The $25 million venture with two state-owned Chinese partners will provide broadband Internet service to Shanghai's new Pudong business district, the biggest U.S. telecommunications concern said.
China has banned foreign investment until now for telephone and Internet services. Regulators rejected attempts in the mid-1990s to skirt that ban with complex joint venture arrangements.
The AT&T deal comes as China prepares to join the World Trade Organization, a step expected by early next year. Beijing has promised to open its state-run economy and let foreigners own up to 50 percent of ventures for Internet access, e-mail and other telecom services.
Further opening will offer ambitious Chinese telecom firms access to investment and technology that could help them to compete more aggressively.
Attempts to create purely Chinese competition to such giant former monopolies as China Telecom have fared poorly. China Telecom has more than 50 times the revenues of its biggest competitor, China Unicom.
In a desperate bid for capital, Unicom formed a series of indirect joint ventures with U.S., Japanese and Hong Kong companies. But Beijing ruled last year that those still violated the foreign investment ban.
China's fast-growing Internet industry also relies heavily on foreign financing. Regulators say foreign investment in the industry is formally banned until China gets into WTO, but have refrained from enforcing that ban after protests by Chinese entrepreneurs.
AT&T's partners are Shanghai Telecom and city government-owned Shanghai Information Investment Inc. The American firm is to own 25 percent of Shanghai Symphony Telecommunications Co.
AT&T has tried for years to secure a Chinese joint venture. It began feasibility studies in Shanghai in March 1999.
"It's a relatively modest initial investment, but this is really seen very much as the first step," said AT&T spokesman Greg Brutus.
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