning July 1, 2001, connection fees were no longer collected from new customers.
    December 31,
2002 2003

RMB RMB

Balance at beginning of year 50,590 43,339
Additions for the year
— installation fees 3,014 2,534
— calling cards 6,865 4,464

9,879 6,998

Reduction for the year
— amortization of connection fees (8,554 ) (7,885 )
— amortization of installation fees (1,575 ) (1,831 )
— usage of calling cards (7,001 ) (4,629 )

Balance at end of year 43,339 35,992

Representing:
— Current portion 11,604 10,603
— Non-current portion 31,735 25,389

43,339 35,992

   December 31,

   2003
2004

   RMB RMB
Balance at beginning of year
   55,921 46,601
Additions for the year

- installation fees
   3,309 2,135
- calling cards
   5,451 4,392


   8,760 6,527


Reduction for the year

- amortization of connection fees
   (9,771 ) (8,458 )
- amortization of installation fees
   (2,643 ) (2,865 )
- usage of calling cards
   (5,666 ) (5,034 )


Balance at end of year
   46,601 36,771


Representing:

- Current portion
   13,857 11,589
- Non-current portion
   32,744 25,182


   46,601 36,771


Included in other non-current assets are capitalized direct incremental costs associated with the installation of wireline services. As of December 31, ~~2002~~2003 and ~~2003,~~2004, the unamortized portion of these costs was ~~RMB8,761~~RMB12,366 and ~~RMB8,720,~~RMB11,428, respectively.

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F - 27
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
17. SHARE CAPITAL
~~17.~~ ~~SHARE CAPITAL~~
December 31,
2002 2003
RMB RMB

Registered, issued and fully paid
67,586,776,503 ordinary domestic shares of RMB 1.00 each 67,587 67,587
8,027,410,000 overseas listed H shares of RMB 1.00 each 8,027 8,027

75,614 75,614

The Company was incorporated on September 10, 2002 with a registered capital of 68,317,270,803 ordinary domestic shares with a par value of RMB1.00 each. Such shares were issued to China Telecom in consideration for the assets and liabilities related to the Predecessor Operations transferred to the Company (Note 1). As part of a reform plan approved by the State Council on the administration of rural telecommunication services, China Telecom transferred a portion of its shareholdings in the Company to certain state-owned enterprises (“Other Domestic Shareholders”) owned and controlled by the provincial governments in each of Guangdong Province, Jiangsu Province and Zhejiang Province.
   December 31,
   2003
   2004
   RMB    RMB
Registered, issued and fully paid

67,054,958,321 ordinary domestic shares of RMB 1.00 each
   67,587    67,055
13,877,410,000 overseas listed H shares of RMB 1.00 each
   8,027    13,877


   75,614    80,932


Pursuant to the resolutions passed at an Extraordinary General Meeting held on November 4, 2002 and approvals from relevant government authorities, the Company was authorized to increase its share capital to a maximum of 76,216 million shares with a par value of RMB1.00 each and offer not more than 7,899 million of such shares to investors outside the PRC. China Telecom and the Other Domestic Shareholders were authorized to offer not more than 791 million shares in aggregate of their shareholdings in the Company to investors outside the PRC. The shares sold by China Telecom and the Other Domestic Shareholders to investors outside the PRC are convertible into H shares.
In ~~November 2002,~~May 2004, the Company issued ~~6,868,767,600~~and allotted 5,318,181,818 new H shares with a par value of RMB1.00 each, representing ~~377,820,000~~4,466,693,018 H shares and ~~64,909,476~~8,514,888 American Depositary Shares (“~~ADSs’~~ADS”, each representing 100 H shares), at prices of HK$~~1.47~~2.30 per H share and US$~~18.98~~29.49 per ADS, respectively, by way of a global ~~initial public~~ offering to Hong Kong and overseas investors. As part of the global ~~initial public~~ offering, ~~687,632,400 ordinary~~531,818,182 existing domestic shares of RMB1.00 each owned by China Telecom and the Other Domestic Shareholders were converted into H shares and sold to Hong Kong and overseas investors.
~~In December 2002, the~~ The Company ~~issued 428,148,100~~raised net proceeds of RMB12,702 from issue of new H shares with a par value of RMB1.00 each, representing 4,281,481 ADSs at US$18.98 per ADS to overseas investors upon exercise of an over-allotment option granted to the underwriters in connection with the global initial public offering. In addition, 42,861,900 ordinary domestic shares of RMB1.00 each owned by China Telecom and the Other Domestic Shareholders were converted into H shares and sold to overseas investors.shares.
All ordinary domestic shares and H shares rank pari passu in all material respects.

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F - 28
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
18. RESERVES
~~18.~~ ~~RESERVES~~
Statutory
common
Capital Share Revaluation Surplus welfare Other Retained
reserve premium reserve reserves fund reserves earnings Total

RMB RMB RMB RMB RMB RMB RMB RMB

Balance as of January 1, 2002, as adjusted (Note 1) — — 4,154 — — 41,730 89,272 135,156
Capitalization as share capital upon incorporation of the Company (Note (i)) 20,955 — — — — — (89,272 ) (68,317 )
Issue of shares, net of issuing expenses of RMB796 — 3,362 — — — — — 3,362
Net income — — — — — — 9,773 9,773
Contributions from China Telecom — — — — — — 1,482 1,482
Distributions to China Telecom — — — — — — (2,221 ) (2,221 )
Assets distributed to China Telecom in connection with the Acquisition — — — — — — (5,189 ) (5,189 )
Revaluation surplus — — 760 — — — — 760
Recognition of deferred tax assets — — — — — 2,408 — 2,408
Elimination of deferred tax liabilities — — — — — — 20 20
Transfer from retained earnings to other reserves — — — — — (12,999 ) 12,999 —
Appropriations (Notes (ii) and (iii)) — — — 8,121 1,624 — (9,745 ) —
Revaluation surplus realized — — (10 ) — — — 10 —
Deferred tax on land use rights realized — — — — — (75 ) 75 —

Balance as of December 31, 2002 20,955 3,362 4,904 8,121 1,624 31,064 7,204 77,234
Net income — — — — — — 24,686 24,686
Contributions from China Telecom — — — — — — 60 60
Transfer from retained earnings to other reserves — — — — — 6,589 (6,589 ) —
Consideration for the acquisition of the Acquired Group — — — — — (45,649 ) — (45,649 )
Transfer from other reserves to capital reserve (14,388 ) — — — — 14,388 — —
Appropriations (Notes (ii) and (iii)) — — — 7,340 1,748 — (9,088 ) —
Dividends (Note 24) — — — — — — (673 ) (673 )
Revaluation surplus realized — — (17 ) — — — 17 —
Deferred tax on land use rights realized — — — — — (131 ) 131 —

Balance as of December 31, 2003 6,567 3,362 4,887 15,461 3,372 6,261 15,748 55,658

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   Capital
reserve

Share
premium

Revaluation
reserve
Surplus
reserves
   Statutory
common
welfare
fund
   Other
reserves
Retained
earnings

Total
shareholders’
equity

   RMB RMB    RMB RMB    RMB    RMB RMB RMB
Balance as of January 1, 2003, as adjusted (Note 1)
   20,955 3,362    4,904 8,121    1,624    65,241 7,204 111,411
Net income
   —   —      —   —      —      —   13,882 13,882
Contributions from China Telecom
   —   —      —   —      —      —   4,309 4,309
Distributions to China Telecom
   —   —      —   —      —      —   (1,234 ) (1,234 )
Assets distributed to China Telecom in connection with the Second Acquisition
   —   —      —   —      —      —   (10,762 ) (10,762 )
Revaluation surplus
   —   —      1,537 —      —      —   —   1,537
Recognition of deferred tax assets
   —   —      —   —      —      2,209 —   2,209
Elimination of deferred tax liabilities
   —   —      —   —      —      —   150 150
Transfer from retained earnings to other reserves
   —   —      —   —      —      (11,812 ) 11,812 —
Consideration for the acquisition of the First Acquired Group
   —   —      —   —      —      (45,649 ) —   (45,649 )
Transfer from other reserves to capital reserve
   (14,388 ) —      —   —      —      14,388 —   —
Appropriations (Note (i) and (ii))
   —   —      —   7,340    1,748    —   (9,088 ) —
Dividends
   —   —      —   —      —      —   (673 ) (673 )
Revaluation surplus realized
   —   —      (17 ) —      —      —   17 —
Deferred tax on land use rights realized
   —   —      —   —      —      (131 ) 131 —







