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China's Internet: A shaky but onward path.

For the record
Science &
Chinan's internet
Nisar A. Memon
Politics & Policy
National Accountability

By Diana J. Choyce
Nov  29 - Dec 05, 1999

Amid frequent wavering and saber rattling, China has finally settled down to a trade agreement with the World Trade Organization. At the center of this storm sits the common knowledge that China is a fertile investment area for all things internet. And everyone wants a piece of the investment pie, including China. Now that the trade doors are open it should be a free for all as is common these days with internet related commerce.

The chaos started in mid September when a top government official stated that China would enforce its ban on all foreign telecom investments including internet content and services. At the time, china.com stocks were soaring at nearly $85. After the statement by Wu Jichuan the stock slammed down to $52. By mid October the stock was closing at $51, and a collective breath was held the world over. It seems no one wanted to rock the boat and risk making things worse. Following that was an announcement by China Unicom which froze all payments to its foreign telecom partners who had invested $1.4 billion into it. All of a sudden investments took on the comparison of jumping from a bridge without a parachute.

Fast forward to November and we find that china.com stock is now running in the $125 range. Why? Because China and the US have finally signed a trade agreement with the World Trade Organization. I find myself wishing I had bought a few of those shares in September. Included in the pact is the allowance of foreign companies to own 49 percent shares in telecom joint ventures that will increase to 50 percent over two years. In April, China had already agreed to drop all tariffs on chips, chip gear, and other high-tech products over a six-year period It is unknown whether China will allow investment into domestic internet publishers and content providers. Either way, the news has caused a surge in most of the top China stocks. And everyone has let out their breath.

Most analysts speculate that the flood gates to China's domestic internet industry will open ever so slowly. This is in part due to its own government interests who would like a piece of the action. The State Administration of Industry & Commerce, the State Administration for Radio, Film and Television, and the Ministry of Public Security all want to have direct involvement in China's Internet industry. And the ongoing struggle between reformists and anti-reformists will keep constant pressure on those gates. At least until they carve their places in the profit taking.

At the heart of all this shuffling is the fact that China's internet industry has seen a huge growth with over 4 million internet users. It is estimated that the numbers will surge to 85 million over the next 10 years.

In fact many researchers believe that China will have the most online users by 2005. Beijing has even helped this growth by cutting access charges twice in the last year. But in-country investment has been severely limited due to banks lending only to state owned enterprise. Small business owners are literally starved for investment capital. Opening the trade doors will be a huge boon to these private companies. The greatest early benefactors appear to be the semi-conductor sector which is estimated to be an $8 billion dollar market. With tariffs dropping to 6-10 percent from 20 percent, the domestic information technology industry should open up and lead to the sale of more advanced components at lower prices.

Another positive benefit is the hope of drawing out new talent among the college student base, and bringing back many talented Chinese who moved on to other countries. As the industry expands, so will opportunity and this will seed a new generation of experts. Microsoft has already recognized this and provided $80 million in research and development funding in Beijing. The research will include next-generation multimedia, a next-generation user's interface, and new information-processing technologies particular to Chinese processing technologies. MSR China, as it is called, has already made breakthroughs in Chinese speech recognition, MPEG-4, object-oriented multimedia, and new Internet technologies. The deep pockets of Microsoft will no doubt lure many patriots back to China and give students a reason to stay. Since the research centers launch earlier this year it has received over 1200 applications for employment. Kai-Fu Lee, managing director, says, "My first requirement is that they must be the best talent in the world". Whatever might be said about Microsoft, they have an uncanny ability to be in the right place at the right time.

Other companies positioning themselves in China are Lucent Technologies. It is planning a $10 million center to develop network management software for optical networks in China and around the world. And LSI Logic Corp. plans to launch a program to train local designers on how to make its latest set-top box and DVD chips. China is also seeking to export more high tech products to boost its economy. It is about to enter the U.S. digital TV market with less expensive receivers than currently available models. Companies like Keijan, Konka, Zhongxin Telecom and TCL are introducing GSM cellular handsets which are comparable to foreign products. And many Chinese companies are investing in research through their own universities in hope of keeping development, talent, and profits "in house".

If China continues on this path it will likely grow into a technology powerhouse. That is if the government will keep its political bureaucracy from constricting the opportunities ahead. It also has a large amount of work to be done on enacting stable industry regulations, a reliable credit and risk management system, and a banking system that is capable of supporting e-commerce transactions. The future looks bright for China and the investors willing to take the risk with her. Excuse me while I go to my corner and lament my not buying those stocks in September.