RealTime IT News

China's Net Investment Policy: Good Partner or Suicide Bomber?

Today's Internet China watchers are nervously whistling past what they hope won't be an Asian investment graveyard following a top government official's September 14 bombshell that the government would enforce its ban on foreign telecom investment including Internet services and content.

The repeated statements by Wu Jichuan, Minister of Information Industry, has rocked the Internet investment community, and hammered the stock of (Nasdaq: CHINA) which went public in July.

China.com's stock was on a tear in early September, topping out at more than $85 before Wu crashed the Internet party scene like a Hamas suicide bomber wrapped in explosives. China.com quickly tanked to $52-5/8.

A quick reiteration by lead IPO underwriter Lehman Brothers pumped the share price up briefly to the $70 level, but it's been in a slump, especially in late September after Wu again threatened to push the detonator on his plastique parka. It closed Oct. 13 at 51-1/16.

While Wu's statements have not sparked a full-fledged telecom Tienammen, they have spooked the venture capital and investment community so badly that none of VC Watch's usual and frequently quoted fund sources were willing to comment for the record.

"Why is every body so quiet?" asked a Menlo Park angel investor. " Why are the usual big mouths you read about in every news story so damned silent? Right now, the Chinese ministries are like a jar of old unstable nitroglycerin and anything the international investment community could say right now could set them off."

"Even the folks who like to read their names in print understand that. On the other hand, I think the government is arguing among themselves about what the rules should be in this [Internet] sector. They are clear that they want total control over the infrastructure, but there might -- might -- be some wiggle room for content."

The edginess wasn't helped Sept. 30 when state-owned China Unicom froze all payments to its foreign telecom partners -- companies which have invested more than $1.4 billion into its operations. The unilateral cessation of payments is seen as a harbinger of what could happen in the Internet sector.

"They showed us at Tienammen what could happen when the rules got pushed too far," said a partner in a Los Angeles-area VC with substantial Asian investments. "Unicom showed us that they're willing to do the same thing to foreign investors if it suits their purposes. They scared the hell out of us and I can tell you, they've made investments there a whole lot riskier."

And greater risk means that funds like his will demand a greater share of equity for related investments.

The unstable situation within the Chinese government has trapped venture capitalists and investment bankers like deer in the headlights, casting uncertainty over both private venture capital investments and on the IPO prospects for such high-profile sites as