Commentary: Big Brother May Crush China's Web Dreams

The control freaks who rule Beijing don't give up easily. Back in September, Chinese officials threw investors a scare by declaring the country's Internet companies off-limits for foreigners. Eventually, Beijing backed down as part of its deal to join the World Trade Organization. Undaunted, Communist hardliners in late January unveiled a package of new regulations that threaten to do far more to retard the development of China's Internet than any curbs on investment. They range from limits on encryption software that enables Web users to keep communications confidential to threats of punishment for any Internet host whose service disseminates "state secrets."

But Beijing's agenda is much bigger than silencing a few dissidents. As with most attempts to rein in foreign involvement in a domestic industry, a primary motive for Beijing's Internet crackdown is commercial self-interest. The new rules, which also limit Net companies' ability to raise funds by listing shares on overseas stock exchanges, are part of an escalating campaign to consolidate control over what promises to be a vastly lucrative e-commerce industry.

JEALOUSY. Beijing's real targets are not subversive foreigners; they are the fleet-footed startups run by private entrepreneurs who have emerged as the leaders of Chinese cyberspace.,, and have run circles around sites controlled by sluggish bureaucracies and state-owned enterprises. The dot.coms set off an Internet explosion in China with entertaining and interesting sites. Business-to-business offerings such as, funded by Softbank and Goldman Sachs, promise to transform Chinese industry.

This success has fueled nothing but jealousy among state enterprises, which could be left in the dust as the Internet Age takes off. And if Beijing's leaders let the hardliners have their way, the biggest loser will be an economy struggling to throw off the last stifling burdens of socialism.

One champion of state control is Information Industry Minister Wu Jichuan. His interest is clear. Wu's ministry is starting to lose the monopoly on its old cash cow, the telecom sector. A freewheeling Net would make the ministry far less powerful. It was Wu who first proposed kicking out the foreigners last year. In the weeks of uncertainty that followed his statements, the Chinese Internet world was on hold, waiting to see if Wu had the clout to make his threats real. He didn't. In November, President Jiang Zemin and Premier Zhu Rongji promised to allow foreigners to own up to 50% of Chinese Net companies.

Yet the opening to foreigners gave the protectionists a new weapon. Chinese Net companies know that if they violate certain taboos, they will get a visit from unfriendly Public Security Bureau agents. So most dot.coms have censored themselves to keep sensitive content from the masses. Now, in the name of making the rules more transparent for foreigners, Beijing is putting these unstated guidelines in writing, giving them more weight.

OLD MISTAKES. But the new rules leave one thing deliberately vague: What, in the end, is a state secret? The answer: Whatever Beijing wants it to be. Thus, Net companies must stay on the government's good side. What's the best way to do that? Not by joining forces with some uppity private entrepreneur straight out of college. Much safer to ally itself with a state company that has the connections to make problems go away.

The sad thing is that the Internet represents China's big chance to leap into the New Economy. Instead, Beijing is about to repeat old mistakes, entrusting its economic future to the folks who made such a mess in the past. That could put China at a disadvantage compared with Asia's other awakening giant--India. Investors there rave about the country's hot software and Net content suppliers.

Of course, Beijing's gambit may fail to scare away investors. Cybertycoons, after all, thrive on risk. Let's hope so. Otherwise, a few years from now we'll be reading about the desperate plans to reform China's state-dominated Net sector--and of how Beijing blew one more chance to change.

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