China’s second-largest mobile service provider, China Unicom, recently said it would acquire fixed-line operator China Netcom with a share swap deal valued at more than $56 billion, part of a much larger, government-organized restructuring of the Chinese telecommunications industry, which has a combined market capitalization of several hundred billion dollars.

China is hardly a country in need of a telecommunications overhaul. Economic growth is consistently more than 10% a year, and the number of telecommunications subscribers is growing at an even greater rate. Pedestrians walking the streets of Beijing have no fewer cell phones than those in any other city around the world.

In instances when the Chinese government has attempted to manage competition for its own benefit, technology and entrepreneurship have intervened — to the benefit of businesses and consumers alike. For example, while not officially allowed to offer mobile services, wire-line carriers China Telecom and China Netcom offer personal handy-phone system services, a short-range wireless service particularly useful in cities, to nearly 100 million customers. The Chinese government invests countless resources attempting to monitor and block access, but the population is more cunning than its government.

Despite the success of the current system, China’s central government recently announced the plan to restructure its telecommunications industry. Six companies are directly affected by the reorganization: In addition to China Unicom acquiring China Netcom, China Mobile — the largest wireless carrier in the world — will acquire China Tietong Telecommunications, a wire-line company. China Telecommunications, the largest of the wireline companies, will acquire the CDMA wireless network of China Unicom as well as China Satellite Communications.

It will take many months, if not years, for the government’s plan to be fully implemented. When that happens, China will have three substantial telecommunications companies, each with wire-line and wireless assets. In the coming year, China, not coincidentally, is likely to issue three licenses for the next-generation 3G wireless services, presumably with one license going to each of the new companies. But the success of the current telecommunications system in China is not the result of markets strictly obeying government rules. In fact, it is quite the opposite. As it controls all major telecommunications companies in China, the Chinese government can do what it pleases. But not everyone wins when a government restructures an industry.

One apparent loser in the reorganization is China Mobile. Its shares lost more than 10% of their value in the days that followed the initial May 23 announcement, and now stand more than 25% below their October 2007 highs. Once the undisputed pre-eminent wireless carrier, it will now face more formidable competition from two other carriers, both with a combination of wire-line and wireless assets. Shares of China Telecom, China Netcom, and China Unicom initially traded higher before trading was suspended in Hong Kong for many days.

Other losers may well be the investors in telecommunications services in China. Investors are savvy at rewarding profitability, innovation, and ingenuity. Those factors are less important when the government can at whim place value in or out of a company. A government that can restructure at will an industry the size of the telecommunications sector has the ability to intervene in any industry. No business and no investor is immune. The Chinese government is not recklessly destroying all shareholder value in the telecommunications industry reorganization, but this action does demonstrate that the government has the power to do so if it wants.

It is difficult to fathom the scale of the government’s intervention. It is as if our federal government one day decided to reorganize AT&T, Verizon, Sprint, T-Mobile, Qwest, and a few other companies for good measure without so much as a shareholder vote. The business press has been resigned to the event, describing it as part of a long-anticipated plan. Extraordinary exercises of governmental power may be anticipated, but they are no less extraordinary.

Some investment analysts have even been quoted as saying that the Chinese government has reorganized wisely. It takes little wisdom for a government to assert itself and tell businesses what to do. It takes far more wisdom for a government to resist the urge to interfere.

A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.