China's Internet Gold Rush

By Terry McCarthy/Beijing

Early in 1998, William Ding, then 26, took a bet on his future. After four years of writing software in the southern Chinese city of Guangzhou, he had saved $60,000--enough to pay for him to study at Stanford. China's Internet was then in its infancy, with fewer than 1 million users. But he sensed it was about to explode, and decided to stay in China and set up his own Internet company, Netease.com

The bet has paid off--so far. Netease.com is one of the top portals in China. With free e-mail, news, auctions and a job site, it claims to have upwards of 6 million page views a day. Netease.com and Sohu.com a portal run by Charles Zhang, are vying to be the first Chinese Internet companies to list on the NASDAQ. The payoff will be crazy, 10-digit money. But Ding still has to deal with the China Uncertainty Principle: bureaucrats in Beijing, whose treatment of the Internet is even more erratic than the movement of the markets.

The Internet has hit the Chinese government with all the force of an electromagnetic burst. The number of Net users, now 10 million, is doubling every six months--the fastest growth in Asia. Money is pouring in from U.S. venture capitalists. There are 50,000 Chinese domain names. By some calculations, China will have the second largest population of Web surfers in the world, after the U.S., by 2005. Such a frenetic buildup would delight most governments. It terrifies Beijing's officials, who fear the Net will vaporize their power over the masses. "It is not like anything they have ever experienced before," says Ding.

China has become the cyberworld's hottest battlefield. On one side are the control freaks of the Communist Party, who believe anyone who challenges them belongs in a labor camp for 10 years. On the other side are the tech-savvy Net entrepreneurs, who expect anyone who challenges them to set up his own website within the next 10 minutes. The outcome of the conflict will not just determine whether Ding or Zhang becomes a billionaire. Dotcoms highlight the central contradiction of China today--the drive to modernize without giving up one-party rule. The government wants the economic benefits of the Internet without the freedom it gives. The information revolution, minus the revolution.

From the beginning, bureaucrats have desperately sought ways to manage this contradiction. In 1997 they set up an intranet with China-only access. It was quietly abandoned. Last month came strict regulations on Internet content and encryption technology. Members of the cyberelite in China yawned. They've perfected the art of finding ways around the government's lockdowns on particular sites, and most companies think the requirement to reveal the encryption codes they use to protect commercial secrets and online merchandising will not be enforced. But after trailing behind the e-curve for so long, Beijing has finally worked out where the Net is most vulnerable: in its voracious appetite for capital.

"The question is not whether China will pull the plug on the Internet," says Ted Dean of BDA China, an Internet consultancy in Beijing. "It is whether China will regulate it in a way that will make it commercially viable." Netease.com and Sohu.com want to list on the NASDAQ this spring--Sohu.com has even made a preliminary filing with the SEC. But the government in Beijing has dragged its feet in giving public approval to the two firms and, according to bankers and industry sources, has actually blocked the IPO of a third contender, Sina.com which is China's largest Internet company. As government agencies line up to regulate a slice of the Internet, many insiders fear the creation of a huge potential for graft. "You get all these bureaucrats who say to the entrepreneurs, 'You young guys, you have some American friends and loads of money, where do we get our share?'" says Xie Wen, executive vice president of Cis.com a Beijing company that runs an online game site.

"The risks of investing in China's Internet are just this side of ridiculous," says Johnny Chan, partner in Techpacific, one of the growing number of venture-capital firms set up in Hong Kong to do just that. "But the potential rewards are enormous."

As recently as a year ago, top graduates from China's best universities applied for further study in the U.S. as a matter of course. No longer. Now many of the smartest are flocking to the Haidian district in northwest Beijing, close to Qinghua and Peking universities and home to long rows of computer hardware and software stores. In a scrappy postindustrial milieu of neon-lighted computer shop fronts, abandoned building sites and empty factories, these young people rent a room or two, buy or borrow a few computers and several crates of instant noodles and become a dotcom overnight. Salaries are spiraling--the going rate in Haidian for a university graduate with elementary computer knowledge is about $1,000 a month, in contrast to Beijing's average wage of $200 for a graduate student. Returnees from U.S. high-tech and consulting firms are commanding $100,000 annual salaries plus option packages. Net entrepreneurs are becoming role models for a new generation of Chinese, who see that they can get ahead on their own initiative, without relying on official connections or government sinecures. "People used to think you could only get rich with stocks or smuggling," says Wang Zhidong, CEO of Sina.com "Now, with the Internet, they know they can get rich using their intelligence."

Beyond money, the Internet is also spurring a sense of nationalism among many of the Net entrepreneurs. They think the Internet can help them draw level with the West. "This is the first time we see a way we Chinese can catch up," says Jack Ma, head of Alibaba.com an e-commerce site based in Hangzhou. "This is a new industry defining the new century. Just like the auto industry defined the Japanese economy--if you catch the wave, you can move the whole country forward."

So Web surfers are optimistic that the government will not dump them from the wave. "China needs to embrace high tech in the 21st century," says Ding. "So they won't slow down the development of the Internet." The real battle now is not over letting the Internet in, but about who will benefit, and how much, from a wired China.