Balance as of December 31, 2003
   6,567 3,362    6,424 15,461    3,372    24,246 15,748 75,180
Issue of shares, net of issuing expenses of RMB294
   —   7,384    —   —      —      —   —   7,384
Net income
   —   —      —   —      —      —   28,023 28,023
Contributions from China Telecom
   —   —      —   —      —      —   100 100
Transfer from retained earnings to other reserves
   —   —      —   —      —      2,653 (2,653 ) —
Consideration for the acquisition of the Second Acquired Group
   —   —      —   —      —      (27,800 ) —   (27,800 )
Transfer from other reserves to capital reserve
   (9,371 ) —      —   —      —      9,371 —   —
Revaluation surplus
   —   —      1,233 —      —      —   —   1,233
Deferred tax on revaluation surplus of property, plant and equipment
   —   —      —   —      —      (378 ) —   (378 )
Appropriations (Note (i) and (ii))
   —   —      —   10,168    2,421    —   (12,589 ) —
Dividends (Note 24)
   —   —      —   —      —      —   (5,224 ) (5,224 )
Effect of change in tax rate
   —   —      —   —      —      (244 ) —   (244 )
Revaluation surplus realized
   —   —      (72 ) —      —      —   72 —
Deferred tax on land use rights realized
   —   —      —   —      —      (165 ) 165 —







Balance as of December 31, 2004
   (2,804 ) 10,746    7,585 25,629    5,793    7,683 23,642 78,274







F - 29
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
18. RESERVES (continued)
~~18.~~Note: ~~RESERVES (Continued)~~
~~Note:~~
(i) ~~The amount of RMB68,317 represents the par value of shares issued to China Telecom upon incorporation of the Company.~~
~~(ii)~~ According to the Company’s Articles of Association, the Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve until such reserve balance reaches 50% of the registered capital. The transfer to this reserve must be made before distribution of any dividend to shareholders. For the years ended December 31, ~~2002~~2003 and ~~2003,~~2004, the Company transferred ~~RMB1,624~~RMB1,748 and ~~RMB1,748,~~RMB2,421, respectively, being 10% of the respective year’s net income determined in accordance with PRC accounting rules and regulations, to this reserve.
According to the Company’s Articles of Association, the Directors authorized, subject to shareholders’ approval, for the years ended December 31, 2003 and 2004 the transfer of RMB5,592 and RMB7,747, being 32% of the respective year’s net income determined in accordance with PRC accounting rules and regulations, to a discretionary surplus reserve.
The surplus reserves are non-distributable other than liquidation and can be used to make good of previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholdings or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
According to the Company’s Articles of Association, the Directors authorized, subject to shareholders’ approval, for the years ended December 31, 2002 and 2003 the transfer of RMB6,497 and RMB5,592, being 40% and 32% of the respective year’s net income determined in accordance with PRC accounting rules and regulations, to a discretionary surplus reserve.
The surplus reserves are non-distributable other than liquidation and can be used to make good of previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholdings or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
~~(iii)~~(ii) According to the Company’s Articles of Association, the Company is required to transfer 5% to 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory common welfare fund. This fund can only be utilized on capital items for the collective benefits of the Company’s employees such as construction of dormitories, canteen and other staff welfare facilities. This fund is non-distributable other than on liquidation. The transfer to this fund must be made before distribution of any dividend to shareholders. For the years ended December 31, ~~2002~~2003 and ~~2003,~~2004, the Directors authorized, subject to shareholders’ approval, the transfer of ~~RMB1,624~~RMB1,748 and ~~RMB1,748,~~RMB2,421, respectively, being 10% of the respective year’s net income determined in accordance with the PRC accounting rules and regulations, to this fund.
~~(iv)~~(iii) According to the Company’s Articles of Association, the amount of retained earnings available for distribution to shareholders of the Company is the lower of the amount determined in accordance with the PRC accounting rules and regulations and the amount determined in accordance with IFRS. As of December 31, ~~2002~~2003 and ~~2003,~~2004, the amount of retained earnings available for distribution was ~~RMB6,497~~RMB14,212 and ~~RMB14,212~~RMB20,609, respectively, being the amount determined in accordance with the PRC accounting rules and regulations. Final dividend of ~~RMB5,210~~approximately RMB5,576 in respect of the financial year ~~2003~~2004 proposed after the balance sheet date has not been recognized as a liability at the balance sheet date (Note 24).

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F - 30
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
19. OPERATING REVENUES
~~19.~~ ~~OPERATING REVENUES~~
Operating revenues represent revenues from the provision of wireline telecommunications services. The components of the Group’s operating revenues are as follows:
               Year ended December 31,
Note 2001     2002     2003
RMB RMB RMB

Upfront connection fees (i) 8,896 8,554 7,885
Upfront installation fees (ii) 1,264 1,575 1,831
Monthly fees (iii) 15,300 18,998 20,429
Local usage fees (iv) 32,502 34,433 35,761
DLD (iv) 20,625 20,123 19,888
ILD (iv) 3,785 3,694 3,770
Internet (v) 2,800 4,914 8,160
Managed data (vi) 2,052 2,431 2,540
Interconnections (vii) 5,316 5,921 6,444
Leased line (viii) 4,040 4,214 3,915
Others (ix) 3,917 4,707 7,828

100,497 109,564 118,451

   Year ended December 31,
   Note
2002
   2003
   2004
   RMB    RMB    RMB
Upfront connection fees
   (i) 10,564    9,771    8,458
Upfront installation fees
   (ii) 2,305    2,643    2,865
Monthly fees
   (iii) 25,338    27,499    29,827
Local usage fees
   (iv) 44,440    45,815    47,646
DLD
   (iv) 25,726    25,460    26,231
ILD
   (iv) 3,878    3,943    3,788
Internet
   (v) 5,998    10,007    14,109
Managed data
   (vi) 3,147    3,210    3,015
Interconnections
   (vii) 7,524    8,365    10,719
Leased line
   (viii) 5,520    5,103    4,154
Others
   (ix) 6,466    9,737    10,400



   140,906    151,553    161,212



Note:
(i) Represent the amortized amount of the upfront fees received for initial activation of wireline services.
(ii) Represent the amortized amount of the upfront fees received for installation of wireline services.
(iii) Represent amounts charged to customers each month for their use of the Group’s telephone services.
(iv) Represent usage fees charged to customers for the provision of telephone services.
(v) Represent amounts charged to customers for the provision of Internet access services.
(vi) Represent amounts charged to customers for the provision of managed data transmission services.
(vii) Represent amounts charged to domestic and foreign telecommunications operators for delivery of calls connecting to the Group’s wireline telecommunications networks.
(viii) Represent lease income from other domestic telecommunications operators and business customers for the usage of the Group’s wireline telecommunications networks and is measured by the number of lines leased and the agreed upon rate per line leased. The lease arrangements are primarily on a year to year basis.
(ix) Represent primarily revenues from provision of value-added telecommunications services to customers, sale and repairs and maintenance of customer-end equipment, and lease of telecommunications network facilities.

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F - 31
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
20. OTHER OPERATING EXPENSES
~~20.~~ ~~OTHER OPERATING EXPENSES~~
~~Other operating expenses consist of:~~
      Year ended December 31,

Note     2001     2002     2003
RMB RMB RMB

Interconnection charges (i) 1,797 2,828 2,848
Donations 30 28 28
Others 38 17 20
1,865 2,873 2,896
Other operating expenses consist of:
   Year ended December 31,
   Note
2002
   2003
   2004
   RMB    RMB    RMB
Interconnection charges
   (i) 3,115    3,104    4,095
Donations
   36    41    17
Others
   37    31    27



   3,188    3,176    4,139



Note:
(i) Interconnection charges represent amounts incurred for the use of other domestic and foreign telecommunications operators’ networks for facilitating the completion of calls that originate from the Group’s wireline telecommunications networks.
~~21.~~ ~~TOTAL OPERATING EXPENSES~~
21. TOTAL OPERATING EXPENSES
Total operating expenses for the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004 include personnel expenses of ~~RMB10,392, RMB13,315~~RMB18,894, RMB20,812 and ~~RMB15,251,~~RMB23,233, respectively.
~~22.~~ ~~NET FINANCE COSTS~~
~~Net finance costs comprise:~~
      Year ended December 31,
2001     2002     2003
RMB RMB RMB

Interest expense incurred. 3,257 3,201 2,890
Less: Interest expense capitalized* (1,596 ) (1,196 ) (1,177 )
Net interest expense 1,661 2,005 1,713
Interest income. (313 ) (174 ) (276 )
Foreign exchange losses 7 330 422
Foreign exchange gains (479 ) (17 ) (45 )
876 2,144 1,814
*Interest expense was capitalized in construction in progress at the following rates per annum. 4.4% to 5.8% 4.4% to 5.6% 4.3% to 5.5%
~~23.~~ ~~INCOME TAX~~
~~Income tax in the consolidated statement of income comprises:~~
      Year ended December 31,

2001 2002 2003
RMB RMB RMB

Provision for PRC income tax 3,319 4,296 6,014
Deferred taxation (Note 11) (3,158 ) (4,878 ) (81 )
161 (582 ) 5,933

~~Back to Contents~~
22. NET FINANCE COSTS
Net finance costs comprise:

