The ongoing housing price correction – to use a less alarming phrase – has perhaps prevented the bursting of the Chinese IT stock bubble from receiving the full attention it deserves. While house prices affect a much broader social range and have a bigger economic impact, IT stocks are bellwethers of China as a “new economy”, indicators of the Chinese ability to create and regulate a new economic sector. China’s economic success has largely been based upon low-cost (and low-skill) manufacturing; however, to rise up the value chain, as was successfully done by Singapore, Taiwan, Thailand and so on, requires success in more creative industries. The Chinese IT industry, with its enormous market (450 million online, as of August 2011) and the low cost of website creation, was seen as a surefire winner, especially following the success of Alibaba group, the blocking of overseas competition (such as Facebook and Twitter) and the failure of overseas competitors like eBay.cn and Groupon.
The past few years thus saw a series of IPOs (often listing on the NASDAQ) where IT stocks soared to dizzying heights. However, as Kai Lukoff at iChinaStock.com points out, the market peaked in April and has declined over 50% since then. Renren, a Facebook clone with Chinese characteristics, rocketed to USD 17 a share on its IPO; it’s now trading at USD 3.30. (Bill Bishop, the esteemed China commentator, points out on his Digicha blog that Renren CEO Joe Chen sold approximately USD 50 million of stock during the IPO.) Youku similarly reached USD 65 a share in April and slumped below USD 16 in December.
Meanwhile, new regulations on microblogs show the difficulties within which the sector is operating. Beijing residents are now required to register with their real name when using weibo (whether Sina or Tencent). Some of the regulations (translated by William Farris and posted by him on Google+), are as follows:
Article 4. Websites that launch micro-blog services shall abide by the Constitution, laws, regulations, and rules, and operate in a sincere, honest, and civilized manner, actively spread the core values of the socialist system, disseminate advanced socialist culture, and build a harmonious socialist society.
Article 7. Anyone who launches a micro-blog services website shall comply with relevant laws, regulations, rules, and the following provisions:
(i) establish comprehensive micro-blog information security management systems;
(v) establish a comprehensive system of exposing false information and the timely publication of truthful information;
(vii) do not create fake micro-blog users;
(viii) stop and restrict users that spread harmful information, and make a timely report to the public security authorities upon discovery of any act that constitutes a violation of public order or that is suspected of being a crime;
Article 8. Websites that launch micro-blog services shall establish a comprehensive system for the examination and verification of information content, and shall supervise all information content production, copying, publication, and transmission.
Article 9. Any organization or individual that registers a micro-blog account and produces, reproduces, publishes, or disseminates information content shall use real identity information, and shall not carry out registration by falsifying or replicating a resident's identity information, business registration information, or organization code information.
Websites that launch micro-blog services shall ensure the authenticity of registered user information under the preceding paragraph.
Article 10. No organization or individual shall make unlawful use of a micro-blog to reproduce, publish, or transmit information with the following contents:
(i) violating the basic principles of the Constitution;
(ii) jeopardizing national security, leaking state secrets, subverting the government, undermining national unity;
(iii) harming national honour and interests;
(iv) inciting ethnic hatred or ethnic discrimination, undermining national unity;
(v) violating state religion policies or propagating cults and feudal superstitions;
(vi) spreading rumours, disturbing social order, or undermining social stability;
(ix) inciting illegal assembly, association, processions or demonstrations, assembling to disturb social order
Given that the vibrancy of Chinese microblogging contributed in large part to the success of Sina (owner of the largest weibo), this move is likely to greatly diminish user interest. (Already average online time has declined from an average of 29 minutes per day in July to 20 minutes per day in December). Though this regulation only applies at the moment to Beijing users, this is extremely likely to be applied throughout the rest of the mainland, and follows the government’s traditional route of incremental policy implementation.
The regulatory framework of the Chinese IT sector is one which clearly seems to pose material risks for investors. Further restrictions and controls seem highly likely. Whether these will throttle the vibrant life out of Chinese internet and social media corporations, or whether they will neuter them to an agreeable state of docility, remain to be seen. My own bet would be on the latter. Given the tremendous population in China and the modern tendency to get online and get connecting, an IT sector with strong controls could still easily have a large audience. The publishing, TV, radio, and media sectors all are subject to similar controls and retain large audiences. There’s no intrinsic reason the internet cannot be controlled similarly. Whether this will ultimately be a good thing for the IT sector is another question. At the very least, such controls are likely to limit creativity and expression at precisely the moment when China is seeking to advance in these areas.
The ongoing housing price correction – to use a less alarming phrase – has perhaps prevented the bursting of the Chinese IT stock bubble from receiving the full attention it deserves. While house prices affect a much broader social range and have a bigger economic impact, IT stocks are bellwethers of China as a “new economy”, indicators of the Chinese ability to create and regulate a new economic sector. China’s economic success has largely been based upon low-cost (and low-skill) manufacturing; however, to rise up the value chain, as was successfully done by Singapore, Taiwan, Thailand and so on, requires success in more creative industries. The Chinese IT industry, with its enormous market (450 million online, as of August 2011) and the low cost of website creation, was seen as a surefire winner, especially following the success of Alibaba group, the blocking of overseas competition (such as Facebook and Twitter) and the failure of overseas competitors like eBay.cn and Groupon.
Meanwhile, new regulations on microblogs show the difficulties within which the sector is operating. Beijing residents are now required to register with their real name when using weibo (whether Sina or Tencent). Some of the regulations (translated by William Farris and posted by him on Google+), are as follows:
