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
Netease.com .
In addition to outright reneging on financial agreements with foreign investors, the Chinese
government can also bring China-related sites to their knees simply by pulling the plug on the
national routers.
China.com’s SEC filings point out that “the Propaganda department of the
Communist Party has been given the responsibility to censor news published in China to ensure, supervise and control political correctness.” This means, according to the filings, that sites face legal and criminal liabilities for distributing “content deemed to be socially destabilizing.”
“Periodically,” the China.Com filings continued, “the Ministry of Public Security has stopped the distribution of information over the Internet …. Web sites that are blocked in China include many news-related Web sites such as www.cnn.com, www.latimes.com, www.nytimes.com and
www.appledaily.com.hk.”
Having a possible suicide bomber as a business associate doesn’t seem to phase many who see China’s 1.2 billion people as simply too tempting to ignore regardless of the risks.
International Data Group Chairman Patrick McGovern was quoted by the Wall Street Journal on October 5 as
saying the Boston-based publisher would be investing $1 billion in China ventures by 2005. IDG currently publishes 20 magazines in China, most of them technology related and has invested some $130 million in Chinese tech ventures since 1993.
According to the Wall Street Journal piece, McGovern believes that Wu’s prohibitions apply only
to Internet infrastructure ventures and not to IDG’s main investments in content, e-commerce
and software.
However, Wu, according to the Wall Street Journal, reiterated his statements in Shanghai Sept.
27 and made it clear that “Internet content providers and Internet service providers are
value-added telecommunications operations and this has never been open to foreigner
investors…this is our policy.”
IDG did not respond to requests by VC Watch for further information.
For venture capitalists and other investors used to managing and understanding risks rather
than just taking them, China’s closed internal struggle represents a shaky image — a lot like
trying to understand the inner workings of the suicide bomber’s deepest thoughts, trying to
fathom whether he’s going to push the button or pull out his wallet.