   Year ended December 31,

   2002
2003
2004

   RMB RMB RMB
Interest expense incurred
   5,494 4,948 6,834
Less: Interest expense capitalized*
   (1,668 ) (1,608 ) (1,467 )


Net interest expense
   3,826 3,340 5,367
Interest income
   (248 ) (331 ) (231 )
Foreign exchange losses
   520 647 207
Foreign exchange gains
   (27 ) (50 ) (3 )


   4,071 3,606 5,340


*Interest expense was capitalized in construction in progress at the following rates per annum
   4.4% to 5.8% 4.3% to 5.5% 4.1% to 5.2%


F - 32
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
23. INCOME TAX
~~23.~~ ~~INCOME TAX (Continued)~~
Income tax in the consolidated statement of income comprises:
   Year ended December 31,
   2002
2003
2004
   RMB RMB RMB
Provision for PRC income tax
   4,296 6,014 5,114
Deferred taxation (Note 11)
   (6,152 ) (5,545 ) 73


   (1,856 ) 469 5,187


A reconciliation of the expected tax with the actual tax ~~expense/~~(benefit) / expense is as follows:
Year ended December 31,

Note 2001 2002 2003

RMB RMB RMB

Income before taxation and minority interests 10,133 9,263 30,675

Expected PRC income tax expense at statutory tax rate of 33% (i) 3,344 3,057 10,123
Differential tax rate on subsidiaries’ income (i) (506 ) (708 ) (692 )
Non-deductible expenses (ii) 614 800 291
Non-taxable income (iii) (3,291 ) (3,731 ) (3,789 )

Income tax 161 (582 ) 5,933

   Year ended December 31,

   Note
2002
2003
2004

   RMB RMB RMB
Income before income tax and minority interests
   6,435 14,407 33,263


Expected PRC income tax expense at statutory tax rate of 33%
   (i) 2,124 4,754 10,977
Differential tax rate on subsidiaries’ income
   (i) (624 ) (314 ) (1,608 )
Non-deductible expenses
   (ii) 1,106 515 294
Non-taxable income
   (iii) (4,139 ) (3,659 ) (3,266 )
Tax credit for domestic equipment purchases
   (323 ) (827 ) (1,210 )


Income tax
   (1,856 ) 469 5,187


Note:
~~Note:~~
(i) The provision for PRC current income tax is based on a statutory rate of 33% of the assessable income of the Group as determined in accordance with the relevant income tax rules and regulations of the PRC, except for certain subsidiaries of the Company which are taxed at a preferential rate of 15%.
(ii) Amounts represent personnel and other miscellaneous expenses in excess of statutory deductible limits for tax purpose.
(iii) Amounts primarily represent connection fees received from customers which are not subject to income tax.
~~24.~~ ~~DIVIDENDS~~
24. DIVIDENDS
Pursuant to a resolution passed at the Directors’ meeting on March ~~17, 2004,~~31, 2005, a final dividend of ~~RMB0.0689~~equivalent to HK$0.065 per share totaling ~~RMB5,210~~approximately RMB5,576 for the year ended December 31, 2004 was proposed for shareholders’ approval at the Annual General Meeting. The dividend has not been provided for in the consolidated financial statements for the year ended December 31, ~~2003.~~2004.
Pursuant to the shareholders’ approval at the Annual General Meeting held on ~~June 20, 2003,~~May 3, 2004, a final dividend of ~~RMB0.008897~~RMB0.069083 equivalent to HK$0.065 per share totaling ~~RMB673~~RMB5,224 in respect of the year ended December 31, ~~2002~~2003 was declared and was paid on ~~July 10, 2003.~~May 20, 2004.
~~25.~~ ~~BASIC EARNINGS PER SHARE~~
F - 33
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
25. BASIC EARNINGS PER SHARE
The calculation of basic earnings per share for the ~~year~~years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004 is based on the net income of ~~RMB9,986, RMB9,773~~RMB8,219, RMB13,882 and ~~RMB24,686~~RMB28,023 respectively, and the weighted average number of shares in issue during the year of ~~68,317,270,803,~~ 69,241,674,942, 75,614,186,503 and ~~75,614,186,503~~78,839,968,917 shares, respectively. ~~For~~The weighted average number of shares for the ~~years~~year ended December 31, ~~2001 and~~2004 reflects the issuance of 5,318,181,818 new H shares in May 2004 (Note 17). For the year ended December 31, 2002, the weighted average number of shares reflects as if the 68,317,270,803 shares issued and outstanding upon the legal formation of the Company on September 10, 2002 had been outstanding for all periods presented. The weighted average number of shares for the year ended December 31, 2002 also reflects the issuance of 7,296,915,700 shares in 2002 in connection with the Company’s global initial public ~~offering (Note 17).~~offering.
The amount of diluted earnings per share is not presented as there were no dilutive potential ordinary shares in existence for all periods presented.
~~26.~~ ~~COMMITMENTS AND CONTINGENCIES~~
26. COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Group leases business premises through ~~non-cancellable~~non-cancelable operating leases. These operating leases do not contain provisions for contingent lease rentals. None of the rental agreements contain escalation provisions that may require higher future rental payments nor impose restrictions on dividends, additional debt and/or further leasing.

~~Back to Contents~~
~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~
~~26.~~ ~~COMMITMENTS AND CONTINGENCIES (Continued)~~
~~Operating lease commitments (Continued)~~
As of December 31, ~~2003,~~2004, future minimum lease payments under ~~non-cancellable~~non-cancelable operating leases having initial or remaining lease terms of more than one year were as follows:
RMB

2004 500
2005 200
2006 117
2007 113
2008 70
Thereafter 192
Total minimum lease payments 1,192
   RMB
2005
   369
2006
   187
2007
   137
2008
   124
2009
   127
Thereafter
   341

Total minimum lease payments
   1,285

Total rental expense in respect of operating leases charged to the consolidated statements of income for the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004 were ~~RMB585, RMB886~~RMB1,136, RMB1,262 and ~~RMB989,~~RMB1,271, respectively.
Capital commitments
As of December 31, ~~2003,~~2004, the Group had capital commitments as follows:
~~RMB~~
~~Authorized and contracted for~~
     ~~Properties~~ ~~1,571~~
     ~~Telecommunications network plant and equipment.~~ ~~4,633~~
~~6,204~~
   RMB
Authorized ~~but not~~and contracted for

Properties
~~1,405~~
   918
Telecommunications network plant and equipment
~~7,316~~ 3,947
4,865
Authorized but not contracted for

Properties
1,699
Telecommunications network plant and equipment
9,168
~~8,721~~
   10,867
F - 34
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
26. COMMITMENTS AND CONTINGENCIES (continued)
Contingent liabilities
(a) The Company and the Group have been advised by their PRC lawyers that, except for liabilities arising out of or relating to the businesses of the Predecessor Operations and the Acquired ~~Group~~Groups transferred to the Company in connection with the Restructuring and the ~~Acquisition,~~Acquisitions, no other liabilities were assumed by the Company or the Group, and the Company or the Group are not jointly and severally liable for other debts and obligations incurred by China Telecom Group prior to the Restructuring and the ~~Acquisition.~~Acquisitions.
(b) As of December 31, ~~2003,~~2004, the Group had no contingent liabilities in respect of guarantees.
The Group monitors the conditions that are subject to the guarantees to identify whether it is probable that a loss has occurred, and recognizes any such losses under guarantees when those losses can be estimated. As of December 31, 2003 and 2004, it was not probable that the Group would be required to make payments under these guarantees. Thus no liability was accrued for losses related to the Group’s obligations under these guarantee arrangements.
Legal contingencies
The Group is a defendant in certain lawsuits as well as the named party in other proceedings arising in the ordinary course of business. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have a material adverse effect on the financial position or operating results of the Group.

