Threat to Foreign Investors in China's Internet Industry

Computergram International, Sept 16, 1999

China's protectionist Minister for Information Industry, Wu Jichaun, has issued a statement that seems to imply the government is preparing to crack down on foreign investment in the internet industry in China. He told a press conference that foreign involvement is not technically allowed in China's booming internet industry as current legislation bars foreign involvement in the service sector. "Whether or not it is an ICP [internet content provider] or an ISP, it is about value added services," Wu said, "Iin China, the service area is not open".

Most of the major international players in the internet industry have already invested in Chinese ventures. Popular portal Sohu.com, for example, is backed by Dow Jones and Intel. China.com, which recently had a highly successful debt on Nasdaq, is partly owned by America Online Inc. There are numerous other examples.

What is particularly worrying for foreign investors are the similarities with what happened in the mobile telecoms market. For several years the government turned a blind eye to major foreign companies investing in China Unicom's networks via a loophole, until issuing a statement last October saying such investments were banned. Investors have been offered their money back with small interest payments but otherwise nothing to show for the money invested or the technology and expertise transferred to Unicom. Several are threatening to sue in foreign jurisdictions if Unicom goes ahead with planned overseas listings.

However some Hong Kong analysts speculated that Wu could simply be putting pressure on the US before the next round of WTO negotiations in which telecommunications will feature prominently. But others thought there may be more to it than that, particularly as Wu noted that the Chinese government had clearly stipulated in 1993 that foreign investors were restricted from participating in telecoms networks, and also pledged to "clear up irregularities".

"I think the MII's move is in response to the recent rush of foreign companies to grab a share of China's internet and telecommunications business," said Daiwa Institute of Research manager Stephen Leung. He noted that the ban could be broadly applied to cable-network and internet-related businesses and said if it is enforced strictly it could have severe implications for companies that already have invested in these businesses.