In Lanzhou, the biggest city in western China, its ultra-cheap mobile service is pulling in subscribers faster than its stunned competitors China Mobile and China Unicom can dial for help.
Similar networks operated by China Telecom, which officially has only a fixed-line franchise, are popping up across the country with nearly one million subscribers.
Built on the sly, they have emerged as a major challenge to the two licenced mobile operators in the world's fastest-growing telecoms market. By some estimates, China Telecom has enough network capacity to take 10 percent of the national wireless market.
"It's an assault on our business," said Chen Chang, the deputy to the chairman of China Unicom in Lanzhou. "Originally we had a price advantage. Now we have none to speak of -- it's been handed to them," he said.
The China Telecom wireless service piggy-backs on a nationwide grid of fixed-line networks, allowing the company to argue it is not a strictly mobile system. But eager Lanzhou residents queueing for handsets at the company's main retail store in the city aren't too concerned with the distinction.
The bottom line is price: China Telecom's call rates are just 16 percent of what China Mobile charges and 20 percent of Unicom's. "We're signing up 400 to 500 subscribers a day," boasted a saleswoman at the store, which was festooned with banners and gigantic inflatable babies sporting the wireless logo "Xiao Lingtong" -- translated roughly as "Little and In-the-Loop".
Around the corner, Unicom's flagship store is virtually empty. China Mobile shops do not appear to be doing much better. China Telecom phones may not be as convenient -- they cannot roam outside their home network -- but within network boundaries they work just as well. In Lanzhou, China Mobile is fighting back by excluding China Telecom traffic from its network.
But China Unicom appears to have given up the struggle as its customer base is consumed by the former state telecoms monopoly which still has the support of government regulators. The network made headlines this month after China Telecom blocked fixed-line calls to China Mobile for a day in Lanzhou.
Passions run high because of the vast market at stake: the number of mobile phone subscribers in China will almost double this year to 70 million, second only to the United States.
China Telecom's monopoly was broken in 1999 when it was handed the fixed-line market, leaving China Mobile and Unicom to compete for the mobile market.
However, two years earlier China Telecom had launched its first "Xiao Lingtong" network near the eastern city of Hangzhou using a hybrid of fixed-line architecture and a Japanese wireless technology called PHS (personal handyphone system).
By branding "Xiao Lingtong" as a service to help rural backwaters, China Telecom won a green light from the Ministry of Information Industry to quietly continue expansion. Poor farmers in impoverished Qinghai and Gansu provinces, however, were not the only customers China Telecom had in mind. "Xiao Lingtong" networks were soon launched in affluent cities such as Wuhan, Xi'an and suburbs of Guangzhou.
With the launch of "Xiao Lingtong" in Lanzhou, a sprawling city of three million with a sizeable middle class, China Mobile decided to take defensive measures. When China Telecom asked China Mobile to open its networks to "Xiao Lingtong" calls, China Mobile said no.
China Telecom retaliated. On August 2, it blocked fixed-line phone traffic to and from China Mobile subscribers in Lanzhou for 21 hours, leaving 260,000 people with dead lines. "It was a full day of lost revenues," said a China Mobile official who declined to be named. "It goes without saying that our subscribers had big losses as well."
The incident sparked an angry article in the Communist Party's flagship, the People's Daily, and a deputy general manager of China Telecom has been sacked. Yet political winds appear to be favouring China Telecom.
China Telecom is planning a multi-billion dollar overseas stock listing and wants to go to market with the star attraction that has made shares in China Mobile and Unicom such hits with investors: mobile phone networks. It has lobbied aggressively for a national mobile licence, and shows little sign of reining in "Xiao Lingtong".
"I personally think the ministry will support China Telecom," said the China Mobile official. "They have better personal relations." The location of the telecoms regulatory bureau in Lanzhou suggests as much: It is on the 12th floor of China Telecom's provincial headquarters -- a vestige of the recent past when regulators actually ran the phone company.
From behind his expansive wooden desk, regulatory bureau director Zhao Weidong said China Telecom would be allowed to keep its wireless network in Lanzhou and that China Mobile would eventually have to interconnect its network.
Zhao acknowledged a government edict issued in June that restricts China Telecom's wireless business to small and medium-sized cities, but said the Lanzhou network and other big city networks had been rolled out before the edict.