A battle has broken out between China's top telecommunications official and Chinese reformers that could deal a severe blow to the country's nascent Internet industry.
Wu Jichuan, China's Minister of Information Industry, sparked the conflict Monday when he told the Financial Times newspaper that foreign investment in Chinese Internet firms is illegal and that "irregularities" would be cleaned up. Aides reiterated Wu's position today.
But Wu's statement puts him in direct opposition with some of China's leading local governments, including Shanghai, which have actively courted foreign Internet investors. Chinese reformers and foreign industry executives said today that a government ban on foreign funds would undermine China's position in one of the world's fastest growing and most important industries by forcing both intellectual and financial capital away from China.
"This is a Chinese jobs program for Taiwan, Hong Kong and California," said a U.S. industry executive, who noted that Chinese-language Internet sites can be built and based elsewhere and targeted to domestic Chinese audiences. "All the money, jobs and intelligence will be offshore" if the ban holds up.
Foreign investors, the majority from the United States, have pumped more than $50 million into China's leading Internet companies, and that figure is expected grow to at least $200 million within two years, industry sources said. Investors include Intel Corp., International Data Corp., Goldman, Sachs & Co., Dow Jones & Co., and News Corp. Ltd. America Online Inc. has invested in a Hong Kong-based Internet concern with interests on the mainland.
China's domestic venture capital markets are underdeveloped, and there is no local equivalent of the high-tech-heavy Nasdaq stock exchange, so foreign money has been essential for creating sites like sina.com and sohu.com, China's two leading Web "portals," sites that serve as entryways to the Web for Chinese users.
The funds have enabled Chinese entrepreneurs to create everything from search engines to Web sites on sports, entertainment, and financial news, and have brought China's Internet industry an aura of excitement. Many Chinese dream of being the next fabulously rich Jerry Yang, the Chinese-American co-founder of Internet giant Yahoo.
But Wu said China's long-standing ban on foreign investment in Chinese telecommunications services includes Chinese companies creating material for the Internet and Internet service providers.
If his view prevails, foreign investors could be forced to divest. The companies could also relocate abroad, though that would bring other problems, including a more expensive work force.
Wu is a long-time opponent of opening China's telecommunications services sector to foreign investment. He opposed Premier Zhu Rongji's offer in Washington in April to allow foreigners significant access to that market as part of China's bid to join the World Trade Organization.
Industry executives said Wu's announcement could be a negotiating tactic aimed at influencing the current round of talks with the United States on the WTO, or could be a "power grab" aimed at domestic opponents.