~~Back to Contents~~
~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~27. CONCENTRATION OF RISKS
~~27.~~ ~~CONCENTRATION OF RISKS~~
Credit and concentration risks
The carrying amounts of cash and cash equivalents, time deposits, accounts receivable and other receivables represent the Group’s maximum exposure to credit risk in relation to financial assets. The majority of the Group’s accounts receivable relate to provision of telecommunications services to residential and corporate customers operating in various industries. The Group performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral on accounts receivable. The Group maintains an allowance for doubtful accounts and actual losses have been within management’s expectations.
The Group has a diversified base of customers. No single customer contributed more than 10% of revenues for the periods presented.
The Group does not have concentrations of available sources of ~~labour,~~labor, services, franchises, licenses or other rights that could, if suddenly eliminated, severely impact its operations. The Group invests its cash with several large state-owned financial institutions in the ~~PRC and international financial institutions.~~PRC.
F - 35
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
27. CONCENTRATION OF RISKS (continued)
Business and economic risks
The Group conducts its principal operations in the PRC and accordingly is subject to special considerations and significant risks not typically associated with investments in equity securities of United States and Western European companies. These include risks associated with, among others, the political, economic, legal environment and social uncertainties in the PRC, influence of the Ministry of Information Industry over certain aspects of the Group’s operations and competition in the telecommunications industry. In addition, the ability to negotiate and implement specific business development projects in a timely and favorable manner may be impacted by political considerations unrelated to or beyond the control of the Group. Although the PRC government has been pursuing economic reform policies for the past two decades, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective and as a result, changes in the rate or method of taxation, reduction in tariff protection and other import restrictions, and changes in State policies and regulations affecting the telecommunications industry may have a negative impact on the Group’s operating results and financial condition.
Currency risk
Substantially all of the revenue-generating operations of the Group are transacted in RMB, which is not fully convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted by the People’s Bank of China. However, the unification of the exchange rate does not imply convertibility of RMB into United States dollars or other foreign currencies. All foreign exchange transactions must take place either through the People’s Bank of China or other institutions authorized to buy and sell foreign exchange or at a swap center. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.
Interest rate risk
The interest rates and terms of repayment of the Group’s debts are disclosed in Note 12.
~~28.~~
28. RELATED PARTY TRANSACTIONS
~~RELATED PARTY TRANSACTIONS~~
Companies are considered to be related if one company has the ability, directly or indirectly, to control the other company or exercise significant influence over the other company in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

~~Back to Contents~~
~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~
~~28.~~ ~~RELATED PARTY TRANSACTIONS (Continued)~~
The Group conducts business with enterprises directly or indirectly owned or controlled by the PRC government (“state-owned enterprises”). Furthermore, the PRC government itself represents a significant customer of the Group both directly through its numerous authorities and indirectly through its numerous affiliates and other organizations. The Group considers that the provision of wireline telecommunications services to the PRC government authorities and affiliates and other state-owned enterprises are activities in the ordinary course of business in the PRC and has not disclosed such services as related party transactions.
The Group is part of a larger group of companies under China Telecom and has significant transactions and relationships with members of China Telecom. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. Under IFRS, state-owned enterprises, other than China Telecom and its affiliates, are not disclosed as related parties. Related parties refer to enterprises over which China Telecom is able to exercise control or significant influence.
F - 36
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
28. RELATED PARTY TRANSACTIONS (continued)
The principal related party transactions with China Telecom Group, which were carried out in the ordinary course of business, are as follows:
          Year ended December 31,

Note 2001     2002     2003

RMB RMB RMB

Purchases of telecommunications equipment and materials (i) 3,371 1,366 213
Construction, engineering and information technology services (ii) 4,404 5,625 5,410
Provision of community services (iii) 972 1,650 1,850
Provision of ancillary services (iv) 749 1,439 986
Operating lease expenses (v) 97 373 290
Centralized service expenses (vi) — 483 369
Interconnection revenues (vii) — 302 253
Interconnection charges (vii) — 687 685
   Year ended December 31,
   Note
2002
   2003
   2004
   RMB    RMB    RMB
Purchases of telecommunications equipment and materials
   (i) 1,599    573    304
Construction, engineering and information technology services
   (ii) 7,668    7,999    6,568
Provision of community services
   (iii) 2,284    2,563    2,417
Provision of ancillary services
   (iv) 1,745    1,311    2,490
Provision of comprehensive services
   (v) —      —      361
Operating lease expenses
   (vi) 441    353    393
Centralized service expenses
   (vii) 483    369    163
Interconnection revenues
   (viii) 302    253    98
Interconnection charges
   (viii) 687    685    201
Interest on amounts due to and loans from China Telecom Group
   (ix) —      —      2,426
Note:
(i) Represent purchases of telecommunications equipment and materials from China Telecom Group.
(ii) Represent provision of network construction, engineering and information technology services to the Group by China Telecom Group.
(iii) Represent amounts paid and payable by the Group to China Telecom Group in respect of cultural, educational, hygiene and other community services.
(iv) Represent amounts paid and payable by the Group to China Telecom Group in respect of ancillary services such as repairs and maintenance of telecommunications equipment and facilities and certain customer services.
(v) Represent amounts paid and payable by the Group to China Telecom Group in respect of comprehensive services provided (see scope of comprehensive services defined below).
~~(v)~~(vi) Represent amounts paid and payable to China Telecom Group for operating leases in respect of business premises and inter-provincial transmission optic fibers.
~~(vi)~~(vii) Represent net amount charged by China Telecom to the Group for costs associated with common corporate services and international telecommunications facilities.
~~(vii)~~(viii) Represent amounts charged from/to China Telecom for interconnection of domestic long distance telephone calls.

~~Back~~
(ix) Represent interest paid and payable to China Telecom with respect to the deferred consideration payable to China Telecom in connection with the Acquisitions and interest with respect to loans from China Telecom Group (Note 12).
In connection with the Second Acquisition, the Group and China Telecom Group entered into a number of agreements on April 13, 2004. The principal terms of these agreements are similar to ~~Contents~~those disclosed in Note 28 to the Group’s 2003 consolidated financial statements, other than an increase in the maximum commission rate for domestic equipment procurement from 1.8% to 3.0% to reflect the latest market price.
F - 37
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
28. RELATED PARTY TRANSACTIONS (continued)
~~28.~~ ~~RELATED PARTY TRANSACTIONS (Continued)~~
In addition, the Company entered into a comprehensive services framework agreement with China Telecom on April 13, 2004 to govern the terms and conditions of transactions between the Group and entities within China Telecom Group which were not within the scope of the agreements entered into previously. Such transactions include procurement of telecommunications equipment, network design, software upgrade, system integration, manufacture of calling cards and other services. Pursuant to this agreement, China Telecom Group charges the Group for these services in accordance with the following terms:
government prescribed price;
where there is no government prescribed price but where there is a government guided price, the government guided price will apply;
where there is neither a government prescribed price nor a government guided price, the market price will apply;
where none of the above is available, the price is to be agreed between the relevant parties, which shall be based on the cost incurred in providing the services plus a reasonable profit margin.
The directors of the Company are of the opinion that the above transactions with related parties were conducted in the ordinary course of business and on normal commercial terms or in accordance with the agreements governing such transactions, and this has been confirmed by the independent non-executive directors.

In connection with the Restructuring and the Acquisition, the Group and China Telecom Group entered into a number of agreements effective January 1, 2002 and January 1, 2003 respectively, with terms expiring on December 31, 2005. The terms of the principal agreements are summarized as follows:

~~(1)~~	The Company has entered into an agreement with China Telecom pursuant to which expenses associated with common corporate services and international telecommunications facilities will be allocated between the Group and China Telecom based on revenues or volume of traffic as appropriate.

~~(2)~~	The Company has entered into an agreement with China Telecom for interconnection of domestic long distance telephone calls. Pursuant to the interconnection agreement, the telephony operator terminating a telephone call made to its local network shall be entitled to receive a fee prescribed by the Ministry of Information Industry from the operator from which the telephone call is originated.

~~(3)~~	The Company has entered into an optic fiber leasing agreement with China Telecom pursuant to which the Company will lease the inter-provincial transmission optic fibers in Shanghai Municipality, Guangdong Province, Jiangsu Province and Zhejiang Province from China Telecom. The lease payment will be based on the depreciation charge of the optic fibers.

~~(4)~~	The Group has entered into agreements with China Telecom Group pursuant to which China Telecom Group will provide the Group with construction, design, equipment installation, testing and engineering project management services. In addition, the Group has entered into information technology service agreements with China Telecom Group pursuant to which China Telecom Group will provide the Group with certain information technology services including office automation and software modification. The amounts to be charged for these services will be determined by reference to market rates as reflected in prices obtained through a tender.

~~(5)~~	The Group has entered into property leasing agreements with China Telecom Group pursuant to which the Group will lease certain business premises and storage facilities from China Telecom Group. The rental charges will be based on market rates, with reference to amounts stipulated by local price bureaus.

~~(6)~~	The Group has entered into agreements with China Telecom Group pursuant to which China Telecom Group will provide the Group with the procurement of equipment and materials. The amount to be charged for this service will be based on a percentage not exceeding 1.8% of the contract value of the equipment and materials purchased.

~~(7)~~	The Group has entered into community services agreements for cultural, educational, hygiene and other community services with China Telecom Group. In addition, the Group has entered into ancillary services agreements with China Telecom Group. The ancillary services to be provided by China Telecom Group will include repairs and maintenance of telecommunications equipment and facilities and certain customer services. Pursuant to these agreements, China Telecom Group will charge the Group for these services in accordance with the following terms:

	▪	~~government prescribed price;~~

	▪	~~where there is no government prescribed price but where there is a government guided price, the government guided price will apply;~~

	▪	~~where there is neither a government prescribed price nor a government guided price, the market price will apply;~~

	▪	~~where none of the above is available, the price is to be agreed between the relevant parties, which shall be based on the cost incurred in providing the services plus a reasonable profit margin.~~

China Telecom has agreed to hold and maintain, for the Group’s benefit, all licenses received from the Ministry of Information Industry associated with the operations of the Predecessor Operations and the Acquired Group. The licenses maintained by China Telecom were granted by the Ministry of Information Industry at zero or nominal cost. To the extent that China Telecom incurs a cost to maintain or obtain licenses in the future, the Company will reimburse China Telecom for the expenses it incurs.

