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Foreign Capital Floods China in Internet Frenzy

Web: Bidding wars, reverse migration of scholars mark arrival of cyber-boom. Phenomenon poses dilemma for government.


Only days ago China's first big Internet takeover battle ended, but it's unlikely to be the last.

Propelled by foreign fantasies of 1.3 billion computer junkies, the Internet is sweeping across China and Hong Kong like a tsunami, barely slowed by the government's half-hearted efforts to steer a different course.

Some of technology's biggest names have thrown hundreds of millions of dollars at China's Internet market and found influential local partners in recent months, even while the government was issuing new restrictions on cyberspace.

This foreign capital, much of it flowing into start-ups launched by Chinese graduates of America's leading business schools, has triggered a feeding frenzy on China and Hong Kong stock markets that has sent tech shares sky-high and triggered fierce bidding wars for coveted properties.

It has also sparked a reverse migration among U.S.-educated Chinese, who are helping turn parts of Beijing and Shanghai into Chinese versions of Silicon Valley.

"The magic words are Chinese-born Harvard MBA," said Matthew McGarvey, an Internet analyst in Hong Kong.

The most dramatic validation of China's arrival on the Internet scene came Tuesday when a Hong Kong Internet start-up, Pacific Century CyberWorks, succeeded in taking over Hong Kong's biggest phone company for nearly $40 billion--a huge prize in winning Internet access to the Greater China region.

Started less than a year ago by Richard Li, son of powerful Hong Kong tycoon Li Ka-shing, the company has no profit, and its only real assets are stakes in more than two dozen Internet start-ups. But it prevailed in a bidding war against Singapore Telecommunications and media billionaire Rupert Murdoch.

For China's leadership, this cyberspace boom--and its attractiveness to wealthy foreign companies--poses a major dilemma.

The Internet could provide a powerful boost to the nation's economic reforms by streamlining the nation's banking and manufacturing systems. China's manufacturers, for example, must rapidly upgrade their technology or lose out to competitors as the world's largest automotive, apparel and electronics firms move their supply chains online.

Indeed, without embracing the Internet, China stands little hope of catching up with the industrial world. Thus the government is modernizing its telecommunications and computer infrastructure, while trying to lure back would-be tech entrepreneurs who studied abroad.

Yet the Internet also hands a powerful tool to those interested in getting access to forbidden information or challenging the government's authority.

In recent months, China has tried to tighten its hold over the Web, concerned about its role in the spread of news about a major government corruption scandal and the banned religious group Falun Gong. The new measures included expanded penalties for spreading "state secrets" and restrictions on popular encryption software that protects privacy.

China's seemingly contradictory attitudes toward the Internet reflect its ongoing struggle over how best to promote economic openness without relinquishing political control. Although more regulatory fits and starts are likely, the government will be forced to relax its grip on the Internet further as the technology overwhelms its policing abilities, predicted Daniel Lynch, a China telecommunications expert at USC.

"The Chinese government is just putting its finger in the dike, but it's not able to hold it off in the long run," Lynch said.

Still, Internet firms in China are advised to avoid sensitive areas such as pornography or politics, says Stella Jin, a Silicon Valley-based investor in several Chinese Internet firms. "You have to work with the Chinese government, or you really don't have a future," she said.

By late last year, China boasted at least 163 e-commerce Web sites, including 30 shopping malls, 18 bookstores and 10 auction sites, according to a study by Boston Consulting Group.

But the risk that surrounds any Internet start-up is magnified in China by the heavy-handed political leadership, bureaucratic red tape, low personal computer usage, primitive telecommunications and an undeveloped credit card system.

"At the moment, there is a massive wave of hopefuls, and later there will be a core of survivors," said David Michael, a Boston Consulting Group Internet expert based in Hong Kong.

Still, China's Internet market has increased eightfold during the last two years--an irresistible lure to Internet firms. With a current subscriber base of 9 million, China is expected to become Asia's leading market by 2005, according to Computer Economics, a consulting firm in Carlsbad, Calif.

China's "more than a diamond in the rough, it's the Hope diamond in the rough," said Abbey Silverstone, co-founder of Silicon Graphics.

Silverstone is now president of Multacom, a Southern California firm that has partnered with a Chinese firm to build and manage a high-speed data transmission network along railroad tracks linking Beijing, Shanghai and Guangzhou.

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