Internet Regulations in China May Ban Foreign Investment

Just days after Intel chief executive officer Craig Barret reiterated his company’s determination to invest in China, the country has drafted rules that would formally ban foreign investment in the Internet.

Although China’s Internet policies have been difficult for foreign investors to interpret over the past few years, the new guidelines would clearly provide for a new type of business license for commercial Internet providers, and would ban foreign participation in such companies. This development would come as a severe blow to Intel and Boston, Massachusetts-based International Data Group (IDG).

IDG, an information technology publishing and research company, had planned to invest $100 million in Chinese software and telecom companies through a fund partially backed by the Chinese government. Those plans are now on hold until the government clarifies its policies toward foreign investment.

As for Intel, Barrett just last week confirmed his own plans to participate in any dialogue with the Chinese government that relates to foreign investment in the Internet. At that time, Barrett asserted his intention to communicate with government officials in China about the value that foreign venture capital can bring to Chinese companies.

Ruling Expected By The End Of The Year

Currently, Internet content providers that produce online news, stock information and e-mail services operate in China with a standard business license. Since the rules have been rather liberal pertaining to these services, foreign companies have invested heavily in such ventures, and Chinese-owned content providers have come to rely on continuing foreign investment. However, in September, Minister of Information Industry Wu Jichuan declared even these foreign investments illegal.

In spite of this situation, Intel, as well as other companies including Dow, Jones & Co. and Yahoo!, continued to pour money into these ventures. Word now is that a final policy on foreign investment will be issued by the end of this year, and that it will be far stricter than anything the country has put into effect previously.

Although it is anybody’s guess as to exactly what the ruling will state, there is reportedly a proposal that would require foreign investors who already have equity in Chinese companies to convert it into debt. That tactic was already used once this year, when the Chinese government tried to push foreign investors out of the country’s telecommunications services.

China’s Internal Investment Struggle

Meanwhile, additional new regulations in China have been enacted to bar cable television stations from hooking up to the phone networks. Chinese cable TV companies have been investing heavily in new infrastructure to offer high-speed access to the Internet and to Internet protocol phone services.

With the new ruling, a quick sell-off seems imminent among Chinese companies that have invested heavily into the new infrastructure. Although the Chinese have been slow to take to the Internet, cable television reaches an estimated 80 million Chinese households. In a country where less than one percent of the population owns a personal computer, cable TV is a potential medium of huge revenues in e-commerce.

IDG reports that China currently has about 3.8 million Internet users, a figure that is expected to grow to about 7.3 million in 2000 and 33.1 million by 2004.