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~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~29. EMPLOYEE BENEFITS PLAN

~~29.~~

~~EMPLOYEE BENEFITS PLAN~~

As stipulated by the regulations of the PRC, the Group participates in various defined contribution retirement plans organized by municipal and provincial governments for its employees. The Group is required to make contributions to the retirement plans at rates ranging from ~~17%~~18% to ~~22%~~20% of the salaries, bonuses and certain allowances of the employees. A member of the plan is entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. The Group has no other material obligation for the payment of pension benefits associated with these plans beyond the annual contributions described above. The Group’s contributions for the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004 were ~~RMB1,201, RMB1,467~~RMB1,987, RMB1,996 and ~~RMB1,443,~~RMB2,031, respectively.

~~30.~~

~~STOCK APPRECIATION RIGHTS~~

30. STOCK APPRECIATION RIGHTS

The Company implemented a plan of stock appreciation rights for members of its senior management in order to provide further incentives to these employees. Under this plan, stock appreciation rights were granted in units with each unit representing one H share. No shares will be issued under the stock appreciation rights plan.

Under the plan, all stock appreciation rights will have an exercise period of six years. A recipient of stock appreciation rights may not exercise the rights in the first 18 months after the date of grant. As at each of the third, fourth, fifth and sixth anniversary of the date of grant, the total number of stock appreciation rights exercisable may not in aggregate exceed 25%, 50%, 75% and 100%, respectively, of the total stock appreciation rights granted to such person.

In March 2003, the Company’s compensation committee approved the plan for stock appreciation rights pursuant to which the Company granted 276 million stock appreciation right units to eligible employees during 2003.

F - 38

CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in millions, except per share data)

30. STOCK APPRECIATION RIGHTS (continued)

The exercise price of stock appreciation rights ~~initially~~ granted in 2003 is the initial public offering price of the Company’s H shares. Upon exercise of the stock appreciation rights, a recipient will receive, subject to any applicable withholding tax, a cash payment in RMB, translated from the Hong Kong dollar amount equal to the product of the number of stock appreciation rights exercised and the difference between the exercise price and market price of the Company’s H shares at the date of exercise based on the applicable exchange rate between RMB and Hong Kong dollar at the date of the exercise.

During the year ended December 31, 2004, 70 million stock appreciation right units were exercised. No stock appreciation right units were exercised in the year ended December 31, 2003.

The Company recognizes compensation expense of the stock appreciation rights over the applicable vesting period. For the ~~year~~years ended December 31, 2003 and 2004, compensation expense recognized was ~~RMB97.~~RMB97 and RMB70, respectively.

~~31.~~

~~PRINCIPAL SUBSIDIARIES~~

31. PRINCIPAL SUBSIDIARIES

Details of the Company’s subsidiaries as of December 31, ~~2003,~~2004, which principally affected the results of operations and the financial position of the Group, are as follows:


Name of Company	Type of legal entity	Date of incorporation	~~Registered capital~~ ~~(RMB)~~
	Registered capital (RMB)

Shanghai Telecom Company Limited	Limited company	October 11, ~~October~~ 2002	15,984
Guangdong Telecom Company Limited	Limited company	October 10, ~~October~~ 2002	47,513
Jiangsu Telecom Company Limited	Limited company	October 19, ~~October2002~~2002	19,208
Zhejiang Telecom Company Limited	Limited company	October 10, ~~October~~ 2002	22,400
Anhui Telecom Company Limited	Limited company	August 26, ~~August~~ 2003	3,871
Fujian Telecom Company Limited	Limited company	August 28, ~~August~~ 2003	10,364
Jiangxi Telecom Company Limited	Limited company	September 18, ~~September~~ 2003	1,153
Guangxi Telecom Company Limited	Limited company	August 28, ~~August~~ 2003	4,992
Chongqing Telecom Company Limited	Limited company	August 22, ~~August~~ 2003	4,276
Sichuan Telecom Company Limited	Limited company	August 28, ~~August~~ 2003	8,123
Hubei Telecom Company Limited	Limited company	March 9, 2004	5,412
Hunan Telecom Company Limited	Limited company	March 12, 2004	661
Hainan Telecom Company Limited	Limited company	March 9, 2004	580
Guizhou Telecom Company Limited	Limited company	March 12, 2004	2,401
Yunnan Telecom Company Limited	Limited company	March 9, 2004	3,747
Shaanxi Telecom Company Limited	Limited company	March 8, 2004	2,482
Gansu Telecom Company Limited	Limited company	March 10, 2004	3,413
Qinghai Telecom Company Limited	Limited company	March 10, 2004	965
Ningxia Telecom Company Limited	Limited company	March 10, 2004	795
Xinjiang Telecom Company Limited	Limited company	March 11, 2004	4,660

All of the above subsidiaries are incorporated in the PRC, are wholly-owned by the Company and are engaged in provision of telecommunications services.

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F - 39
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
32. FAIR VALUES OF FINANCIAL INSTRUMENTS
~~32.~~ ~~FAIR VALUES OF FINANCIAL INSTRUMENTS~~
Financial assets of the Group include cash and cash equivalents, time deposits, investments, accounts receivable, amounts due from China Telecom Group, advances and other receivables. Financial liabilities of the Group include debts, accounts payable, amounts due to China Telecom Group, accrued expenses and other payables. The Group does not hold nor issue financial instruments for trading purposes.

The disclosures of the fair value estimates, methods and assumptions set forth below for the Group’s financial instruments are made to comply with the requirements of IAS 32 and IAS 39, and should be read in conjunction with the Group’s consolidated financial statements and related notes. The estimated fair value amounts have been determined by the Group using market information and valuation methodologies considered appropriate. However, considerable judgment is required to interpret market data to develop the estimates of fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Group could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following summarizes the major methods and assumptions used in estimating the fair values of the Group’s financial instruments.
Long-term debt: The fair values of long-term indebtedness are estimated by discounting future cash flows using current market interest rates offered to the Group for debt with substantially the same characteristics and maturities. As of December 31, ~~2002~~2003 and ~~2003,~~2004, the carrying amounts and fair values of the Group’s long-term debt were as follows:
December 31, 2002 December 31, 2003

Carrying Fair
Carrying Fair

amount value amount value
RMB RMB RMB RMB

Long-term debt 23,268 23,854 56,099 56,296

   December 31, 2003
   December 31, 2004
   Carrying
amount

Fair
value
   Carrying
amount

Fair
value
   RMB    RMB    RMB    RMB
Long-term debt
   82,589    83,070    84,208    82,850




The Group’s ~~long term~~long-term investments are unlisted equity interests and there are no quoted market prices for such interests in the PRC. Accordingly, a reasonable estimate of their fair values could not be made without incurring excessive costs.
The fair values of all other financial instruments approximate their carrying amounts due to the short-term maturity of these instruments.
~~33.~~ ~~SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP~~
33. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP
The Group’s accounting policies conform with IFRS which differ in certain significant respects from US GAAP. ~~Differences which have a~~The significant ~~effect on net income and shareholders’ equity~~differences are set out below.
~~(a)~~ ~~Revaluation of property, plant and equipment~~
(a) Revaluation of property, plant and equipment
In connection with the Restructuring, the property, plant and equipment of the Predecessor Operations were revalued as of December 31, 2001 (Note 7). The net revaluation deficit has been reflected in the consolidated financial statements as of December 31, 2001. Such revaluation resulted in an increase directly to shareholders’ equity of RMB4,154 with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB11,930 with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.
F - 40
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
33. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP (continued)
(a) Revaluation of property, plant and equipment (continued)
In connection with the First Acquisition, the property, plant and equipment of the First Acquired Group were revalued as of December 31, 2002 (Note 7). The net revaluation deficit has been reflected in the consolidated financial statements as of December 31, 2002. Such revaluation resulted in an increase directly to shareholders’ equity of RMB760 with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB14,690 with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.

~~Back~~
In connection with the Second Acquisition, the property, plant and equipment of the Second Acquired Group were revalued as of December 31, 2003. The net revaluation deficit has been reflected in the consolidated financial statements as of December 31, 2003. Such revaluation resulted in an increase directly to ~~Contents~~shareholders’ equity of RMB1,537 with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB14,832 with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.
~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts~~
In accordance with Group’s accounting policy, the property, plant and equipment of the Group were revalued as of December 31, 2004. The net revaluation deficit has been reflected in ~~millions, except share data)~~the consolidated financial statements as of December 31, 2004. Such revaluation resulted in an increase directly to shareholders’ equity of RMB1,233 with respect to the increase in carrying amount of certain property, plant and equipment above their historical cost bases, and a charge to income of RMB1,262 with respect to the reduction in carrying amount of certain property, plant and equipment below their historical cost bases.
~~33.~~ ~~SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP (Continued)~~
Under US GAAP, property, plant and equipment are stated at their historical cost less accumulated depreciation unless an impairment loss has been recorded. An impairment loss on property, plant and equipment is recorded under US GAAP if the carrying amount of such asset exceeds its future undiscounted cash flows resulting from the use of the asset and its eventual disposition. The future undiscounted cash flows of the Group’s property, plant and equipment, whose carrying amount was reduced ~~in connection with~~as a result of the ~~Restructuring and the Acquisition,~~above revaluations, exceed the historical cost carrying amount of such property, plant and equipment and, therefore, impairment of such assets is not appropriate under US GAAP. Accordingly, the revaluation ~~reserve~~reserves recorded directly to shareholders’ equity and the ~~charge~~charges to income recorded under IFRS as a result of the ~~Restructuring and the Acquisition~~above revaluations are reversed for US GAAP purposes.
However, as a result of the tax deductibility of the net revaluation deficit, a deferred tax liability related to the net revaluation deficit is created under US GAAP with a corresponding decrease in shareholders’ equity.
~~(b)~~ ~~Disposal of revalued property, plant and equipment~~
(b) Disposal of revalued property, plant and equipment
Under IFRS, on disposal of a revalued asset, the related revaluation surplus is transferred from the revaluation reserve to retained earnings. Under US GAAP, the gain and loss on disposal of an asset is determined with reference to the asset’s historical cost carrying amount and included in current earnings.
~~(c)~~ ~~Related party transactions~~
(c) Effect of change in tax rate
Under IFRS, the effect of a change in tax rate that results in a change in the carrying amounts of deferred tax assets and liabilities is charged or credited directly to equity, to the extent that such deferred tax assets and liabilities are previously charged or credited to equity. Under US GAAP, the effect of a change in tax rate for all items of deferred tax assets and liabilities is recorded in the income statement.
F - 41
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
33. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP (Continued)
(d) Related party transactions
Under IFRS, transactions with state-controlled enterprises other than China Telecom and its affiliates are not required to be disclosed as related party transactions. Furthermore, government departments and agencies are deemed not to be related parties to the extent that such transactions are in the normal course of business. Therefore, related party transactions as disclosed in Note 28 only refer to transactions with China Telecom Group.
Under US GAAP, there are no similar exemptions. The Group’s principal transactions with state-controlled telecommunications operators in the PRC were as follows:
Year ended December 31,

2001 2002 2003

RMB RMB RMB

Interconnection revenues 5,316 3,967 5,010
Interconnection charges 1,797 668 898
Leased line revenues 3,767 3,586 2,751
   Year ended December 31,
   2002
   2003
   2004
   RMB    RMB    RMB
Interconnection revenues
   5,570    6,931    8,964
Interconnection charges
   955    1,154    2,190
Leased line revenues
   4,489    3,476    2,701
The amounts set out above represent the historical costs incurred by the related parties in carrying out such transactions.
~~(d)~~ ~~Recently issued accounting standards~~
~~SFAS No.150~~
(e) Recently issued accounting standards.
SFAS No. 123R
In ~~May 2003,~~December 2004, the FASB issued SFAS No. ~~150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”~~123 (revised 2004), “Share-based payment” (SFAS No. 123R). SFAS ~~No.150 establishes standards~~No. 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for equity instruments of the ~~classification~~enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R requires an entity to recognize the grant-date fair-value of stock options and ~~measurement~~other equity-based compensation issued to employees in the income statement. SFAS No. 123R generally requires that an entity account for those transactions using the fair-value-based method, and eliminates an entity’s ability to account for share-based compensation transactions using the intrinsic value method of ~~certain financial instruments with characteristics of both liabilities and equity. It also includes required disclosures for financial instruments within its scope.~~accounting, which was permitted under Statement 123, as originally issued. For the Group, SFAS ~~No.150 was effective for instruments entered into or modified after May 31, 2003 and otherwise will be~~No. 123R is effective at the beginning of the ~~first financial year beginning~~reporting period that begins after June 15, 2003. FASB Staff Position No. FAS150-3 deferred certain provisions of SFAS No.150 for certain mandatorily redeemable non-controlling interests. The Group currently does not have any financial instruments that are within2005. Currently, the ~~scope of SFAS No.150.~~

~~Back to Contents~~
~~CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All amounts in millions, except share data)~~
~~33.~~ ~~SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP (Continued)~~
~~FIN No. 46R~~
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46R), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, which was issued in January 2003. The Group will be required to apply FIN 46R to variable interests in Variable Interest Entities (“VIEs”) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The Group does not expect the application of ~~this Interpretation~~SFAS No. 123R will have a material impact on its consolidated financial statements.
~~(e)~~ ~~Reconciliation of net income and shareholders’ equity under IFRS to US GAAP~~
SFAS No. 151
In November 2004, the FASB issued SFAS No. 151, “Inventory costs”. SFAS No. 151 clarifies accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current period charges. Additionally, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion based on normal capacity of the production facilities. For the Group, SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. Currently, the Group does not expect the application of SFAS No. 151 will have a material impact on its consolidated financial statements.
SFAS No. 152
In December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions”. SFAS No. 152 amends SFAS No. 66, “Accounting for Sales of Real Estate” to reference accounting and reporting guidance for real estate time-sharing transactions. SFAS No. 152 amends SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects”, so that the guidance in SFAS No. 67 about incidental operations and costs incurred to sell real estate projects does not apply to real-estate time-sharing transactions. For the Group, SFAS No. 152 is effective for fiscal years beginning after June 15, 2005. Currently, the Group does not expect the application of SFAS No. 152 will have a material impact on its consolidated financial statements.
F - 42
CHINA TELECOM CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data)
33. SIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP (Continued)
(e) Recently issued accounting standards (continued)
SFAS No. 153
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets”. SFAS No. 153 addresses the accounting for non-monetary exchanges of productive assets. SFAS No. 153 requires non-monetary exchanges to be accounted for at fair value, recognizing any gains or losses, if the fair value is determinable within reasonable limits and the transaction has commercial substance. For the Group, SFAS No. 153 is effective for fiscal years beginning after June 15, 2005. Currently, the Group does not expect the application of SFAS No. 153 will have a material impact on its consolidated financial statements.
(f) Reconciliation of net income and shareholders’ equity under IFRS to US GAAP
The effect on net income of significant differences between IFRS and US GAAP for the years ended December 31, ~~2001,~~ 2002, 2003 and ~~2003~~2004 is as follows:
Year ended December 31,

2001 2002 2003 2003

RMB RMB RMB US$

Net income under IFRS 9,986 9,773 24,686 2,983
US GAAP adjustments:
     Reversal of deficit on revaluation of property, plant and equipment, net of minority interests. 11,838 14,690 — —
     Depreciation on revalued property, plant and equipment — (1,542 ) (3,940 ) (476 )
     Disposal of revalued property, plant and equipment — (55 ) (60 ) (7 )
     Deferred tax effect of US GAAP adjustments (3,936 ) (4,321 ) 1,320 159
Net income under US GAAP 17,888 18,545 22,006 2,659

Basic earnings per share under US GAAP 0.26 0.27 0.29 0.04
Basic earnings per ADS* under US GAAP 26.18 26.78 29.10 3.52
   Year ended December 31,

   2002
2003
2004
2004

   RMB RMB RMB US$
Net income under IFRS
   8,219 13,882 28,023 3,386
US GAAP adjustments:

Reversal of deficit on revaluation of property, plant and equipment
   14,690 14,832 1,262 152
Depreciation on revalued property, plant and equipment, net of minority interests
   (1,542 ) (3,940 ) (6,766 ) (817 )
Disposal of revalued property, plant and equipment
   (55 ) (60 ) (128 ) (16 )
Effect of change in tax rate on deferred tax assets arising from revaluation of land use rights
   —   —   (244 ) (29 )
Effect of change in tax rate on deferred tax liabilities arising from revaluation of property, plant and equipment
   —   —   2,189 264
Deferred tax effect of US GAAP adjustments
   (4,321 ) (3,262 ) 1,379 167


Net income under US GAAP
   16,991 21,452 25,715 3,107


Basic earnings per share under US GAAP
   0.25 0.28 0.33 0.04


Basic earnings per ADS* under US GAAP
   24.54 28.37 32.62 3.94


* Basic earnings per ADS is calculated on the basis that one ADS is equivalent to 100 H shares.
The effect on shareholders’ equity of significant differences between IFRS and US GAAP as of December 31, ~~2002~~2003 and ~~2003~~2004 is as follows:
December 31,

2002 2003 2003

RMB RMB US$

Shareholders’ equity under IFRS 152,848 131,272 15,860
US GAAP adjustments:
     Revaluation of property, plant and equipment, net of minority interests 20,017 16,017 1,935
     Deferred tax effect of US GAAP adjustment (6,636 ) (5,316 ) (642 )
Shareholders’ equity under US GAAP 166,229 141,973 17,153
~~F-36~~
   December 31,

   2003
2004
2004

   RMB RMB US$
Shareholders’ equity under IFRS
   150,794 159,206 19,236
US GAAP adjustments:

Revaluation of property, plant and equipment, net of minority interests
   29,312 22,447 2,712
Deferred tax effect of US GAAP adjustment
   (9,465 ) (5,519 ) (667 )


Shareholders’ equity under US GAAP
   170,641 176,134 21,281


F - 43

Exhibit Index


Exhibits		Description
1.1		Articles of Association (as amended) (English translation).

2.1		Form of H Share Certificate.⁽¹⁾

2.2		Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and Owners and Beneficial Owners from time to time of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt.⁽²⁾

4.1		Supplemental Trademark License Agreement, dated October 26, 2003, between the Registrant and China Telecom Group (English translation).⁽³⁾

4.2		Sale and Purchase Agreement, dated October 26, 2003, between the Registrant and China Telecom Group (English translation).⁽³⁾

4.3		Supplemental Connected Transactions Agreement, dated October 26, 2003, between the Registrant and China Telecom Group (English translation).⁽³⁾

4.4		Form of Underwriting Agreement.⁽⁴⁾

4.5		Supplemental Trademark License Agreement, dated April 13, 2004, between the Registrant and China Telecom Group (English translation).⁽⁵⁾

4.6		Supplemental Connected Transactions Agreement, dated April 13, 2004, between the Registrant and China Telecom Group (English translation).⁽⁶⁾

4.7		Comprehensive Services Agreement, dated April 13, 2004, between the Registrant and China Telecom Group (English translation).⁽⁷⁾

4.8		Conditional Sale and Purchase Agreement, dated April 13, 2004, between the Registrant and China Telecom Group (English translation).⁽⁸⁾

4.9		Supplemental Conditional Sale and Purchase Agreement, dated June 9, 2005, between the Registrant and China Telecom Group (English summary)

8.1		List of subsidiaries of the Registrant.

11.1		Code of Ethics (English translation).⁽³⁾

12.1		Certification of CEO pursuant to Rule 13a-14(a).

12.2		Certification of CFO pursuant to Rule 13a-14(a).

13.1		Certification of CEO pursuant to Rule 13a-14(b).

13.2		Certification of CFO pursuant to Rule 13a-14(b).

14.1		Consent of KPMG.

(1)	Incorporated by reference to our Registration Statement on Form F-1 (File No. 333-100042), filed with the Securities and Exchange Commission on November 5, 2002.

(2)	Incorporated by reference to our Registration Statement on Form F-6 (File No. 333-100617), filed with the Securities and Exchange Commission with respect to American Depositary Shares representing our H shares.

(3)	Incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (File No. 001-31517), filed with the Securities and Exchange Commission.

(4)	Incorporated by reference to Exhibit 1.1 to our Form 6-K filed on April 29, 2004

(5)	Incorporated by reference to Exhibit 1.2 to our Form 6-K filed on April 29, 2004.

(6)	Incorporated by reference to Exhibit 1.3 to our Form 6-K filed on April 29, 2004.

(7)	Incorporated by reference to Exhibit 1.4 to our Form 6-K filed on April 29, 2004.

(8)	Incorporated by reference to Exhibit 1.5 to our Form 6-K filed on April 29, 2004.


Title of Each Class		Name of Each Exchange On Which Registered
American depositary shares H shares, par value RMB1.00 per share		New York Stock Exchange, Inc. New York Stock Exchange, Inc.*


	As of or for the year ended December 31,
	2002	2003	2004
Local Telephone:
Access lines in service (in millions)	133.1	161.0	186.7
Total pulses (in billions)	459.3	455.1	466.8
Domestic Long Distance:
Total outgoing call minutes carried (in billions)	59.5	67.3	82.0
International, Hong Kong, Macau and Taiwan Long Distance:
Total outgoing call minutes carried (in billions)	1.55	1.67	1.65
Interconnection
Volume of inbound local call minutes (in billions)	53.5	76.2	94.7
Dial-up Internet Access:
Number of subscribers (in millions)	24.0	22.2	15.8
Dial-up on-line usage (minutes in billions)	81.6	54.9	30.0
Broadband Access:
Number of subscribers (in millions)	2.4	7.2	13.8
Managed Data (bandwidth leased in thousands):
DDN (x64Kbps)	378.2	471.2	493.3
Frame relay (x128Kbps)	48.1	88.3	156.3
ATM (x2Mbps)	16.6	19.0	23.8
Leased Digital Circuits:
Total bandwidth (x2Mbps) (bandwidth leased in thousands)	164.5	163.1	169.5
Value-added Services
Caller ID service subscribers (in millions)	51.5	82.5	109.0
Usage of telephone information services (minutes in billions)	0.9	1.7	2.4

~~(2)~~⁽³⁾	Includes primarily revenue from ~~dial-up and broadband Internet access services.~~

~~(3)~~	~~Includes revenue from DDN, frame relay and ATM services.~~

~~(4)~~	~~Includes revenue from~~the provision of value-added telecommunications services, sale ~~repair~~and repairs and maintenance of customer-end equipment, and lease of telecommunications network facilities.

			As of December 31,

			2001		2002		2003

			(in thousands, except percentages)
Number of access lines in service: ⁽¹⁾
	Residential		64,262		72,266		79,407
	Enterprise		10,694		12,456		13,639
	Public telephones		3,182		4,822		6,700
	Wireless local access		2,696		7,243		18,346

		Total	80,834		96,788		118,091
Wireline telephone penetration rate			15.6	%	18.6	%	22.8	%


	As of December 31,
	2002	2003	2004
	(in millions)
Residential	98.8	108.1	113.1
Enterprise	16.3	17.7	19.0
Public telephones	7.2	9.6	12.4
Wireless local access	10.8	25.6	42.2
Total	133.1	161.0	186.7


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

ORx

	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the fiscal year ended December 31, 2003~~

OR

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the transition period from __________ to __________~~

*	Not for trading, but only in connection with the listing on the New York Stock Exchange, Inc. of American depositary shares, each representing 100 H shares.

		~~Page~~

~~Forward-Looking Statements~~		2

~~Certain Definitions and Conventions~~		3
				Page
Forward-Looking Statements				1

Certain Definitions and Conventions				2

PART I				2

Item 1.		Identity of Directors, Senior Management and Advisers.	4	2
Item 2.		Offer Statistics and Expected Timetable.	4	2
Item 3.		Key Information.	4	2
Item 4.		Information on the Company.	16	15
Item 5.		Operating and Financial Review and Prospects.	49	47
Item 6.		Directors, Senior Management and Employees.		64
Item 7.		Major Shareholders and Related Party Transactions.	72	71
Item 8.		Financial Information.	81	79
Item 9.		The Offer and Listing.	82	79
Item 10.		Additional Information.	83	80
Item 11.		Quantitative and Qualitative Disclosures about Market Risk.	92	88
Item 12.		Description of Securities Other than Equity Securities.	95
		92

PART II				9692

Item 13.
~~Item 13.~~	Defaults, Dividend Arrearages and Delinquencies.	96	92
Item 14.		Material Modifications to the Rights of Security Holders and Use of Proceeds.	96	92
Item 15.		Controls and Procedures.	97	93
Item 16A.		Audit Committee Financial Expert.	97	93
Item ~~16B~~16B.		Code of ~~Ethics~~Ethics.	97	94
Item 16C.		Principal Accountant Fees and ~~Services~~Services.	97	94
Item 16D.		Exemptions ~~From~~from the Listing Standards for Audit ~~Committees~~Committees.	97	94
Item 16E.		Purchases of Equity Securities by the Issuer and Affiliated Purchasers.	97
		94

PART III				9894

Item 17.		Financial Statements.		94
Item ~~17.~~18.		Financial Statements.	98	94
~~Item 18.~~	~~Financial Statements.~~	98
Item 19.	~~Exhibits.~~	98Exhibits.		94

	As of or for the year ended December 31,

	1999		2000		2001		2002		2003		2003
	RMB		RMB		RMB		RMB		RMB		US$

	(in millions, except share numbers and per share and per ADS data)
Income Statement Data:
IFRS
Operating revenue	92,107		101,433		100,497		109,564		118,451		14,311
Operating expenses	(60,046	)	(72,170	)	(77,881	)	(83,567	)	(86,003	)	(10,391	)
Operating income	32,061		29,263		22,616		25,997		32,448		3,920
Income before income tax and minority interests⁽²⁾	31,167		29,015		10,133		9,263		30,675		3,706
Income tax	(6,409	)	(5,596	)	(161	)	582		(5,933	)	(717	)
Net income	24,657		23,344		9,986		9,773		24,686		2,983
Basic earnings per share⁽¹⁾	0.36		0.34		0.15		0.14		0.33		0.04
Basic earnings per ADS⁽¹⁾	36.09		34.17		14.62		14.11		32.65		3.95
U.S. GAAP
Net income	24,657		23,344		17,888		18,545		22,006		2,659
Basic earnings per share⁽¹⁾	0.36		0.34		0.26		0.27		0.29		0.04
Basic earnings per ADS⁽¹⁾	36.09		34.17		26.18		26.78		29.10		3.52
Balance Sheet Data:
IFRS
Cash and cash equivalents	22,055		18,358		7,697		18,685		10,119		1,222
Accounts receivable, net	10,673		10,890		8,536		9,058		10,187		1,231
Property, plant and equipment, net⁽²⁾	180,807		202,659		221,333		220,761		235,211		28,418
Total assets⁽²⁾	276,544		301,250		299,088		303,611		305,605		36,923
Short-term debt⁽³⁾	19,600		23,454		33,914		40,336		40,097		4,845
Accounts payable	16,424		22,218		24,071		21,728		20,129		2,432
Long-term obligations	25,366		22,814		22,160		17,676		49,684		6,003
Deferred revenues (excluding current portion)	46,771		43,879		38,465		31,735		25,389		3,068
Total liabilities	156,494		166,101		162,944		149,577		173,064		20,910
Shareholders’ equity⁽²⁾	119,128		134,158		135,156		152,848		131,272		15,860
U.S. GAAP
Property, plant and equipment, net	180,807		202,659		229,109		240,870		251,320		30,365
Total assets	276,544		301,250		306,864		323,720		321,714		38,870
Shareholders’ equity	119,128		134,158		140,274		166,229		141,973		17,153
Cash Flow Data:
IFRS
Cash flows from operating activities	50,483		49,641		46,648		52,158		46,884		5,665
Net cash used in investing activities⁽⁴⁾	(41,505	)	(49,832	)	(55,844	)	(47,060	)	(40,781	)	(4,927	)
Capital expenditures⁽⁴⁾	(41,999	)	(48,507	)	(54,625	)	(45,807	)	(41,825	)	(5,053	)
Net cash (used in) / from financing activities	(4,298	)	(3,506	)	(1,465	)	5,890		(14,669	)	(1,773	)

Average Noon Buying Rate

	RMB per US$ 1.00	HK$ per US$1.00

1999	8.2785	7.7599
2000	8.2784	7.7936
2001	8.2772	7.7996
2002	8.2772	7.7996
2003	8.2771	7.7864

	•	~~industry policies and regulations;~~

	•	~~licensing;~~

	•	~~tariffs;~~

	•	~~competition;~~

	•	~~telecommunications resource allocation;~~

	•	~~service standards;~~

	•	~~technical standards;~~

	•	~~interconnection and settlement arrangements; and~~

	•	~~universal service obligations.~~

	•	~~government involvement;~~

	•	~~level of development;~~

	•	~~growth rate;~~

	•	~~control of foreign exchange; and~~

	•	~~allocation of resources.~~

	•	~~payment of interest and principal on foreign currency-denominated debt;~~

	•	~~payment for equipment and materials purchased offshore; and~~

	•	~~payment of dividends declared, if any, in respect of our H shares.~~

	•	wireline telephone services, including local telephone, domestic and international, Hong Kong, Macau and Taiwan long distance and interconnection services as well as a range of related value-added services;

	•	~~Internet and managed data services, including dial-up Internet access, broadband Internet access, managed data, system integration and related value-added services; and~~

	•	~~leased line services.~~

	•	not to sell, transfer or pledge any of ~~our shares it obtained under the share transfer agreement during the three-year period after November 15, 2002, and~~

	•	following the expiry of the three-year period after November 15, 2002, not to sell or transfer more than 20% of our shares it obtained under the share transfer agreement during any six-month period for two years.


(1)	The percentages may not add up to 100% due to rounding discrepancies.

(2)	Denotes the companies acquired pursuant to the acquisition.


	For the Year Ended December 31
	2002	2003	2004
	(RMB in millions)
Wireline telephone services⁽¹⁾
Local
Installation fees	2,305	2,643	2,865
Monthly fees	25,338	27,499	29,827
Local usage fees	44,440	45,815	47,646

Sub-total	72,083	75,957	80,338
Domestic long distance⁽²⁾	25,726	25,460	26,231
International, Hong Kong, Macau and Taiwan long distance⁽²⁾	3,878	3,943	3,788
Interconnections	7,524	8,365	10,719
Upfront connection fees	10,564	9,771	8,458

Sub-total	119,775	123,496	129,534
Internet	5,998	10,007	14,109
Managed data	3,147	3,210	3,015
Leased line services	5,520	5,103	4,154
Others⁽³⁾	6,466	9,737	10,400

Total operating revenue	140,906	151,553	161,212

~~(1)~~⁽²⁾	Includes revenue from our VoIP long distance services.


~~(1)~~	~~Includes ISDN lines as measured by the number of bearer channels.~~


(1)	Pulses are the billing units for calculating local telephone usage fees. The definition of a pulse for intra-district calls changed in connection with the tariff adjustments mandated by the Chinese government and implemented by us in 2001. See “— Tariffs” for the respective definitions of a pulse before and after the tariff adjustments in 2001.

~~(2)~~	~~Minutes reported were calculated from pulses through a statistical sampling of calling patterns.~~

			~~Before Tariff Adjustments~~		~~After Tariff Adjustments~~

		Before Tariff Adjustments		After Tariff Adjustments
		(RMB)
Monthly fee:⁽¹⁾
~~Monthly fee:~~⁽¹⁾
	Residential customers		7.6 – 25.0		10.0 – 25.0
	Enterprise customers		12.0 – 37.0		15.0 – 35.0
Usage fee:
	Intra-district		0.16 – 0.22 per pulse (three minute intervals)		0.18 – 0.22 for the first two pulses (first three minutes or less) and 0.09 – 0.11 for each additional pulse (one minute intervals)
	Inter-district		0.20 – 0.50 per pulse (one minute intervals)		0.20 – 0.50 per pulse (one minute intervals)


(1)	Monthly fees for customers vary depending on whether a subscriber is located in the provincial capital, a city, a county or rural areas.


(1)	Includes calls originated by mobile subscribers that are carried over our long distance networks.


(1)	A discount rate of up to 40% applies to calls made during off-peak hours, which are from 12:00 am to 7:00 am every day.

(2)	A discount rate of 50% applies to calls made during off-peak hours, which are from 9:00 pm to 12:00 am for weekdays and from 7:00 am to 12:00 am on public holidays and weekends; a discount rate of 70% applies to calls made during 12:00 am to 7:00 am everyday.

(3)	Does not include separate usage fees for local services when a VoIP call is placed. The local usage fee of a VoIP call is the same as the local usage fee of an intra-district local voice call.


(1)	Includes calls originated by subscribers of other operators that are carried through the international gateways of China Telecom Group.

		~~Before Tariff Adjustments~~		~~After Tariff Adjustments~~

		~~(RMB)~~
~~Public switched telephone networks services:~~
		Before Tariff Adjustments		After Tariff Adjustments
		(RMB)
Public switched telephone networks services:
To Hong Kong, Macau and Taiwan		2.55 – 5.00 per minute	⁽¹⁾		0.20 per 6 seconds
	To all international destinations		5.30 – 15.00 per minute	⁽²⁾		0.80 per 6 seconds	⁽³⁾
VoIP services:⁽⁴⁾
	To Hong Kong, Macau and Taiwan		1.50 – 2.50 per minute	⁽⁵⁾	~~Not regulated~~	1.50 per minute
	To all international destinations		2.40 – 4.80 per minute		~~Not regulated~~	2.40 - 4.60 per minute


(1)	A discount rate of 40% applies to calls made during off-peak hours.

(2)	Rates of RMB5.30-12.00 per minute apply to calls made to Asian countries and regions and a rate of RMB15.00 per minute applied to calls to all other international destinations. A discount rate of 40% applied to calls made during off-peak hours.

		Monthly Fee

		2001	2002	2003

		(RMB)
64Kbps

	Intra-district	1,500	1,500	1,500
	Inter-district	2,000	2,000	2,000
	Intra-provincial	3,500	3,500	3,500
	Inter-provincial	3,500	3,500	3,500
2Mbps
	Intra-district	6,000	6,000	6,000
	Inter-district	8,000	8,000	8,000
	Intra-provincial	12,000	12,000	12,000
	Inter-provincial	12,000	12,000	12,000

~~Communications fee:~~

Before Tariff Adjustments

After Tariff Adjustments

Communications fee:

Internet dial-up

0.08 – 0.11 per pulse (three minute intervals)

0.02 per pulse (one minute intervals)